| | | 2009 | | | | |
| | | | | | | |
| Finished goods | | $ | 978,000 | | | $ | 2,320,000 | |
| Work in process | | 499,000 | | | | 167,000 | |
| Raw materials | | | 1,322,000 | | | | 849,000 |
| Packaging supplies | | | 439,000 | | | | 547,000 | |
| | | | | | | | |
| Total inventories | | $ | 3,238,000 | | | $ | 3,883,000 |
NutraCea
Notes to Consolidate Financial Statements
NoteNOTE 6. INVENTORIES
Inventories are composed of the following (in thousands):
| | | As of December 31, | |
| | | 2010 | | | 2009 | |
| Finished goods | | $ | 553 | | | $ | 978 | |
| Work in process | | | 1,076 | | | | 499 | |
| Raw materials | | | 1,119 | | | | 1,322 | |
| Packaging supplies | | | 246 | | | | 439 | |
| Total inventories | | $ | 2,994 | | | $ | 3,238 | |
NOTE 7. ACCOUNTS RECEIVABLE
A summary of the activity in the allowance for doubtful accounts receivable is summarized in the following table (in thousands):
| | | As of December 31 | |
| | | 2010 | | | 2009 | |
| Balance, beginning of year | | $ | 153 | | | $ | 365 | |
| Provision for doubtful accounts receivable | | | 153 | | | | 39 | |
| Accounts written off | | | (29 | ) | | | (251 | ) |
| Balance, end of year | | $ | 277 | | | $ | 153 | |
Pursuant to a March 2011 settlement agreement with a former customer, we expect to receive no later than March 31, 2011, $0.8 million in payment of trade accounts receivable written-off as uncollectible prior to 2009.
Concentration of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of trade accounts receivable and notes receivable. We perform ongoing credit evaluations on our customers’ financial condition and generally do not require collateral.
One customer accounted for 9.7% of our 2010 revenues and 14.7% of our 2009 revenues. At December 31, 2010, one customer accounted for 36.1% of our accounts receivable. At December 31, 2009, another customer accounted for 14.1% of our accounts receivable.
NOTE 8. Property, PlantNOTES RECEIVABLE
As of December 31, 2010 and Equipment2009, notes receivable, net, relates to our note receivable from Ceautamed. In July 2009, we sold to Ceautamed our investments and rights in Vital Living Inc. (VLI). These investments included senior secured convertible promissory notes with a principal amount of approximately $4.2 million, 1,000,000 shares of VLI’s series A preferred stock, and rights assigned to us under the original security agreement between VLI and the original holders of the promissory notes. Total consideration was $3.6 million. We received $0.2 million of cash and a promissory note for $3.4 million. The note bore interest at the greater of 2.5% or prime (as defined) plus 1.0%. The interest rate could not exceed 6.0%. The note principal was to be repaid in monthly installments of $0.1 million beginning September 2009 and ending July 2012. One half of accrued and unpaid interest was due in July 2012 with the remainder due August 2012. Effective March 2011, pursuant to a note modification, the interest rate is fixed at 5.0%, monthly principal installments now extend through August 2012, and interest will be paid in full no later than September 2012.
Provision for Doubtful Notes Receivable
We maintain an allowance for doubtful accounts on the notes receivable. A summary of the activity in the allowance for doubtful accounts follows (in thousands):
| | | 2010 | | | 2009 | |
| Balance, beginning of year | | $ | 636 | | | $ | 550 | |
| Provision for doubtful notes receivable | | | - | | | | 86 | |
| Balance, end of year | | $ | 636 | | | $ | 636 | |
In 2008, we entered into a promissory note with CURA Pharmaceutical Co. for $0.2 million. CURA had arranged for the sale of our products, but failed to deliver the collected funds. We have not received any payments since April 2009. We have reserved the remaining balance of $0.1 million in 2009.
NutraCea
Notes to Consolidate Financial Statements
In 2006, we entered into promissory notes to VTLV, LLC and VTLV II, LLC totaling $0.5 million to assist them in purchasing secured convertible notes and shares of preferred stock of VLI. We have received no payments on the notes and reserved the note balances in 2008. Our current management is unaware of the business reasons for making these loans.
NOTE 9. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost less accumulated depreciation. Depreciation is computed usingon the straight-line basis over the estimated useful lives as follows:lives. Property, plant and equipment consisted of the following (in thousands):
Furniture and equipment | 5-7 years |
| |
Plant | 30 years |
| |
Software | 3 years |
| |
Leasehold improvements | 3-7 years or life of lease |
| |
Machinery and equipment | 7-10 years |
| | | As of December 31, | | |
| | | 2010 | | | 2009 | | Estimated Useful Lives |
| | | | | | | | |
| Land | | $ | 208 | | | $ | 199 | | |
| Furniture and fixtures | | | 1,461 | | | | 1,506 | | 5-7 years |
| Plant | | | 13,369 | | | | 12,939 | | 30 years |
| Computer and software | | | 1,628 | | | | 1,424 | | 3 years |
| Leasehold improvements | | | 189 | | | | 189 | | 3-7 years or life of lease |
| Machinery and equipment | | | 15,239 | | | | 14,837 | | 7-10 years |
| Construction in progress | | | 2,081 | | | | 2,575 | | |
| Subtotal | | | 34,175 | | | | 33,669 | | |
| Less accumulated depreciation | | | 10,121 | | | | 7,426 | | |
| Property, plant and equipment, net | | $ | 24,054 | | | $ | 26,243 | | |
Expenditures for maintenance and repairs are charged to operations as incurred while renewals and betterments are capitalized. Gains or losses on the sale of property and equipment are reflected in the statementstatements of operations.
Property, plant and equipment consisted of the following at December 31:
| | | 2009 | | | 2008 | |
| | | | | | | |
| Land | | $ | 199,000 | | | $ | 3,128,000 | |
| Furniture and fixtures | | | 1,506,000 | | | | 3,068,000 | |
| Plant | | | 12,939,000 | | | | 15,556,000 | |
| Computer and Software | | | 1,424,000 | | | | 724,000 | |
| Automobile | | | 283,000 | | | | 338,000 | |
| Leasehold improvements | | | 189,000 | | | | 3,727,000 | |
| Machinery and Equipment | | | 14,554,000 | | | | 21,705,000 | |
| Construction in progress | | | 2,575,000 | | | | 15,958,000 | |
| Subtotal | | $ | 33,669,000 | | | $ | 64,204,000 | |
| Less accumulated depreciation | | | 7,426,000 | | | | 7,221,000 | |
| Total | | $ | 26,243,000 | | | $ | 56,983,000 | |
Depreciation expense was $4,916,000, $4,473,000$3.3 million in 2010 and $1,501,000 for 2009, 2008 and 2007, respectively.$4.9 million in 2009.
ImpairmentImpairments and Assets Held for Sale
Corporate OfficeThe following is a summary of property, plant and equipment held for sale (in thousands):
| | | As of December 31, | |
| | | 2010 | | | 2009 | |
| | | | | | | |
| Land | | $ | 233 | | | $ | 2,928 | |
| Plant | | | 1,814 | | | | 5,569 | |
| Machinery and equipment | | | 1,551 | | | | 4,813 | |
| Construction in progress | | | - | | | | 1,241 | |
| Assets held for sale - property, plant and equipment | | $ | 3,598 | | | $ | 14,551 | |
| | | As of December 31, | |
| | | 2010 | | | 2009 | |
| Dillon facility | | $ | 3,598 | | | $ | 4,492 | |
| Phoenix building | | | - | | | | 6,000 | |
| Phoenix equipment | | | - | | | | 4,059 | |
| Assets held for sale - property, plant and equipment | | $ | 3,598 | | | $ | 14,551 | |
Dillon Facility
Our Dillon, Montana facility produces certain retail products - RiSolubles, RiFiber and RiBalance. In Novemberaddition, Dillon produces infant cereal products under a tolling agreement. In October 2009, as part of evaluating non-core assets and businesses, management determined that the U.S. Bankruptcy CourtDillon facility (which included land, building and equipment) would be offered for sale. We began to aggressively market the District of Arizona approved a motion filed byDillon facility in January 2010 once an agreement to sell the Company to reject its then current headquarter lease and to enterinfant cereal business was entered into a new less expensive headquarters lease. The Company relocated its headquarters in December 2009. As a resultA written offer to purchase the facility was received in December 2009,January 2010 for $5.3 million. Subsequently, the Company recorded a $4,039,000 loss on disposaloffer was withdrawn by the prospective buyer. The net book value of the leasehold improvementsland, building and furnitureequipment as of December 31, 2009, was $4.5 million and fixtures associated withno impairment was noted at that time, as we believed we could sell all the old corporate office.assets of Dillon at or above net book value. It is a fully functional facility.
Throughout 2010, we aggressively marketed the facility. The facility is classified as held for sale as of December 31, 2010. Based on an evaluation of market conditions and discounted cash flow analyses we recognized an impairment loss on disposal was partially off-set by i)a $1,064,000 tenant improvement and moving allowance deferred credit related to the prior lease and ii) $179,000 of net proceeds from an auction of the furniture and fixtures. Since the old corporate lease was rejected under the bankruptcy procedures, the resulting charge has been included within the Reorganization Items$0.9 million in the statementsfourth quarter of op eration. In addition, approximately $220,000 of non-cash charge was recorded related to furniture and fixture relocated to the new corporate office.2010.
NutraCea
Phoenix building and equipmentNotes to Consolidate Financial Statements
The In February 2011, we ceased actively marketing the facility. We continue to operate the facility for toll processing and are evaluating ways to utilize excess capacity. As a result, in the first quarter of 2011, we reclassified the Dillon facility to property, plant and equipment and restarted depreciation.
Phoenix Building and Equipment
Our Phoenix, Arizona building owned by NutraPhoenix, LLC, the Company’s wholly owned subsidiary, was constructed to produce infant and adult cereal for worldwide sale. When additional sales did not materialize, managementwe determined that the cereal production could be adequately handled at the Dillon, MTMontana facility. In July 2009, managementwe decided to sell itsour infant cereal manufacturing building located in Phoenix, Arizona as well as the equipment housed in the building. The building was listed for sale in September 2009, and based on management’sour best judgment and prevailing market conditions, the Companywe recorded a non-cashnoncash impairment charge of $6.5 million in September 2009 associated with the building. In December 2009, an offer was received to purchase the cereal equipment. As a resu lt, the Companyresult, we decided to sell the equipment and building separately. Subsequently, basedBased on offers received from potential buyers, we recognized an additional impairment of $1.0 million was recordedon the building in Aprilthe second quarter of 2010. The building was finally sold in September 2010 for a gross price of $4.5 million. As a result of the sale the CompanyWe recorded a loss on disposal in 2010 of $0.5 million plus closing costs.
The cereal equipment was sold in March 2010 for $3.7 million pursuant to the December 2009 offer, in March 2010. The transaction closed in March 2010 after necessaryupon Bankruptcy Court approvals and as a result the Companyapproval. We recorded a loss on disposal of $159,000$0.3 million during the first quarter of 2010.
The Company hasWe determined that the cereal product line doesdid not constitute a component of the overall business entity and thus it has not been reported as a discontinued operation.
We used the proceeds from the sale of the building to (i) pay the remaining $1.8 million owed under the DIP Credit Agreement, (ii) pay the $1.4 million owed for all mechanic’s liens secured by the property, closing costs and property taxes, (iii) pay $1.0 million of unsecured creditor obligations and (iv) provide $0.3 million of funding for our exit from bankruptcy.
Lake Charles
ThisOur Lake Charles, Louisiana facility was built at a cost of $3.8 million to process rice bran from a rice milling company Farmers Rice Milling (“FRM”) adjacent to the facility at a value of $3.8 million.facility. The facility was idled in May 2009 due to lack of orders. ThisThe facility is built on leased land which is owned by FRM.the rice milling company. Due to non-payment of the land lease rent, FRMthe rice milling company served us with a foreclosure notice on the Company in July 2009. In July 2009,Upon receipt, management initiated discussions with FRMthe rice milling company to possibly sell them the building. In September 2009, management made a written offer to FRM to sell the building for $1.3 million which was not accepted. As a result of the written offer, the Companywe recorded an impairment of $2.3 million as of Septemberin 2009. The facility is not classified as held for sale due to potential alternative uses and because the Company iswe are not aggressively marketing the property. ManagementWe evaluated, and continuescontinue to evaluate, alternate uses of the facility which could include 1)serving as an oil pressing 2) a DRB processing facilityoperation or 3) serving as a warehouse to store and distribute DRB produced in Brazil. See Note 19, below, concerning
Corporate Office
In November 2009, the reinstatement of theBankruptcy Court approved our motion to reject our old corporate office lease and to enter into a new, less expensive, corporate office lease.
Dillon facility
The Company’s Dillon facility produces certain retail Ri-Solubles, RiFiber and RiBalance products and the infant cereal products. In October 2009 as part of evaluating non-core assets and business, management determined that the Dillon facility which included land, building and equipment will be put up for sale. Management began to aggressively market the Dillon facility in January 2010 once an agreement to sell the infant cereal business was entered into We relocated our headquarters in December 2009. A written offer to purchase the facility was receivedAs a result, in January 2010 for all the assets at Dillon for $5.25 million. Subsequently the offer was withdrawn. The net book value2009, we recorded a $4.0 million loss on disposal of the land, buildingleasehold improvements and equipment asfurniture and fixtures associated with the old corporate office. The loss on disposal was partially off-set by (i) a $1.1 million tenant improvement and moving allowance deferred credit related to the prior lease and (ii) $0.2 million of December 31, 2009net proceeds from an auction of the furniture and fixtures. Since the old corporate lease was $4.5rejected under the bankruptcy procedures, the resulting charge has been included within reorganization expenses in the consolidated statements of operations. In addition, we recorded a non-cash charge of $0.2 million related to furniture and no impairmentfixtures relocated to the new corporate office.
NOTE 10. INTANGIBLE ASSETS
Intangible assets consist of the following (in thousands):
| | | As of December 31, 2010 | | | As of December 31, 2009 | | |
| | | Original Cost | | | Accumulated Amortization | | | Net Book Value | | | Original Cost | | | Accumulated Amortization | | | Net Book Value | | Estimated Useful Lives |
| | | | | | | | | | | | | | | | | | | | |
| Patents | | $ | 2,703 | | | $ | 1,039 | | | $ | 1,664 | | | $ | 2,672 | | | $ | 806 | | | $ | 1,866 | | 17 years domestic, 20 years foreign |
| Trademarks | | | 4,231 | | | | 1,728 | | | | 2,503 | | | | 4,787 | | | | 1,770 | | | | 3,017 | | 7 years domestic, 7 years foreign |
| Customer lists | | | 4,205 | | | | 2,076 | | | | 2,129 | | | | 4,153 | | | | 1,357 | | | | 2,796 | | 7 years |
| | | $ | 11,139 | | | $ | 4,843 | | | $ | 6,296 | | | $ | 11,612 | | | $ | 3,933 | | | $ | 7,679 | | |
Amortization expense was noted as managem ent believes it can sell all the assets of Dillon at or over their net book value. It$1.5 million in 2010 and $2.0 million in 2009. Amortization expense is a fully functional facility. The Dillon facility is classified as an asset held for sale as of December 31, 2009.
The following is a summary of fixed assets held for sale as of December 31:
| | | 2009 | | | 2008 | |
| | | | | | | |
| Land | | $ | 2,928,000 | | | $ | — | |
| Plant | | | 8,193,000 | | | | — | |
| Machinery and Equipment | | | 5,963,000 | | | | — | |
| Construction in progress | | | 1,241,000 | | | | 822,000 | |
| Subtotal | | $ | 18,325,000 | | | $ | 822,000 | |
| Less accumulated depreciation | | | 3,774,000 | | | | — | |
| Total | | $ | 14,551,000 | | | $ | 822,000 | |
NutraCea
Notes to Consolidate Financial Statements
Note 9. Intangible AssetsImpairment
Intangible assets consisted of the following at December 31:
| | | Original Cost | | | Accumulated Amortization | | | Net Book Value | |
| December 31, 2009 | | | | | | | | | |
| Amortized intangible assets: | | | | | | | | | |
| Patents | | $ | 2,672,000 | | | $ | 806,000 | | | $ | 1,866,000 | |
| Trademarks | | | 4,787,000 | | | | 1,770,000 | | | | 3,017,000 | |
| Customer lists | | | 4,153,000 | | | | 1,357,000 | | | | 2,796,000 | |
| Non-Compete | | | 650,000 | | | | 650,000 | | | | — | |
| | | $ | 12,262,000 | | | $ | 4,583,000 | | | $ | 7,679,000 | |
| | | | | | | | | | | | | |
| December 31, 2008 | | | | | | | | | | | | |
| Amortized intangible assets: | | | | | | | | | | | | |
| Patents | | $ | 2,524,000 | | | $ | 617,000 | | | $ | 1,907,000 | |
| Trademarks | | | 6,984,000 | | | | 1,018,000 | | | | 5,966,000 | |
| Customer lists | | | 4,309,000 | | | | 247,000 | | | | 4,062,000 | |
| Non-Compete | | | 650,000 | | | | 542,000 | | | | 108,000 | |
| | | $ | 14,467,000 | | | $ | 2,424,000 | | | $ | 12,043,000 | |
Amortization expense was $2,039,000 and $1,541,000 for 2009 and 2008, respectively. Amortization expense is expected to be approximately $1,848,000, $1,764,000, $894,000, $894,000 and $893,000 for the years ended 2010 through 2014, respectively.
During December 2008 management decided to cease all marketing efforts under the Dr. Vetz trademark acquired in September 2007. The demand for these products declined significantly and products held in inventory only had a shelf-life of three months, causing the Company to destroy the entire remaining inventory. The Company recorded a loss on the disposal of this product line of $598,000 in 2008 consisting of inventory of $339,000 and the trademark valued at $259,000 (net of $37,000 accumulated amortization).
In August 2008 CURA Pharmaceutical Co. (“CURA”) reached a settlement agreement on a lawsuit which had been filed against it as a result of the products which were being distributed by NutraCea/Cura LLC (“NCC”), a limited liability company formed between NutraCea and CURA. Pursuant to the terms of the agreement, CURA received a settlement of $340,000 which was assigned to NutraCea, and NCC returned its remaining inventory of approximately $135,000 to a third party. The Company recorded a loss on disposal of assets of approximately $131,000 in 2008 for the unamortized portion of the intangible asset. The overall effect of the transaction resulted in a net gain on settlement of the assets of NCC of approximately $75,000 (see Note 11 Acquisition and Joint Ventures).
| | | | | | | | | | | Loss on | |
| | | Acquisition | | Acquisition | | | Accumulated | | | Disposal | |
| | | Date | | Value | | | Amortization | | | of Asset | |
| Dr. Vetz trademark | | 8/28/2007 | | $ | 296,000 | | | $ | 37,000 | | | $ | 259,000 | |
| Cura Supply agreement | | 9/1/2007 | | | 220,000 | | | | 89,000 | | | | 131,000 | |
| | | | | | | | | | | | | | | |
| | | | | $ | 516,000 | | | $ | 126,000 | | | $ | 390,000 | |
Impairment
In July 2009, managementwe decided to sell itsour animal nutrition product related equine trademarks in order to stop competing with its major customers. The CompanyWe initiated discussions with several potential buyers to sell a supply agreement and the trademarks for $750,000 and a supply agreement. As of September 30, 2009 the net book value of the trademarks was $2.2$0.8 million. As a result of management’s decision to sell the equine trademarks, the net book value was reduced to $750,000 with an impairment charge of $1.5 million as of September 30, 2009.
An offer of $650,000$0.7 million was received from an existing customer of equine products in December 2009. Based onThe $2.2 million net book value of the written offer received, an additionaltrademarks was reduced to $0.7 million, with impairment was recordedcharges totaling $1.5 million in December 2009 of $100,000.
The transaction closed in April 2010 for $650,000 plus closing costs. 2009. ��The equine trademarks representing a value of $650,000 are$0.7 million were classified as assets held for salesale–trademarks as of December 31, 2009.
Note 10. Notes Receivable
In March 2010, Manna Pro Products, LLC (Manna Pro) agreed to purchase from us (i) the Natural Glo, Satin Finish and Max-E-Glow trademarks and intellectual property for $0.7 million and (ii) certain supplies and inventory. In April 2010, the asset sale closed and total consideration was $0.8 million. As of December 31, 2009,a condition to the Company held four promissory notes outstanding with an aggregate principal amount of $3,636,000. These promissory notes bear interest at annual rates between six (6%) and ten (10%) percentsale, we agreed to supply Manna Pro with the principal and all accrued interest due and payable at dates through June 2012.
As of December 31, 2008,stabilized rice bran they require to utilize the Company held four promissory notes outstanding with as aggregate principal amount of $858,000. These secured promissory notes bear interest at annual rates between six (6%) and ten (10%) percent.
A summary ofpurchased assets. All products sold by Manna Pro under the activity in the notes receivable account, before deduction for estimated uncollectable amount, for the periods ended December 31, is as follows:
| | | | | | | | | Herbal | | | VTLV/ | | | | | | | | | Ceautamed | | | | | | | |
| | | ITV | | | CURA | | | Science | | | VTLV II | | | Diabco | | | VLI | | | Worldwide | | | Other | | | Total | |
| Balance as of 12/31/07 | | $ | 1,978,000 | | | $ | — | | | $ | 150,000 | | | $ | 550,000 | | | $ | 500,000 | | | $ | — | | | $ | — | | | $ | 47,000 | | | $ | 3,225,000 | |
| Notes receivable issued - 2008 | | | 221,000 | | | | 211,000 | | | | — | | | | — | | | | 43,000 | | | | — | | | | — | | | | 40,000 | | | | 515,000 | |
| Payments received | | | (1,978,000 | ) | | | (53,000 | ) | | | — | | | | — | | | | — | | | | — | | | | — | | | | (48,000 | ) | | | (2,079,000 | ) |
| Deconsolidation of VLI | | | — | | | | — | | | | — | | | | — | | | | — | | | | 666,000 | | | | — | | | | — | | | | 666,000 | |
| Write off of notes receivable | | | (221,000 | ) | | | — | | | | — | | | | — | | | | (543,000 | ) | | | (666,000 | ) | | | — | | | | (39,000 | ) | | | (1,469,000 | ) |
| Balance as of 12/31/08 | | $ | — | | | $ | 158,000 | | | $ | 150,000 | | | $ | 550,000 | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 858,000 | |
| Notes receivable issued - 2009 | | | — | | | | — | | | | — | | | | — | | | | — | | | | — | | | | 3,400,000 | | | | — | | | | 3,400,000 | |
| Payments received | | | — | | | | (72,000 | ) | | | (150,000 | ) | | | — | | | | — | | | | — | | | | (400,000 | ) | | | — | | | | (622,000 | ) |
| Balance as of 12/31/09 | | $ | — | | | $ | 86,000 | | | $ | — | | | $ | 550,000 | | | $ | — | | | $ | — | | | $ | 3,000,000 | | | $ | — | | | $ | 3,636,000 | |
During the year ended December 31, 2009, the Company entered into one promissory note arrangementtrademarks being purchased will be co-branded with a principal amount of $3,400,000 and received payments totaling $622,000 on all notes receivable.
As of December 31, 2006, the Company hadNutraCea SRB logo. In 2009, a $500,000 promissory note from ITV, an infomercial customer. The note accrued interest at 6% and payments were due over a one year period. In February 2007, the Company entered into a new promissory note with ITV with the principal amount of $3,966,000, representing $446,000 in principal amount outstanding from December 31, 2006 and an additional amount of $3,520,000. The note accrued interest at 7% and had weekly scheduled payments over a one year period. The Company obtained a security interest in certain assets of ITV to secure payments under the note. As of November 2007, $3,385,000 had been paid on the promissory note, and a principal amount of $581,000 was still outstanding. In November 2007, the Company entered into another promissory note with ITV for the principal amount of $1,968,000. This note accrued interest at 6% and was due over the period of five months. As of December 31, 2007, the total principal amount outstanding on the two promissory notes to ITV was $1,978,000. By February 2008, $649,000 in payments had been received on the notes, and the remaining amount of $1,329,000 was converted into a new promissory note along with an additional amount of $221,000 which primarily represented accrued interest. The new promissory note total of $1,550,000 carried scheduled payments over a five month period. As of December 31, 2008, the Company has collected $1,329,000 and had written off the remaining balance of $221,000.
In September 2008, the Company entered into a promissory note with CURA for $211,000. CURA had arranged for the sale of various products for the Company, but failed to deliver the collected funds$1.6 million non-cash charge related to the Company. The note carried equal monthly payments over a twelve month period beginning October 2008. The Company received a security interestassets sold is reflected as loss on impairment of trademarks in CURA’s rights and interest in NutraCea/CURA, LLC, a limited liability company formed between NutraCea and CURA. The Company received the scheduled payments through April 2009 totaling $125,000. The Company has not received any payments since April 2009 and has established a reserveour consolidated statements of $86,000 as of December 31, 2009 for the amount outstanding.operations.
In December 2007, the Company formed Rice Rx LLC (“RRX”) with Herbal Science Singapore PTe Ltd. (“HS”) (See Note 11 - Acquisitions and Joint Ventures). In conjunction with the formation of RRX, NutraCea sold, an exclusive license to develop, manufacture and sell certain SRB isolates and identify and commercialize certain patentable pharmaceuticals to HS for $300,000. Payment for this license was made in the form of $150,000 cash and the execution of a promissory note for $150,000 at the prime rate of interest and was due within one year. Payment of the entire p rincipal amount was received in January 2009.NOTE 11. EQUITY METHOD INVESTMENTS AND OTHER INVESTMENTS
In June 2006, the Company issued a promissory note for $300,000 to VTLV, LLC (“VTLV”) to assist VTLV in purchasing $1,000,000 in principal amount of secured convertible notes and 1,000,000 shares of Series D Preferred Stock of Vital Living, Inc. (“VLI”) (See Note 11 – Acquisition and Joint Ventures) for an aggregate discounted amount of approximately $417,000. The note bore an interest rate of 6% and was due and payable along with all accrued interest in May 2007. As of December 31, 2008, the entire principal balance was outstanding. This remaining balance of the note was fully reserved as of December 31, 2008.Equity Method Investments
In December 2006, the Company issued a promissory note for $250,000 to VTLV II, LLC (“VTLV II”) to assist VTLV II in purchasing $1,943,000 in principal amount of secured convertible notes of VLI (See Note 12 - Acquisitions and Joint Ventures) for a discounted amount of $1,077,000. The note bore an interest rate of 6% and was due and payable along with all accrued interest in October 2007. As of December 31, 2008, the entire principal amount was outstanding. The note was fully reserved as of December 31, 2008.
The current management of the Company is unaware of the business reasons for making the above loans to VTLV and VTLV II.
In September 2006, the Company entered into a Supply Agreement with VLI whereas NutraCea would supply to VLI and VLI would exclusively purchase from NutraCea its entire requirement of stabilized rice bran. The term of the supply agreement was for five years. VLI signed a promissory note in the principal amount of $300,000 plus interest to be paid in sixty consecutive monthly payments of $6,000 beginning on October 1, 2007. The interest rate on the note was 5% per annum. A principal payment of approximately $84,000 was received by the Company in the second quarter of 2007, and the remaining principal amount and accrued interest were written off as of December 31, 2008.
In December 2006, the Company entered into a Label License agreement with VLI whereby the Company granted VLI the right to use various NutraCea patents with regards to marketing, distribution and sale of a joint inflammation product. A note was signed for the principal amount of $450,000 plus interest to be paid in 36 consecutive monthly principal installments of $12,500 beginning on September 1, 2007 until paid in full. The interest rate for the note was 8%. No payments were received on this note and the entire principal amount and accrued interest amounts were written off as of December 31, 2008.
In December 2006, the Company entered into a Supply Agreement with Diabco whereby Diabco agreed to buy and the Company agreed to sell them certain products. Also in December 2006, the Company sold to Diabco $365,000 of its products. In April 2007, Diabco requested an extension to pay amounts owed due to a longer than anticipated timeframe to develop and market its product. In April 2007, the Company rolled the accounts receivable balance as well as a cash advance for approximately $135,000 into a promissory note totaling $500,000. The note had an annual interest of 10% and was secured by a warrant (“Warrant Collateral”) to purc hase Company stock held by Diabco. No payment was received in 2007 on the outstanding notes receivable. In January 2008, the Company entered into a new promissory note for $542,500 representing the principal balance of $500,000, accumulated interest of $17,500, and a default penalty of $25,000. The note had an annual interest rate of 10% and was secured by the Warrant Collateral. As of the end of 2008, the Company had received no payments on the notes receivable, and the value of the Warrant Collateral had reduced to zero. Accordingly, the notes were written off as of December 31, 2008.
In November 2006, the Company entered into a promissory note with Famous Discoveries, an infomercial customer, for $400,000. The note accrued interest at 6% per annum and was due in February 2007. In March 2007, the note was paid in full. The Company entered into a new promissory note in March 2007 with this customer. The note was for $300,000, accrued interest at 8.25%, and was due in 180 days. As of December 31, 2007, no payments had been made on the note, and the Company wrote off the entire principal amount and accrued interest.
In July 2009, the Company entered into a purchase agreement with Ceautamed Worldwide, LLC (“CW”) in which NutraCea sold to CW its rights in VLI. These rights included senior secured convertible promissory notes having a principal amount of approximately $4.2 million, 1,000,000 shares of VLI’s Series A Preferred Stock, and rights assigned to NutraCea under the original security agreement between VLI and the original holders of the promissory notes. Total consideration for the purchase agreement was $3,600,000 with CW making a deposit of $200,000 and a promissory note was signed for the remaining principal amount of $3,400,000 T he note bears interest at the greater of (i) the prime rate of interest (as quoted by Wells Fargo Bank, N.A. at its San Francisco branch), plus an additional one percent per annum, and (ii) two and one half percent per annum. The interest rate shall not exceed six percent per annum. The initial interest rate will remain in effect for the first twelve month period with the interest rate for each successive twelve month period being determined on the first day of such twelve month period. Principal payments of $100,000 per month are to be made each month beginning September 1, 2009, and continuing for thirty four consecutive months. One half of all of the accrued and unpaid interest is due on July 1, 2012, with the remaining one half due on August 1, 2012. As of December 31, 2010, the Company has received all of the principal payments due on the note.
Provision for doubtful notes receivable:
The Company maintains an allowance for doubtful accounts on the notes receivable based upon expected collection. A summary of the activity in the allowance for doubtful accounts for the year ended December 31, 2009, 2008 and 2007 are as follows:
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | |
| Balance, beginning of period | | $ | 550,000 | | | $ | 250,000 | | | $ | — | |
| Provision for allowance for doubtful notes receivable | | | | | | | | | | | | |
| charged to operations | | | 86,000 | | | | 1,877,000 | | | | 250,000 | |
| Losses charged against allowance | | | — | | | | (1,577,000 | ) | | | — | |
| Balance, end of period | | $ | 636,000 | | | $ | 550,000 | | | $ | 250,000 | |
Note 11. Acquisition and Joint Ventures
Irgovel
On January 31, 2008, NutraCea, through its’ wholly owned subsidiary Nutra SA, entered into a Quotas (share) Purchase and Sale Agreement (“Purchase Agreement”) with the Quota Holders (“Sellers”) of Irgovel - Industria Riograndens De Oleos Vegetais Ltda. (“Irgovel”), a limited liability company organized under the laws of the Federative Republic of Brazil. Irgovel owns and operates a rice bran oil processing facility in Pelotas, Brazil.
In February 2008, the Company completed the purchase of Irgovel paying $14,237,000 for 100% of the company. The Company used the purchaseOur equity method of accounting to record this transaction. Under the purchase method of accounting, the assets acquired and liabilities assumed from Irgovel were recorded at the date of acquisition, at the preliminary estimate of their respective fair values. The purchase price plus acquisition costs exceeded the fair values of acquired assets and assumed liabilities. This resulted in the recognition of goodwill in the amount of $5,579,000.
The total consideration of $14,237,000 included approximately $354,000 in legal fees which were capitalized as part of the purchase price. Additionally, the Company agreed to fund as necessary up to $5,300,000 to pay deferred taxes due to the Brazilian government. These deferred taxes are included in notes payable in the liabilities on Irgovel’s financial statements and are payable over periods through November 2024. Under the terms of the acquisition, the Company has escrowed approximately $2,023,000 to fund certain potential pre-acquisition litigation cost of Irgovel. This amount is recorded as restricted cash within the consolidated assets as of December 31, 2009 and will be released upon resolution of certain pre-acquisition litigation. The balance remaining in the escr ow account is $1,917,000 and $1,915,000investment as of December 31, 2010 and 2009, respectively.
The following table summarizes the estimated fair valuesis related entirely to our investment in Grain Enhancement, LLC. Loss on equity method investments is comprised of the assets acquired and liabilities assumed at the date of acquisition:following (in thousands):
| | | 2010 | | | 2009 | |
| | | | | | | |
| PIN | | $ | - | | | $ | (29 | ) |
| Grain Enhancement | | | (42 | ) | | | (51 | ) |
| RRX | | | - | | | | (138 | ) |
| Loss on equity method investments | | $ | (42 | ) | | $ | (218 | ) |
| Cash | | $ | 79,000 | |
| Accounts receivable | | | 1,243,000 | |
| Inventory | | | 837,000 | |
| Other current assets | | | 602,000 | |
| Property, plant and equipment | | | 15,047,000 | |
| Intangibles | | | 5,452,000 | |
| Other non-current assets | | | 18,000 | |
| Goodwill | | | 5,579,000 | |
| Total assets acquired | | | 28,857,000 | |
| | | | | |
| Current liabilities | | | 2,791,000 | |
| Other non-current liabilities | | | 5,785,000 | |
| Deferred tax liability | | | 6,044,000 | |
| Total liabilities assumed | | | 14,620,000 | |
| | | | | |
| Net assets acquired | | $ | 14,237,000 | |
PIN
See Note 12 for pro forma consolidated results of operations presented as though the acquisition had occurred on January 1, 2007.
Nutra SA, LLC Membership Interest Purchase Agreement
On December 29, 2010, NutraCeaIn 2009, we entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with Nutra SA, LLC, NutraCea’s wholly-owned subsidiary (“Nutra SA”), Irgovel, Nutra SA’s wholly-owned subsidiary, and AF Bran Holdings-NL LLC and AF Bran Holdings LLC (collectively, the “Investor”). The transaction was consummated and closed on January 18, 2011.
Pursuantan agreement to the Purchase Agreement, the Investor agreed to purchase from NutraCea or Nutra SA, as applicable, an aggregate of 3,862,500 units in Nutra SA for an aggregate purchase price of $7,725,000 of which NutraCea will receive $4,000,000 of the proceeds. Following the consummation of the foregoing transactions, NutraCea will own 7,000,000 units, or a 64.4%sell our 51% interest in Nutra SA and the Investor will own 3,862,500, or a 35.6% interest, in Nutra SA. The remaining amount of $3,725,000, less $500,000 retained by Nutra SA for administrative expenses, was invested in Irgovel to be used for capital improvements and working capital needs.
In addition, upon the occurrence of certain events and conditions as described in the Purchase Agreement, the Investor may be required to purchase from NutraCea or Nutra SA, as applicable, a number of units of Nutra SA, at $2.00 per unit, resulting in the Investor holding upPT Panganmus Inti Nusantara (PIN), an Indonesian company, to a 49% interest in Nutra SA.
NutraCea agreed to use $2,200,000 of the funds it received from the transaction to repay amounts owed to its general unsecured creditors in accordance with its Amended Plan of Reorganization.buyer. The remaining $1,800,000 was used for general corporate purposes, unsecured creditor claims and administrative expenses associated with the Chapter 11 Reorganization.
NutraCea will be restricted from competing with Nutra SA and Irgovel in Brazil as further described in the Purchase Agreement. Management is assessing the accounting impact of this transaction.
Medan, LLC.
On January 24, 2008, NutraCea, through its newly formed wholly-owned subsidiary, Medan, LLC, a Delaware limited liability company, entered into a stock purchase agreement (“Purchase Agreement”) with Fortune Finance Overseas Ltd., a British Virgin Islands company (“FFOL”). Pursuant to the Purchase Agreement, on March 28, 2008, Medan purchased 9,700 outstanding shares of capital stock of PT Panganmas Inti Nusantara, an Indonesian Company (“PIN”) from FFOL for $8,175,000 (“First Purchase”). In June 2008, Medan purchased an additional 3,050 shares of PIN’s capital st ock directly from PIN for $2,500,000. Of the 3,050 shares, 2,550 were voting shares and 500 were non-voting shares. The total consideration paid by NutraCea for both purchases through Medan was $10,675,000. After the completion of these two transactions, NutraCea owned 51% and FFOL owned 49% of the capital stock of PIN. Our investment agreement provides for 50% voting rights for NutraCea and FFOL. Accordingly, our interest is non-controlling and therefore our investment is accounted for under the equity method.
The Company made this acquisition in order to construct and operate a wheat mill incorporating the Company’s stabilization technology. PIN owns land and obtained the permits necessary to construct a wheat facility in Kuala Tnajung, Medan, and North Sumatra, Indonesia. Medan and FFOL entered into a voting agreement wherein each party will vote all of its shares in a manner so that PIN’s Board of Directors and Board of Commissioners shall consist of an even number of persons designated each by Medan and FFOL. The Purchase Agreement required the Company to pay Theorem Capital Partners a $500,000 commission upon the completion of the transaction. This commission was paid in equal installments in June and July, 2008. Additionally, upon completion of the transaction the Comp any granted to Theorem an option to purchase 500,000 shares of the Company’s common stock at an exercise price per share of $1.50, which expires in five years. The fair value of this option is approximately $128,000 and was charged to professional fees in the Company’s results of operations during the third quarter of 2008.
Concurrently with the Purchase Agreement, NutraCea entered into a Wheat Bran Stabilization Equipment Lease (“Lease”) with PIN. Pursuant to the Lease, NutraCea would lease to PIN wheat stabilization equipment developed by NutraCea for the use at PIN’s facility. The term of the lease was fifteen years with an automatic extension of five years if the PIN stabilized wheat bran facility was fully operational and the equipment leased from NutraCea was still located in and being used at the facility. The amount of the rent for the leased equipment would be equal to NutraCea’s actual cost of purchasing, manufacturing, and installing the equipment, and would be due and payable, in one single payment, thirty days following the installation of the equipment at the facility. At December 31, 2008, minimal spending had occurred towards capital or operational expenses.
Prior to the Company’s initial acquisition of its shares, PIN was engaged in a flour trading operation. PIN divested itself of its trading operations in the first quarter of 2008 before the Company made the First Purchase. After the date of the Company’s initial investment, PIN has had no sales and its operational expenses were only those related to the preparation of the wheat mill project.
In March 2008, PAHL paid to the Company $5 million as a License Fee for an exclusive license and distribution rights for the production and sale of SRB and SRB derivative products in certain countries in Southeast Asia. A principal shareholder of FFOL was also a principal shareholder of PAHL, and the Company’s receipt of payment for the License Fee was made at the same time the Company decided to make the First Purchase of the PIN shares. Based in part upon the related ownership of FFOL and PAHL, the timing of the payments, the sub-license of PAHL’s rights under the License to Grain Enhancement and the Company’s determination of the value of the PIN shares, the Company believes the First Purchase of the PIN shares and the payment of the License Fee should be viewed as a combined event with relat ed parties, causing the Company to value the First Purchase of the PIN shares at $3.175 million instead of $8.175 million.
On July 23, 2009, Medan entered into a Stock Purchase Agreement with FFOL to sell its 12,750 shares of capital stock of PIN to FFOL, which shares represent 51% of the currently issued and outstanding capital stock of PIN (“Agreement”). Pursuant to the Agreement, FFOLbuyer agreed to pay $1,675,000 to Medan,us $1.7 million thus completely liquidating NutraCea’sour ownership in PIN. Based upon the liquidation of the Company’s ownership in PIN, the CompanyAs a result, we recorded as of December 31, 2008 an impairment charge of $3,996,000in 2008 to reduce the PIN investment at December 31, 2008 to $1,675,000. As$1.7 million. In 2009, we received $1.6 million in cash, which was net of August 31, 2009, the Company had received $1,591,000 with the remaining amount of $84,000$0.1 million representing taxes withheld by the Indonesian Go vernment. The Company has written-offwithheld. We wrote-off the taxes withheld amount as of December 31,in 2009.
The Company’s share of the net loss of PIN for the period from March 28, 2008 through December 31, 2008 and the year ended December 31, 2009 was approximately $4,000 and $29,000, respectively.
Infomaxx, LLC
In December 2006, our wholly-owned subsidiary Nutramercials, Inc. acquired a 50% interest in Infomaxx,Grain Enhancement, LLC (“INFMX”). INFMX was determined to be a variable interest entity of which NutraCea was the primary beneficiary. As such its’ financial position and operations were included in our Consolidated Financial Statements at December 31, 2006.
In August 2007, the Company became the sole member of INFMX after the Company purchased from the other member of INFMX their 50% interest in INFMX by canceling a $300,000 note payable to NutraCea by the other member. The Company received along with the 50% interest all rights to a certain trademark and product line of the former member. The Company recorded an intangible asset of $296,000 in connection with the acquisition of the trademark and product line. Additionally, in order to consummate this transaction, the Company agreed to accept the return of $275,000 of inventory from the other previous member of INFMX which the Company sold them in December 2006 for $1,551,000.
NutraCea/Cura LLC
In August 2007, the Company formed NutraCea/Cura, LLC (“NCC”) with CURA Pharmaceuticals (“CURA”) and the Company acquired a 60% in NCC. NCC was established to jointly develop, produce, market, and sell nutraceutical and pharmaceutical products. In December 2007 we acquired from CURA 75% of their 40% interest in NCC of $120,000 which increased the Company’s interest to 90%. Accordingly we have consolidated NCC in our financial statements. The Company recorded an intangible asset of $220,000 which the Company was amortizing on a straight-line basis over a period of five years.
NCC entered into a supply agreement with a co-packer for materials with minimum purchase requirements of approximately $1,150,000 for the first year with an increase to the then current minimum of 5% per year over the term of the agreement. The initial term was for three years, and would automatically renew for a one year periods unless either party terminates the agreement in accordance with the provisions of the supply agreement. If the minimum purchase commitments were not met in any year, the co-packer of the products may terminate the supply agreement.
In August 2008, CURA reached a settlement agreement on a lawsuit which had been filed against it as a result of the products which were being distributed by NCC. Pursuant to the terms of the agreement, CURA received a settlement of $340,000 which was assigned to NutraCea, and NCC returned its remaining inventory of approximately $135,000 to a third party. The Company recorded a loss on disposal of assets of approximately $131,000 for the unamortized portion of the intangible asset. The overall effect of the transaction resulted in a net gain on settlement of the assets of NCC of approximately $75,000 in 2008.
In September 2008, the Company entered into a promissory note with CURA for $211,000. CURA had arranged for the sale of various products for the Company, but failed to deliver the collected funds to the Company. The note carried equal monthly payments over a twelve month period beginning October 2008. The Company received a security interest in CURA’s rights and interest in NCC. The Company has received the scheduled payments through April 2009 totaling $125,000. The Company has not received any payments since April 2009 and established a reserve of $86,000 during 2009 for the principal amount still outstanding.
Grainnovation, Inc.
In April 2007, the Company acquired 100% of the outstanding stock of Grainnovation, Inc. (“GI”) a privately held company in Freeport, Texas which manufactures SRB pellets and other SRB products for equine customers for a total of $2,150,000.
In May 2009, this facility was closed due to lack of demand and reduction in company wide capacity needs. At the time this location employed five people who were terminated as a result of the closure. No termination benefits were paid as a result of the closure. All of the goodwill associated with the purchase was impaired as of December 31, 2008. All of the property, plant and equipment and intangibles were fully depreciated and amortized as of the date of the closure.
Grain Enhancements LLC
In June 2007, NutraCea, PAHL,we established, along with Pacific Holdings Advisors Limited (PAHL) and two other entities, (Theorem and Ho’okipa Capital Partners) entered into a limited liability company agreement (“GE Agreement”) to establish Grain Enhancement, (“GE”)LLC (GE), a Delaware limited liability company. The equity position in GE of the four entities was: 47.5% for NutraCea, 47.5% for PAHL, and 3.333% and 1.6667% for the other two entities. The equity interests of NutraCeaWe and PAHL are designated as Classclass A members, and the other two entities are designated as Classclass B members. Only Classclass A members are allowed to participate on the GE Finance Committee,finance committee, and are the only members required to make capital contri butionscontributions to GE. The purposes of GE were: (i) to sublicense or otherwise acquire from PAHL all of the rights granted to PAHL under the License Agreement;license agreement; (ii) within the territory, to establish, construct, and operate one or more rice bran stabilization facilities utilizing the proprietary technologies licensed in the License Agreement;technologies; (iii) to manufacture, distribute, sell, advertise, promote, market and otherwise commercialize SRB products throughout the territory; and (iv) to engage in any and all other activities reasonably related to the foregoing. One of the minority partners was paid $750,000 and $500,000 by NutraCea and GE, respectively, for services related to the formation of GE.
Both NutraCea and PAHL agreed to make $5,000,000 (for a total maximum of $10,000,000) cash contributions to GE based upon the following schedule: $1,500,000 each on or before June 30, 2007, $2,000,000 each on or before October 30, 2007, and $1,500,000 each on or before August 31, 2008. The initial payments of $1,500,000 due on or before June 30, 2007 were made by both NutraCea and PAHL. The GE Agreement along with other related agreements also required NutraCea to; (i) grant PAHL a warrant to purchase 1,500,000 shares of common stock of NutraCea at an exercise price of $5.25 per share; (ii) enter into a Rice Bran Supply Agreement with GE; and (iii) enter into a Rice Bran Stabilization Equipment lease. The warrant was to vest and become exercisable as to 375,000 shares of Common Stock on July 1, 2007, and shall vest and become exercisable as to 375,000 shares of Common Stock on each of October 1, 2007, February 1, 2008 and May 1, 2008; provided however, that the warrant shall not vest and Holder may not exercise the warrant, or any portion thereof, until GE had entered into one or more binding contracts with one or more rice millers to supply to GE at least 20,000 tons of usable raw rice bran per year. As of December 31, 2007, performance was not completed to earn the initial warrant to purchase 1,500,000 shares of NutraCea common stock, therefore no vesting had occurred and it appeared improbable that the performance would be met by the June 2008 expiration date. The original award was going to be forfeited because the construction of the rice mill facility had not begun nor were plans in p lace to begin the construction of the rice mill facility. The $2,000,000 contribution due to GE on or before October 30, 2007 was not contributed by either NutraCea or PAHL, and on January 24, 2008, certain terms of the GE Agreement were amended by NutraCea and PAHL. The amendment suspended the contribution of the remaining $7,000,000 ($3,500,000 by each party) to a date when GE’s finance committee determines that all or any portion of the remaining cash contributions are necessary for the successful operation of the business. In addition, PAHL would no longer receive a monthly management fee.
Concurrently with the January 24, 2008 amendment, NutraCea agreed to issue to PAHL a new warrant (“Warrant”) for the purchase of 1,000,000 shares of NutraCea common stock at an exercise price of $2.50 per share, and PAHL agreed to cancel the existing warrant for the purchase of 1,500,000 shares at an exercise price of $5.25. The Warrant shall vest and become exercisable in full upon GE entering into one or more letters of intent with one or more rice millers to supply to GE an initial 4,000 tons of usable raw rice bran per year. The performance conditions for the Warrant were satisfied on March 24, 2008 with a Letter of Intent between GE and Gentraco, Vietnam which was signed on March 26, 2008 for 10,000 tons of fresh rice bran. In this case the fair value of the equity instruments is more reliably measurable than the fair value of the goods or services received. The Company estimated the fair value of the Warrant at the respective date using the Black-Scholes Merton option valuation model, based on the estimated market value of the underlying stock at the valuation measurement date, the contractual term of the Warrant, risk-free interest rates, expected dividends, and expected volatility of the price of the underlying stock. The value of the Warrant was estimated at $132,000 using the Black-Scholes Merton model. The Warrant issued to PAHL was recorded as a liability because the Warrant contains a provision where it is required to be settled for cash if certain events occur. The warrants do not contain any down-round or anti-dilutive features and expired on January 24, 2010.
The Company accounts for its investment in GE under the equity method of accounting as we do not maintain control over GE. For the years ended December 31, 2009, 2008 and 2007, the Company’s share of Grain Enhancement net loss was $51,000, $98,000 and $309,000, respectively.
In October 2009, the Company withdrew $950,000we received a distribution of $1.0 million in available cash from the joint ventureGE to facilitatemeet cash requirements. At December 31, 2009Currently there are no ongoing operational GE activities and 2008 the value ofthere are no commitments on our investment was $91,000 and $1,093,000, respectively.
Vital Living, Inc.
In April 2007, the Company acquired the outstanding shares of Series D Convertible Preferred Stock (“Preferred Stock”) and Secured Convertible Notes (“Notes”) of Vital Living, Inc. (“VLI”), a publicly traded company. VLI distributed nutritional supplements. VLI had a set of products that were complementarypart to our products and an established marketing channel that would enable NutraCea to market its own products without the expense of building the marketing base. In addition, some of VLI’s products were suitable for modification to include NutraCea’s SRB as a key ingredient, which the Company believed would further enhance and develop the NutraCea brand. The Company paid $1,000,000 for the 1,000,000 shares of Preferred Stock and $4,226,000 for the outstanding Notes. The Preferred Stock had a liquidation preference of $1.00 per share senior to the liquidation preferences of VLI Series B Preferred Stock and Series C Preferred Stock. The Notes bear interest at 12% per annum, payable June 15 and December 15, maturemake additional investments in December 2008 and were secured by substantially all of VLI’s assets. Originally, the Notes were convertible into VLI common stock and VLI had the option of paying the interest on the Notes in shares of VLI common stock. At the time of the acquisition of the Preferred Stock and Notes, the Company’s Chief Executive Officer and President, Mr. Edson, was the former CEO and President of VLI from May 2001 to January 2004, and the President of the predecessor company of VLI from April 1999 to May 2001. Mr. Edson is no longer the Company’s CEO and President.GE.
The Company purchased the Notes and Preferred Stock of VLI, Inc. as a means of affecting a subsequent acquisition of the productive assets of VLI, either through a merger or asset purchase. The Company’s purchase of the Preferred Stock allowed the Company to control an outstanding class of capital stock, and the purchase of the Notes allowed the Company to obtain a senior secured position with respect to VLI’s assets.
On September 11, 2007, NutraCea and VLI entered into a letter of agreement to eliminate the conversion rights of the Notes. In addition, the parties agreed that until such time, if any, as NutraCea gives 30 days prior written notice to VLI, VLI may not pay accrued interest under the Notes in shares of VLI Common Stock without NutraCea’s consent, and that during such time VLI would not be deemed to be in default under the Notes as a result of not paying accrued interest in such shares.
On September 28, 2007, the Company entered into an Asset Purchase Agreement (“Asset Purchase Agreement”) with VLI which provided that the Company would purchase substantially all of VLI’s intellectual property and other assets used by VLI and certain subsidiaries in its business, including rights to nutritional supplements and nutraceutical products that are marketed for distribution to healthcare practitioners. As part of the transaction, VLI would assign to NutraCea its rights under various distribution and other agreements relating to the products being acquired. The Company would not acquire the inventory, raw materials, cash, or accounts receivable of VLI.
The purchase price consisted of (i) $1,500,000 to be paid by NutraCea at closing, (ii) cancellation of outstanding indebtednesses of VLI, its subsidiaries and certain of its related entities to NutraCea, including all of the Notes, and (iii) cancellation of all of the shares of Preferred Stock of VLI held by NutraCea. Completion of the transaction was subject to a variety of customary closing conditions, including, among other things, the approval of the transaction by the stockholders of VLI at a special meeting and the absence of a material adverse effect on the assets between the date of the agreement and the closing date.
In October 2008 we terminated the agreement pursuant to the terms under the termination section of the Asset Purchase Agreement, which required VLI’s shareholders to approve such transactions. The approval of the VLI shareholders never transpired.
VLI qualified as a VIE and the Company was determined to be the primary beneficiary. The Company accounted for the purchase of the Preferred Stock and Notes of VLI by consolidating VLI into its financial statements from the date of acquisition through September 30, 2008.
The purchase price allocated to assets and liabilities in April 2007 was as follows:
| | |
| Assets | |
| Cash | | $ | 83,000 | |
| Accounts receivable | | | 1,017,000 | |
| Inventory | | | 30,000 | |
| Property and equipment | | | 15,000 | |
| Other Assets | | | 15,000 | |
| Goodwill | | | 6,278,000 | |
| Total Assets | | $ | 7,438,000 | |
| | | | | |
| Liabilities | |
| Accounts payable | | $ | 737,000 | |
| Accrued liabilities | | | 725,000 | |
| Notes payable | | | 750,000 | |
| Total liabilities and equity | | | 2,212,000 | |
| | | | | |
| Net Assets Acquired | | $ | 5,226,000 | |
The Company has included VLI’s results of operation for the period from April, 19, 2007 through December 31, 2007, and September 30, 2008 in its results of operations.
The following table shows the effect of consolidating VLI into the Company’s financial statements (before inter-company eliminations) as of :
| | | September 30, 2008 | | | December 31, 2007 | |
| Total assets | | $ | 6,485 | | | $ | 6,854 | |
| Total liabilities | | | 2,558 | | | | 3,142 | |
| Shareholders’ equity | | | 3,927 | | | | 3,712 | |
| | | | | | | |
| Revenue | | $ | 1,718 | | | $ | 601 | |
| Cost of goods sold | | | 1,142 | | | | 378 | |
| Gross profit | | | 576 | | | | 223 | |
| Operating expense | | | 361 | | | | 1,558 | |
| Impairment of Goodwill | | | — | | | | 1,300 | |
| Net income (loss) | | $ | 215 | | | $ | (2,635 | ) |
In the fourth quarter of 2008, the Company determined that it no longer had a controlling financial interest and deconsolidated VLI as of October 1, 2008. The effect of the deconsolidation on the Company’s consolidated balance sheet at December 31, 2008 was a reduction in total assets of $2,859,000 (after inter-company eliminations), a reduction in total liabilities of $1,799,000 (after inter-company eliminations), and a reduction in shareholder equity of $1,060,000 (after inter-company eliminations). The standalone effect of VLI on the Company’s consolidated results of operations, net of inter-company eliminations, for the twelve months ended December 31, 2008 was an increase in revenues of $1,718,000, an increase in cost of goods sold of $1,142,000, an increase in operating expenses of $496,000, an increase in other expenses of $ 245,000, and a decrease in profit of $165,000.
As part of the deconsolidation of VLI, the Company recorded an impairment charge of $1,600,000 representing the difference between the carrying amount of the Notes and Preferred Stock of VLI and the consideration paid by Ceautamed. The Company also recorded a gain on deconsolidation of $2,799,000 as a result of the deconsolidation of VLI. This resulted in a net gain on deconsolidation of $1,199,000 as of December 31, 2008.
Rice ScienceRx LLC
In December 2007, the Companywe formed Rice Science,Rx LLC (“RS”)(RRX), a Delaware limited liability company, with Herbal Science Singapore Pte. Ltd. (“HS”)(HS), a Singapore corporation. The Company formed RS to acquire from HS certain isolates license rights and to commercialize and sell SRB isolates. NutraCea and HS have an 80% and 20% interest in the operating results, respectively.
The Company made an initial capital contribution to RS in December 2007 of $1,200,000 as specified in the agreement. HS contributed certain Licenses as their capital contribution with a deemed value of $440,000. HS has no interest in the initial capital contribution made by NutraCea. There are no further capital contributions required of either member.
NutraCea holds an 80% interest in RS and therefore accounts for the investment as a fully consolidated subsidiary. In 2008, RS made payments totaling $400,000 to Herbal Science for on-going research programs to commercialize SRB isolates. These amounts are included in our consolidated statement of operations under Research and Development expenses.
In February 2009, the Company withdrew $850,000 in available cash from RS to meet the ongoing cash requirements of the parent.
Rice RX LLC
In December 2007 the Company formed Rice Rx LLC (“RRX”), a Delaware limited liability company, with Herbal Science Singapore Pte. Ltd. (“HS”), a Singapore corporation. The CompanyWe formed RRX to obtain all of the rights granted to HS with regard to the patentable pharmaceuticals under thea license agreement with the Companybetween us and HS and to develop, patent, own, market, distribute, and otherwise commercialize the patentable pharmaceuticals throughout the territory (entire world). NutraCea and HS eachpharmaceuticals. We have a 50% interest in RRX.
CommencingRRX and HS has a 50% interest in July 2008, if and to the extent the members determine that capital contributions are necessary, each member agreed to contribute capital of up to $150,000.
In conjunction with the formation of RRX, NutraCea sold to HS, for $300,000, an exclusive license to develop, manufacture and sell certain SRB isolates and identify and commercialize certain patentable pharmaceuticals. Payment for this license was made in the form of $150,000 cash and the execution of a promissory note payable to NutraCea for $150,000 at the prime rate of interest and due within one year.
Investment in RRX is accounted for under the equity method of accounting. As ofRRX. Since inception through December 31, 20092010, capital contributions of $138,000$0.1 million had been made by each party. For
NutraCea
Notes to Consolidate Financial Statements
Other Investments
Rice Science, LLC
In December 2007, we formed Rice Science, LLC (RS), a Delaware limited liability company, with HS. We formed RS to acquire from HS certain isolates license rights with the years ended December 31,intent to commercialize and sell SRB isolates. We hold an 80% interest and HS has a 20% interest in the operating results. In February 2009, and 2008, the Company’swe withdrew $0.9 million in available cash from RS to meet cash requirements. HS’ share of RRX’s net loss was $138,000 and $138,000, respectively.the losses of RRX are accounted for as a noncontrolling interest.
Settlement with Herbal Science.NOTE 12. SETTLEMENT WITH HERBAL SCIENCE
OnIn March 31, 2010, HS filed a proof of claim against the Parent Company in the amount of $1,503,000$1.5 million in the Chapter 11 Reorganization for damages related to breach of the RS and RRX limited liability company agreements. OnReorganization. In November 30, 2010, the Companywe entered into a stipulated settlement agreement with HS and certain affiliates, which was subsequently approved by the Bankruptcy Court. The stipulation provides that, by no later than January 31, 2011, the Companywe will pay HS $881,000.$0.9 million. Upon HS’s receipt of the payment:
a. | Thea. | We will assume the RRX and RS limited liability company agreements, together with a related supply agreement and license agreement, will be assumed by NutraCeaagreements, and the proof of claim will be deemed satisfied.satisfied; |
| | b. | HS will assign to the Companyus all of its interests in the RRX and RS limited liability companies; |
| | c. | HS and the affiliates will assign to the Companyus any interest they have in the patentable pharmaceuticals, SRB isolates and related intellectual property; |
| | d. | HS will assign to the Companyus the supply agreement, the license agreement and certain related research and development agreements; |
| | e. | HS and the affiliates will agree not to engage in any research, development, sale, distribution, commercialization, and/or manufacturing activities concerning the patentable pharmaceuticals, SRB isolates and related intellectual property; |
| | f. | HS and the affiliates will agree to cooperate with the Companyus in specified ways to protect, preserve and perfect the patentable pharmaceuticals, SRB isolates and related intellectual property; and |
| | g. | The parties will waive and release all claims against each other in regard to the limited liability companies, the supply agreement, the license agreement and the research and development agreements. |
Subsequently, inIn January 2011, the Company, HS and the affiliateswe renegotiated the stipulated settlement agreement with HS and the affiliates to provide that the payment of $881,000$0.9 million would be increased to $897,000 and deferred until the Company receiveswe receive the balance of the purchase price for the sale of up to a 49% interest in its Nutra SA subsidiary or until funds otherwise become available earlier. Until thewe satisfy our payment obligations is satisfied by the Company,obligation to HS, HS has an allowed claim for $897,000$0.9 million and will receive distributions as a general unsecured creditor without priority. We expect to pay our obligation in full no later than April 2011.
Note 12. Acquisition Pro-Forma InformationNOTE 13. DEBT
In February, 2008, the Company acquired 100% of Irgovel (see Note 11, Acquisition and Joint Ventures). Presented below are the unaudited pro forma results of operations for the twelve month periods ending December 31, 2008 and 2007 presented as though the acquisition of Irgovel had occurred on January 1, 2007. This summary of unaudited pro forma results of operations is presented for informational purposes only and does not purport to be indicative of the results of future operations of the Company or of the results that would have actually been attained had the acquisition taken place at the beginning of 2007.
| | | Twelve Months Ended December 31, 2008 | | | Twelve Months Ended December 31, 2007 | |
| | | Unaudited | | | Unaudited | |
| Total revenues | | $ | 38,212,000 | | | $ | 25,481,000 | |
| Net (loss) income available to common shareholders | | $ | (64,592,000 | ) | | $ | (19,294,000 | ) |
| Earnings per share | | | | | | | | |
| Basic | | $ | (0.40 | ) | | $ | (0.15 | ) |
| Diluted | | $ | (0.40 | ) | | $ | (0.15 | ) |
| | | | | | | | | |
| Weighted average shares : | | | | | | | | |
| Basic | | | 160,585,000 | | | | 125,938,000 | |
| Diluted | | | 160,585,000 | | | | 125,938,000 | |
Note 13. Concentration of Credit Risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of trade accounts receivable and notes receivable. The Company performs ongoing credit evaluations on our customers’ financial condition and generally does not require collateral.
For the year ended December 31, 2009, one customers accounted for a total of 14.7% of the Company’s sales. At December 31, 2009, one customer accounted for 14.1% of the Company’s accounts receivable.
For the year ended December 31, 2008, one customer accounted for a total of 14.8% of the Company’s sales:. At December 31, 2008, one customer accounted for 20.0% of the Company’s accounts receivable.
For the year ended December 31, 2007, no customer accounted for more than 10% of the Company’s sales or total accounts receivable.
Accounts receivable:
We maintain an allowance for doubtful accounts on our accounts receivables based upon expected collection of all accounts receivable. A summary of the activity in the allowance for doubtful accounts as of December 31 is summarized in the following table:
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | |
| Balance, beginning of period | | $ | 365,000 | | | $ | 20,000 | | | $ | 20,000 | |
| | | | | | | | | | | | | |
| Provision for allowance for doubtful accounts charged to operations | | | 39,000 | | | | 345,000 | | | | — | |
| | | | | | | | | | | | | |
| Losses charged against allowance | | | (251,000 | ) | | | — | | | | — | |
| Balance, at end of period | | $ | 153,000 | | | $ | 365,000 | | | $ | 20,000 | |
Bad debt expense:
The Company continuously monitors collections from customers and maintain an allowance for doubtful accounts based upon our historical experience and any customer collection issues that the Company have been identified. For year ended December 31, 2009, 2008 and 2007, the Company recorded actual bad debt expense of $125,000, $2,222,000 and $254,000 for both Accounts Receivable and Notes Receivable, respectively, while the combined allowance for doubtful accounts was $789,000 and $915,000, respectively, as of December 31, 2009 and 2008.&# 160; The Company continues to evaluate its credit policy to ensure that the customers are worthy of terms and support the business plans.
Note 14. Notes Payable and Long-Term Debt
The following table summarizes the Company’s current and long-term portions of notes payable and long-term debt as of December 31: (in thousands):
| | | 2009 | | | 2008 | |
| Current Portion | | | | | | |
| NutraCea | | | | | | |
| West Sacramento lease | | $ | 28,000 | | | $ | 24,000 | |
| Wells Fargo - Revolver loan | | | 460,000 | | | | — | |
| Wells Fargo - Real estate loan | | | 3,589,000 | | | | 5,000,000 | |
| Customer list purchase | | | 253,000 | | | | 581,000 | |
| Louisiana Rice Mill note | | | 116,000 | | | | — | |
| NutraCea total current portion | | | 4,446,000 | | | | 5,605,000 | |
| Irgovel | | | | | | | | |
| Equipment financing | | | 860,000 | | | | 155,000 | |
| Working Capital Loan | | | 901,000 | | | | — | |
| Special tax program | | | 435,000 | | | | 399,000 | |
| Irgoval total current portion | | | 2,196,000 | | | | 554,000 | |
| Total current portion | | $ | 6,642,000 | | | $ | 6,159,000 | |
| | | | | | | | | |
| Long-term portion, net of current portion | | | | | | | | |
| NutraCea | | | | | | | | |
| West Sacramento lease | | $ | 24,000 | | | $ | 52,000 | |
| Customer list purchase | | | 1,158,000 | | | | 1,280,000 | |
| Louisiana Rice Mill note | | | 176,000 | | | | — | |
| NutraCea total notes payable | | | 1,358,000 | | | | 1,332,000 | |
| Irgovel | | | | | | | | |
| Equipment financing | | | 562,000 | | | | 92,000 | |
| Special tax program | | | 4,037,000 | | | | 3,293,000 | |
| Irgoval total notes payable | | | 4,599,000 | | | | 3,385,000 | |
| Total long-term portion, net of current portion | | $ | 5,957,000 | | | $ | 4,717,000 | |
| | | | | | | | | |
| Total notes payable and long-term debt | | $ | 12,599,000 | | | $ | 10,876,000 | |
| | | As of December 31, | |
| | | 2010 | | | 2009 | |
| Domestic: | | | | | | |
| Customer list purchase | | $ | 993 | | | $ | 1,411 | |
| Supplier note | | | 177 | | | | 292 | |
| Facility lease | | | - | | | | 52 | |
| Wells Fargo DIP Credit Agreement - revolving line of credit | | | - | | | | 460 | |
| Wells Fargo DIP Credit Agreement - real estate loan | | | - | | | | 3,589 | |
| | | | 1,170 | | | | 5,804 | |
| Foreign: | | | | | | | | |
| Equipment financing | | | 290 | | | | 360 | |
| Working capital lines of credit | | | 4,404 | | | | 1,062 | |
| Special tax program | | | 4,470 | | | | 4,472 | |
| Other obligations | | | 266 | | | | 901 | |
| | | | 9,430 | | | | 6,795 | |
| Total debt | | | 10,600 | | | | 12,599 | |
| Current portion | | | 3,235 | | | | 6,642 | |
| Long-term portion | | $ | 7,365 | | | $ | 5,957 | |
NutraCea
Notes to Consolidate Financial Statements
West Sacramento Lease Note
In October 2007, the Company executed a promissory note with the lessor of the West Sacramento warehouse. The value of the note was $105,000 at 8% payable over four years for the build-out of tenant improvements. In May, 2010, the Company entered into an amendment with the lessor. As part of the amendment, the lessor forgave the balance remainingRequired future minimum payments on the promissory note, which was approximately $39,000.
Well Fargo Credit Facility
In December 2008 the Company entered into the Credit and Security Agreement (the “Agreement”) with Wells Fargo Bank, NA. (“Wells Fargo”). The credit arrangement consisted of three separate credit facilities:
- A revolving line of credit of $2,500,000 for working capital which bore interest at prime plus 2.5% and matured on November 30, 2011.
- A real estate loan of $5,000,000 for general business purposes which bore interest at prime plus 3.0% and matured on December 31, 2018.
- A term loan of $2,500,000 for general business purposes which bore interest at prime plus 3.0% and matured on November 30, 2011.
The above credit facilities were secured by the Phoenix, Arizona manufacturing building and all personal property of NutraCea other than NutraCea’s intellectual property. NutraCea may terminate any of the above facilities at any time upon 90 days notice, subject to payment of fees and repayment of the outstanding credits. NutraCea may terminate any of the above facilities at any time upon less than 90 days notice, subject to a payment of a penalty, payment of fees and repayment of the outstanding credit. Wells Fargo may terminate the facilities at any time upon an event of defaultour long-term debt as defined in the agreement. In the event of a default the interest rate will increase to 3.0% above the applicable interest rate for each facility.
On July 9, 2009, NutraCea received a letter from Wells Fargo stating that NutraCea (i) had failed to provide audited annual and quarterly financial statements and (ii) allowed a non-permitted lien to be placed on the Phoenix manufacturing facility. These events constituted an “Event of Default” under the Agreement. Based on these “Events of Default”, Wells Fargo accelerated the entire principal balance due under the three separate credit facilities listed above. At the time of the notice of default, NutraCea owed approximately $3.3 million under the credit facilities, which included principal and interest. Due to the “Event of Default”, the interest rate increased to 3.0% above the applicable interest rate for each facility. The credi t facilities were secured against personal property owned by NutraCea located at 4502 W. Monterosa Street, Phoenix, Arizona (“Monterosa Property”).
On July 31, 2009, NutraCea and NutraPhoenix, LLC a wholly-owned subsidiary of NutraCea, entered into a Forbearance Agreement and Amendment to the Credit and Security Agreement (“Forbearance Agreement”) with Wells Fargo. The Forbearance Agreement related to the credit facilities under the Agreement.
The Forbearance Agreement identified certain existing defaults under the Agreement and provided that Wells Fargo would forbear from exercising its rights and remedies under the Agreement on the terms and conditions set forth in the Forbearance Agreement, until the earlier of January 31, 2010 or until the date that any new default occurred under the Agreement. In addition, by October 31, 2009, NutraCea was required to obtain a cash infusion of at least $1,250,000 in the form of equity, subordinated debt or asset sale to be used as working capital.
The Forbearance Agreement increased the interest rates applicable to each credit facility to the default rates under the Agreement, which is 3.0% above the applicable interest rate for each facility. In addition, the Forbearance Agreement amended the Agreement by (i) decreasing the maximum amount advanced under the revolving line of credit to $1,500,000 from $2,500,000, (ii) terminated the term loan, and (iii) terminated any obligations Wells Fargo has to make any further advances to NutraCea in connection with the real estate loan. Pursuant to the Forbearance Agreement, NutraCea agreed to deliver to Wells Fargo a first priority lien on certain real property located in Dillon, Montana. As a result of signing the Forbearance Agreement the defaults were cured through January 31, 2010.
On November 10, 2009, NutraCea filed for a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Arizona (the “Chapter 11 Case”). In connection with the Chapter 11 Case, the Company, Nutra Phoenix LLC and Wells Fargo entered into a Senior Secured Super-Priority Debtor-In-Possession Credit and Security Agreement (“DIP Credit Agreement”). The DIP Credit Agreement provided for (i) up to a $2.5 million revolving loan and letter of credit facility (the “Revolver Facility”), and (ii) up to a $4.25 million term loan (“Term Loan”) with both financing facilities subject to specific borrowing bases. The proceeds of the loans and other financial accommodations incurred un der the DIP Credit Agreement were used to satisfy the outstanding obligations under the Forbearance Agreement, pay certain transactional expenses and fees, and support the Company’s working capital needs.
Advances under the Revolver Facility and the Term Loan would bear interest at 9.5% and 10.0% per annum, respectively. In addition, the DIP Credit Agreement obligated the Company to pay certain fees as described in the DIP Credit Agreement. The Company’s obligations under the DIP Credit Agreement were secured by (i) a lien on its facilities in Phoenix, Arizona, Dillon, Montana, and Mermentau, Louisiana and on all of its personal property assets (including a pledge of all of the equity interests of each of the Company’s subsidiaries) other than certain intellectual property assets, and (ii) a super priority administrative claim in the Chapter 11 Case. The DIP Credit Agreement would mature on the earlier of (i) May 7, 2010 or (ii) the date that all loans under the DIP Credit Agreement wo uld become due and payable in full under the DIP Credit Agreement or (iii) the date of termination of the relevant commitments pursuant to the terms of the DIP Credit Agreement. As of December 31, 2009, the outstanding amount on the revolving loan was $460,000 and the outstanding amount on the term loan was $3,589,000. .
Effective May 11, 2010, NutraCea, NutraPhoenix, LLC and Wells Fargo entered into the First Amendment To Senior Secured Super-Priority Debtor-In-Possession Credit and Security Agreement (the “First Amendment”) which made certain modifications to the DIP Credit Agreement. Under the First Amendment, the maturity date of the revolving loan and letter of credit facility was extended to the earlier of (i) December 31, 2010, (ii) the date Company terminates the line of credit, or (iii) the date Wells Fargo terminates the line of credit following an Event of Default. The maturity date for the term loan was extended to November 5, 2010 under the terms of the First Amendment.
The First Amendment also addressed the allocation of proceeds from the sale of any of the collateral assets. Using the proceeds from the sale of the cereal business equipment and the sale of the Phoenix manufacturing facility in 2010, the outstanding amounts on the revolver loan and the term loan were $0 as of September 30, 2010. As of December 31, 2010, the DIP Credit Facility was paidare as follows: $3.2 million in full2011; $1.6 million in 2012; $1.6 million in 2013; $1.3 million in 2014; and terminated.$0.3 million in 2015 and $2.6 million thereafter.
Domestic
Customer List Purchase Obligations
In December 2008, the Companywe entered into a purchase agreement to acquire a customer list (“Customer List Purchase Agreement”) for $3,100,000. The Company$3.1 million. We paid $1,000,000$1.0 million at the time of purchase and the remaining amount of $2,100,000$2.1 million was due in twelve quarterly payments of $175,000$0.2 million beginning March 1, 2009. The imputed interest rate used on the remaining balance was 8%.
On In May 14, 2009, the Companywe amended the Customer List Purchase Agreementcustomer list purchase agreement due to NutraCea’sour failure to comply with the payment terms of the original agreement. The Customer List Purchase Agreement wasUnder the amended to allow NutraCea toagreement, we continue to take orders from the customers on the list. The payment schedule was amended to require the CompanyWe were required to pay $90,000$0.1 million by June 1, 2009, and to have all cash receipts from customers on the list be deposited into a bank account controlled by the seller of the list. Any profits (amounts in excess of the cost of goods sold) generated from the cash receipts will beare applied towards the outstanding principal amount. The quarterly minimum amount required under this amendment was $90,000$0.1 million beginning June 1, 2009. The Company isWe are required to fund any shor tfallshortfall to the minimum quarterly amount. The unsecured principal balance due as of December 31, 2009 was $1,411,000.obligation is unsecured.
Louisiana Rice Mill Note
In August 2009, NutraCeawe entered into a promissory note with Louisiana Rice Mill, L.L.C. (“LRM”)a supplier for approximately $296,000. The note represented amounts due to LRM$0.3 million for goods supplied to the Company.supplied. The note bears interest at 18.0% per annum.. The payments on the note are based upon an assessment fee of $25 per ton charged to the Company for each ton of rice bran purchased from LRMthe supplier during the month.
Well Fargo
In December 2008, we entered into a credit and security agreement with Wells Fargo Bank, NA. (Wells Fargo). The credit arrangement consisted of three separate credit facilities, bearing interest at rates ranging from 2.5% to 3.0%.
In July 2009, due to an event of default, the interest rate increased by 3.0%, and then ranged from 5.5% to 6.0%. At the time of the notice of default, we owed approximately $3.3 million under the credit facilities, including interest. In July 2009, we cured the default by entering into a forbearance agreement with Well Fargo and an amendment to the credit and security agreement which provided for a revolving line of credit of up to $1.5 million, at an interest rate of prime plus 5.5% to 6.0%.
In connection with the Chapter 11 Reorganization, we entered into a senior secured super-priority debtor-in-possession credit and security agreement (DIP Credit Agreement) with Wells Fargo. The DIP Credit Agreement provided for (i) up to a $2.5 million revolving loan and letter of credit facility and (ii) up to a $4.25 million term loan with both financing facilities subject to specific borrowing bases. The proceeds of the loans and other financial accommodations incurred under the DIP Credit Agreement were used to satisfy the outstanding amount onobligations under the unsecured noteforbearance agreement, pay certain transactional expenses and fees, and support working capital needs.
Advances under the DIP Credit Agreement facilities bore interest at rates of 9.5% to 10.0% per year.
Under the DIP Credit Agreement, as amended, we expensed in $0.1 million in bank fees in 2010 and $0.1 million in bank fees in 2009. In addition, in 2009, we expensed fees associated with the original credit and security agreement and forbearance agreement totaling $0.4 million. Using the proceeds from the sale of the cereal product equipment and the sale of the Phoenix, Arizona facility, the DIP Credit Agreement was paid in full as of December 31, 2009 was $292,000.September 2010, and the facilities were terminated.
IrgovelForeign
All foreign debt is denominated in the Brazilian Real and relates to our Bio-Refining segment.
Irgovel has entered into certain equipment financing arrangements with interest rates that range from 14.4% to 16.1% and are payable through December 2013, secured by the related equipment.
Irgovel has working capital lines of credit secured by accounts receivables. The interest rates range from 6.0% to 26.4% with maturities through June 2012.
Irgovel has an unsecured notes payable for Brazilian federal and social security taxes under a special Brazilian government tax program, equipment purchases, and working capital. These notes are payable over periods through November 2024 and bear interest at rates from 6.0% to 21.4%.
Equipment financing – Irgovel has financed certain equipment that bears interest rates that range from 14.4% to 16.6% and is payable over a period of 36 months.
Working capital loans – Irgovel has working capital lines of credit secured by its accounts receivables. The interest rates range from 16.6% to 26.4%.
Special tax program - The amountsprogram. Amounts due under the special tax program are part of an amnesty program relative to unpaid taxes that existed prior to the Company’sour acquisition of Irgovel in 2008. Principal and interest payments are due monthly through 2024 and bear an interest rate of 9.7%.
Covenants
The DIP Credit Agreement with Wells Fargo, as modified by the First Amendment requires the Company to maintain certain compliance and financial covenants. In the event of a default, the repayment of the facilities could be accelerated. As of December 31, 2009, the Company was not in default of the agreement.
The following table summarizes the Company’s required minimum payments as of December 31, 2009:
| 2010 | | $ | 6,642,000 | |
| 2011 | | | 1,004,000 | |
| 2012 | | | 602,000 | |
| 2013 | | | 594,000 | |
| 2014 | | | 537,000 | |
| Thereafter | | | 3,220,000 | |
| Total | | $ | 12,599,000 | |
The Parent Company owes $5,804,000 of the total amount above. These obligations were not compromised under the Chapter 11 Reorganization. The remaining $6,795,000 of minimum payment obligations are attributable to the Irgovel subsidiary and are not subject to the Chapter 11 Reorganization.
NutraCea
Note 15. Restricted CashNotes to Consolidate Financial Statements
Under certain agreements the Company is required to maintain restricted cash balances in order to satisfy future obligations.
The following summarizes restricted cash as of December 31:
| | | 2009 | | | 2008 | |
| | | | | | | |
| Corporate office lease | | $ | — | | | $ | 448,000 | |
| Wells Fargo collateral | | | — | | | | 1,500,000 | |
| Irgovel purchase escrow | | | 1,915,000 | | | | 1,905,000 | |
| Total current portion | | | 1,915,000 | | | | 3,853,000 | |
| | | | | | | | | |
| Corporate office lease | | | — | | | | 1,344,000 | |
| | | | | | | | | |
| Total non-current portion | | | — | | | | 1,344,000 | |
| | | | | | | | | |
| Total restricted cash | | $ | 1,915,000 | | | $ | 5,197,000 | |
Note 16. Deferred rent incentive
In April 2007, the Company began leasing the office space at its old corporate headquarters in Phoenix, Arizona. As part of the lease arrangement, the landlord provided certain moving and rental incentives to the Company. The rental incentives provided funds which the Company used for leasehold improvements of the corporate office space. The Company classified these incentives as deferred rent incentives in its consolidated financial statements and was amortizing such incentives over the life of the rental lease. The amortization expenses were recorded as an offset against the rent expense in the statement of operations. In December 2009, the Company rejected the lease agreement for its old corporate headquarters under the Chapter 11 proceedings. As a result, all of the associated deferred rent incentives liability was released into earnings against the loss on disposal of leasehold improvements.NOTE 14. OTHER LONG-TERM LIABILITIES
Note 17. Other Non-Current Liabilities
The Company, in the second quarter ofIn 2007, we closed on athe sale of its Dr. Vetz PetFlex brand product with respectcertain products to which thea purchaser. The applicable criteria for revenue recognition were not met.met at that time. The $1.0 million deposit we received by the Company in that transaction was provided to the purchaser through a loan from a person who was one of our former officers and, at the time, was a consultant to and a former officer of NutraCea.consulting for us. The deposit is recorded as an other non-currentlong-term liability in the Consolidated Financial Statements.consolidated financial statements. This liability will be extinguished upon the resolution of certainany legal matters.matters associated with the transaction.
Note 18. Income Taxes
Income tax (benefit) expense consisted of the following components:
| | | 2009 | | | 2008 | | | 2007 | |
| | | | | | | | | | |
| Current: | | | | | | | | | |
| Federal | | $ | — | | | $ | — | | | $ | — | |
| State | | | — | | | | 41,000 | | | | 20,000 | |
| Foreign | | | — | | | | 467,000 | | | | — | |
| Total Current | | $ | — | | | $ | 508,000 | | | $ | 20,000 | |
| | | | | | | | | | | | | |
| Deferred: | | | | | | | | | | | | |
| Federal | | | — | | | | — | | | | — | |
| State | | | — | | | | — | | | | — | |
| Foreign | | | (474,000 | ) | | | (444,000 | ) | | | — | |
| Total Deferred | | $ | (474,000 | ) | | $ | (444,000 | ) | | $ | — | |
| | | | | | | | | | | | | |
| Total income tax (benefit) expense | | $ | (474,000 | ) | | $ | 64,000 | | | $ | 20,000 | |
Deferred tax assets (liabilities) are comprised of the following at December 31:(in thousands):
| | | 2009 | | | 2008 | | | As of December 31, | |
| | | | | | | | | 2010 | | | 2009 | |
| Net operating loss carry forward | | $ | 38,634,000 | | | $ | 31,242,000 | | |
| Deffered tax assets: | | | | | | | |
| Net operating loss carryforwards | | | $ | 42,406 | | | $ | 38,634 | |
| Allowance for doubtful accounts | | | 61,000 | | | | 135,000 | | | | 254 | | | | 61 | |
| Stock options and warrants | | | 2,138,000 | | | | 1,910,000 | | | | 2,822 | | | | 2,138 | |
| Intangible assets | | | (1,297,000 | ) | | | (2,308,000 | ) | | | 378 | | | | 87 | |
| Property, plant and equipment | | | (1,073,000 | ) | | | (4,430,000 | ) | | | 3,233 | | | | 2,763 | |
| Capitalized expenses | | | 1,431,000 | | | | 843,000 | | | | 1,312 | | | | 1,431 | |
| Merger expenses | | | 20,000 | | | | 20,000 | | |
| Other | | | 211,000 | | | | 375,000 | | | | 682 | | | | 386 | |
| Deferred tax assets | | | | 51,087 | | | | 45,500 | |
| Less: Valuation allowance | | | | (50,519 | ) | | | (45,235 | ) |
| Net deferred tax assets | | | | 568 | | | | 265 | |
| Deffered tax liabilities: | | | | | | | | | |
| Intangible assets | | | | (1,155 | ) | | | (1,384 | ) |
| Property, plant and equipment | | | | (3,482 | ) | | | (3,836 | ) |
| Other | | | | - | | | | (155 | ) |
| Net deferred tax liabilities | | | | (4,637 | ) | | | (5,375 | ) |
| | | | 40,125,000 | | | | 27,787,000 | | | $ | (4,069 | ) | | $ | (5,110 | ) |
| Less: Valuation allowance | | | (45,235,000 | ) | | | (31,974,000 | ) | |
| Total deferred tax asset/(liability) | | $ | (5,110,000 | ) | | $ | (4,187,000 | ) | |
| | | | | | | | | | |
| Deferred tax asset - current | | | $ | 292 | | | $ | - | |
| Deferred tax liability - long-term | | | | (4,361 | ) | | | (5,110 | ) |
| | | | $ | (4,069 | ) | | $ | (5,110 | ) |
Deferred taxes arise from temporary differences in the recognition of certain expenses for tax and financial reporting purposes. We have determined it is more likely than not that some portion or all of the deferred tax assets will not be realized. Accordingly we have provided a valuation allowance for deferred tax assets. Our valuation allowance includes certain foreign and stateis on domestic deferred tax assets. The change in valuation allowance of approximately $13,261,000$5.3 million in 20092010 is primarily due to the net losses from operations and the impairment charges to various long-lived assets.
As of December 31, 2009, 2008 and 2007,2010, net operating loss carry-forwards were approximately $102,380,000, $84,880,000, and $55,957,000, respectively,carryforwards for federal tax purposes thattotaled $112.1 million and expire at various dates from 2011 through 2023 and $61,017,000, $59,445,000, and $33,596,000, respectively2030. Net operating loss carryforwards for state tax purposes thattotaled $75.7 million as of December 31, 2010, and expire at various dates in 2011 through 2018.2030. As of December 31, 2009,2010, net operating loss carry-forwardscarryforwards for foreign tax purposes are approximately $780,000totaled $0.7 million and do not expire.
Utilization of net operating loss carry-forwardscarryforwards may be subject to substantial annual limitations due to the “change in ownership” provisions of the Internal Revenue Code of 1986, as amended and similar state regulations. The annual limitation may result in the expiration of substantial net operating loss carry-forwardscarryforwards before utilization.
The Company isWe are subject to taxation in the U.S. and various states. We record liabilities for income tax contingencies based on our best estimate of the underlying exposures. The Internal Revenue Services (“IRS”) has commenced(IRS) initiated an audit of our fiscal 20072006 tax return in January 2009.return. We cannot currently cannot estimate the impact of such audit by the IRS.audit. We are open for audit by the U.S. Internal Revenue ServiceIRS for years after 2006 and, generally, by U.S. state tax jurisdictions fromsince our inception in 19981998. We are open for audit by the Brazilian tax authorities for years after 2005.
NutraCea
Notes to 2009.Consolidate Financial Statements
The provision (benefit) forLoss before income taxes differs fromis comprised of the following (in thousand):
| | | 2010 | | | 2009 | |
| | | | | | | |
| Foreign | | $ | (2,722 | ) | | $ | (1,690 | ) |
| Domestic | | | (13,881 | ) | | | (30,987 | ) |
| Loss before income taxes | | $ | (16,603 | ) | | $ | (32,677 | ) |
Foreign earnings are assumed to be permanently reinvested. U.S. federal income taxes have not been provided on undistributed earnings of our foreign subsidiary.
The income tax benefit of $0.9 million in 2010 and $0.5 million in 2009 is foreign deferred taxes
Reconciliations between the amount computed by applying the U.S. federal statutory tax rate (34%) to loss before income taxes, asand income tax benefit follows for the year ended December 31:(in thousands):
| | | 2010 | | | 2009 | |
| | | | | | | |
| Income tax benefit at federal statutory rate | | $ | (5,645 | ) | | $ | (11,110 | ) |
| Increase (decrease) resulting from: | | | | | | | | |
| State tax benefit, net of federal tax effect | | | (690 | ) | | | (1,902 | ) |
| Change in valuation allowance | | | 5,283 | | | | 13,261 | |
| Nontaxable fair value adjustment | | | 119 | | | | (940 | ) |
| True-up to tax return | | | - | | | | (181 | ) |
| Nondeductible expenses | | | 8 | | | | 298 | |
| Foreign taxes | | | (10 | ) | | | 100 | |
| Income tax benefit | | $ | (935 | ) | | $ | (474 | ) |
| | | 2009 | | | 2008 | | | 2007 | |
| Income tax (benefit) expense at federal statutory rate | | $ | (11,110,000 | ) | | $ | (21,978,000 | ) | | $ | (6,081,000 | ) |
| Increase (decrease) resulting from: | | | | | | | | | | | | |
| State tax expense (benefit), net of federal tax effect | | | (1,902,000 | ) | | | (1,368,000 | ) | | | 1,403,000 | |
| Change in valuation allowance | | | 13,261,000 | | | | 9,882,000 | | | | 8,008,000 | |
| Goodwill impairment | | | — | | | | 13,271,000 | | | | 442,000 | |
| Non-taxable fair value adjustment | | | (940,000 | ) | | | — | | | | — | |
| True up to tax return | | | (181,000 | ) | | | (361,000 | ) | | | (102,000 | ) |
| Non-deductible expenses | | | 298,000 | | | | 595,000 | | | | (3,670,000 | ) |
| Foreign taxes | | | 100,000 | | | | 23,000 | | | | — | |
| Tax provision/(benefit) | | $ | (474,000 | ) | | $ | 64,000 | | | $ | — | |
The Company adopted the provisions of FIN 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. The adoption of FIN 48 didWe have not result in the recognition of a cumulative effect of adoption of a new accounting principle adjustment and noidentified any uncertain tax positions requirerequiring a reserve as of December 31, 2010 or 2009.
NOTE 16. WARRANT LIABILITY
The following table is a summary of activity for warrants subject to liability treatment:
| | | Shares Exercisable | | | Weighted Average Exercise Price | |
| Warrants subject to liability treatment, January 1, 2009: | | | | | | |
| Series D Warrants | | | 4,545,455 | | | $ | 0.55 | |
| Adoption of ASC 815-40-15 - warrants with anti-dilution clauses | | | 28,722,848 | | | | 1.77 | |
| 2009 Exchange of Warrants: | | | | | | | | |
| Series D Warrants cancelled | | | (4,545,455 | ) | | | 0.55 | |
| Series E Warrants issued | | | 4,545,455 | | | | 0.30 | |
| Warrants issued in 2009 in connection with anti-dilutive warrant triggering events | | | 9,532,638 | | | | 0.93 | |
| Warrants subject to liability treatment, December 31, 2009 | | | 42,800,941 | | | | 1.24 | |
| Warrants expired in 2010 | | | (2,916,818 | ) | | | 0.64 | |
| Warrants subject to liability treatment, December 31, 2010 | | | 39,884,123 | | | $ | 1.28 | |
Warrants with Anti-Dilution Clauses
We have certain outstanding warrant agreements in effect that contain anti-dilution clauses. Under these clauses, based on future issuances of our common stock, awards of options to employees, additional issuance of warrants, or other convertible instruments below a certain exercise price, we may be required to lower the exercise price on these existing warrants and issue additional warrants.
Effective January 1, 2009, we adopted the provisions of FASB ASC 815, “Derivatives and 2008. Hedging” (FASB ASC 815) (previously EITF 07-5, “Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock”).
NutraCea
Notes to Consolidate Financial Statements
NoteAs a result of adopting this guidance, warrants to purchase 28,722,848 shares of our common stock previously treated as equity were no longer afforded equity treatment. We determined that the anti-dilution provision built into these outstanding warrants should be considered for derivative accounting. The new guidance requires freestanding contracts that are settled in a company’s own stock to be designated as an equity instrument, asset or liability. Under the provisions of the new guidance, a contract designated as an asset or liability must be initially recorded and carried at fair value until the contract meets the requirements for classification as equity, until the contract is exercised or until the contract expires. We determined that, because of the anti-dilution provision associated with the outstanding warrants, they no longer met the criteria for equity accounting through the revised criteria. The new guidance provides for transition implementation which requires the cumulative effect of the change in accounting principle be recognized as an adjustment to retained earnings and other impacted balance sheet items as of January 1, 2009. The cumulative-effect adjustment is the difference between the amounts recognized prior to adoption and amounts recognized at adoption assuming this guidance had been applied from the issuance date of the warrants.
Accordingly, at January 1, 2009, we determined that the warrants should be accounted for as derivative liabilities. The warrants were valued using the Lattice model. The impact of adoption was an increase in accumulated deficit of $3.9 million, and an increase in warrant liabilities of $3.9 million.
In July 2009, our current chief executive officer was granted options at an exercise price which triggered issuance of additional warrants with anti-dilution clauses. As a result we issued 6,966,580 additional warrants at a weighted average exercise price of $0.60 to existing holders.
Warrant liability was $0.9 million as of December 31, 2009, resulting in warrant liability income of $3.1 million, or earnings per share impact of $0.02, included in other income (expense) for 2009, for all warrants with anti-dilution clauses.
Warrant liability was $0.7 million as of December 31, 2010, resulting in warrant liability income of $0.2 million included in other income (expense) for 2010, for all warrants with anti-dilution clauses.
Series D Warrants and Series E Warrants
During October 2008, we issued to two institutional investors shares of Series D Convertible Preferred Stock and five-year warrants to purchase 4,545,455 shares of our common stock (Series D Warrants). Each warrant entitled the investor to purchase 909.09 shares of our common stock at an exercise price of $0.55 per share. We issued 4,545,455 Series D Warrants under an effective registration statement in October 2008. The warrants were silent as to any penalties should we be unable to maintain the effectiveness of the registration and accordingly, the warrants should have been recorded as a liability as of their issuance date and December 31, 2008. We had not previously accounted for these warrants as separate instruments.
We recorded the fair value of the 4,545,455 Series D Warrants totaling $1.2 million as warrant liability, or earnings per share impact of $0.0.1, and the corresponding expense, as of January 1, 2009. In May 2009, the Series D Warrants were exchanged for the same number of Series E Warrants. The fair value related to the Series E Warrants was $0.4 million as of December 31, 2009. The Series D Warrants and Series E Warrants were valued using the Lattice model. The net warrant liability expense associated with the Series D Warrants and the Series E warrants is $0.4 million for the year ended December 31, 2009, namely the $1.2 million of initial expense recorded on January 1, 2009, offset by income of $0.8 million representing the change in the warrant liability value from January 1, 2009 to December 31, 2009. We determined that recording the $1.2 million warrant expense in the first quarter of 2009, instead of recording that expense in the fourth quarter of 2008 does not materially misstate the financial statements of any periods affected.
Exchange of Series D Warrants for Series E Warrants in May 2009 resulted in a triggering event that required issuance of additional warrants with anti-dilution clauses. The Company issued 2,566,058 of additional warrants at a weighted average exercise price of $1.82 to the existing holders.
Warrant liability for the Series E Warrants was $0.9 million as of December 31, 2010, resulting in warrant liability expense of $0.5 million for 2010 for Series E Warrants.
Assumptions
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. As of January 1, 2009, we estimated two future equity instruments issuances and assessed probability between 10%-50%. As of December 31, 2009, we estimated one future equity instruments issuance and assessed a probability of 10%. As of December 31, 2010, we estimated two future equity instruments issuances and assessed a probability of 25%-67%. Additional assumptions that were used to calculate fair value are as follows.
NutraCea
Notes to Consolidate Financial Statements
| | | December 31, 2010 | | | December 31, 2009 | | | January 1, 2009 | |
| | | | | | | | | | |
| Risk-free interest rate | | | 0.15% - 1.27 | % | | | 0.34% - 2.44 | % | | | 0.66% - 1.50 | % |
| Expected volatility | | | 91 | % | | | 111 | % | | | 93 | % |
| Expected life (years) | | | 0.36 - 3.5 | | | | 0.76 - 4.50 | | | | 1.75 - 4.80 | |
| Annual dividend yield | | $ | - | | | $ | - | | | $ | - | |
NOTE 17. CONVERTIBLE PREFERRED STOCK
As of January 1, 2009, there were 4,945 outstanding shares of Series D Convertible Preferred Stock (Series D Preferred Stock). During 2009, we redeemed 2,202 shares of Series D Preferred Stock prior to May 2009.
In May 2009, we entered into two exchange agreements with the holders of the Series D Preferred Stock. The agreements provided for the cancellation of all of the 2,743 then outstanding shares of its Series D Preferred Stock and 4,545,455 outstanding Series D Warrants, in exchange for 2,743 shares of its Series E Convertible Preferred Stock (Series E Preferred Stock) and new warrants to purchase 4,545,455 shares of its common stock (Series E Warrants). The terms of the Series E Warrants were substantially similar to the terms of the Series D Warrants, except that the per share exercise price of the Series E Warrants was $0.20 and the termination date of the Series E Warrants is May 7, 2014. The conversion of Series E Preferred Stock was based on a formula which used the stated value of the Series E Preferred Stock of $1,000 plus any accrued dividend divided by the exercise price of $0.30. Additionally, the redemption and payment of accrued dividends was accelerated to being payable in three equal monthly installments due on June 1, 2009, July 1, 2009 and August 1, 2009.
As of August 2009, we had redeemed all of the Series D Preferred Stock and Series E Preferred Stock and paid the related dividends. We issued 24,560,626 shares of common stock from February through August 2009 for the redemption including dividends. In 2009, cash paid for dividends was $0.1 million and for the redemptions was $0.6 million. The common stock issued in 2009 for the redemptions had a market value of $4.4 million and the common stock issued in 2009 for dividends had a market value of $0.8 million. The dividends are recorded as interest expense in our consolidated financial statements.
NOTE 18. EQUITY AND SHARE-BASED COMPENSATION
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 are initially reserved for issuance under the 2010 Plan. The amount reserved increases annually by 5% each January. 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.
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 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 2005 Plan, determines vesting schedules on plan awards and may accelerate their schedules for award recipients. Options granted under the 2005 Plan have terms of up to 10 years.
In October 2003, the board of directors approved and adopted the 2003 Stock Compensation Plan (2003 Plan) and authorized our president to execute a registration statement under the Securities Act of 1933.
The status of the various plans is as follows:
| | | As of December 31, 2010 | |
| | | 2010 Plan | | | 2005 Plan | | | 2003 Plan | |
| | | | | | | | | | |
| Initially reserved | | | 25,000,000 | | | | 10,000,000 | | | | 10,000,000 | |
| Options and stock granted since inception | | | (23,432,253 | ) | | | (11,242,274 | ) | | | (10,019,137 | ) |
| Forfeited, expired or cancelled since inception | | | 750,000 | | | | 1,638,399 | | | | 22,930 | |
| Available for issuance | | | 2,317,747 | | | | 396,125 | | | | 3,793 | |
We have outstanding a total of 13,248,983 options awarded to current and former directors, employees and consultants at various times beginning in 2001 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 a plan.
Share-based compensation expenses are included in selling, general and administrative expenses in the consolidated statements of operations, and consisted of the following (in thousands):
NutraCea
Notes to Consolidate Financial Statements
| | | 2010 | | | 2009 | |
| | | | | | | |
| Consultants | | $ | 37 | | | $ | 164 | |
| Directors | | | 135 | | | | 81 | |
| Employees | | | 410 | | | | 92 | |
| Executive officers | | | 1,087 | | | | 237 | |
| Total share-based compensation expense - options | | $ | 1,669 | | | $ | 574 | |
The following are the weighted-average assumptions used in valuing the stock options:
| | | 2010 | | | 2009 | |
| | | | | | | |
| Weighted average fair value of options granted | | $ | 0.13 | | | $ | 0.13 | |
| Volatility | | | 114.3 | % | | | 102.7 | % |
| Risk free interest rate | | | 1.5 | % | | | 2.1 | % |
| Expected life of options (in years) | | | 5.8 | | | | 5.4 | |
| Expected dividends | | | - | | | | - | |
| Forfeitures | | | 5-10 | % | | | 5-10 | % |
We have never declared or paid dividends on our common stock and have no plans to pay dividends in the foreseeable future.
The following are summaries of option activity:
| | | Number of Options | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Term (in years) | | | Aggregate Intrinsic Value (in thousands) | |
| | | | | | | | | | | | | |
| Outstanding, January 1, 2009 | | | 25,193,477 | | | $ | 0.80 | | | | 4.4 | | | | - | |
| Granted | | | 9,362,625 | | | | 0.21 | | | | | | | | | |
| Exercised | | | - | | | | | | | | | | | | | |
| Forfeited, expired or cancelled | | | (9,967,151 | ) | | | 1.04 | | | | | | | | - | |
| Outstanding, December 31, 2009 | | | 24,588,951 | | | | 0.49 | | | | 5.4 | | | | - | |
| Granted | | | 23,638,503 | | | | 0.20 | | | | | | | | | |
| Exercised | | | - | | | | | | | | | | | | | |
| Forfeited, expired or cancelled | | | (2,742,343 | ) | | | 0.87 | | | | | | | | - | |
| Outstanding, December 31, 2010 | | | 45,485,111 | | | $ | 0.30 | | | | 7.0 | | | | - | |
| | | Employees and Directors | | | Consultants | | | | |
| | | Weighted Average Exercise Price | | | Number of Options | | | Weighted Average Exercise Price | | | Number of Options | | | Total Number of Options | |
| | | | | | | | | | | | | | | | |
| Outstanding, January 1, 2009 | | $ | 0.69 | | | | 18,860,305 | | | $ | 1.12 | | | | 6,333,172 | | | | 25,193,477 | |
| Granted | | | 0.21 | | | | 9,042,625 | | | | 0.20 | | | | 320,000 | | | | 9,362,625 | |
| Forfeited, expired or cancelled | | | 1.13 | | | | (5,181,130 | ) | | | 0.94 | | | | (4,786,021 | ) | | | (9,967,151 | ) |
| Exercised | | NA | | | | - | | | NA | | | | - | | | | - | |
| Outstanding, December 31, 2009 | | | 0.41 | | | | 22,721,800 | | | | 1.46 | | | | 1,867,151 | | | | 24,588,951 | |
| Granted | | | 0.20 | | | | 23,068,503 | | | | 0.20 | | | | 570,000 | | | | 23,638,503 | |
| Forfeited, expired or cancelled | | | 0.78 | | | | (2,078,727 | ) | | | 1.18 | | | | (663,616 | ) | | | (2,742,343 | ) |
| Exercised | | NA | | | | - | | | NA | | | | - | | | | | |
| Outstanding, December 31, 2010 | | $ | 0.28 | | | | 43,711,576 | | | $ | 1.16 | | | | 1,773,535 | | | | 45,485,111 | |
| | | | | | | | | | | | | | | | | | | | | |
| Exercisable, December 31, 2010 | | $ | 0.30 | | | | 28,014,506 | | | $ | 1.16 | | | | 1,723,535 | | | | 29,738,041 | |
| Exercisable, December 31, 2009 | | $ | 0.48 | | | | 16,564,996 | | | $ | 1.46 | | | | 1,817,151 | | | | 18,382,147 | |
NutraCea
Notes to Consolidate Financial Statements
The following table summarizes information related to outstanding and exercisable options:
| | | | As of December 31, 2010 | |
| | | | Outstanding | | | Exercisable | |
| Range of exercise prices | | | Number of Options | | | Remaining Contractual Life (in years) | | | Weighted Average Exercise Price | | | Number of Options | | | Remaining Contractual Life (in years) | | | Weighted Average Exercise Price | |
| | | | | | | | | | | | | | | | | | | | |
| $ | 0.20 | | | | 31,172,467 | | | | 8.7 | | | $ | 0.20 | | | | 15,862,897 | | | | 8.1 | | | $ | 0.20 | |
| $ | 0.21 to $0.49 | | | | 12,254,109 | | | | 3.5 | | | | 0.29 | | | | 11,816,609 | | | | 3.6 | | | | 0.30 | |
| $ | 0.50 to $0.99 | | | | 175,000 | | | | 2.4 | | | | 0.86 | | | | 175,000 | | | | 2.4 | | | | 0.86 | |
| $ | 1.00 to $1.49 | | | | 975,000 | | | | 2.8 | | | | 1.35 | | | | 975,000 | | | | 2.7 | | | | 1.35 | |
| $ | 1.50 to $1.99 | | | | 500,000 | | | | 2.5 | | | | 1.50 | | | | 500,000 | | | | 2.5 | | | | 1.50 | |
| $ | 2.00 to $2.99 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| $ | 3.00 to $3.49 | | | | 200,000 | | | | 1.3 | | | | 3.03 | | | | 200,000 | | | | 1.3 | | | | 3.03 | |
| $ | 3.50 to $3.99 | | | | 175,000 | | | | 6.5 | | | | 3.83 | | | | 175,000 | | | | 6.5 | | | | 3.83 | |
| $ | 4.00 to $9.99 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| $ | 10.00 | | | | 33,535 | | | | 0.9 | | | | 10.00 | | | | 33,535 | | | | 0.9 | | | | 10.00 | |
| $ | 0.20 to $10.00 | | | | 45,485,111 | | | | 7.0 | | | $ | 0.30 | | | | 29,738,041 | | | | 6.0 | | | $ | 0.35 | |
In July 2010, we modified 3,045,347 outstanding options, which had been awarded to employees. The exercise price of the options was lowered to $0.20 per share from a weighted average $0.40 per share. The stock price on the date of the re-pricing was $0.12 per share. No other terms of the options were modified. We recorded expense of less than $0.1 million in 2010, 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.
The total fair value of options vested during 2010 and 2009 was $1.6 million and $1.0 million. As of December 31, 2010, there was $2.4 million of total unrecognized compensation expense related to outstanding non-vested options to be recognized over a weighted average period of 2.4 years.
In December 2010, we reached an agreement to settle all potential claims associated with the employment of Brad Edson, our former chief executive officer. The agreement was subject to the approval of the Bankruptcy Court and we received approval in January 2011. As part of the settlement, he was required to forfeit 6,000,000 options granted in 2004 along with any stock holdings. The options had an exercise price of $0.30 per share and were outstanding and exercisable as of December 31, 2010 and 2009.
In March 2011, we reached an agreement to settle all potential claims associated with employment of Todd Crow, our former chief financial officer. As part of the settlement, he was required to forfeit 1,662,942 options. The agreement is subject to the approval of the Bankruptcy Court. The options had an average exercise price of $0.37 per share and were outstanding and exercisable as of December 31, 2010 and 2009.
Equity Warrants
We issued to investors certain warrants that do not contain anti-dilution features and hence, qualify as equity warrants. We valued these warrants using the Black-Scholes-Merton model upon issuance. As of December 31, 2010, there were 545,454 of these outstanding with a weighted average exercise price of $0.86 and an expected life of 2.4 years. During 2010, 1,000,000 of these warrants expired. As of December 31, 2009, there were 1,545,454 of these outstanding with a weighted average exercise price of $0.69 and an expected life of 1.8 years. Data for these warrants is not included in the tables above.
Other Equity Transactions
During 2010, we issued 2,391,429 shares of common stock to vendors in payment for services. The shares were valued at $0.5 million, based on the market price of our common stock on the date the shares were issued.
NOTE 19. CommitmentsCOMMITMENTS AND CONTINGENCIES
Purchase and ContingenciesSupply Commitments
In January 2011, Irgovel entered into a commitment to supply $0.4 million of crude rice bran oil each month from April 2011 to December 2011. The commitment represents approximately 50% of Irgovel’s crude oil production capacity.
NutraCea
Notes to Consolidate Financial Statements
In January 2011, Irgovel entered into equipment purchase commitments totaling $5.6 million. The equipment is part of a capital project to expand production capacity and improve operational efficiency. We expect to pay for this equipment during the first nine months of 2011.
Employment contractsContracts
The Company hasWe have entered into employment and other agreements with certain executives and other employees that provide for compensation and certain other benefits. These agreements provide for severance payments under certain circumstances.
In the normal course of business, NutraCeawe periodically entersenter into employment agreements which incorporate indemnification provisions. While the maximum amount to which NutraCeawe may be exposed under such agreements cannot be reasonably estimated, the Company maintainswe maintain insurance coverage, which management believeswe believe will effectively mitigate the Company’sour obligations under these indemnification provisions. No amounts have been recorded in the Consolidated Financial Statementsconsolidated financial statements with respect to the Company’sany obligations under such agreements.
Leases
The Company leasesWe lease certain properties under various operating lease arrangements that expire over the next twenty four years. These leases generally provide the Companyus with the option to renew the lease at the end of the lease term.
Future minimum payments under these commitments atas of December 31, 20092010, are as follows: $0.4 million for 2011; $0.2 million for 2012; $0.2 million for 2013; $0.1 million for 2014; $0.1 million in 2015 and $1.1 million thereafter.
| 2010 | | $ | 444,718 | |
| 2011 | | | 428,035 | |
| 2012 | | | 187,740 | |
| 2013 | | | 184,774 | |
| 2014 | | | 107,964 | |
| Thereafter | | | 1,223,728 | |
| Total | | $ | 2,576,959 | |
The CompanyWe incurred lease expense of $1,619,000, $1,774,000$0.5 million and $1,079,000$1.6 million for the years ended December 31, 2009, 20082010 and 2007, respectively.2009.
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.
Irgovel Stockholders Lawsuit
On August 28, 2008, former Irgovel stockholder David Resyng filed an indemnification suit against Irgovel, Osmar Brito and the remaining Irgovel stockholders (“Sellers”)(Sellers), requesting: (i) the freezing of the escrow account maintained in connection with the transfer of Irgovel’s corporate control to the Companyus 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 the Company,us, in addition to moral damages as determ ineddetermined in the court’s discretion. The amount of damage claimed by Mr. Resyng is approximately $3 million.
The Company believesWe 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 the Companyus on January 31, 2008 (“Purchase Agreement”)(Purchase Agreement). Consequently, the Company believeswe believe that the responsibility for any indemnity, costs and expenses incurred or that may come to be incurred by Irgovel and/or the Companyus in connection with the above lawsuit is the sole responsibility of the Sellers.
On February 6, 2009, the Sellers filed a collection lawsuit against the Companyus seeking payment of the second installment of the purchase price under the Purchase Agreement, which the Sellers allege is approximately $936,000. The Company has$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 the Companyus and the Sellers be adjudicated through arbitration. As part of the Purchase Agreement $2,022,000$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. The Company believesWe believe any payout due to the lawsuit will be made out of the escrow account. As of December 31, 2010 and 2009, the balance in the escrow account was $1,917,000$1.9 million and $1,915,000, respectively. The Company believesis included in restricted cash in the consolidated balance sheets. There is an offsetting liability in accrued expenses in our consolidated balance sheets as of December 31, 2010 and 2009. 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.
NutraCea
Notes to Consolidate Financial Statements
Shareholder Class Action
On February 27, 2009 and on April 27, 2009, securities class action lawsuits were filed in the District Court for the District of Arizona against the Companyus and certain of itsour current and former officers and directors. On May 29, 2009, the cases were consolidated into a single action (the “Federal Action”)Federal Action) and lead plaintiff was appointed. On July 1, 2009, lead plaintiff filed a consolidated class action complaint on behalf of all persons who purchased NutraCeaour common stock between April 2, 2007 and February 23, 2009. The complaint alleged that the Companywe filed material misstatements in publically disseminated press releases and SEC filings misstating the Company’sour financial condition and certain transactions during the period in question. An amended consolidated complaint was filed on September 25, 2009.
The case has been settled in its entirety with the settlement to be funded by the Company’sour directors and officers’officers insurance carrier. On October 1, 2010, the District Court of Arizona issued an Orderorder approving the Settlement,settlement, certifying the class and entering Judgmentjudgment dismissing the matter. On October 27, 2010, the Bankruptcy Court for the District of Arizona also entered an Orderorder approving the settlement.
Shareholder Derivative Action
In addition to the shareholder class actions, on March 30, 2009 and May 8, 2009, two shareholder derivative lawsuits were filed in Maricopa County Superior Court by persons identifying themselves as our shareholders of the Company and purporting to act on itsour behalf, naming the Companyus as a nominal defendant and naming itsour former Chief Executive Officerchief executive officer and itsour then current Boardboard of Directorsdirectors as defendants.
In these actions, the plaintiffs asserted claims against the individual defendants for breach of fiduciary duty, abuse of control, gross mismanagement, waste of corporate assets, and unjust enrichment based on the alleged wrongful conduct complained of in the Federal Actionfederal action described above. All of these claims were purportedly asserted derivatively on the Company’sour behalf and the plaintiffs sought no monetary recovery against the Company.us. Instead they sought, among other relief, disgorgement of all profits, benefits, and compensation received by the individual defendants together with their attorneys’ fees and costs.
By an order entered on June 3, 2009, the superior court consolidated these two cases into one action captioned In re: NutraCea Derivative Litigation, Case No. CV2009-051495. Following the filing of the Chapter 11 Reorganization, the defendants filed a motion to dismiss the action for lack of standing. On February 10, 2010, in response to that motion, plaintiffs filed a voluntary dismissal without prejudice of both actions and the Courtcourt entered the dismissals.
SEC Enforcement Investigation
The CompanyWe received a letter from the SEC in January 2009 indicating that it had opened an informal inquiry, and the Companywe subsequently received an informal request for the production of documents in February 2009 relating to a number of 2007 transactions. In March 2009, the Companywe received a Formal Orderformal order of Private Investigationprivate investigation from the SEC. In June 2009, the Companywe received a subpoena for the production of documents that largely tracked the SEC’s earlier requests. The CompanyWe responded to these requests for documents and based on findings related to the internal review and the SEC’s requests, the Companywe restated itsour financial statements for 2006, 2007 and the first three quarters of 2008.
On January 13, 2011, the SEC filed a complaint in the United States District Court for the District of Arizona alleging that the Companywe violated Section 17(a) of the Securities Act of 1933 (“Securities Act”)(Securities Act), 15 U.S.C. § 77q(a), Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act of 1934 (the “Exchange Act”)Exchange Act), 15 U.S.C. §§ 78j(b), 78m(a), 78m(b)(2)(A), and 78m(b)(2)(B), and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder, 17 C.F.R. §§ 240.10b-5, 240.12b-20, 240.13a-1, and 240.13a-13 (the “SEC Action”)SEC Action). The Company hasWe have settled these allegations with the SEC, without admitting or denying them, and hashave consented to the entry of a Final Judgmentfinal judgment of Permanent Injunctionpermanent injunction (the “Consent Judgment”)Consent Judgment), which, among other things, permanently r estrainsrestrains and enjoins NutraCeaus from violations of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, 15 U.S.C. §§ 78j(b), 78m(a), 78m(b)(2)(A), and 78m(b)(2)(B), and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder, 17 C.F.R. §§ 240.10b-5, 240.12b-20, 240.13a-1, and 240.13a-13. The final Consent Judgment was entered in the SEC Actionaction on February 14, 2011. No financial penalty was assessed by the SEC against the Company.us.
W.D. Manor Mechanical Contractors, Inc. and Related Matters
On April 30, 2009, W.D. Manor Mechanical Contractors, Inc. (“W.D.”)(W.D. Manor) filed a complaint against NutraPhoenix, LLC, the Companyus and other unrelated defendants in Superior Court of Arizona, Maricopa County (CV2009-013957) arising out of the construction of a facility in Phoenix, Arizona that was owned by NutraPhoenix, LLC and at which the Company was the tenant.Arizona. Various other sub-contractors joined in the lawsuit and asserted lien claims. These claims have been accrued and expensed in our consolidated financial statements as of December 31, 2009.statements. With the sale of the Phoenix facility in September 2010, all claims held by W. D.W.D. Manor and the other subcontractors who joined in the lawsuit, totaling $699,000,$0.7 million, were paid in full from the proceeds of the sale and the lawsuit was dismissed.
Halpern
On January 21, 2009, Halpern Capital Inc, filed a complaint against NutraCea in the Circuit Court of the Eleventh Judicial Circuit in Miami-Dade County, Florida (Case No: 09-04688CA06) arising out of a financial advisory and investment banking relationship. The two parties reached a confidential settlement agreement that included cash payment and warrants. The total value of the settlement was accrued in our Consolidated Financial Statements as of December 31, 2008 and the lawsuit was dismissed.
NutraCea
Notes to Consolidate Financial Statements
Farmers’ Rice Milling
Farmers’ Rice Milling (“FRM”)(FRM) contended that the Companywe defaulted by failing to pay rentals due under two leases between the parties: (i) the March 15, 2007, ground lease, as amended on November 1, 2008, and (ii) the April 15, 2007, Warehouse lease (collectively the “Leases”).warehouse lease. FRM filed suit against the Companyus to terminate the Leasesleases and recover damages thereunder. This suit was filed in the 14th Judicial District Court on June 24, 2009, and was timely removed to the United States District Court, Western District of Louisiana, Lake Charles division. The CompanyWe filed an Answeranswer and Counterclaimcounterclaim and deposited into the registry of the court the sum of $60,425$0.1 million constituting the rentalrentals due under both the Leases,leases, a late fee due under the Warehousewarehouse lease plus accrued interest. Following t he filingAs part of the Chapter 11 Reorganization, boththe leases were assumed under Section 365 of the Bankruptcy Code,Code. Arrearages due under the arrearagesleases were paid in January 2011 and the lawsuit was dismissed. FRM also asserted a claim for monetary damages for breach of a supply agreement, but that claim was dismissed from the lawsuit and allowed as a general unsecured claim in the Chapter 11 Reorganization.
NOTE 20. EMPLOYEE BENEFIT PLAN
Substantially all U.S. based employees are eligible to participate in the NutraCea 401(k) Profit Sharing Plan. Safe harbor contributions to the plan are a mandatory 3.0% of the qualified employees’ gross salary, regardless of whether or not the employee makes elective deferrals. In addition to the matters discussed above, from time to time the Company is involved in litigation incidental to the conduct of the Company’s business. While the outcome of lawsuitsany safe harbor contributions, we may make matching contributions, discretionary profit sharing contributions and other proceedings against the Company cannot be predicted with certainty, in the opinion of management, individuallyqualified non-elective contributions. Safe harbor contributions were $0.1 million for 2010 and $0.2 million for 2009. We made no matching contributions for 2010 or in the aggregate, no such lawsuits are expected to have a material effect on the Company’s financial position or results of operations.2009.
Note 20. Segment InformationNOTE 21. SEGMENT INFORMATION
The Company has twoWe have three reportable segments; NutraCea,segments: Corporate; Stabilized Rice Bran (SRB), which manufactures and distributes ingredients primarilySRB in various granulations along with products derived from SRB,bran via patented enzyme treatment processes including a fat and protein rich water soluble fraction and a fiber rich insoluble fraction; and Bio-Refining, which separates rice bran into crude rice bran oil and defatted rice bran which are then further processed into a number of valuable food and feed products. The Bio-Refining segment consisted of our Irgovel our rice-bran oil manufacturing subsidiaryoperations in Brazil. Brazil in 2010 and 2009. The Corporate segment includes corporate general and administrative expenses, litigation settlements, and other expenses not directly attributable to segments. No corporate allocations are made to the other segments. Interest is not allocated.
NutraCea
Notes to Consolidate Financial Statements
The table below presents segment information for the years identified and provides a reconciliation of segment information to total consolidated information:information (in thousands):
| | | 2010 | |
| | | Corporate | | | SRB (1) | | | Bio-Refining (2) | | | Consolidated | |
| | | | | | | | | | | | | |
| Revenues | | $ | - | | | $ | 11,908 | | | $ | 19,723 | | | $ | 31,631 | |
| Cost of goods sold | | | - | | | | 7,510 | | | | 17,137 | | | | 24,647 | |
| Gross profit | | | - | | | | 4,398 | | | | 2,586 | | | | 6,984 | |
| Depreciation and amortization (in selling, general and administrative) | | | (218 | ) (5) | | | (1,420 | ) | | | (1,192 | ) | | | (2,830 | ) |
| Impairment of property, plant and equipment | | | - | | | | (1,900 | ) | | | - | | | | (1,900 | ) |
| Loss on disposal of trademarks, property, plant and equipment | | | - | | | | (943 | ) | | | - | | | | (943 | ) |
| Other operating expenses | | | (8,737 | ) (6) | | | (3,114 | ) | | | (3,365 | ) | | | (15,216 | ) |
| Loss from operations | | $ | (8,955 | ) | | $ | (2,979 | ) | | $ | (1,971 | ) | | $ | (13,905 | ) |
| | | | | | | | | | | | | | | | | |
| Net loss attributable to NutraCea shareholders | | $ | (10,860 | ) | | $ | (3,021 | ) | | $ | (1,787 | ) | | $ | (15,668 | ) |
| Interest expense | | | (616 | ) | | | - | | | | (926 | ) | | �� | (1,542 | ) |
| Depreciation (in cost of goods sold) | | | - | | | | (447 | ) (7) | | | (1,497 | ) | | | (1,944 | ) |
| Purchases of property and equipment | | | 33 | | | | 92 | | | | 647 | | | | 772 | |
| Property, plant and equipment, end of period | | | 1,996 | | | | 9,337 | | | | 12,721 | | | | 24,054 | |
| Assets held for sale, end of period | | | - | | | | 3,598 | | | | - | | | | 3,598 | |
| Goodwill, end of period (3) | | | - | | | | - | | | | 5,835 | | | | 5,835 | |
| Intangible assets, net, end of period | | | - | | | | 2,901 | | | | 3,395 | | | | 6,296 | |
| Total assets, end of period | | | 7,143 | | | | 17,308 | | | | 28,773 | | | | 53,224 | |
| | | 2009 | |
| | | Corporate | | | SRB (1) | | | Bio-Refining (2) | | | Consolidated | |
| | | | | | | | | | | | | |
| Revenues | | $ | - | | | $ | 14,491 | | | $ | 18,732 | | | $ | 33,223 | |
| Cost of goods sold | | | - | | | | 11,116 | | | | 15,938 | | | | 27,054 | |
| Gross profit | | | - | | | | 3,375 | (4) | | | 2,794 | | | | 6,169 | |
| Depreciation and amortization (in selling, general and administrative) | | | (935 | ) (5) | | | (2,418 | ) | | | (1,038 | ) | | | (4,391 | ) |
| Impairment of property, plant and equipment | | | - | | | | (8,845 | ) | | | - | | | | (8,845 | ) |
| Impairment of trademarks | | | - | | | | (1,594 | ) | | | - | | | | (1,594 | ) |
| Loss on disposal of trademarks, property, plant and equipment | | | - | | | | (202 | ) | | | - | | | | (202 | ) |
| Other operating expenses | | | (11,975 | ) (6) | | | (5,232 | ) | | | (3,224 | ) | | | (20,431 | ) |
| Loss from operations | | $ | (12,910 | ) | | $ | (14,916 | ) | | $ | (1,468 | ) | | $ | (29,294 | ) |
| | | | | | | | | | | | | | | | | |
| Net loss attributable to NutraCea shareholders | | $ | (16,057 | ) | | $ | (14,822 | ) | | $ | (1,216 | ) | | $ | (32,095 | ) |
| Interest expense | | | (1,402 | ) | | | - | | | | (912 | ) | | | (2,314 | ) |
| Depreciation (in cost of goods sold) | | | - | | | | (1,443 | ) (7) | | | (1,121 | ) | | | (2,564 | ) |
| Purchases of property and equipment | | | 569 | | | | 796 | | | | 403 | | | | 1,768 | |
| Property, plant and equipment, end of period | | | 1,790 | | | | 10,888 | | | | 13,565 | | | | 26,243 | |
| Assets held for sale, end of period | | | - | | | | 15,201 | | | | - | | | | 15,201 | |
| Goodwill, end of period (3) | | | - | | | | - | | | | 5,626 | | | | 5,626 | |
| Intangible assets, net, end of period | | | - | | | | 3,609 | | | | 4,070 | | | | 7,679 | |
| Total assets, end of period | | | 8,809 | | | | 33,134 | | | | 28,225 | | | | 70,168 | |
| (1) | The SRB segment was formerly referred to as “NutraCea”. |
| (2) | The Bio-Refining segment was formerly referred to as “Irgovel”. |
| (3) | All changes in goodwill between December 31, 2009 and December 31, 2010, relate to foreign currency translation. |
| (4) | SRB segment gross profit in 2009 included $0.5 million in obsolete inventory write-offs. |
| (5) | Corporate depreciation related to leasehold improvements decreased $0.7 million for our corporate headquarters. We relocated in January 2010. |
| (6) | Corporate other operating expenses in 2010 includes $1.2 million less in rents as a result of the relocation of our corporate headquarters and includes $1.0 million less in payroll and related costs. |
| (7) | SRB depreciation in 2009 includes depreciation on the Dillon facility of $0.9 million. There was no depreciation on the Dillon facility in 2010 while the Dillon facility was classified as held for sale. |
NutraCea
| | | 2009 | |
| | | Corporate (1) | | | NutraCea | | | Irgovel | | | Consolidated | |
| Net Revenue | | $ | — | | | $ | 14,491,000 | | | $ | 18,732,000 | | | $ | 33,223,000 | |
| Cost of Goods Sold | | | — | | | | 11,116,000 | | | | 15,938,000 | | | | 27,054,000 | |
| Gross Margin | | | — | | | | 3,375,000 | | | | 2,794,000 | | | | 6,169,000 | |
| | | | | | | | | | | | | | | | | |
| Depreciation & Amortization | | | 2,171,000 | | | | 1,182,000 | | | | 1,038,000 | | | | 4,391,000 | |
| Other operating expenses | | | 12,301,000 | | | | 15,873,000 | | | | 2,898,000 | | | | 31,072,000 | |
| Gain/(Loss) from Operations | | | (14,472,000 | ) | | | (13,680,000 | ) | | | (1,142,000 | ) | | | (29,294,000 | ) |
| | | | | | | | | | | | | | | | | |
| Interest Expense | | | (1,402,000 | ) | | | — | | | | (912,000 | ) | | | (2,314,000 | ) |
| Other Income/(Expense) | | | 1,992,000 | | | | — | | | | 364,000 | | | | 2,356,000 | |
| Total other income/(expense) | | | 590,000 | | | | — | | | | (548,000 | ) | | | 42,000 | |
| | | | | | | | | | | | | | | | | |
| Reorganization expenses: | | | | | | | | | | | | | | | | |
| Professional fees | | | 180,000 | | | | | | | | | | | | 180,000 | |
| Other reorganization expenses | | | 3,231,000 | | | | 14,000 | | | | | | | | 3,245,000 | |
| Net Income/(Loss) before taxes | | | (17,293,000 | ) | | | (13,694,000 | ) | | | (1,690,000 | ) | | | (32,677,000 | ) |
| | | | | | | | | | | | | | | | | |
| Income tax benefit | | | — | | | | — | | | | 474,000 | | | | 474,000 | |
| Noncontrolling interests | | | — | | | | 108,000 | | | | — | | | | 108,000 | |
| Net loss to attribitable to NutraCea | | $ | (17,293,000 | ) | | $ | (13,586,000 | ) | | $ | (1,216,000 | ) | | $ | (32,095,000 | ) |
| | | | | | | | | | | | | | | | | |
| Long lived Assets | | $ | 1,221,000 | | | $ | 14,056,000 | | | $ | 22,503,000 | | | $ | 37,780,000 | |
| Capital Expenditures | | $ | 569,000 | | | $ | 796,000 | | | $ | 403,000 | | | $ | 1,768,000 | |
| Assets Held for Sale | | | | | | $ | 15,201,000 | | | | | | | $ | 15,201,000 | |
| | | 2008 | |
| | | Corporate (1) | | | NutraCea | | | Irgovel (2) | | | Consolidated | |
| Net Revenue | | $ | — | | | $ | 15,023,000 | | | $ | 20,201,000 | | | $ | 35,224,000 | |
| Cost of Goods Sold | | | — | | | | 14,633,000 | | | | 15,783,000 | | | | 30,416,000 | |
| Gross Margin | | | — | | | | 390,000 | | | | 4,418,000 | | | | 4,808,000 | |
| | | | | | | | | | | | | | | | | |
| Depreciation & Amortization | | | 1,924,000 | | | | 106,000 | | | | 704,000 | | | | 2,734,000 | |
| Impairment of Goodwill | | | — | | | | 33,231,000 | | | | — | | | | 33,231,000 | |
| Impairment of Investment-PIN | | | — | | | | 3,996,000 | | | | — | | | | 3,996,000 | |
| Gain on VLI deconsolidation | | | — | | | | (1,199,000 | ) | | | — | | | | (1,199,000 | ) |
| Other operating expenses | | | 18,234,000 | | | | 8,790,000 | | | | 3,079,000 | | | | 30,103,000 | |
| Gain/(Loss) from Operations | | | (20,158,000 | ) | | | (44,534,000 | ) | | | 635,000 | | | | (64,057,000 | ) |
| | | | | | | | | | | | | | | | | |
| Interest Expense | | | (315,000 | ) | | | — | | | | (413,000 | ) | | | (728,000 | ) |
| Other Income/(Expense) | | | 226,000 | | | | — | | | | (29,000 | ) | | | 197,000 | |
| Net Income/(Loss) before taxes | | | (20,247,000 | ) | | | (44,534,000 | ) | | | 193,000 | | | | (64,588,000 | ) |
| | | | | | | | | | | | | | | | | |
| Income tax expense | | | — | | | | (41,000 | ) | | | (23,000 | ) | | | (64,000 | ) |
| Noncontrolling interests | | | — | | | | 80,000 | | | | — | | | | 80,000 | |
| Net (loss) income attributable to NutraCea | | $ | (20,247,000 | ) | | $ | (44,495,000 | ) | | $ | 170,000 | | | $ | (64,572,000 | ) |
| | | | | | | | | | | | | | | | | |
| Long lived Assets | | $ | 1,133,000 | | | $ | 11,826,000 | | | $ | 23,798,000 | | | $ | 36,757,000 | |
| Capital Expenditures | | $ | 2,965,000 | | | $ | 33,958,000 | | | $ | 925,000 | | | $ | 37,848,000 | |
| Assets Held for Sale | | | | | | $ | 822,000 | | | | | | | $ | 822,000 | |
| | | 2007 | |
| | | Corporate (1) | | | NutraCea | | | Consolidated | |
| Net Revenue | | $ | — | | | $ | 12,726,000 | | | $ | 12,726,000 | |
| Cost of Goods Sold | | | — | | | | 8,883,000 | | | | 8,883,000 | |
| Gross Margin | | | — | | | | 3,843,000 | | | | 3,843,000 | |
| | | | | | | | | | | | | |
| Depreciation & Amortization | | | 899,000 | | | | 285,000 | | | | 1,184,000 | |
| Impairment of Goodwill | | | — | | | | 1,300,000 | | | | 1,300,000 | |
| Other operating expenses | | | 18,918,000 | | | | 4,374,000 | | | | 23,292,000 | |
| Gain/(Loss) from Operations | | | (19,817,000 | ) | | | (2,116,000 | ) | | | (21,933,000 | ) |
| | | | | | | | | | | | | |
| Interest Expense | | | (1,000 | ) | | | — | | | | (1,000 | ) |
| Other Income/(Expense) | | | 3,978,000 | | | | — | | | | 3,978,000 | |
| Net Income/(Loss) before taxes | | | (15,840,000 | ) | | | (2,116,000 | ) | | | (17,956,000 | ) |
| | | | | | | | | | | | | |
| Income tax expense | | | — | | | | (20,000 | ) | | | (20,000 | ) |
| Noncontrolling interests | | | — | | | | — | | | | — | |
| Net loss to common shareholders | | $ | (15,840,000 | ) | | $ | (2,136,000 | ) | | $ | (17,976,000 | ) |
| | | | | | | | | | | | | |
| Long lived Assets | | $ | 529,000 | | | $ | 55,813,000 | | | $ | 56,342,000 | |
| Capital Expenditures | | $ | 2,097,000 | | | $ | 6,726,000 | | | $ | 8,823,000 | |
| (1) | Includes corporate general and administrative expenses, litigation settlements, amortization of intangible assets, and other expenses not directly attributable to segments. |
| (2) | Represents result of operations from February 18, 2008 through December 31, 2008. |
The following table presents net revenues and property, plant, and equipment, by geographic area:
| | | 2009 | | | 2008 | | | 2007 | |
| Net revenue from customers: | | | | | | | | | |
| United States | | $ | 11,685,000 | | | $ | 13,638,000 | | | $ | 11,781,000 | |
| Brazil | | | 18,138,000 | | | | 18,977,000 | | | | — | |
| Other International | | | 3,400,000 | | | | 2,609,000 | | | | 945,000 | |
| Total Revenues | | $ | 33,223,000 | | | $ | 35,224,000 | | | $ | 12,726,000 | |
| | | | | | | | | | | | | |
| Property, plant and equipment, net: | | | | | | | | | | | | |
| United States | | $ | 12,678,000 | | | $ | 42,307,000 | | | $ | 19,912,000 | |
| Brazil | | | 13,565,000 | | | | 14,676,000 | | | | — | |
| Total property, plant and equipment, net | | $ | 26,243,000 | | | $ | 56,983,000 | | | $ | 19,912,000 | |
Note 21. Preferred StockDuring October 2008, the Company issuedNotes to two institutional investors, for the purchase price of $5,000,000, shares of our Series D Convertible Preferred Stock (“Preferred Stock”) and five-year warrants to purchase up to 4,545,455 shares of our common stock. The securities were offered in “units” at a price of $1,000 per unit. The units immediately separated upon issuance. Each warrant entitled the investor to purchase 909.09 shares of NutraCea common stock at an exercise price of $0.55 per share. The investors also received additional warrants that granted them the right, for a period of 60 days after the initial issuance, to purchase an additional $5,000,000 of Preferred Stock and associated warrants on the same terms as the initial issuance. The investors did not exercise th is right. For the sale of 5,000 units we received an aggregate of $4,500,000 net of fees and expenses.
The Preferred Stock accrued preferred dividends at 8% per annum. These dividends were payable quarterly in arrears, commencing on January 1, 2009. Subject to the satisfaction of certain conditions, the dividends were payable in shares of NutraCea common stock, but may have been paid in cash at NutraCea’s election along with a 10% penalty. On December 31, 2008, we paid to the investors $82,417 in cash representing the preferred dividends amount for the period October 17 to December 31, 2008.
The terms of the Preferred Stock required NutraCea to redeem all of the Preferred Stock (unless converted) in nine equal monthly installments commencing on February 1, 2009. The redemption amount was payable in shares of NutraCea Common Stock, but may have been paid in cash at NutraCea’s election. The conversion price and the exercise price for the warrants were each subject to anti-dilution adjustments upon certain stock issuances at a price per share less than the conversion price. Subject to certain limitations, the Company may have redeemed the Preferred Stock at any time upon 10 days notice at a price equal to 110% of the aggregate stated value of the Preferred Stock being redeemed plus accrued and unpaid dividends thereon.
The Preferred Stock is considered to be a financial instrument that is a mandatorily redeemable security, and as such, should be measured at fair value and classified, recorded, and presented as a liability in the financial statements. Additionally, hybrid financial instruments meeting certain criteria are recorded at fair value and the return paid to the holders as interest expense rather than dividends. Holders of the Preferred Stock shall have no voting right except as required by applicable law and have a liquidation preference of $5,000,000. There is no established public trading market for the Preferred Stock.
In December 2008 one investor converted 55 shares of the Preferred Stock into 100,111 shares of the Company’s common stock in accordance with the terms of the Preferred Stock. At December 31, 2008 there were 4,945 shares of the Preferred Stock outstanding.
On May 7, 2009, NutraCea entered into two Exchange Agreements with the holders of its Preferred Stock. The agreements provided for the cancellation of all of the 2,743 then outstanding shares of its Preferred Stock and outstanding warrants to purchase a total of 4,545,455 shares of its common stock held by these holders (“Series D Warrants”), in exchange for 2,743 shares of its Series E Convertible Preferred Stock (“Series E Preferred Stock”) and new warrants to purchase 4,545,455 shares of its common stock (“Series E Warrants”). The terms of the Series E Warrants are substantially similar to the Terms of the Series D Warrants, except that the per share exercise price of the Series E Warrants is $0.20 and the termination date of the Series E Warrants is May 7, 2014. The Co nversion of Series E Preferred Stock is based on a formula which uses the stated value of the Series E Preferred Stock of $1,000 plus any accrued dividend divided by the exercise price of $0.30. Additionally, the new Series E accelerated the redemption and payment of accrued dividends to three equal monthly installments due on June 1, 2009, July 1, 2009 and August 1, 2009.
As of August 2009 we had redeemed all of the Preferred Stock and Series E Preferred Stock and paid the related dividends in common stock. The Company issued 24,560,626 shares of Common Stock from February through August 2009 for the redemption of the Preferred D and E Stock including dividends. Additionally, the Company paid $698,000 in cash in December 2008 and January 2009 for the redemption of the Preferred Stock including dividends. The total interest expense recorded at fair market value of the Common Shares of Stock and cash issued for the dividends on the Preferred D and E Stock was $861,000.
Note 22. Warrants
Anti-dilutive warrants
The Company has certain outstanding warrants that contain anti-dilutive clauses in their agreements. Under these clauses, based on future issuances of the Company’s common stock, awards of options to employees, additional issuance of warrants, or other convertible instruments below a certain exercise price, the Company may be required to lower the exercise price on these existing warrants and issue additional warrants.
Effective January 1, 2009, the Company adopted the provisions of FASB ASC 815, “Derivatives and Hedging” (FASB ASC 815) (previously EITF 07-5, “Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock”).
As a result of adopting this guidance, warrants to purchase 28,723,000 of our common stock previously treated as equity were no longer afforded equity treatment. The Company determined that the anti-dilution provision built into these outstanding warrants should be considered for derivative accounting. The new guidance requires freestanding contracts that are settled in a company’s own stock to be designated as an equity instrument, asset or liability. Under the provisions of the new guidance, a contract designated as an asset or liability must be initially recorded and carried at fair value until the contract meets the requirements for classification as equity, until the contract is exercised or until the contract expires. The Company determined that, because of the anti-dilution provision associated with the outstanding w arrants, they no longer met the criteria for equity accounting through the revised criteria. The new guidance provides for transition implementation which requires the cumulative effect of the change in accounting principle be recognized as an adjustment to retained earnings and other impacted balance sheet items as of January 1, 2009. The cumulative-effect adjustment is the difference between the amounts recognized prior to adoption and amounts recognized at adoption assuming this guidance had been applied from the issuance date of the warrants.
Accordingly, at January 1, 2009, we determined that the warrants should be accounted for as derivative liabilities. The warrants were valued using the Lattice model. The impact of adoption was an increase in accumulated deficit of $3,913,000, and an increase in warrant liabilities of $3,913,000.
In July 2009, under the employment agreement with the Company’s current Chief Executive Officer, he was granted options at an exercise price which triggered issuance of additional anti-dilutive warrants. As a result the Company issued 6,967,000 additional warrants at a weighted average exercise price of $0.60 to existing holders.
Warrant liability was $896,000 as of December 31, 2009 resulting in warrant liability income of $3,017,000 or earnings per share of $0.02 included in other income for the year ended December 31, 2009 for all anti dilutive warrants.
Series D Warrants (see Note 21)
The Company issued 4,545,000 Series D warrants under an effective registration statement in October 2008. The warrants were silent as to any penalties should the Company be unable to maintain the effectiveness of the registration and accordingly, the warrants should have been recorded as a liability as of their issuance date and December 31, 2008. The Company had not previously accounted for these warrants as separate instruments. The Company recorded the fair value of its 4,545,000 Series D warrants totaling $1,156,000 as warrant liability or earnings per share impact of $0.01 and the corresponding expense as of January 1, 2009. In May 2009 the Series D Warrants were exchanged for the same number of Series E Warrants. The fair value related to the Series E Warrants was $383,000 as of Decemb er 31, 2009. The Series D Warrants and Series E Warrants were valued using the Lattice Model. The net warrant liability expense associated with the Series D Warrants and the Series E warrants is $383,000 for the year ended December 31, 2009, namely the $1,156,000 of initial expense recorded on January 1, 2009 offset by income of $773,000 representing the change in the warrant liability value from January 1, 2009 to December 31, 2009. The Company’s management determined that recording the $1,156,000 warrant expense in the first quarter of 2009 instead of recording that expense in the fourth quarter of 2008 does not materially misstate the financial statements of any periods affected.
Exchange of Series D Warrants for Series E Warrants in May 2009, resulted in a triggering event that required issuance of additional anti-dilutive warrants. The Company issued 2,566,000 of additional warrants at a weighted average exercise price of $1.82 to the existing holders.
Consolidate Financial Statements
The following table is a summary of activity for warrants subject to liability treatment:
| | | Outstanding Warrants | | | Weighted Average Exercise Price | |
| | | | | | | |
| January 1, 2009: | | | | | | |
| Series D warrants | | | 4,545,000 | | | $ | 0.55 | |
| | | | | | | | | |
| Adoption of ASC 815-40-15 anti-dilutive warrants | | | 28,723,000 | | | $ | 1.77 | |
| | | | | | | | | |
| Exchange of Warrants: | | | | | | | | |
| Series D warrants Cancelled | | | (4,545,000 | ) | | $ | 0.55 | |
| Series E warrants issued | | | 4,545,000 | | | $ | 0.30 | |
| | | | | | | | | |
| Additional warrants issued in connection with anti-dilutive warrant triggering events | | | 9,533,000 | | | $ | 0.93 | |
| | | | | | | | | |
| | | | | | | | | |
| Total anti dilutive and Series E warrants outstanding at December 31, 2009 | | | 42,801,000 | | | $ | 1.24 | |
The Lattice Model requires management to assess the probability of future issuance of equity instruments at a price lower than the current exercise price of the warrants. As of January 1, 2009, management estimated two future equity instruments issuances and assessed probability between 10%-50%. As of December 31, 2009, management estimated one future equity instruments issuance and assessed a probability of 10%. Additional assumptions that were used to calculate fair value are as follows.
| | | January 1, 2009 | | | December 31, 2009 | |
| | | | | | | |
| Risk-free interest rate | | | 0.66% - 1.50 | % | | | 0.34% - 2.44 | % |
| Expected volatility | | | 93 | % | | | 111 | % |
| Expected life (years) | | | 1.75 - 4.80 | | | | 0.76 - 4.50 | |
| Annual dividend yield | | $ | 0 | | | $ | 0 | |
Other Warrantstables present data by geographic area (in thousands):
The Company has issued to investors certain warrants that do not contain anti-dilutive features and hence, qualify as equity warrants. The Company valued these warrants using the Black-Scholes Merton model upon issuance. As of December 31, 2009, there were 1,546,000 of Equity Warrants outstanding with a weighted average exercise price of $0.69 and expected life of 2.35 years.| | | 2010 | | | 2009 | |
| | | | | | | |
| United States | | $ | 9,548 | | | $ | 11,685 | |
| Brazil | | | 16,497 | | | | 18,138 | |
| Other international | | | 5,586 | | | | 3,400 | |
| Total revenues | | $ | 31,631 | | | $ | 33,223 | |
Note 23. Employee Benefit Plan| | | As of December 31, | |
| | | 2010 | | | 2009 | |
| | | | | | | |
| United States | | $ | 11,333 | | | $ | 12,678 | |
| Brazil | | | 12,721 | | | | 13,565 | |
| Total property, plant and equipment, net | | $ | 24,054 | | | $ | 26,243 | |
At the time of merger with RiceX, the Company adopted RiceX’s 401(k) profit sharing plan, now referred to as the NutraCea 401(k) Profit Sharing Plan and trust (the “Plan”) for the exclusive benefit of eligible employees and their beneficiaries. Substantially all US based employees are eligible to participate in the Plan. Safe harbor contributions to the Plan are a mandatory 3% of the qualified employees’ gross salary, regardless of whether or not the employee is a participant in the Plan. Also, in addition to any safe harbor contributions, the Company may make matching contributions, discretionary profit sharing contributions and qualified non-elective contributions. For 2009, 2008 and 2007, the Company made matching contributions of $0, $0, and $113,000, respectiv ely. For 2009, 2008 and 2007 our Safe Harbor contributions were $152,000, $185,000 and $0, respectively.NOTE 22. FAIR VALUE MEASUREMENT
Note 24. Fair Value Measurement
As defined in ASC No. 820, Fair Value Measurements (“ASC 820”), 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 onin the Company’s financial statements at fair value. Assets and liabilities measured at fair value on a recurring basis on the Company’s balance sheet include warrant liabilities.liability. Assets and liabilities measured at fair value on a non-recurring basis include held-for-sale fixed assetsproperty, plant and equipment and held-for-sale intangibles.
The following table summarizes the fair values by input hierarchy of items measured at fair value on a recurring basis on our consolidated balance sheet as of December 31:sheets (in thousands):