formposam.htm
As filed
with the Securities and Exchange Commission on April 30, 2008
Registration
No. 333-134957
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
POST-EFFECTIVE
AMENDMENT NO. 3
on
Form S-1 to Form SB-2
REGISTRATION
STATEMENT UNDER THE
SECURITIES
ACT OF 1933
NUTRACEA
(Name of
Small Business Issuer in Its Charter)
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California
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2040
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87-0673375
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(State
or Other Jurisdiction of Incorporation or Organization)
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(Primary
Standard Industrial Classification Code Number)
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(I.R.S.
Employer Identification No.)
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5090
N. 40th Street,
Suite 400, Phoenix, Arizona 85018
(602)
522-6000
(Address
and Telephone Number of Principal Executive Offices)
Bradley
D. Edson
5090
N. 40th Street,
Suite 400, Phoenix, Arizona 85018
(602)
522-6000
(Name,
Address and Telephone Number of Agent For Service)
Copy
to:
Christopher
Chediak, Esq.
Weintraub
Genshlea Chediak Law Corporation
400
Capitol Mall, 11th Floor,
Sacramento, CA 95814
(916)
558-6000
Approximate
Date of Commencement of Proposed Sale to the Public: from time to time after the
effective date of this Registration Statement.
If any of
the securities being registered on this Form are to be offered on a delayed or
continuous basis pursuant to Rule 415 under the Securities Act of 1933, check
the following box. T
If this
form is filed to register additional securities for an offering pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. o
____________________
If this
form is a post-effective amendment filed pursuant to Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
____________________
If this
form is a post-effective amendment filed pursuant to Rule 462(d) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. o
____________________
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer” and “smaller reporting company” in
Rule 12b-2 of the Exchange Act (Check One):
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Large
accelerated
filer o
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Accelerated
filer T
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Non-accelerated
filer o (Do not check if
a smaller reporting company)
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Smaller
reporting company o
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If, as a
result of stock splits, stock dividends or similar dilutive transactions, the
number of securities purported to be registered on this registration statement
increases, the provisions of Rule 416 under the Securities Act of 1933 shall
apply, and this registration statement shall be deemed to cover any such
additional shares of common stock.
The
Registrant hereby amends this registration statement on such date or dates as
may be necessary to delay its effective date until the registrant shall file a
further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
EXPLANATORY
NOTE
This
Post-Effective Amendment is being filed to include updated financial, business
and other information for NutraCea as required by Section 10(a)(3) of the
Securities Act of 1933 and to update the section entitled "Selling Security
Holders" beginning on page 68 of the prospectus which is a part of this
registration statement to reflect earlier sales or dispositions made by the
named Selling Security Holders.
The
information in this prospectus is not complete and may be changed. The Selling
Security Holders may not sell these securities until the registration statement
filed with the Securities and Exchange Commission is effective. This prospectus
is not an offer to sell securities, and we are not soliciting an offer to buy
these securities, in any state where the offer or sale is not
permitted.
SUBJECT
TO COMPLETION, DATED APRIL 30, 2008.
PROSPECTUS
NutraCea
4,038,216
Shares of Common Stock
This
prospectus relates to the disposition of up to 4,038,216 shares of NutraCea
common stock or interests therein by the shareholders named in this prospectus
under the heading "Selling Security Holders". We will not receive any of the
proceeds from the disposition of the shares covered hereby or interests therein,
although we will receive the proceeds from the cash exercise of warrants to
acquire certain of these shares.
Our
common stock is quoted on the Over-the-Counter (“OTC”) Bulletin Board under the
symbol “NTRZ.OB”. On April 24, 2008, the last sale price of our common stock on
the OTC Bulletin Board was $1.13 per share.
Our
principal executive offices are located at 5090 N. 40th Street,
Suite 400, Phoenix, Arizona 85018, and our
telephone number is (602) 522-6000.
INVESTING
IN THE COMMON STOCK OFFERED HEREIN INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
PURCHASE SHARES ONLY IF YOU CAN AFFORD A COMPLETE LOSS OF YOUR INVESTMENT. YOU
SHOULD CONSIDER CAREFULLY THE “RISK FACTORS” CONTAINED IN THIS PROSPECTUS
BEGINNING ON PAGE 5.
NEITHER THE SECURITIES AND EXCHANGE
COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF
THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
The date
of this prospectus is April 30, 2008.
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We have
not authorized anyone to provide information different from that contained in
this prospectus. This prospectus is not an offer to sell nor is it seeking an
offer to buy these securities in any jurisdiction where such offer or sale is
not permitted. The information contained in this prospectus is accurate only as
of the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock. In this prospectus, references to
“NutraCea”, the “Company”, “we”, “us” and “our” refer to NutraCea, a California
corporation.
Some of
the statements in this prospectus and in any prospectus supplement we may file
constitute “forward-looking statements” within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.
These statements relate to future events concerning our business and to our
future revenues, operating results, and financial condition. In some cases, you
can identify forward-looking statements by terminology such as “may,” “will,”
“could,” “would,” “should,” “expect,” “plan,” “anticipate,” “intend,” “believe,”
“estimate,” “forecast,” “predict,” “propose,” “potential,” or “continue” or the
negative of those terms or other comparable terminology.
Any
forward looking statements contained in this prospectus or any prospectus
supplement are only estimates or predictions of future events based on
information currently available to our management and management’s current
beliefs about the potential outcome of future events. Whether these future
events will occur as management anticipates, whether we will achieve our
business objectives, and whether our revenues, operating results, or financial
condition will improve in future periods are subject to numerous risks. The
section of this prospectus captioned “Risk Factors,” beginning on page 5,
provides a summary of the various risks that could cause our actual results or
future financial condition to differ materially from forward-looking statements
made in this prospectus. The factors discussed in this section are not intended
to represent a complete list of all the factors that could adversely affect our
business, revenues, operating results, or financial condition. Other factors
that we have not considered may also have an adverse effect on our business,
revenues, operating results, or financial condition, and the factors we have
identified could affect us to a greater extent than we currently anticipate.
Before making any investment in our securities, we encourage you to carefully
read the information contained under the caption “Risk Factors,” as well the
other information contained in this prospectus and any prospectus supplement we
may file.
“TheraFoods,”
“NutraCea,” “NutraBeauticals,” “RiSolubles,” “RiceMucil,” “RiceMucille,”
“StaBran,” “SolublesSolution,” “ZymeBoost,” “NutraHGH,” “Equineceuticals,”
“FiberSolutions,” “NutraBreathe,” “LiverBoost,” “RiceLean,” “VetCeuticals,”
“PetCeuticals,” Caduceus logo, “HiFiSolubles,” “Therafeed,” “Via-Bran,”
“Proventics,” “SuperSolubles,” “Nourishing The Body to Health,” “Proceuticals,”
“Cea100,” “DiaBoost” and “NutraBalance” are registered trademarks of
NutraCea.
RiceX®
and RiceX Solubles® are registered trade names of The RiceX Company, NutraCea’s
wholly owned subsidiary. Mirachol®, Max "E"® and Max "E" Glo® are registered
trademarks of The RiceX Company.
The
following summary is qualified in its entirety by the information contained
elsewhere in this prospectus. You should read the entire prospectus, including
“Risk Factors” and the financial statements before making an investment
decision.
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Issuer:
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NutraCea
5090
N. 40th
Street, Suite 400
Phoenix,
Arizona 85018
(602)
522-6000
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Description
of Business:
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We
are a developer, formulator and distributor of nutraceutical, health,
cosmetic and nutrition products using stabilized rice brand and specially
formulated rice bran oil. We have also developed dietary products that
provide the benefits of stabilized rice bran and rice bran oil as a
nutritional supplement for humans and animals. Consumer products are
marketed under the TheraFoods® name. Medical supplements are marketed
under the NutraCea® name. Products for veterinary and animal use are
marketed under the NutraGlo® name. Cosmetics are marketed under the
NutraBeautical® name. A description of our business begins on page 25 of
this prospectus.
On
October 4, 2005, we acquired The RiceX Company. The RiceX Company
manufactures and distributes nutritionally dense foods and food
ingredients made from stabilized rice bran for supply to the global food
manufacturing and equine feed industries.
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The
Offering:
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This
offering relates to the disposition of shares of our common stock, or
interests therein, that are outstanding and shares of our common stock
that may be acquired from time to time upon exercise of outstanding
options and warrants. The selling shareholders and the number of shares
that may be disposed of by each are set forth on page 68 of this
prospectus.
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Shares:
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4,038,216
shares of our common stock. A description of our common stock is set forth
on page 67 of this prospectus.
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Manner
of Sale:
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The
selling shareholders may sell, transfer or otherwise dispose of any or all
of their shares of common stock or interests in shares of common stock on
any stock exchange, market or trading facility on which the shares are
traded or in private transactions. These dispositions may be at fixed
prices, at prevailing market prices at the time of sale, at prices related
to the prevailing market price, at varying prices determined at the time
of sale, or at negotiated prices. A description of the manner in which
sales may be made is set forth in this prospectus beginning on page 72 of
this prospectus.
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Use
of Proceeds:
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We
will not receive any of the proceeds from the disposition of our common
stock, or interest therein, by the selling
shareholders.
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Risk
Factors:
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The
securities offered hereby involve a high degree of risk and will result in
immediate and substantial dilution. A discussion of additional risk
factors relating to our stock, our business and this offering begins on
page 5 of this prospectus.
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Please
carefully consider the specific factors set forth below as well as the other
information contained in this prospectus before purchasing shares of our common
stock. This prospectus contains forward-looking statements that involve risks
and uncertainties. Our actual results may differ significantly from the results
discussed in the forward-looking statements.
Risks
Related to Our Business
We
have a limited operating history and have generated losses in each quarter of
2007, except the second, and in each quarter before 2006.
We began
operations in February 2000 and incurred losses in each reporting period until
the second fiscal quarter of 2006, and we incurred losses in each quarter of
2007 except the second. Our prospects for financial success are difficult to
forecast because we have a relatively limited operating history. Our prospects
for financial success must be considered in light of the risks, expenses and
difficulties frequently encountered by companies in new, unproven and rapidly
evolving markets. Our business could be subject to any or all of the problems,
expenses, delays and risks inherent in the establishment of a new business
enterprise, including limited capital resources, possible delays in product
development, possible cost overruns due to price and cost increases in raw
product and manufacturing processes, uncertain market acceptance, and inability
to respond effectively to competitive developments and attract, retain and
motivate qualified employees. Therefore, there can be no assurance that our
business or products will be successful, that we will be able to achieve or
maintain profitable operations or that we will not encounter unforeseen
difficulties that may deplete our capital resources more rapidly than
anticipated.
There
are significant market risks associated with our business.
We have
formulated our business plan and strategies based on certain assumptions
regarding the size of the rice bran market, our anticipated share of this market
and the estimated price and acceptance of our products. These assumptions are
based on the best estimates of our management; however there can be no assurance
that our assessments regarding market size, potential market share attainable by
us, the price at which we will be able to sell our products, market acceptance
of our products or a variety of other factors will prove to be correct. Any
future success may depend upon factors including changes in the dietary
supplement industry, governmental regulation, increased levels of competition,
including the entry of additional competitors and increased success by existing
competitors, changes in general economic conditions, increases in operating
costs including costs of production, supplies, personnel, equipment, and reduced
margins caused by competitive pressures.
We
depend on a limited number of customers.
During
2007, we received approximately 59% of product sales revenue from six
customers. During
2006, we received approximately 67% of product sales revenue from five customers
and approximately 48% of our revenue from one customer. A loss of any of these
customers could have a material adverse effect on our revenues and results of
operations.
The
inability of our significant customers to meet their obligations to us may
adversely affect our financial results.
We are
subject to credit risk due to concentration of our trade accounts receivables
and notes receivables. As of December 31, 2007, 6 customers accounted for 28% of
our $2,346,000 trade accounts receivable and 2 debtors accounted for 81% of
$7,975,000 notes receivables reflected on our December 31, 2007 balance sheet.
In addition, we acquired secured promissory notes of Vital Living, Inc. with
aggregate principal amounts of $4,226,000 in connection with our entering into
an asset purchase agreement with Vital Living to acquire Vital Living’s assets.
While we obtain personal guarantees and security interests backing these
obligation when possible, many of these obligations are not guaranteed or
secured. The inability of our significant customers and obligors to meet their
obligations to us, or, in the case of Vital Living, the deterioration of Vital
Living’s financial condition or assets before we are able to consummate our
asset purchase, may adversely affect our financial condition and results of
operations.
We rely upon a limited number of
product offerings.
The
majority of the products that we have sold as of December 31, 2007 have been
based on stabilized rice bran. Although we will market stabilized rice bran as a
dietary supplement, as an active food ingredient for inclusion in our products
and in other companies’ products, and in other ways, a decline in the market
demand for our stabilized rice bran products, as well as the products of other
companies utilizing our stabilized rice bran products, could have a significant
adverse impact on us.
We
are dependent upon our marketing efforts.
We are
dependent on our ability to market products to animal food producers, food
manufacturers, mass merchandise and health food retailers, and to other
companies for use in their products. We must increase the level of awareness of
dietary supplements in general and our products in particular. We will be
required to devote substantial management and financial resources to these
marketing and advertising efforts and there can be no assurance that it will be
successful.
We
rely upon an adequate supply of raw rice bran.
All of
our current products depend on our proprietary technology using unstabilized or
raw rice bran, which is a by-product from milling paddy rice to white rice. Our
ability to manufacture stabilized rice bran raw is currently limited to the
production capability of our production equipment at Farmers’ Rice Co-operative,
Archer Daniels Midland, our own plants located next to the Louisiana Rice Mill
in Mermentau, LA, and American Rice, Inc. in Freeport, TX, and our single
value-added products plant in Dillon, Montana. We currently are
capable of producing enough finished products at our facilities to meet current
demand. With the exception of our new rice oil facility in Pelotas, Brazil, our
existing facilities do not allow for dramatic expansion of product demand,
therefore additional production capacity is needed. While be believe
our facilities should meet our production needs for 2008, but we do not
anticipate that they will meet our longer term supply needs. Therefore, we
anticipate building new facilities to meet the forecasted demand for our
products and envision we will be able to execute on this initiative. In the
event we are unable to create additional production capacity to produce more
stabilized rice bran products to fulfill our current and future requirements
this could materially and adversely affect our business, results from
operations, and financial condition.
We are
pursuing other supply sources in the United States and in foreign countries and
anticipate being able to secure alternatives and back-up sources of rice bran,
however, there can be no assurance that we will continue to secure adequate
sources of raw rice bran to meet our requirements to produce stabilized rice
bran products. Since rice bran has a limited shelf life, the supply of rice bran
is affected by the amount of rice planted and harvested each year. If economic
or weather conditions adversely affect the amount of rice planted or harvested,
the cost of rice bran products that we use may increase. We are not generally
able to immediately pass cost increases to our customers and any increase in the
cost of stabilized rice bran products would have an adverse effect on our
results of operations.
We
intend to pursue significant foreign operations and there are inherent risks in
operating abroad.
An
important component of our business strategy is to build rice bran stabilization
facilities in foreign countries and to market and sell our products
internationally. For example, we recently entered into a joint venture with an
Indonesian company produce and market our SRB products in Southeast Asia and
purchased a company in Brazil that manufactures rice bran oil. There are risks
in operating stabilization facilities in developing countries because, among
other reasons, we may be unable to attract sufficient qualified personnel,
intellectual property rights may not be enforced as we expect, power may not be
available as contemplated. Should any of these risks occur, we may be unable to
maximize the output from these facilities and our financial results may decrease
from our anticipated levels. The inherent risks of international operations
could materially adversely affect our business, financial condition and results
of operations. The types of risks faced in connection with international
operations and sales include, among others:
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cultural
differences in the conduct of
business;
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fluctuations
in foreign exchange rates;
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greater
difficulty in accounts receivable collection and longer collection
periods;
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impact
of recessions in economies outside of the United
States;
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reduced
protection for intellectual property rights in some
countries;
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unexpected
changes in regulatory requirements;
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tariffs
and other trade barriers;
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political
conditions in each country;
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management
and operation of an enterprise spread over various
countries;
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the
burden and administrative costs of complying with a wide variety of
foreign laws; and
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We
have identified material weaknesses in our internal control over financial
reporting, which could impact negatively our ability to report our results of
operations and financial condition accurately and in a timely
manner.
As
required by Section 404 of the Sarbanes-Oxley Act of 2002, management has
conducted an evaluation of the effectiveness of our internal control over
financial reporting at December 31, 2007. We identified two material weaknesses
in our internal control over financial reporting and concluded that, as of
December 31, 2007, we did not maintain effective control over financial
reporting based on criteria established in Internal Control-Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission. Each of our material weaknesses results in
reasonable possibility that a material misstatement of the annual or interim
financial statements that we prepare will not be prevented or detected on a
timely basis. As a result, we must perform additional work to obtain reasonable
assurance regarding the reliability of our financial statements.
If we are
unsuccessful in implementing or following our remediation plan, or fail to
update our internal control over financial reporting as our business evolves or
to integrate acquired businesses into our controls system, we may not be able to
timely or accurately report our financial condition, results of operations or
cash flows or to maintain effective disclosure controls and procedures. If we
are unable to report financial information in a timely and accurate manner or to
maintain effective disclosure controls and procedures, we could be subject to,
among other things, regulatory or enforcement actions by the SEC, securities
litigation and a general loss of investor confidence, any one of which could
adversely affect our business prospects and the market value of our common
stock.
We
face competition.
Competition
in our targeted industries, including nutraceuticals, functional food
ingredients, rice bran oils, animal feed supplements and companion pet food
ingredients is vigorous, with a large number of businesses engaged in the
various industries. Many of our competitors have established reputations for
successfully developing and marketing their products, including products that
incorporate bran from other cereal grains and other alternative ingredients that
are widely recognized as providing similar benefits as rice bran. In addition,
many of our competitors have greater financial, managerial, and technical
resources than us. If we are not successful in competing in these markets, we
may not be able to attain our business objectives.
We
may face difficulties integrating businesses that we acquire.
As part
of our strategy, we expect to review opportunities to buy other businesses or
technologies that would complement its current products, expand the breadth of
its markets or enhance technical capabilities, or that may otherwise offer
growth opportunities. In the event of any future acquisitions, we
could:
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issue
stock that would dilute current shareholders' percentage
ownership;
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These
purchases also involve numerous risks, including:
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problems
combining the purchased operations, technologies or
products;
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diversion
of management's attention from our core
business;
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adverse
effects on existing business relationships with suppliers and
customers;
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risks
associated with entering markets in which we have no or limited prior
experience; and
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potential
loss of key employees of purchased
organizations.
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We cannot
assure you that we will be able to successfully integrate any businesses,
products, technologies or personnel that we might purchase in the
future.
We
Have Not Yet Achieved Positive Cash Flow
We have
not generated a positive cash flow from operations continuous period to period
since commencing operations and have relied primarily on cash raised from
private offerings of our securities to fund capital investments and
acquisitions. For example, we raised in private placements of equity
approximately $50,000,000 in a February 2007, $17,560,000 in May 2006, and
$8,000,000 in October 2005. While we believe that we have adequate cash reserves
and working capital to fund current operations, our ability to meet long term
business objectives may be dependent upon our ability to raise additional
financing through public or private equity financings, establish increasing cash
flow from operations, enter into collaborative or other arrangements with
corporate sources, or secure other sources of financing to fund long-term
operations. There is no assurance that external funds will be available on terms
acceptable to us in sufficient amount to finance operations until we do reach
sufficient positive cash flow to fund our capital expenditures. In addition, any
issuance of securities to obtain such funds would dilute percentage ownership of
our shareholders. Such dilution could also have an adverse impact on our
earnings per share and reduce the price of our common stock. Incurring
additional debt may involve restrictive covenants and increased interest costs
and demand on future cash flow. Our inability to obtain sufficient financing may
require us to delay, scale back or eliminate some or all of our product
development and marketing programs.
Our
products could fail to meet applicable regulations which could have a material
adverse affect on our financial performance.
The
dietary supplement and cosmetic industries are subject to considerable
government regulation, both as to efficacy as well as labeling and advertising.
There is no assurance that all of our products and marketing strategies will
satisfy all of the applicable regulations of the Dietary Supplement, Health and
Education Act, the Food, Drug and Cosmetic Act, the U.S. Food and Drug
Administration and/or the U.S. Federal Trade Commission. Failure to meet any
applicable regulations would require us to limit the production or marketing of
any non-compliant products or advertising, which could subject us to financial
or other penalties.
Our
success depends in part on our ability to obtain patents, licenses and other
intellectual property rights for our products and technology.
We have
one patent entitled Methods for Treating Joint Inflammation, Pain and Loss of
Mobility, which covers both humans and mammals. In addition, our subsidiary
RiceX has five United States patents and may decide to file corresponding
international applications. RiceX holds patents to the production of Beta Glucan
and to a micro nutrient enriched rice bran oil process. RiceX also holds patents
to a method to treat high cholesterol, to a method to treat diabetes and to a
process for producing Higher Value Fractions from stabilized rice bran. We also
have filed a number of provisional patent applications for our
technology. The process of seeking patent protection may be long and
expensive, and there can be no assurance that patents will be issued, that we
will be able to protect our technology adequately, or that competition will not
be able to develop similar technology.
There
currently are no claims or lawsuits pending or threatened against us or RiceX
regarding possible infringement claims, but there can be no assurance that
infringement claims by third parties, or claims for indemnification resulting
from infringement claims, will not be asserted in the future or that such
assertions, if proven to be accurate, will not have a material adverse affect on
our business, financial condition and results of operations. In the future,
litigation may be necessary to enforce our patents, to protect our trade secrets
or know-how or to defend against claimed infringement of the rights of others
and to determine the scope and validity of the proprietary rights of others. Any
litigation could result in substantial cost and diversion of our efforts, which
could have a material adverse affect on our financial condition and results of
operations. Adverse determinations in any litigation could result in the loss of
our proprietary rights, subjecting us to significant liabilities to third
parties, require us to seek licenses from third parties or prevent us from
manufacturing or selling our systems, any of which could have a material adverse
affect on our financial condition and results of operations. There can be no
assurance that a license under a third party's intellectual property rights will
be available to us on reasonable terms, if at all.
We
are dependent on key employees and consultants.
Our
success depends upon the efforts of our top management team, including the
efforts of Bradley D. Edson, our President and Chief Executive Officer, Todd C.
Crow, our Chief Financial Officer, Leo Gingras, our Chief Operating Officer,
Margie D. Adelman, our Secretary and Senior Vice President and Kody K. Newland,
our Senior Vice President of Sales and Marketing. Although we have written
employment agreements with each of the foregoing individuals other than Ms.
Adelman, there is no assurance that such individuals will not die, become
disabled or resign. In addition, our success is dependent upon our ability to
attract and retain key management persons for positions relating to the
marketing and distribution of our products. There is no assurance that we will
be able to recruit and employ such executives at times and on terms acceptable
to us.
Our
products may require clinical trials to establish efficacy and
safety.
Certain
of our products may require clinical trials to establish our benefit claims or
their safety and efficacy. Such trials can require a significant amount of
resources and there is no assurance that such trials will be favorable to the
claims we make for our products, or that the cumulative authority established by
such trials will be sufficient to support our claims. Moreover, both the
findings and methodology of such trials are subject to challenge by the FDA and
scientific bodies. If the findings of our trials are challenged or found to be
insufficient to support our claims, additional trials may be required before
such products can be marketed.
Risks
Related to Our Stock
Our
Stock Price is Volatile.
The
market price of a share of our common stock has fluctuated significantly in the
past and may continue to fluctuate significantly in the future. The high and low
closing sales prices of a share of our common stock for the following periods
were:
|
|
|
High
|
|
|
Low
|
|
|
Twelve
months ended December 31, 2007
|
|
$ |
5.00 |
|
|
$ |
0.75 |
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
months ended December 31, 2006
|
|
$ |
2.74 |
|
|
$ |
0.60 |
|
|
|
|
|
|
|
|
|
|
|
|
Twelve
months ended December 31, 2005
|
|
$ |
1.81 |
|
|
$ |
0.30 |
|
|
|
·
|
announcements
of new products or product enhancements by us or our
competitors;
|
|
|
·
|
fluctuations
in our quarterly or annual operating
results;
|
|
|
·
|
developments
in our relationships with customers and
suppliers;
|
|
|
·
|
the
loss of services of one or more of our executive officers or other key
employees;
|
|
|
·
|
announcements
of technological innovations or new systems or enhancements used by us or
its competitors;
|
|
|
·
|
developments
in our or our competitors intellectual property
rights;
|
|
|
·
|
adverse
effects to our operating results due to impairment of
goodwill;
|
|
|
·
|
failure
to meet the expectation of securities analysts' or the public;
and
|
|
|
·
|
general
economic and market conditions.
|
We
have significant "equity overhang" which could adversely affect the market price
of our common stock and impair our ability to raise additional capital through
the sale of equity securities.
As of
March 3, 2008, we had approximately 145,418,965 shares of common stock
outstanding. Additionally, as of March 3, 2008, options and warrants to purchase
a total of approximately 41,981,000 shares of our common stock were outstanding.
The possibility that substantial amounts of our outstanding common stock may be
sold by investors or the perception that such sales could occur, often called
"equity overhang," could adversely affect the market price of our common stock
and could impair our ability to raise additional capital through the sale of
equity securities in the future.
Sales
of Our Stock Pursuant to Registration Statements May Hurt Our Stock
Price
We
granted registration rights to the investors in our October 2005, May 2006 and
February 2007 capital stock and warrant financings. As of March 3,
2008, a total of approximately 25,319,000 shares of our common stock remained
eligible for resale pursuant to outstanding registration statements filed for
investors. Sales or potential sales of a significant number of shares
into the public markets may negatively affect our stock price.
The
Exercise of Outstanding Options and Warrants May Dilute Current
Shareholders
As of
March 3, 2008, there were outstanding options and warrants to purchase a total
of 41,981,000 shares of our common stock. Holders of these options
and warrants may exercise them at a time when we would otherwise be able to
obtain additional equity capital on terms more favorable to us. Moreover, while
these options and warrants are outstanding, our ability to obtain financing on
favorable terms may be adversely affected.
We
may need to raise funds through debt or equity financings in the future, which
would dilute the ownership of our existing shareholders and possibly subordinate
certain of their rights to the rights of new investors.
We may
choose to raise additional funds in debt or equity financings if they are
available to us on terms we believe reasonable to increase our working capital,
strengthen our financial position or to make acquisitions. Any sales of
additional equity or convertible debt securities would result in dilution of the
equity interests of our existing shareholders, which could be substantial.
Additionally, if we issue shares of preferred stock or convertible debt to raise
funds, the holders of those securities might be entitled to various preferential
rights over the holders of our common stock, including repayment of their
investment, and possibly additional amounts, before any payments could be made
to holders of our common stock in connection with an acquisition of the company.
Such preferred shares, if authorized, might be granted rights and preferences
that would be senior to, or otherwise adversely affect, the rights and the value
of our common stock. Also, new investors may require that we and certain of our
shareholders enter into voting arrangements that give them additional voting
control or representation on our board of directors.
The
authorization of our preferred stock may have an adverse effect on the rights of
holders of our common stock.
We may,
without further action or vote by holders of our common stock, designate and
issue shares of our preferred stock. The terms of any series of preferred stock
could adversely affect the rights of holders of our common stock and thereby
reduce the value of our common stock. The designation and issuance of preferred
stock favorable to current management or shareholders could make it more
difficult to gain control of our Board of Directors or remove our current
management and may be used to defeat hostile bids for control which might
provide shareholders with premiums for their shares.
Compliance
with corporate governance and public disclosure regulations may result in
additional expenses.
Changing
laws, regulations and standards relating to corporate governance and public
disclosure, including the Sarbanes-Oxley Act of 2002, and new regulations issued
by the Securities and Exchange Commission, are creating uncertainty for
companies. In order to comply with these laws, we may need to invest substantial
resources to comply with evolving standards, and this investment would result in
increased general and administrative expenses and a diversion of management time
and attention from revenue-generating activities to compliance
activities.
Our
officers and directors have limited liability and have indemnification
rights
Our
Articles of Incorporation and by-laws provide that we may indemnify our officers
and directors against losses sustained or liabilities incurred which arise from
any transaction in that officer’s or director’s respective managerial capacity
unless that officer or director violates a duty of loyalty, did not act in good
faith, engaged in intentional misconduct or knowingly violated the law, approved
an improper dividend, or derived an improper benefit from the
transaction.
As
previously disclosed in our annual report on Form 10-K for the year ended
December 31, 2007, we identified two material weaknesses in our internal control
over financial reporting as of December 31, 2007. Solely based upon these
material weaknesses, our management concluded that as of December 31, 2007 we
did not maintain effective internal control over financial reporting based on
the criteria established in Internal Control— Integrated Framework, issued by
the Committee of Sponsoring Organizations of the Treadway
Commission. A material weakness is a deficiency, or combination of
deficiencies, in internal control over financial reporting such that there is a
reasonable possibility that a material misstatement of the annual or interim
financial statements will not be prevented or detected on a timely
basis. The material weakness that we reported related to the
inadequacy of our procedures for (i) hiring third-party financial and valuation
experts and (ii) timely analyzing and reviewing the accounting treatment of
significant and complex transactions. Notwithstanding the existence
of these material weaknesses, we concluded that the consolidated financial
statements contained in our annual report on Form 10-K for 2007 presented
fairly, in all material respects, our consolidated financial condition as of
December 31, 2007 and 2006, and consolidated results of its operations and cash
flows for the years ended December 31, 2007, 2006 and 2005, in conformity with
U.S. generally accepted accounting principles.
We have
actively engaged in the development and implementation of a remediation plan to
address the material weaknesses in internal controls over financial reporting
and oversight thereof as of December 31, 2007.
1. For
the material weakness concerning retention of experts, we have developed a
written policy and procedures that document the processes relating to retention
of expert service providers for assistance with valuations and significant
financial transactions of NutraCea. Included in the process is an analysis to
verify and document the extent of any past relationships with the service
providers and to confirm the lack of apparent conflicts of interest. Since
December 31, 2007, we have revised these procedures as follows:
|
|
·
|
For
transactions or valuations with aggregate amounts ranging from two to five
percent of net equity (“Reporting Threshold”), management will report to
the Board of Directors the retention and qualifications of selected
experts.
|
|
|
·
|
For
transactions or valuations with aggregate values greater than five percent
of net equity (“Approval Threshold”), management will report to the Board
of Directors its recommendation for the retention of experts and seek
approval to retain expert service
providers.
|
Our
expert retention policy in effect as of December 31, 2007 (i) did not apply to
the engagement of experts for the purpose of providing valuation and (ii)
maintained a Reporting Threshold of five to ten percent of net equity and an
Approval Threshold of over ten percent of net equity. These
percentage thresholds will be monitored and revised as appropriate.
2. For
the material weakness concerning performing timely, comprehensive review of
financial transactions, we have developed the following remediation plan that
will enhance our current policies and procedures:
|
|
·
|
Assess
and evaluate our chief executive officer’s authorization thresholds to
enter into agreements that has been delegated by our board of directors
and make appropriate recommendations. Additionally, we will recommended
that our board of directors expand its documentation requirements and
receive analysis from our chief financial officer and chief operating
officer when reviewing proposed
transactions.
|
|
|
·
|
Continue
to enhance and improve month-end and quarter-end closing procedures by
having reviewers analyze and monitor financial information in a consistent
and thorough manner. We plan to continue to enhance and improve the
documentation and review of required information associated with the
preparation of our quarterly and annual
filings.
|
|
|
·
|
Perform
SAB 104 analysis of significant revenue transactions in excess of $100,000
per customer per quarter, or over $250,000 in any one year to assess if
collectibility is reasonable assured and to ensure proper period revenue
recognition.
|
|
|
·
|
Prepare
accounting memos within twenty days after the end of each quarter
analyzing our allowance for doubtful accounts for all accounts receivable
that exceed ten percent of our total accounts
receivable.
|
|
|
·
|
Prepare
accounting memos to summarize all significant transactions and the
accounting treatment therefore within forty days after the completion of
such transactions.
|
We
recognize that continued improvement in our internal controls is necessary and
are committed to continuing our significant investments as necessary to make
these improvements in our internal controls over financial
reporting.
The
shares covered by this prospectus are being registered for the account of the
selling shareholders. We will not receive any proceeds from the disposition of
common stock, or the interests therein, by the selling
shareholders.
Our
common stock currently trades on the Over-the-Counter Bulletin Board (“OTCBB”)
under the symbol “NTRZ.OB”. The following table sets forth the range of high and
low sales prices for our common stock as reported on the OTCBB for the periods
indicated below. The quotations below reflect inter-dealer prices, without
retail mark-up, markdown or commission, and may not represent actual
transactions.
|
NUTRACEA
COMMON STOCK
|
|
Low
|
|
|
High
|
|
|
Year
Ending December 31, 2008
|
|
|
|
|
|
|
|
Second
Quarter (through April 24, 2008)
|
|
$ |
0.81 |
|
|
$ |
1.23 |
|
|
First
Quarter
|
|
$ |
0.82 |
|
|
$ |
1.71 |
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$ |
0.74 |
|
|
$ |
1.87 |
|
|
Third
Quarter
|
|
$ |
1.15 |
|
|
$ |
3.43 |
|
|
Second
Quarter
|
|
$ |
2.60 |
|
|
$ |
5.04 |
|
|
First
Quarter
|
|
$ |
2.17 |
|
|
$ |
3.42 |
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31, 2006
|
|
|
|
|
|
|
|
|
|
Fourth
Quarter
|
|
$ |
1.30 |
|
|
$ |
2.74 |
|
|
Third
Quarter
|
|
$ |
0.80 |
|
|
$ |
1.38 |
|
|
Second
Quarter
|
|
$ |
0.60 |
|
|
$ |
1.45 |
|
|
First
Quarter
|
|
$ |
0.65 |
|
|
$ |
1.42 |
|
As of
March 3, 2008, there were approximately 276 holders of record of our common
stock.
We have
never declared or paid any cash dividends on our common stock. We currently
anticipate that we will retain all future earnings for the expansion and
operation of our business and do not anticipate paying cash dividends in the
foreseeable future.
The
following unaudited selected historical information has been derived from the
audited consolidated financial statements of NutraCea. The selected consolidated
financial information as of December 31, 2007 and 2006 and for each of the three
years in the period ended December 31, 2007 are derived from our audited
consolidated financial statements included elsewhere in this prospectus. The
selected consolidated financial information as of December 31, 2005, 2004 and
2003 and for each of the two years in the period ended December 31, 2004 have
been derived from our audited consolidated financial statements that are not
included in this prospectus. The information set forth below should be read in
conjunction with the financial statements, related Notes thereto, and the
section entitled “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” included elsewhere in this Prospectus.
Annual
Summary
Selected
financial information represents annual results. Due to the acquisition of The
RiceX Company on October 4, 2005, the following represents annual results for
NutraCea and three months of operations for RiceX for 2005
information.
Statements
of Operations Data: (In thousands, except per share data)
|
|
|
Years Ended December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Revenues
|
|
$ |
22,161 |
|
|
$ |
18,090 |
|
|
$ |
5,564 |
|
|
$ |
1,225 |
|
|
$ |
1,536 |
|
|
Costs
and expenses
|
|
|
37,291 |
|
|
|
17,038 |
|
|
|
8,556 |
|
|
|
24,776 |
|
|
|
9,763 |
|
|
(Loss)
income from operations
|
|
|
(15,130
|
) |
|
|
1,052 |
|
|
|
(2,992
|
) |
|
|
(23,551
|
) |
|
|
(8,227
|
) |
|
Other
income (expense)
|
|
|
3,239 |
|
|
|
538 |
|
|
|
(878
|
) |
|
|
(24
|
) |
|
|
(4,309
|
) |
|
Net
(loss) income
|
|
$ |
(11,911 |
) |
|
$ |
1,585 |
|
|
$ |
(3,872 |
) |
|
$ |
(23,575 |
) |
|
$ |
(12,536 |
) |
|
Basic
(loss) net income per common share
|
|
$ |
(0.09 |
) |
|
$ |
0.02 |
|
|
$ |
(0.10 |
) |
|
$ |
(1.18 |
) |
|
$ |
(2.05 |
) |
|
Diluted
(loss) net income per common share
|
|
$ |
(0.09 |
) |
|
$ |
0.02 |
|
|
$ |
(0.10 |
) |
|
|
(1.18
|
) |
|
|
(2.05
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares outstanding
|
|
|
125,938 |
|
|
|
76,692 |
|
|
|
38,615 |
|
|
|
19,906 |
|
|
|
6,107 |
|
Balance
Sheet data: (In thousands)
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Cash,
cash equivalents, restricted cash and investments
|
|
$ |
43,847 |
|
|
$ |
15,235 |
|
|
$ |
3,636 |
|
|
$ |
2,112 |
|
|
$ |
100 |
|
|
Total
assets
|
|
|
124,293 |
|
|
|
73,255 |
|
|
|
47,464 |
|
|
|
3,338 |
|
|
|
541 |
|
|
Current
liabilities
|
|
|
7,619 |
|
|
|
2,881 |
|
|
|
1,261 |
|
|
|
441 |
|
|
|
1,028 |
|
|
Long-term
debt
|
|
|
77 |
|
|
|
- |
|
|
|
9 |
|
|
|
1,635 |
|
|
|
— |
|
|
Accumulated
deficit
|
|
|
(61,216
|
) |
|
|
(49,305
|
) |
|
|
(50,890 |
)(1) |
|
|
(44,928
|
) |
|
|
(21,345
|
) |
|
Total shareholders’ equity
(deficit)
|
|
$ |
116,597 |
|
|
$ |
70,374 |
|
|
$ |
38,893 |
|
|
$ |
1,167 |
|
|
$ |
(487 |
) |
(1) The
Company adopted Securities and Exchange Commission, Staff Accounting Bulletin
No. 108 in 2006. As a result, the Company increased accumulated deficit at
December 31, 2005 by $2,090,000. See Note 3 to the consolidated financial
statements.
AND
RESULTS OF OPERATIONS
The
following discussion on our financial condition and results of operations should
be read in conjunction with the consolidated financial statements and notes
thereto included elsewhere in this Prospectus.
Note
Regarding Forward-Looking Statements
This
discussion contains forward-looking statements that relate to future events or
future financial performance. In some cases, you can identify forward-looking
statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "intends," "potential" or "continue" or the negative of
such terms or other comparable terminology. These statements are only
predictions. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements. Actual results could differ
materially from those anticipated in these forward-looking statements as a
result of various factors, including the risks outlined under "Risk Factors" and
elsewhere in this prospectus.
Comparison
of Results for the Years Ended December 31, 2007 and 2006
For the
year ended December 31, 2007, our net loss was $11,911,000, or ($0.09) per
share, compared to net income of $1,585,000, or $0.02 per share, in 2006,
showing a decrease of $13,496,000. The decrease for the year ended December 31,
2007 was primarily due to a net increase in revenue of $4,071,000, with a
corresponding increase in cost of goods sold of $768,000, resulting in an
increase in gross margins of $3,303,000 for 2007 compared to 2006, which was
offset by a $10,244,000 increase in Selling, General, and Administrative, or
SG&A, costs, a $3,224,000 increase in allowance for bad debt, a $1,000,000
charge for a separation agreement with our former Chief Executive Officer, an
increase of $3,216,000 in professional fees, and an increase in Research and
Development, or R&D, costs of $501,000. Other income (net of expenses) for
the twelve month period increased $2,701,000 consisting of a $2,264,000 increase
in interest income and a $1,250,000 gain on the settlement of a lawsuit, offset
by a $347,000 loss on the retirement of assets, a $309,000 loss on an equity
investment, and a $163,000 loss on the sale of marketable equity
securities.
Revenues,
cost of goods sold and gross margin:
Consolidated
revenues for the year ended December 31, 2007 were $22,161,000, an increase of
$4,071,000, or 23%, from consolidated revenues of $18,090,000 in 2006. The
increased revenue was a result of a $7,386,000 increase in our core SRB and
related products categories and an increase of $4,355,000 in royalty and
licensing fees, offset by a $7,670,000 decease in infomercial sales (net of a
$1,551,000 sales return).
During
the second quarter of 2007 we granted to Pacific Holdings Advisors Limited, or
PAHL, an exclusive, perpetual, royalty-free right and license to use and
distribute SRB and SRB derivative products in certain Southeast Asian countries.
PAHL paid a one-time fee of $5,000,000 for these rights. PAHL paid the license
fee by issuing to NutraCea an interest bearing promissory note payable over five
years. In January 2008, in conjunction with another agreement (see Note 20 of
the Consolidated Financial Statements) we amended this note to provide that PAHL
will pay us the $5,000,000 license fee by March 31, 2008 in full satisfaction of
its obligations under the Note. In consideration for this accelerated payment,
NutraCea agrees to waive all accrued interest owed by PAHL ($118,000 at December
31, 2007).
Cost of
goods sold increased $768,000 from $9,130,000 in 2006 to $9,898,000 in 2007 due
primarily to the corresponding increase in product sales in the twelve months
ended December 31, 2007. Cost of goods sold on our various product lines vary
widely and the gross margins are impacted from period to period by sales mix and
utilization of production capacity.
Gross
margins increased $3,303,000 to $12,263,000 in 2007, from $8,960,000 in 2006 due
to a $4,355,000 increase in licensing and royalty revenues, which has no
associated cost of goods, offset by a $768,000, or 2%, increase in cost of goods
sold from $9,130,000 (53% of sales) to $9,898,000 (55% of sales) in the twelve
months ended December 31, 2007 and 2006, respectively. The following table
summarizes the changes in revenue, cost of goods sold, and our gross
margin.
|
|
|
2007
|
|
|
2006
|
|
|
Increase / Decrease
|
|
|
Product,
net of discounts
|
|
$ |
15,970,000 |
|
|
$ |
8,584,000 |
|
|
$ |
7,386,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Infomercial
|
|
|
2,402,000 |
|
|
|
8,521,000 |
|
|
|
(6,119,000
|
) |
|
Less
infomercial sales return
|
|
|
(1,551,000
|
) |
|
|
- |
|
|
|
(1,551,000
|
) |
|
Net
infomercial sales
|
|
|
851,000 |
|
|
|
8,521,000 |
|
|
|
(7,670,000
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Royalty
and licensing fees
|
|
|
5,340,000 |
|
|
|
985,000 |
|
|
|
4,355,000 |
|
|
Total
revenues
|
|
|
22,161,000 |
|
|
|
18,090,000 |
|
|
|
4,071,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
10,166,000 |
|
|
|
9,130,000 |
|
|
|
1,036,000 |
|
|
Cost
of goods sold, returns
|
|
|
(268,000
|
) |
|
|
- |
|
|
|
(268,000
|
) |
|
Net
cost of goods sold
|
|
|
9,898,000 |
|
|
|
9,130,000 |
|
|
|
768,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
margin
|
|
$ |
12,263,000 |
|
|
$ |
8,960,000 |
|
|
$ |
3,303,000 |
|
Operating
expenses:
Research
and Development (R&D) expenses increased $501,000 in 2007 to $878,000 from
$377,000 in 2006, due to on-going product development activities.
Sales,
General and Administrative (SG&A) expenses increased $10,244,000 from
$6,018,000 in 2006 to $16,262,000 in 2007. The increase was mostly due to
expanded investment in personnel, infrastructure, and sales and marketing
activities to meet anticipated future demands (with certain exceptions as noted
below). Specific changes in SG&A expense is detailed in the following
schedule:
|
|
|
Twelve Months
Ended December 31,
2007
|
|
|
Twelve Months
Ended December 31,
2006
|
|
|
Increase /
Decrease
|
|
|
Payroll
|
|
$ |
5,159,000 |
|
|
$ |
1,814,000 |
|
|
$ |
3,345,000 |
|
|
Employee
benefits, payroll taxes, and hiring costs
|
|
|
1,216,000 |
|
|
|
520,000 |
|
|
|
696,000 |
|
|
Sales
and marketing
|
|
|
2,661,000 |
|
|
|
624,000 |
|
|
|
2,037,000 |
|
|
Operations
|
|
|
1,341,000 |
|
|
|
394,000 |
|
|
|
947,000 |
|
|
Travel
and entertainment
|
|
|
829,000 |
|
|
|
505,000 |
|
|
|
324,000 |
|
|
Rent
and facility costs
|
|
|
1,104,000 |
|
|
|
124,000 |
|
|
|
980,000 |
|
|
Stock
based compensation
|
|
|
1,679,000 |
|
|
|
704,000 |
|
|
|
975,000 |
|
|
Depreciation
and amortization, net of allocation to cost of goods sold
|
|
|
1,114,000 |
|
|
|
608,000 |
|
|
|
506,000 |
|
|
Administration,
insurance, and other
|
|
|
1,159,000 |
|
|
|
725,000 |
|
|
|
434,000 |
|
|
Total
selling, general and administrative expenses
|
|
$ |
16,262,000 |
|
|
$ |
6,018,000 |
|
|
$ |
10,244,000 |
|
Included
in our total increase in selling, general and administrative costs were $448,000
for payroll, $169,000 for marketing, and $267,000 for other administrative costs
(total $884,000) due to the inclusion in our results of operations the results
of Vital Living, Inc.’s operations for the period of April 20, 2007 through
December 31, 2007 which are consolidated under Variable Interest Entity rules
(see Note 10 of the Consolidated Financial Statements).
In the
twelve months ended December 31, 2007 our provision for the allowance for bad
debt expense was $3,233,000 compared to $9,000 in the same period of the prior
year. This increase is the result of additional provisions for doubtful accounts
receivable of $1,601,000 and $1,378,000 and doubtful notes receivable of
$250,000 for two customers and one note maker, respectively. Additionally, we
wrote off $4,000 of accounts receivable deemed to be
un-collectible.
Total
goodwill recorded on our financial statements as of result of our purchase of
certain debt securities and preferred stock securities of Vital Living, Inc.
(see Note 10 to the Consolidated Financial Statements) amounted to $7,579,000.
We evaluated the value of this goodwill and determined that it is $6,279,000.
Accordingly we have recorded an intangible impairment of
$1,300,000.
In
November 2007, we reached an accord with our former Chief Executive Officer, Ms.
McPeak, under which we agreed to pay her $1,000,000 in a separation agreement
under which she surrendered all prior claims to patents and other rights
relating to products developed for RiceX and NutraCea during her employment, and
grants us a right of first refusal for ten years to any patent, process, or
product she might develop that are derived from stabilized rice bran
ingredients.
Professional
fees increased $3,216,000 from $1,504,000 in 2006 to $4,720,000 in 2007. In
2007, professional expenses were associated with consultants, accounting, SOX
404 compliance, legal, investor relations and stock-based compensation expenses.
We incurred investor relations costs of $580,000 in 2007 compared to $251,000 in
2006, an increase of $329,000 associated with an investor relations firm and
fees associated with SEC filing requirements. Stock-based compensation on stock
and warrant issued to consultants for services was $379,000 in 2007 and $213,000
in 2006. We incurred a $750,000 cost associated with developing our joint
venture with Grain Enhancements LLC (see Note 10 of the consolidated financial
statements). Our increase in professional fees also includes a $624,000 charge
due to the inclusion of the results of Vital Living for the period of April 20,
2007 through December 31, 2007 (see Note 10 of the Consolidated Financial
Statements).
Other
income (expense):
Interest
income increased $2,264,000 to $2,809,000 from $545,000 in the twelve month
period ended December 31, 2007 over the same period in the prior year due to the
higher cash balance available.
The gain
on a settlement increased $1,250,000 due to the settlement of a lawsuit in
relation to the investment in Langley (see Note 4 of the Consolidated Financial
Statements).
The loss
on an equity investment increased $309,000 as a result of our investment in
Grain Enhancements LLC (see Note 10 of the Consolidated Financial
Statements).
The loss
on retirement of assets increased $347,000 due to the sale or retirement of
assets.
The loss
on disposition of marketable equity securities increased $162,000 due to the
sale of Langley (see Note 4 of the Consolidated Financial
Statements).
Income
taxes:
Income
tax expense for the year ended December 31, 2007 increased $15,000 to $20,000
from $5,000 for the prior year due to a payment for State of California
corporate income taxes.
Deferred
taxes arise from temporary differences in the recognition of certain expenses
for tax and financial reporting purposes. At December 31, 2007 and 2006,
management determined that realization of these benefits is not assured and has
provided a valuation allowance for the entire amount of such benefits. At
December 31, 2007, net operating loss carry-forwards were approximately
$37,488,000 for federal tax purposes that expire at various dates from 2011
through 2021 and $10,087,000 for state tax purposes that expire in 2010 through
2016.
The
Company has an unrecorded income tax benefit of $9,015,000 resulting from the
exercise of options during 2007. This benefit can only be recognized if the net
operating losses are used in future periods or if net operating losses expire,
and will be recorded in equity.
Utilization
of net operating loss carry forwards 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 expiration of net operating loss carry forwards before
utilization.
Comparison
of Results for the Years Ended December 31, 2006 and 2005
For the
year ended December 31, 2006, our net income was $1,585,000, or $0.02 per share,
compared to a loss of $3,872,000, or ($0.10) loss per share, in 2005, showing an
improvement of $5,457,000. The improvement for the year ended December 31, 2006
was primarily due to increased revenue of $12,526,000, offset by increased cost
of sales of $6,252,000, resulting in an increase in gross margins of $6,274,000
for 2006 compared to 2005. The favorable increase of $5,457,000 was primarily
due to increased total revenues combined with new product sales and new license
and royalty fees. There were positive trends in our infomercial products,
domestic animal product lines primarily sold to the equine market and our
domestic functional foods and nutraceutical product lines. Assuming the merger
with RiceX was effective for the entire year of 2005, the unaudited pro forma
condensed combined consolidated net loss for year ended December 31, 2005 would
have been $7,506,000 (NutraCea year ended December 31, 2005 net loss $3,567,000,
RiceX year ended December 31, 2005 net loss $3,994,000 and $55,000 intercompany
adjustment).
Revenue,
cost of goods sold and gross margin
Consolidated
revenues for the year ended December 31, 2006 were $18,090,000, an increase of
$12,526,000, or 225%, from consolidated revenues of $5,564,000 in 2005. The
increased revenue was a result of increased volume in all categories, including
a $5,044,000 increase in the infomercial market, a $2,500,000 increase in the
equine market, and a $2,000,000 increase in sales of the nutraceutical products.
Also contributing to our revenue increase was license fees, royalties and other
income in the amount of $985,000. Assuming the merger with RiceX was effective
for the entire year of 2005, the unaudited pro forma condensed combined
consolidated revenues for year ended December 31, 2005 would have been
$8,082,000 (NutraCea year ended December 31, 2005 consolidated revenues
$4,569,000, RiceX year ended December 31, 2005 consolidated revenues $3,838,000
and $325,000 intercompany adjustment).
Cost of
goods sold increased $6,252,000 from $2,878,000 in 2005 to $9,130,000 in 2006
due primarily to the significant increase in product sold in 2006. Gross margins
increased $6,274,000 to $8,960,000 in 2006, from $2,686,000 in 2005. This 233%
increase was due to new sales in the infomercial market and increased sales in
the equine market and nutraceutical markets. Assuming the merger with RiceX was
effective for the entire year of 2005, the unaudited pro forma condensed
combined consolidated gross margins for the year ended December 31, 2005 would
have been $4,351,000 (NutraCea year ended December 31, 2005 gross margins at
$2,046,000 and RiceX year ended December 31,2005 gross margins at
$2,305,000).
Operating
expenses:
Research
and Development (R&D) expenses increased $186,000 in 2006 to $377,000 due to
increased product development costs.
Sales,
General and Administrative (SG&A) expenses increased $2,158,000 from
$3,860,000 in 2005 to $6,018,000 in 2006. The increase was mostly due to added
employee-related, travel, office, commission, and other general operating
expenses. Included in SG&A category is stock-based compensation for
employees, directors and consultants. Stock-based compensation decreased
$142,000 from $868,000 in 2005 to $726,000 in 2006. Stock-based compensation
expenses decreased $420,000 from $1,511,000 in 2005 to $1,091,000 in 2006. These
non-cash charges relate to issuances of common stock and common stock warrants
and options in 2006 and 2005. The higher issuances of restricted stock, options
and warrants during 2005 was deemed necessary by management to retain and
compensate officers, directors, consultants and employees while conserving cash
assets that would otherwise have been expended for these purposes.
Professional
fees decreased $123,000 from $1,627,000 in 2005 to $1,504,000 in 2006. In 2006,
professional expenses were associated with consultants, accounting, SOX 404
compliance, legal, investor relations and stock-based compensation expenses. We
incurred investor relations costs of $251,000 in 2006 compared to $307,000 in
2005, a decrease of $56,000 associated with an investor relations firm and fees
associated with SEC filing requirements. Stock-based compensation on stock and
warrant issues to consultants for services decreased $278,000 from $643,000 in
2005 to $365,000 in 2006
Other
income and expense:
Interest
income increased by $527,000 from $18,000 to $545,000 due to the higher balance
of cash available.
Interest
expense decreased by $889,000 to $7,000 in 2006 due to the payoff of a note of
$2,400,000 at 7% interest compounded quarterly on October 4, 2005. Interest
expense in 2006 primarily consisted of interest on a loan for
equipment.
Income
tax:
The
provision for income tax expense increased $3,000 from $2,000 to $5,000 due to a
payment for State of California corporate income taxes.
Deferred
taxes arise from temporary differences in the recognition of certain expenses
for tax and financial reporting purposes. At December 31, 2006 and 2005,
management determined that realization of these benefits is not assured and has
provided a valuation allowance for the entire amount of such benefits. At
December 31, 2006, net operating loss carry forwards were approximately
$25,018,000 for federal tax purposes that expire at various dates from 2011
through 2020 and $12,230,000 for state tax purposes that expire in 2010 through
2015.
The
Company has an unrecorded income tax benefit of $14,100,000 resulting from the
exercise of options during 2006. This benefit can only be recognized if the net
operating losses are used in future periods or if net operating losses expire,
and will be recorded in equity.
Utilization
of net operating loss carry forwards 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 expiration of net operating loss carry forwards before
utilization.
Liquidity
and Capital Resources
Our cash
and cash equivalents were $41,298,000 and $14,867,000 at December 31, 2007 and
2006, respectively.
We have
$2,549,000 of restricted cash ($758,000 and $1,791,000 classified as current and
non-current asset, respectively), of which $310,000 is in 3rd party
escrow to be paid in April, 2008 as the final payment on our Grainnovations
purchase (see Note 10 to the consolidated Financial Statements). The $2,239,000
balance is restricted by contract as security on our office lease in Phoenix.
The amount of restricted cash relating to the office lease reduces yearly for
five years per the lease agreement. The lease itself expires in
2016.
For the
year ended December 31, 2007, net cash used in operations was $2,353,000,
compared to net cash used in operations in the same period of 2006 of $629,000,
an increase of $1,724,000. This increase in cash used by operations resulted
primarily from the $13,496,000 increase in our net loss, offset by non-cash
charges of: a $2,202,000 for depreciation and amortization, $1,300,000 for the
impairment of goodwill, a $3,229,000 increase in allowance for doubtful
accounts, a $2,166,000 charge for stock-based compensation, a $347,000 loss on
the retirement of assets, a $309,000 loss on equity investments, a $290,000 loss
on marketable equity securities, an $886,000 increase in accounts receivable, a
$971,000 increase in inventories and a $1,167,000 increase in deposits and other
current assets, offset by a $2,738,000 increase in accounts payable and accrued
liabilities.
Cash used
in investing activities for the year ended December 31, 2007 was $27,261,000,
compared to $9,698,000 for the same period of 2006. This increase of $17,563,000
was caused primarily by our current plant expansion projects. We invested
$11,652,000 in the purchase of property and equipment at several locations, an
increase of $6,970,000 over the year ended December 31, 2006, including our
Mermentau, LA facility which became operational in the second quarter of 2007.
We invested $2,169,000 in the acquisition of Grainnovations, Inc., and
$5,143,000 in our acquisition of certain securities of Vital Living, Inc. We
invested $1,500,000 in Grain Enhancements LLC, a joint venture we formed in the
second quarter of 2007. We placed restrictions on $2,239,000 of cash and
purchased $2,225,000 of other assets. Additionally, we issued notes receivable
to several strategic customers and others totaling $7,828,000 and received
payments against outstanding notes receivable of $5,410,000.
Cash
provided from financing activities for the year ended December 31, 2007 was
$56,045,000, an increase of $34,342,000 over the year ended December 31, 2006.
The increase is due to a $46,805,000 private placement financing (see below), an
increase of $30,871,000 over 2006, and proceeds of $9,240,000 from the exercise
of common stock options and warrants, an increase of $3,456,000 over
2006.
Our
working capital position was $45,863,000 and $23,320,000 as of December 31, 2007
and 2006, respectively.
Equity
financing:
On
February 15, 2007, we sold an aggregate of 20,000,000 shares of our common stock
at a price of $2.50 per share in connection with a private placement for
aggregate gross proceeds of $50,000,000 ($46,805,000 after offering expenses).
Additionally, the investors were issued warrants to purchase an aggregate of
10,000,000 shares of our common stock at an exercise price of $3.25 per share.
An advisor for the financing received a customary 6% cash-fee, based on
aggregate gross proceeds received from the investors, reasonable expenses and a
warrant to purchase 1,200,000 shares of common stock at an exercise price per
share of $3.25. The warrants have a term of five years and are exercisable after
August 16, 2007.
On May
12, 2006, we sold an aggregate of 17,560 shares of our Series C Convertible
Preferred Stock at a price of $1,000 per share in a private placement
transaction. This private placement of securities generated aggregate gross
proceeds of approximately $17,560,000 ($15,934,000 net after offering and
related expenses). The preferred shares can be converted to shares of our common
stock at a conversion rate of approximately 1,176 shares of common stock for
each preferred share issued in the transaction. Additionally, the investors were
issued warrants to purchase an aggregate of 10,329,412 shares of our common
stock at an exercise price of $1.35 per share. The warrants have a term of five
years and are immediately exercisable. An advisor for the financing received a
customary fee based on aggregate gross proceeds received from the investors and
a warrant to purchase 500,000 shares of common stock at an exercise price per
share of $1.35 and a term of five years.
Subsequent
expenditures (see Note 20 - Subsequent Events, to the consolidated financial
statements):
In
January, 2008, through our newly formed subsidiary, Medan, LLC, we purchased 51%
of the stock of PT Panganmas Inti Nusantara, an Indonesian company for
$10,675,000
In
February 2008, we purchased Irgovel, a Brazilian company which operates a rice
bran oil processing plant, for approximately $14,492,000. Additionally, we
agreed to fund as necessary up to $5,300,000 to pay deferred taxes due to the
Brazilian government. These deferred taxes are payable over a period of 10
years.
Purchase
commitments:
In
January 2008 we signed a letter of intent to purchase a building in Phoenix for
our planned SRB stage II processing facility for $8,250,000. We expect to close
escrow in March 2008. Additionally, we estimate our costs to equip the facility
for the production of our products to be $5,000,000. We plan for the facility to
be operational in the fourth quarter of 2008.
Domestic
Initiatives
We
continued an initiative to expand our Dillon, Montana plant to increase
production capacity to meet the growing market demand for our value-added
products made from stabilized Rice Bran. We ordered additional equipment and
expanded the Dillon Montana facility. The plant was increased from its initial
annual capacity of 900 tons to a capacity of 2,700 tons by the end of the second
quarter of 2007.
We have
existing financial liquidity from cash on hand and current cash flow to complete
the expansion. Strong market interest in our proprietary stabilized Rice Bran
derivatives has prompted the need for increased manufacturing capability and is
consistent with our goal of meeting growing customer demands and a new awareness
of our products’ value. This increase in manufacturing capacity is the most
efficient and economical means of boosting capacity as quickly as possible to
meet the increasing demands of the marketplace.
We
entered into a raw rice bran supply agreement with Louisiana Rice Mill LLC,
(LRM) and completed the construction of a stabilization facility with an annual
capacity of 30,000 tons of stabilized rice bran. The agreement quadrupled our
previous annual supply of raw rice bran in the United States. In addition, we
announced the construction of an additional stabilization facility at Lake
Charles, LA that will provide an additional 30,000 tons of annual capacity,
which we expect to become operational in the second quarter of 2008. We funded
these projects from existing capital resources.
International
Initiatives
On
September 13, 2005, we entered into an agreement with a Dominican Republic rice
mill whereby the two companies agreed to form a joint venture. The terms of the
agreement allows us the option to install equipment to produce annually at least
5,000 metric tons of stabilized rice bran in the Dominican Republic, or in the
alternative to produce the product in the United States and ship the raw
ingredients to the Dominican Republic and package it in final form there. The
joint venture will be equally owned by the two companies and will commercially
sell stabilized rice bran products through retail and government in the
Dominican Republic and Haiti. NutraCea has shipped product directly rather than
utilize the joint venture since the company chose not to build a processing
facility in the Dominican Republic at this time. We are shipping product from
the United States facilities to honor obligations in the Dominican
Republic.
On
October 28, 2005, we entered into a binding letter of intent with an Ecuadorian
company to determine whether we should enter into a working arrangement that
will allow the Ecuadorian company the right to utilize our proprietary
ingredients and value-added processing in their multi-faceted food business,
which includes animal feed, poultry and cereals. We are currently servicing this
company with product shipped from the United States although we have not entered
into a definitive agreement as of March 3, 2008, as we chose not to locate
facilities in Ecuador at this time.
On
December 19, 2006, NutraCea began distributing product to thousands of orphans
through community- based organizations in Malawi as part of an extraordinary
collaborative effort with Feed the Children, Raising Malawi and The Malaria
Solution Foundation. The mission was to provide direct physical assistance,
long-term sustainability and support to many of Malawi’s two million orphans and
vulnerable children. Approximately ten thousand children at the Consol
Homes-Raising Malawi Orphan Care Center received our product to help improve
their overall nutrition. The initial product distribution was made possible
through funding raised by The Malaria Solution Foundation with a purchase and
donation of NutraCea’s products.
In June,
2007 we began distributing product to thousands of children in Indonesia as part
of a humanitarian feeding program sponsored by Feed the Children.
In June
2007, we entered into a joint venture with an Indonesian company to construct
Rice Bran Stabilization facilities in Southeast Asia. We expect the first such
facility to be operation in the fourth quarter of 2008.
There can
be no assurance that these international initiatives will be achieved in part or
whole, however management continues its efforts to formalize its relationship
within these countries to further its business activities.
Off-Balance
Sheet Arrangements
We have
not entered into any transactions with unconsolidated entities whereby we have
financial guarantees, subordinated retained interests, derivative instruments or
other contingent arrangements that expose us to material continuing risks,
contingent liabilities, or any other obligation under a variable interest in an
unconsolidated entity that provides financing and liquidity support or market
risk or credit risk support to the Company.
Contractual
Obligations
As part
of the normal course of business, the Company incurs certain contractual
obligations and commitments which will require future cash payments. The
following tables summarize the significant obligations and
commitments.
|
|
Payments
Due by Period
|
|
|
Total
|
|
2008
|
|
2009
|
|
2010
|
|
2011
|
|
2012
|
|
|
|
($
in thousands)
|
|
Long-term
debt
|
|
$ |
100 |
|
|
$ |
26 |
|
|
$ |
26 |
|
|
$ |
26 |
|
|
$ |
22 |
|
|
$ |
— |
|
|
Capital
lease
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Operating
leases
|
|
|
7,801 |
|
|
|
1,303 |
|
|
|
1,608 |
|
|
|
1,637 |
|
|
|
1.655 |
|
|
|
1,598 |
|
|
Purchase
obligations
|
|
|
250 |
|
|
|
50 |
|
|
|
50 |
|
|
|
50 |
|
|
|
50 |
|
|
|
50 |
|
|
Total
contractual obligations
|
|
$ |
8,151 |
|
|
$ |
1,379 |
|
|
$ |
1,684 |
|
|
$ |
1,713 |
|
|
$ |
1,727 |
|
|
$ |
1,648 |
|
Critical
Accounting Policies
A summary
of our significant accounting policies is included in Note 2, Part II - Item 8,
FINANCIAL STATEMENTS. We believe the application of these accounting policies on
a consistent basis enables us to provide timely and reliable financial
information about our earnings results, financial condition and cash
flows.
The
preparation of financial statements in accordance with generally accepted
accounting principles requires management to make judgments, estimates and
assumptions regarding uncertainties that affect the reported amounts presented
and disclosed in the financial statements. Management reviews these estimates
and assumptions based on historical experience, changes in business conditions
and other relevant factors that they believe to be reasonable under the
circumstances. In any given reporting period, actual results could differ from
the estimates and assumptions used in preparing our financial
statements.
Critical
accounting policies are those that may have a material impact on our financial
statements and also require management to exercise significant judgment due to a
high degree of uncertainty at the time the estimate is made. Management has
discussed the development and selection of our accounting policies, related
accounting estimates and the disclosures set forth below with the Audit
Committee of our Board of Directors. We believe our critical accounting policies
include those addressing revenue recognition, allowance for doubtful accounts,
and inventories.
Revenue
Recognition
Revenues
from product sales are recognized when products are shipped and when the risk of
loss has transferred to the buyer. Deposits are deferred until either the
product has shipped or conditions relating to the sale have been substantially
performed.
Allowance
for Doubtful Accounts
We
continuously monitor collections from our customers and maintain an allowance
for doubtful accounts based upon our historical experience and any specific
customer collection issues that we have identified. While such credit losses
have historically not exceeded our expectations and the provisions established,
there is a risk that credit losses in the future will exceed those that have
occurred in the past, in which case our operating results would be adversely
affected.
Valuation
of long-lived assets
Long-lived
assets, consisting primarily of property and equipment, patents and trademarks,
and goodwill, comprise a significant portion of our total assets. Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that their carrying values may not be recoverable. Recoverability of
assets is measured by a comparison of the carrying value of an asset to the
future net cash flows expected to be generated by those assets. The cash flow
projections are based on historical experience, management’s view of growth
rates within the industry, and the anticipated future economic
environment.
Factors
we consider important that could trigger a review for impairment include the
following:
|
|
(a)
|
significant underperformance
relative to expected historical or projected future operating
results,
|
|
|
(b)
|
significant changes in the manner
of its use of the acquired assets or the strategy of its overall business,
and
|
|
|
(c)
|
significant negative industry or
economic trends.
|
When we
determine that the carrying value of patents and trademarks, long-lived assets
and related goodwill and enterprise-level goodwill may not be recoverable based
upon the existence of one or more of the above indicators of impairment, it
measures any impairment based on a projected discounted cash flow method using a
discount rate determined by its management to be commensurate with the risk
inherent in its current business model.
Marketable
Securities
Marketable
securities are marked to market at each period end. Any unrealized gains and
losses on the marketable securities are excluded from operating results and are
recorded as a component of other comprehensive income (loss). If declines in
value are deemed other than temporary, losses are reflected in Net income
(loss).
Inventory
Inventory
is stated at the lower of cost (first-in, first-out) or market and consists of
nutraceutical products. While we have an inventory of these products, any
significant prolonged shortage of these ingredients or of the supplies used to
enhance these ingredients could materially adversely affect our results of
operations.
Property
and Equipment
Property
and equipment are stated at cost. We provide for depreciation using the
straight-line method over the estimated useful lives as follows:
|
Furniture
and equipment
|
3-7
years
|
|
Automobile
|
5
years
|
|
Software
|
3
years
|
|
Leasehold
improvements
|
7
years
|
|
Property
and equipment
|
7-10
years
|
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 statements of operations.
Fair
Value of Financial Instruments
For
certain of our financial instruments, including cash, accounts receivable,
inventory, prepaid expenses, accounts payable, accrued salaries and benefits,
deferred compensation, accrued expenses, customer deposits, due to related
party, and notes payable, the carrying amounts approximate fair value due to
their short maturities.
Stock-Based
Compensation
On
January 1, 2006, NutraCea adopted SFAS No. 123(R), “Share-Based Payment” (“SFAS
123(R)”). SFAS 123(R) replaced SFAS No. 123 and supersedes APB Opinion No. 25.
SFAS 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. The pro forma disclosures previously permitted under SFAS 123
are no longer an alternative to financial statement recognition. NutraCea
adopted SFAS 123(R) using the modified prospective method which requires the
application of the accounting standard as of January 1, 2006. The consolidated
financial statements as of and for the year ended December 31, 2006 reflect the
impact of adopting SFAS 123(R). In accordance with the modified prospective
method, the consolidated financial statements for prior periods have not been
restated to reflect, and do not include, the impact of SFAS 123(R). For
stock-based compensation grants to consultants, we recognize as compensation
expense the fair value of such grants, recognized over the related service
period. Prior to 2006, we recorded stock-based compensation grants to employees
based on the excess of the estimated fair value of the common stock on the
measurement date over the exercise price.
Quantitative
and Qualitative Disclosures About Market Risk
Our cash
and cash equivalents have been maintained only with maturities of 30 days or
less. Our short-term investments have interest reset periods of 30 days or less.
These financial instruments may be subject to interest rate risk through lost
income should interest rates increase during their limited term to maturity or
resetting of interest rates. As of December 31, 2007, there was one note payable
outstanding which bears interest of 8% and is payable over 4 years (see Note 12
of the consolidated financial statements). Future borrowings, if any, would bear
interest at negotiated rates and would be subject to interest rate risk. We do
not believe that a hypothetical adverse change of 10% in interest rates would
have a material effect on our financial position.
GENERAL
NutraCea
(“we,” “us,” “our,” or the “Company”) is a California corporation formerly known
as Alliance Consumer International, Inc. As a result of the reorganization
transaction discussed below, we conduct the business previously carried on by
NutraStar Technologies Incorporated (“NTI”), a Nevada corporation that was
formed and started doing business in February 2000 and is a wholly-owned
subsidiary. In addition, we conduct business through our wholly-owned
subsidiary, The RiceX Company, or RiceX, a Delaware corporation that we acquired
on October 4, 2005.
NutraCea
is a health science company that has proprietary intellectual property that
allows us to process and convert rice bran, one of the world’s most
underutilized food resources, into a highly nutritious ingredient that has
applications in various food products and as key components of patented and
proprietary formulations that have applications for treatment modalities in
nutritional supplementation. It is also used as a stand-alone products that can
be sold through non-related entities with distribution into the market place,
both domestically and internationally. These products include food supplements
and medical foods, or “nutraceuticals,” which provide health benefits for humans
and animals based on stabilized rice bran and stabilized rice bran derivatives.
We believe that stabilized rice bran products can deliver beneficial
physiological effects. We have conducted and are continuing to pursue ongoing
clinical trials and third party analyses in order to further support the uses
for and effectiveness of our products.
The RiceX
subsidiary is primarily engaged in the manufacturing of stabilized rice bran
(“SRB”) at its Sacramento facility for various consumptive uses, and the custom
manufacturing of various grain based products for food ingredient companies at
its production facility in Dillon, Montana. RiceX Nutrients, Inc. has
specialized processing equipment and techniques for the treatment of rice grain
products to cook, convert, isolate, dry and package finished food ingredients
used in the formulation of health food and consumer food finished products.
NutraCea RiSolubles, a highly nutritious, carbohydrate and lipid rich fraction,
is produced at the Dillon, Montana facility along with RiFiber, a fiber rich
derivative and RiBalance, a complete rice bran nutritional package. NutraCea
believes that these manufacturing capabilities are unique among grain
processors, with custom processing capabilities suited to numerous food
applications.
Through
the acquisition of The RiceX Company by NutraCea on October 4, 2005, the
combined company, known as NutraCea, has created a vertically integrated company
combining the manufacture, product development and marketing of a variety of
products based upon the use of stabilized rice bran and rice bran formulations.
We generated approximately $22,161,000, $18,090,000, and $5,564,000 in revenue
for the years ended December 31, 2007, 2006 and 2005, respectively. We reported
a net loss for the year ended December 31, 2007 of $11,911,000, a net income of
$1,585,000 for the year ended December 31, 2006, and a net loss of $3,872,000
for the year ended December 31, 2005. Our net operating loss, or NOL,
carry-forwards expire for federal tax purposes at various dates from 2011
through 2021, and expire for state tax purposes in 2010 through 2016. See Part
II — Item 8. FINANCIAL STATEMENTS, Note 13 - Income Taxes.
RiceX™ and RiceX
Solubles™ are
our registered trade names. TheraFoods®, ProCeuticals®, NutraGlo®,
NutraBeauticals®, Mirachol®, Max “E” ®, Max “E” Glo®, StaBran®, RiSolubles® and
RiceMucil®, are some of our registered trademarks. In total, we have thirty five
registered trademarks. In addition to our trade names and our trademarks, we
hold patents to the production of Beta Glucan and a micro nutrient enriched rice
bran oil process. We also hold patents to a method to treat high cholesterol, to
a method to treat diabetes and on a process for producing higher value fractions
(“HVF”) from stabilized rice bran. See PATENTS AND TRADEMARKS
below.
The
Company relocated its headquarters to Phoenix, Arizona in April 2007, replacing
the office space previously occupied in El Dorado Hills, California. Our
corporate offices are located at 5090 N. 40th St.,
Phoenix, AZ 85018. Our telephone number is (602) 522-3000. As of December 31,
2007, we occupy approximately 50,000 square feet of executive offices in
Phoenix, and 28,000 square feet of laboratory, warehouse and production
facilities in West Sacramento, California. Additionally, we own operating
production facilities in Dillon, MT, Mermentau, LA, and Freeport, TX. Our other
production facilities are co-located within supplier rice mills in Arbuckle and
West Sacramento, CA.
At the
end of December 31, 2007, we had three wholly-owned subsidiaries, NTI, which in
turn wholly owns NutraGlo Incorporated, a Nevada corporation, RiceX, which
wholly owns RiceX Nutrients, Inc., a Montana corporation and Nutramercials,
Inc., a Nevada corporation that owns 100% of Infomaxx, LLC. We also own part of
NutraStarSport, Inc., an inactive Nevada corporation. We own 90% of
NutraCea/Cura LLC, a joint venture we entered in 2007 to buy and market
pharmaceutical grade products. Additionally, we have a 47.5% interest in Grain
Enhancements LLC, a joint venture to produce and distribute SRB products in
Southeast Asia, which was formed in June 2007. In December, 2007, we formed Rice
RX, LLC, and Rice Science, LLC, in which we hold a 50%, and 80% interest,
respectively.
In
February 2008, we acquired 100% of Irgovel - Industria Riograndens De Oleos
Vegetais Ltda., a limited liability company organized under the laws of the
Federative Republic of Brazil (“Irgovel”). Irgovel, located in Brazil, owns and
operates a rice bran oil processing facility in South America.
HISTORY
We
originally incorporated on March 18, 1998 in California as Alliance Consumer
International, Inc. On December 14, 2001, NTI effected a reorganization with the
inactive publicly-held company, Alliance Consumer International, Inc., and the
name was changed to NutraStar Incorporated. As a result of the reorganization
NTI became a wholly-owned subsidiary of NutraStar Incorporated and NutraStar
Incorporated assumed the business of NTI.
On April
27, 2000, NutraStar formed NutraGlo Incorporated, or NutraGlo, a Nevada
corporation, which was owned 80% by NTI and 20% by NaturalGlo Investors L.P.
During 2001, NutraGlo started marketing, manufacturing and distributing one of
our products to the equine market. In 2002, we issued 250,001 shares of our
common stock to NaturalGlo Investors L.P. in exchange for the remaining 20% of
the common stock of NutraGlo. The value of the shares was $250,001. As a result,
NutraGlo is now a wholly-owned subsidiary of NTI.
On
October 1, 2003, NutraStar Incorporated changed our name to NutraCea and the
common stock began trading on the OTCBB under the symbol “NTRC.” On November 12,
2003, we declared a 1:10 reverse stock split. Our common stock trades on the
OTCBB under the symbol “NTRZ.OB”.
On
October 4, 2005, we acquired RiceX in a merger transaction in which our
wholly-owned subsidiary, Red Acquisition Corporation, merged with and into
RiceX, with RiceX surviving the merger as our wholly-owned subsidiary. In the
merger, the shareholders of RiceX received 28,272,064 shares of NutraCea common
stock in exchange for 100% of the shares of RiceX common stock, and NutraCea
assumed the outstanding RiceX options and warrants, which became options and
warrant to purchase a total of 11,810,507 shares of NutraCea common
stock.
PRODUCTS
The
NutraCea Process stabilizes rice bran, which is the portion of the rice kernel
that lies beneath the hull and envelopes the endosperm (white rice). Rice bran
contains over 60% of the nutritional value of rice. However, without
stabilization, the nutritional value of rice bran is lost shortly after the
milling process. This is due to the lipase-induced rancidity caused by the rice
milling process. Consequently, this rich nutrient resource is typically disposed
of as low value animal feed. The NutraCea Process deactivates the lipase enzyme
and makes the bran shelf life stable for a minimum of one year. While other
competing processes have been able to stabilize rice bran for a limited time,
the NutraCea Process naturally preserves most of the higher value nutritional
and antioxidant compounds found in rice bran for a significantly longer period
of time.
The
NutraCea Process has enabled the Company to develop a variety of nutritional
food products, including its primary product, NutraCea® Stabilized Rice Bran.
NutraCea® Stabilized Rice Bran meets microbiological standards for human
consumption. Our customers include consumer nutrition and healthcare companies,
domestic and international food companies, and companion animal feed
manufacturers. We believe that the NutraCea process of stabilizing rice bran may
be used to stabilize other cereal brans, such as wheat bran. The Company has
ongoing research in this area expects to provide industrial proof of concept
soon.
We
produce stabilized, nutrient-rich rice bran and derivatives that are used in a
wide variety of new products. These include:
|
NutraCea
Stabilized Rice Bran:
|
|
Stable
whole rice bran and germ. This is our basic stabilized rice bran product
that is both a food supplement and an ingredient for cereals, baked goods,
companion animal feed, health bars, etc. It is also the base material for
producing NutraCea Solubles, oils and NutraCea Fiber
Complex.
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|
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NutraCea
Stabilized Rice Bran Fine:
|
|
This
is the same product as the NutraCea Stabilized Rice Bran, except that it
has been ground to a particle size that will pass through a 20 mesh
screen. It is used primarily in baking and pasta
applications.
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|
|
|
|
|
NutraCea
Stabilized Rice Bran Extra Fine:
|
|
This
is the same product as the NutraCea Stabilized Rice Bran, except that it
has been ground to a particle size that will pass through a 80 mesh
screen. It is used primarily in baking and pasta
applications.
|
|
Dextrinized
Rice Bran:
|
|
A
modified carbohydrate converted NutraCea Stabilized Rice Bran that is more
functional in baking and mixed health drink applications. This product
contains all of the nutrient-rich components of NutraCea Stabilized Rice
Bran.
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|
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NutraCea
RiSolubles:
|
|
A
highly concentrated water dispersible carbohydrate and lipid rich fraction
component of NutraCea Stabilized Rice Bran. This product contains only a
small amount of fiber and is a concentrated form of the vitamins and
nutrients found in NutraCea Stabilized Rice Bran.
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|
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NutraCea
Fiber Complex:
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Nutrient-rich
insoluble fiber source with associated nutrients. This product, designed
for use by the baking and health food markets, is the remaining ingredient
when NutraCea Stabilized Rice Bran is processed to form NutraCea
Solubles.
|
In
addition to the above, further refining NutraCea Stabilized Rice Bran into oil
and its by-products can produce NutraCea Oil, NutraCea Defatted Bran and Higher
Value Fractions.
|
NutraCea
Rice Bran Oil:
|
|
Nutrient-rich
oil made from NutraCea Stabilized Rice Bran. This oil has high smoke and
flash points, which provides a very long fry life, is not readily absorbed
into food, is naturally trans fat free and provides excellent nutritional
qualities. It is sold into consumer, food services, and industrial
segments.
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NutraCea
Defatted Bran:
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Low
fat bran that does not contain rice bran oil. This is a product designed
for use by the baking industry for its high fiber nutritional benefits
which include a balanced amino acid profile, high fiber content, and high
mineral content.
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Higher
Value Fractions:
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Nutraceutical-like
compounds naturally occurring in NutraCea Stabilized Rice Bran and Rice
Bran Oil that provide specific health benefits. Tocopherols, tocotrienols,
and gamma oryzanol, lecithin and phytosterols are some of the
antioxidant-rich fractions that are found in rice bran and are enhanced by
stabilization. Gamma oryzanol has a variety of uses as a nutraceutical and
is unique to rice bran in terms of the quantity
available.
|
We have
developed a number of product lines using NutraCea Process stabilized rice bran
products and proprietary rice bran formulations in various
categories.
INDUSTRY
BACKGROUND
By
definition, nutraceuticals are products from natural sources that have
biologically therapeutic effects in humans and animals. These compounds include
vitamins, antioxidants, polyphenols, phytosterols, oryzanols, as well as macro
and trace minerals. The NutraCea Process provides stabilized rice bran and rice
bran oil that are good sources for some of these compounds, including
tocotrienols, a highly potent antioxidant form of vitamin E, and gamma-oryzanol,
which is found in significant amounts in rice bran. Among other things, these
compounds act as potent antioxidants. Stabilized rice bran and its derivatives
also contain high levels of B-complex vitamins and beta-carotene, a vitamin A
precursor. Stabilized rice bran also contains high levels of carotenoids and
phytosterols, both essential fatty acids, a balanced amino acid profile and
soluble and insoluble fiber which promote colon health. See section “Benefits of
NutraCea Stabilized Bran” for additional information.
Rice is
one of the world’s major cereal grains, although United States production of
rice is only a small fraction of total world production. According to the United
States Department of Agriculture, approximately 65% of the nutritional value of
rice is contained in the rice bran, the outer brown layer of the rice kernel
which is removed during the milling process. However, raw, unstabilized rice
bran deteriorates rapidly. Because of the rapid degradation and short shelf
life, rice bran has not been widely accepted as a component of nutrition, health
or beauty products, notwithstanding the known benefits. We have developed a
method of stabilizing rice bran we believe is superior in providing a shelf life
greater than one year, which we believe is longer than any other stabilized rice
bran. The longer shelf life allows for economical production of nutrition
products which incorporate rice bran ingredients.
As the
market becomes more aware of the value of our ingredients and proprietary
formulations we believe demand for our products will increase materially. Since
stabilized rice bran is a safe food product, we believe that its beneficial
effects can be obtained with no known deleterious side effects, such as those
that may be present in pharmaceuticals. Many physicians have taken an interest
in our nutraceutical products as a means of offering alternative or
complementary approaches for treating serious healthcare problems. If further
clinical trials support the beneficial effects of our nutraceutical and medical
foods products and if the medical community widely endorses such use of our
products, we believe that our products in certain situations, may be used as a
nutritional therapy either prior to or as a complement to traditional
pharmaceutical therapies for the treatment of a variety of ailments including
diabetes and coronary heart disease. NutraCea has recently begun collaborating
with Herbal Science, a manufacturer of nutraceutical products, to further
explore the pharmaceutical potential of the thousands of compounds found within
rice bran.
THE
IMPORTANCE OF RICE
Rice is
the staple food for approximately 70% of the world’s population, and is the
staple food source for several of the world’s largest countries. World rice
production is expected to be more than 615 million metric tons in the 2006-2007
crop year (according to the United States Department of Agriculture),
constituting more than one quarter of all cereal grains produced worldwide. The
United States accounts for less than 2% of the world’s rice production. 90% of
world rice tonnage is produced in 13 countries with aggregate populations of 3.2
billion people (according to the USA Rice Federation, Rice Notes). Approximately
75% of all rice production occurs in China, India, South East Asia, Africa and
South America. Combined, these regions have a population of 2.3 billion people
(nearly 50% of the world’s population), and an average per capita gross domestic
product of $2,000 (less than one tenth of the U.S. average).
Malnutrition
is a common problem in this group of nations, particularly for people located in
rural villages where subsistence rice farming is a primary livelihood.
Transportation and storage are poor. Consequently, locally grown rice is
consumed locally and the amount of food available varies widely over time with
changes in seasons and weather. Children are especially susceptible to
variations in local agricultural output due to their heightened nutritional
needs and dependency on others for food. Per capita rice consumption in many of
the poorer rice belt countries exceeds one pound per day.
Despite
the importance of rice as a worldwide food source and the problems associated
with nutritional deficiencies in rice-dependent nations, approximately 65% of
the nutrients found in rice are destroyed during milling. Most of the rice
nutrients are contained in the outer brown layer of the rice kernel known as the
bran layer, which, because of poor stability, becomes inedible due to
lipase-induced rancidity or microbiological spoilage shortly after the milling
process.
RICE
PROCESSING AND RICE BRAN STABILIZATION
When
harvested from the field, rice is in the form of paddy, or “rough” rice. In this
form, the rice kernel is fully enveloped by the rice hull. The hull is removed
in the first stage of milling, yielding brown rice. In the second stage of
milling, the outer brown layer, or rice bran, is removed to produce white rice.
Rice bran is composed of the rice germ and several sub-layers, which accounts
for approximately 8% by weight of paddy rice and contains over 60% of the
nutrients found in each kernel of rice. (See Juliano, B.O., 1985 Rice: Chemistry
and Technology, American Association of Cereal Chemists, St. Paul, MN, pp.
37-50.)
Under
normal milling conditions, when brown rice is milled into white rice, the oil in
the bran and a potent lipase enzyme found on the surface of the bran come into
contact with one another. The lipase enzyme causes very rapid hydrolysis of the
oil, converting it into glycerol, monoglycerides, diglycerides and free fatty
acid, or FFA. As the FFA content increases, the rice bran becomes unsuitable for
human or animal consumption due to rancidity with resultant off flavor. At
normal room temperature, the FFA level increases to 5-8% within 24 hours and
thereafter increases at the rate of approximately 4-5% per day. Rice bran is
unfit for human consumption at 5% FFA, which typically occurs within 24 hours of
milling.
When the
lipase enzyme are deactivated, rice bran is stabilized, thus preserving a
potentially important nutrient source that is largely wasted today. Heat will
deactivate the lipase enzyme, reduce microbiological load and reduce moisture
levels. Several approaches have used heat as the basis for stabilization.
However, most of the rice bran nutrients are lost in this process and enzyme
deactivitation is not optimized. For example, parboiled, or converted rice, is
subjected to soaking and steaming prior to being dried and milled. This process
softens the rice kernel and reduces the problem of lipase-induced hydrolysis.
The bran produced from parboiled rice, however, is only semi-stabilized,
typically spoiling in 20 days or less. The parboiling process also destroys much
of the nutritional value of the bran because many of the micro nutrients are
water-soluble and are leached out during the parboiling process. There have been
a number of attempts to develop alternative rice bran stabilization processes
that deactivate the lipase enzyme using chemicals, microwave heating and
variants on extrusion technology. We believe each of these efforts results in an
inferior product that uses chemicals or does not remain stable for a
commercially reasonable period, or the nutrients in the bran are lost thereby
significantly reducing the nutritional value in the bran.
THE
NUTRACEA SOLUTION
The
NutraCea Process uses proprietary innovations in food extrusion technology to
create a combination of temperature, pressure and other conditions necessary to
deactivate the lipase enzyme without significantly damaging the structure or
activity of other, higher value compounds, oils and proteins found in the bran.
The NutraCea Process does not use chemicals to stabilize raw rice bran, and
produces an “all natural” nutrient-rich product.
Our
processing equipment is designed to be installed on the premises of any two or
three-stage rice mill and is located downstream from the rice polishers. After
de-hulling, the rice is transported pneumatically to the rice polishing room
where the brown rice kernels are tumbled between abrasive surfaces and the rice
bran is polished from the surface of each kernel. The bran is separated from the
denser polished rice grain and is transported pneumatically to a loop conveyor
system of NutraCea design. The loop conveyor system immediately carries the
fresh, unstabilized rice bran to the NutraCea stabilizer. Stabilization is
achieved by feeding the fresh rice bran into a specially designed and
proprietary technological process. The result is a selectively deactivated
lipase enzyme and reduced microbiological load. Process controllers that
maintain process conditions within the prescribed pressure/temperature regime
control the system. In case of power failure or interruption of the flow of
fresh bran into the system, the electronic control system is designed to purge
our equipment of materials in process and resume production only after proper
operating conditions are re-established.
Bran
leaving our stabilization system is treated through an additional proprietary
technological process that further tempers and reduces the moisture. This bran
is then discharged onto our proprietary cooling unit specifically controlling
air pressure and humidity. The cooled bran is then loaded into one ton shipping
containers for transportation to other processing facilities or is transported
by pneumatic conveyor to a bagging unit for packaging in 30, 40, 50 and 2,000
pound sacks. NutraCea Stabilized Rice Bran (NutraCea SRB) has a shelf life of at
least one year and is rich in tocopherols, tocotrienols, oryzanols, a complete
and balanced amino acid profile and other nutritional and natural compounds that
exhibit positive health properties.
The
NutraCea Process system is modular. The processing conditions created by the
NutraCea Process are unique. Each stabilization module can process approximately
2,000 pounds of NutraCea Bran per hour and has a capacity of over 5,700 tons per
year. Stabilization production capacity can be doubled or tripled by installing
additional NutraCea units sharing a common conveyor and stage system, which we
believe can handle the output of the world’s largest rice mills. We have
developed and tested a smaller production unit, which has a maximum production
capacity of 840 tons per year, for installation in countries or locations where
rice mills are substantially smaller than those in the United
States.
NutraCea
also produces proprietary value-added products in its Dillon, Montana facility.
In Dillon, NutraCea has established a production facility which has the ability
to isolate components of the Stabilized Rice Bran into value-added products with
impressive nutritional profiles. The primary isolate is NutraCea RiSolubles
which is a nutritionally-dense pleasant tasting ingredient. RiSolubles can be
used in nutritional finished goods like beverages, bars, powders and pastes.
RiSolubles can also be served as a stand-alone nutrition supplement in feeding
programs designed to address malnutrition in pregnant/lactating mothers and
infant to adolescent children. Another isolate produced in Dillon is Fiber
Complex. Fiber complex is an excellent source of hypoallergenic fiber which can
be used in dietary supplement formats like a fiber powders, capsules, wafers,
baked products and fiber bars.
BENEFITS
OF NUTRACEA STABILIZED RICE BRAN
Rice bran
is a rich source of protein, oil, vitamins, antioxidants, dietary fiber and
other nutrients. The approximate composition and caloric content of NutraCea
Stabilized Rice Bran is as follows:
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Fat
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18%-23
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% |
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Protein
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12%-16
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% |
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Total
Dietary Fiber
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23%-35
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% |
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Soluble
Fiber
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|
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2%-6
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% |
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Moisture
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4%-8
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% |
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Ash
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7%-10
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% |
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Calories
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3.2
kcal/gram
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Rice bran
is unique in the plant kingdom. Its protein is hypoallergenic and contains all
of the essential amino acids, the necessary building blocks of protein in the
body. Rice bran contains approximately 20% oil, which has a favorable fatty acid
composition and excellent heat stability. Rice bran oil contains essential fatty
acids and a broad range of nutraceutical compounds that have been demonstrated
to have therapeutic properties. (See Cheruvanky and Raghuram, 1991 Journal of
the American College of Nutrition, Vol. 10, No. 4, pp. 593-691.)
Nutraceuticals
are food constituents that have human therapeutic effects. Some of these
compounds include a highly potent anti-oxidant form of Vitamin E called
“tocotrienols,” and gamma oryzanol, which is found in rice bran in large
quantities. These compounds are potent antioxidants that have been shown to aid
in reducing damage from free radicals in the body. NutraCea SRB also contains
very high levels of B-complex vitamins, betacarotene (a vitamin A precursor),
other carotenoids and phytosterols, as well as both soluble and insoluble fiber.
(See Saunders, 1990, Rice Bran Oil, presented at Calorie Control Council
Meeting, February 14, 1990, Washington, D.C.)
We have
been assigned five U.S. patents relating to the production or use of
nutraceutical HVF products. See PATENTS AND TRADEMARKS below.
BUSINESS
STRATEGY
Our goal
is to become a significant global supplier of Stabilized Rice Bran and rice bran
based products in the premium consumer food and animal feed sectors of the
marketplace. We produce stabilized rice bran and related products in
manufacturing facilities we own or through other arrangements. See SUPPLY AND
MANUFACTURING below. We intend to vigorously protect our process and products
through both trade secret protection and through patent and trademark
protection. See PATENTS AND TRADEMARKS below.
We
believe that clinical support for stabilized rice bran products will further
enhance the value of our products as nutraceuticals and functional food
ingredients. Finally, we intend to aggressively market our products in four
distinct product areas. These areas are nutraceuticals, functional food
ingredients, performance feed and companion pet food supplements, and rice bran
oils. In pursuit of this goal, we have focused and will continue to focus our
marketing and development efforts in developed regions, including the U.S.,
Europe, Japan, South Korea and Taiwan; and in developing regions, including
Central and South America, India, China, Indonesia and most of the other
countries in Asia and Africa.
DEVELOPED
NATIONS
In
developed nations, our focus is on producing and selling ingredients to large
consumer product marketers as health-enhancing ingredients for existing or
newly-developed products, and as stand-alone products to consumers. In addition,
we have continuing relationships with U.S., European, North American, South
American, and Japanese companies to introduce our products into these regions.
Although there can be no assurance that our products will continue to be
successfully introduced into these regions, we believe that our current sales
and continued interest from these countries validates the potential opportunity.
In addition, we believe that the relationship reflects the strategy for our
foreign ventures. We intend to seek other opportunities in developed nations to
convert stabilized rice bran grown in those countries into finished goods and
into HVF's with demonstrated health or nutritional benefits.
DEVELOPING
NATIONS
Our
strategic development, using the NutraCea model, has been focused on making our
nutrient-dense stabilized rice bran products available to developing countries
where nutritional deficiencies are a major concern, particularly among
school-aged children. We remain on the cutting edge in developing nations by
reducing malnutrition and enhancing nutritional growth potential of school-aged
children. The school nutritional and diet upgrading programs in developing
countries worldwide represent a multi-billion dollar market, which provides us
with an opportunity to make significant sales. The Food and Agriculture
Organization of the United Nations and the Foreign Agricultural Service of the
United States Department of Agriculture have targeted over 800 million
nutritionally deficient humans for assistance in the worldwide program titled
“American Special Supplemental Food Programs for Women, Infants and
Children”.
NutraCea’s
first international strategic alliance was established through its wholly-owned
subsidiary RiceX, in December 2000 with PRODESA and the Christian Children’s
Fund in Guatemala. Under this alliance, we supplied nutritionally-dense
ingredients throughout Guatemala over a twelve-month period starting in January
2001. As a result, our stabilized rice bran product, NutraCea Solubles, has been
used as a base for a nutritionally enhanced drink for school breakfast and lunch
programs to over 67,000 children in rural communities throughout Guatemala. The
twelve-month program in Guatemala was highly successful in reducing malnutrition
in school age children and enhancing their nutritional growth potential. This
proof-of-concept program in Guatemala generated nearly $2,300,000 in revenues
for RiceX in the year ended December 31, 2001. In 2002 and following the similar
program of Guatemala, El Salvador’s Ministry of Education in San Salvador
purchased RiceX’s stabilized rice bran product, RiceX Solubles, for applications
in its school nutrition programs for El Salvadorian children. RiceX had similar
programs in the region in 2003 and 2004.
We are
broadening our presence in the international markets. Building on our 2001
successful proof-of-concept program in Guatemala, we continue to develop and
expand international market development activities in Central and South America.
We have initiated discussions with governmental agencies within various Central
and South America countries to explore securing contracts for the introduction
of our highly nutritious and proprietary food supplements for use in local and
national school feeding initiatives and family nutritional support programs. We
are pursuing a strategy to introduce our technology to both the public and
private sectors simultaneously using the strength of our local partners in
foreign markets. In the year ended December 31, 2007, we initiated feeding
programs in Malawaii, Afrca, and Indonesia with support and assistance from Feed
the Children and Happy Hearts that supplied nutritional supplementation to over
200,000 children.
We are
building alliances with strong partners demonstrating our commitment to building
the type of mutually-beneficial strategic relationships that could launch our
products through distribution channels in commercial and retail outlets in Latin
America countries as well as supply a better, more cost effective solution for
government feeding programs.
We
continue to work with major rescue and relief agencies, congressional supporters
and government offices of the USDA and the United States Agency for
International Development to bring a multi-year program to provide nutritional
drinks to substantial numbers of children each school day from either a U.S.
based facility or some future international facilities.
We also
intend to partner with local governments and companies in developing nations to
stabilize locally grown rice bran for local consumption and for future export.
In furtherance of this objective, we plan to introduce our stabilization process
systems in large rice mills located in Central and South America, China, India
and Southeast Asia in the future. In many developing nations, the average person
has a 300-500 calorie daily diet deficit. (See The Food and Agriculture
Organization of the United Nations (FAO), Agrostat PC, on diskette (FAO, Rome,
12993); and the World Resources Institute in collaboration with the United
Nations Environment Programme and the United Nations Development Programme,
World Resources 1994-95 (Oxford University Press; New York, 1994), p. 108.). If
we are able to expand into these areas, each NutraCea processing system has the
capacity to provide up to 500 nutritionally dense calories to over one million
people daily on an ongoing basis. The diet supplement provided by the locally
grown and stabilized rice bran would help those people approach U.S. levels of
nutrition.
We
continue to hold discussions regarding the demonstration of our system and the
end products for our technology with a number of companies and governments,
including countries in Central America, India, China, Brazil, and certain
African countries. We currently have signed letters of intent with companies in
the food processing business and rice milling business in Central and South
America countries as well as the Far East. See Part II - Item 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION - “International Initiatives”, for
additional discussions. However, there can be no assurance that these letters of
intent and discussions will lead to implementation of the NutraCea Process with
these companies or governments.
SALES
AND MARKETING
We have
targeted three distinct channels of product distribution in which NutraCea Bran
and related products may be used as the primary ingredient. Our key marketing
strategy is to form strategic alliances with industry leaders in each of our
target markets. This strategy will allow us to leverage the research, marketing
and distribution strengths of our partners in order to more economically and
efficiently introduce and market products. We have formed alliances, or have
entered into negotiations to form alliances, in each of our target markets,
which are nutraceuticals, functional food ingredients, performance feed and
companion pet food supplements.
During
fiscal 2007, approximately four percent of our net products sales were to
regions outside of the United States. Information on net sales to unaffiliated
customers and long-lived assets attributable to our geographic regions is
included in Note 22 of Notes to Consolidated Financial Statements.
Our
overall marketing plans in each of the target markets are discussed
below.
Nutraceuticals
Nutraceuticals
are plant-derived substances with pharmaceutical-like properties, including
vitamins and dietary supplements. NutraCea Bran can be used as a nutraceutical
to provide certain specific nutrients or food components (including
antioxidants, oryzanols, Vitamin E, Vitamin B, and bran fiber) or to address
specific health applications such as cardiovascular health, diabetes control,
fighting free radicals and general nutritional supplementation. Our ingredient
products are sold to consumer nutrition and healthcare companies, national
nutritional retailers, multi-level personal product marketers,` and an
infomercial company.
Functional
Food Ingredients
NutraCea
Bran is a low cost, all natural food product that contains a unique combination
of oil, protein, carbohydrates, vitamins, minerals, fibers, and antioxidants
that can be used to enhance the nutritional value of popular consumer products.
Foods that are ideally suited for the addition of NutraCea Bran to their
products include cereals, snack foods and breads. We are marketing NutraCea
Stabilized Bran to consumer food companies for use in already established
products and for development of new products.
The
functional food market in the United States is $16 billion and we estimate that
this represents more than a $100 million annual market share opportunity for us.
Premium ingredient manufacturers are in high demand and we are strategically
positioned to take advantage of this growing and sustainable market opportunity.
Our proprietary technology and product patents represent extremely valuable
assets for achieving strategic leverage in this industry segment.
Performance
Feed and Companion Pet Food Supplements
We also
market NutraCea Bran as a feed supplement for animals. NutraCea Stabilized Bran
is used as an equine feed supplement and has proven to provide greater muscle
mass, improved stamina, and hair-coat luster when added to a normal diet. Show
and performance horses represent the premium end of the equine market and
present more than a $100 million annual market share opportunity for our future
revenue growth. During 2003, NutraCea launched its own equine supplement label
“Max E Glo”. In 2004, NutraCea entered into a license and distribution agreement
with MannaPro, a national feed distributor, for this brand. We continued to hold
numerous discussions with several major domestic equine feed manufacturers and
distributors.
Rice
Bran Oils
Nutrient-rich
oil made from NutraCea Stabilized Rice Bran has high smoke and flash points,
which provides a long fry life and is not readily absorbed into food. The oil
also maintains many of the nutritional benefits of whole rice bran products,
making it ideally suited for healthy salad and cooking oils. We hold a patent on
the process for obtaining micronutrient enriched rice bran oil. There can be no
assurance that any of our Rice Bran Oil marketing efforts will be
successful.
MARKETING
METHODS
As of
March 3, 2008, we have a Senior Vice-President of Sales and Marketing and seven
domestic sales representatives. In addition, we have several marketing and
distribution agreements with distributors in Mexico, South America, Western and
Eastern Europe and Africa, for developing and marketing NutraCea Bran products.
In addition, we have retained a firm to provide and assist in potential
qualified customer introductions. We also have a non-exclusive agreement with a
firm granting rights to advertise, promote, market, sell and distribute some of
our products world-wide. We continue to work to develop additional significant
alliances in efforts to increase our sales volume.
Pursuant
to the Stabilized Rice Bran Processing Sales and Marketing Agreement between
NutraCea and Farmers Rice Cooperative (“FRC”), a cooperative association
organized under the California Food and Agriculture Code, dated September 1,
2005, we granted a license to Farmers to use our rice bran processing equipment
to produce stabilized rice bran for a limited number of Farmers’ customers. Our
Nutrition Supplements are currently marketed domestically through various
distribution channels. In addition, we distribute products under the names
FlexProtex™, Rice’n Shine™, Flex Protex Cream™, SuperSolubles®, ZymeBoost® and
CeaBars™ through ITV Global, Inc. (“ITV”), a direct response marketing company.
We and ITV entered into a Private Label Supply Agreement (the “Supply
Agreement”) and Strategic Alliance on August 24, 2005. Pursuant to this
agreement, ITV markets and sells our products through infomercials. In 2007, we
generated $851,000 in sales from these infomercials (net of a $1,551,000 sales
return of infomercial products from another customer). The Supply Agreement has
an initial term of two years and allows for a subsequent one-year term renewal.
We have agreed in the Supply Agreement to fulfill ITV’s requirements for the
products specified in the agreement while ITV will use its best efforts to
market, distribute and sell such products. The contracts have specific unit and
dollar minimums in order for them to maintain limited exclusivity.
Our
nutraceutical equine products are distributed under the name “Absorbine Flex+®” by W.F.
Young, Inc. We and W.F. Young entered into a distribution agreement on May 1,
2001 which provides for NutraGlo to manufacture, package and ship all W.F.
Young’s sales requirements while W.F. Young is granted a license to use and
market our equine products. NutraGlo has agreed to sell its equine healthcare
products exclusively through W.F. Young at preferred product prices. W.F. Young
has agreed to use its best efforts to promote NutraGlo’s current and future
equine products and make minimum product purchases. In May of 2003, the purchase
requirements for the three-year contract had been met. The distribution
agreement was for an initial term of three years ending on August 31, 2004. On
September 18, 2003, NutraCea, W.F. Young and Wolcott Farms, Inc. entered into a
Technology Agreement which, among other things, extended the initial term of the
distribution agreement through September 12, 2006. On April 12, 2005, NutraCea
and W.F. Young entered into a Manufacturing Agreement which granted to us the
exclusive worldwide rights to manufacture certain equine products for W.F.
Young. Additionally, on April 12, 2005, NutraCea and W.F. Young entered into a
Distribution Agreement under which we granted W.F. Young (i) the right of first
offer and right of first refusal to market our stabilized rice bran food
supplements (other than Equine Flex+) for the equine market and (ii) the right
of first offer and right of first refusal to market the Flex+ product and Flex+
technology for the non-equine, non-human market.
We have
developed a number of other nutraceutical animal products, which we are seeking
to distribute, subject to certain limited rights of first refusal granted to
W.F. Young, through various distribution channels such as the Internet and
strategic joint ventures in the large animal, pet and veterinarian
industries.
CUSTOMERS
During
year ended December 31, 2007 we had revenues of $22,161,000. Excluding revenues
of $5,340,000 for license and royalty fees, we had 6 customers that accounted
for 59% of the remaining $16,821,000 sales generated during 2007. Of these,
three customers, Bi-Coastal, Wellness Watchers Global, LLC, and ITV Global,
Inc., accounted for 19%, 18% and 12% of sales, respectively.
During
year ended December 31, 2006 we had revenues of $18,090,000. We had one customer
that represented more than ten percent of total revenues generated during 2006,
that being ITV Global, Inc. with revenues reported approximately $8,057,000, or
45%.
During
year ended December 31, 2005 we had revenues of $5,564,000. We had one customer
that represented more than ten percent of total revenues generated during 2005,
that being ITV Global, Inc. with revenues reported approximately $3,013,000, or
54%.
Loss of
any one of these customers could have a material adverse effect on our revenues
and results of operations.
SUPPLY
AND MANUFACTURING
We
purchase unstabilized rice bran from multiple suppliers. These include FRC in
Sacramento, CA, ADM Rice (“ADM”) in Arbuckle, CA, and Louisiana Rice Mill in
Mermentau, LA. Pursuant to our agreements our stabilization machinery is
physically located within or adjacent to the rice processing plants and the rice
bran by-product is directly transferred to our machinery for stabilization
without the need for shipping. The relationship with the rice mills are
symbiotic, as the rice manufacturer searches for raw rice bran marketing
channels while we have ready access to unstabilized bran. At the end of 2007, we
had three domestic suppliers of unstabilized rice bran and an additional supply
contract with another rice mill in Lake Charles, LA which will be utilized when
we complete construction of that SRB plant in the second quarter of
2008.
We have
negotiated additional supply agreements with other rice mills within the United
States and have begun engineering designs and seeking permits in preparation for
additional domestic operations. We have ongoing discussions regarding entering
into contracts for the supply of rice bran in Europe, Indonesia, Brazil, and
throughout other areas of the world. We are continuing to seek additional
relationships with rice processors, both in the United States and abroad as part
of our overall business strategy. We believe suitable alternative supply
arrangements are readily available if needed.
As
required, we ship NutraCea Bran from our warehouse in California to our plant in
Dillon, Montana for further processing into NutraCea RiSolubles, Dextrinized
Rice Bran and NutraCea Fiber Complex. We ordered and installed additional
equipment and have expanded the Dillon Montana facility. This additional
equipment has increased our production of NutraCea Solubles and NutraCea Fiber
Complex by more than 150% since the end of 2005. We plan to construct and
complete an additional value-added product processing facility during 2008, in
Phoenix, AZ which will initially add 5,000 tons of capacity, with room to more
than quadruple that capacity over the next 18 months.
Every
food product that we manufacture is produced under published FDA and USDA
regulations for “Good Manufacturing Practices.” Our Chief Operating Officer
oversees quality control and quality assurance testing. Product samples for each
product code are frequently analyzed for adherence to a predetermined set of
product microbiological and attribute specifications and each lot is released
only when it demonstrates its compliance with specifications.
RESULTS
OF TRIALS AND SCIENTIFIC RESEARCH
The
beneficial attributes of stabilized rice bran, including the RiSolubles® and
RiceMucil® Nutritional Supplements, have been studied and reported by several
laboratories, including Medallion Laboratories, Craft’s Technologies, Inc.,
Southern Testing & Research Laboratories, and Ralston Analytical
Laboratories. NutraCea has no affiliation with any of the laboratories that
performed these studies but did pay for certain portions of these studies. These
analyses have verified the presence of antioxidants, polyphenols, and
phytosterols, as well as beneficial macro and trace minerals, in NutraCea’s
stabilized rice bran products. Antioxidants are compounds which scavenge or
neutralize damaging compounds called free radicals. Polyphenols are organic
compounds which potentially act as direct antioxidants. Phytosterols are
plant-derived sterol molecules that help improve immune response to fight
certain diseases.
A
57-subject clinical trial conducted by Advanced Medical Research with funding by
NutraCea suggested that consumption of the stabilized rice bran used in
NutraCea’s RiSolubles® and RiceMucil® Nutritional Supplements may lower blood
glucose levels of type 1 and type 2 diabetes mellitus patients and may be
beneficial in reducing high blood cholesterol and high blood lipid levels. If
warranted, NutraCea may develop products which address the use of stabilized
rice bran products as medical foods for, and to potentially make health benefit
claims relating to, the effects of dietary rice bran on diabetes and
cardiovascular disease.
Through
several consulting physicians, NutraCea has relationships with several medical
institutions and practicing physicians who may continue to conduct clinical
trials and beta work for its products. Some of these previous clinical trials
are reviewed in an article published in the March 2002 issue of the Journal of
Nutritional Biochemistry. The trials produced positive results by showing that
the levels of blood lipids and glycosylated hemoglobin were reduced.
Subsequently, six domestic and international patents were issued.
The W. F.
Young Company, distributors of Absorbine® Equine Pain Relief Products, sponsored
a 50-horse equine clinical trial, which demonstrated NutraCea’s Absorbine Flex+®
Equine Products to be effective products for treating joint degeneration as well
as inflammation in horses.
Our
program managed by Christian Children’s Fund, or CCF, of Guatemala in 2001 was
highly successful in reducing malnutrition in school age children and enhancing
their nutritional growth potential. Our stabilized rice bran product, NutraCea
Solubles, was used as a base for a nutritionally enhanced drink for school
breakfast and lunch programs to over 67,000 children in rural communities
throughout Guatemala. CCF randomly selected 150 children from the group and
evaluated their nutritional condition. Thirty-seven percent (37%) of the
children were classified as having acute or chronic malnutrition at the start of
the test. At the end of six months, no acute malnutrition existed and only 5%
chronic malnutrition remained.
NutraCea
has an on-going immune system response study for HIV patients at the Haddassah
Medical University in Israel. This study was initiated due to mounting anecdotal
evidence obtained from NutraCea’s humanitarian efforts in Africa that RiSolubles
seems to boost energy levels in HIV infect individuals, also helping them gain
weight and regain relatively normal lifestyles. We caution that no causal
relationship has yet been proven and that RiSolubles does not reverse infection
by HIV. The study, with a medically reviewed, statistically validated protocol,
is intended to provide a definitive answer. Assuming no unexpected delays in the
study, initial results are expected toward the end of 2008.
On
January 10, 2008 NutraCea announced the formation of a joint venture with Herbal
Science (“HS”) to develop Nutraceutical extracts and pharmaceutical chemistries
from NutraCea Stabilized Rice Bran. HS utilizes very sophisticated methodologies
in the identification and isolation of specific biologically active compounds
that have been tested for effectiveness against specific disease conditions.
Thus far, it is apparent that NutraCea Stabilized Rice Bran contains a large
number of novel, potentially active compounds that will be the target of HS’s
methodologies. We are hopeful that the partnership will result in biologically
active Stabilized Rice Bran extracts for use in the nutraceutical industry as
well as specific identified compounds targeting the pharmaceutical
industry.
Late in
2007, the Cancer Biomarkers Group in the Department of Cancer Studies and
Molecular Medicine, University of Leicester in Leicester, UK published a
research paper evaluating the effect of NutraCea Stabilized Rice Bran in
ApcMin mice
(British Journal of
Cancer (2007) 96, 248-254). These mice have been genetically modified to
serve as models for mammary, prostate and intestinal carcinogenesis. They
reported that consumption of Stabilized Rice Bran (30% in the diet) reduced the
numbers of intestinal adenomas in these mice by 51% compared to the same mice on
a control diet. The results suggest that NutraCea Stabilized Rice Bran might be
further evaluated as a chemo-preventative intervention in humans. These results
lead to the filing for patent protection on “Methods for Treatment of Intestinal
Carcinogenesis with Rice Bran” in January 2008. A new clinical trial utilizing
NutraCea Fiber Complex has been initiated at the University of Leicester to
further characterize the effectiveness of this rice bran derivative as a
chemo-preventative intervention against intestinal cancer in
humans.
In
December, 2007 we have begun working with Herbal Science to identify and
characterize compounds and extracts contained in rice bran that demonstrate
effectiveness in controlling the major imbalances in serum glucose and lipid
composition that typify diabetes symptoms.
PATENTS
AND TRADEMARKS
Through
our subsidiary NTI, we filed a non-provisional patent application with 47 claims
entitled “Methods of Treating Joint Inflammation, Pain and Loss of Mobility” on
November 6, 2001. In a December 3, 2002 office action, the U.S. Patent and
Trademark Office allowed 26 and disallowed 21 of the patent’s 47 claims.
Subsequently, in February 2004, the 26 claims which were allowed in December of
2002 were disallowed. In March 2004, we appealed the disallowance of the 26
claims which were previously allowed. Additionally, in October 2003, nine
additional preventive claims were added to the patent. In February 2005, we
received a written notification that the U.S. Patent and Trademark Office had
allowed 11 claims and the prosecution of the application was closed. On June 8,
2005, NutraCea was granted U.S. Patent Number 6,902,739.
Through
our subsidiary RiceX, we have been assigned five U.S. patents relating to the
production or use of Nutraceutical or HVF products. The patents include Patent
Number 5,512,287 “PRODUCTION OF BETA-GLUCAN AND BETA-GLUCAN PRODUCT,” which
issued on April 30, 1996; Patent Number 5,985,344 “PROCESS FOR OBTAINING
MICRONUTRIENT ENRICHED RICE BRAN OIL,” which issued on Nov. 16, 1999; Patent
Number 6,126,943 “METHOD FOR TREATING HYPERCHOLESTEROLEMIA, HYPERLIPIDEMIA, AND
ATHEROSCLEROSIS,” which issued on Oct. 3, 2000; Patent Number 6,303,586 B1
“SUPPORTIVE THERAPY FOR DIABETES, HYPERGLYCEMIA AND HYPOGLYCEMIA,” which issued
on Oct. 15, 2001 and Patent Number 6,350,473 B1 “METHOD FOR TREATING
HYPERCHOLESTEROLEMIA, HYPERLIPIDEMIA AND ATHEROSCLEROSIS,” which issued on Feb.
26, 2002. NutraCea currently has several additional patents filed and pending
formal review, and we intend to apply for additional patents in the future as
new products, treatments and uses are developed.
In
addition to the previously identified issued patents NutraCea has been assigned
several additional US patents. These include patent number 6,558,714-B2 “Method
for Treating Hypercholesterolemia, Hyperlipidemia and Atherosclerosis” which
issued on May 06, 2003, a Continuation in Part with the same title which issued
on May 11, 2004 and patent number 6,902,739 “Methods for Treating Joint
Inflammation, Pain and Loss of Mobility” which issued June 07, 2005. Also
NutraCea has been issued eight additional International patents covering this
subject area. As of December 31, 2007, NutraCea has filed four additional
provisional patents. NutraCea currently has a number of additional patents filed
and pending formal review and we do intend to apply for additional patents in
the future as new products, applications and data become available.
The
NutraCea Process is an adaptation and refinement of standard food processing
technology applied to the stabilization of rice bran. We have chosen to treat
the NutraCea Process as a trade secret and not to pursue process or process
equipment patents on the original processes. However, process improvements will
be reviewed for future patent protection. We believe that the unique products,
and their biological effects, resulting from NutraCea’s Stabilized Rice Bran are
patentable.
We
endeavor to protect our intellectual property rights through patents,
trademarks, trade secrets and other measures. However, there can be no assurance
that we will be able to protect our technology adequately or that competitors
will not develop similar technology. There can be no assurance that any patent
application we may file will be issued or that foreign intellectual property
laws will protect our intellectual property rights. Other companies and
inventors may receive patents that contain claims applicable to our systems and
processes. The use of our systems covered by such patents could require licenses
that may not be available on acceptable terms, if at all. In addition, there can
be no assurance that patent applications will result in issued
patents.
Although
there currently are no pending claims or lawsuits against us regarding possible
infringement claims, there can be no assurance that infringement claims by third
parties, or claims for indemnification resulting from infringement claims, will
not be asserted in the future or that such assertions, if proven to be true,
will not have a material adverse affect on our financial condition and results
of operations. In the future, litigation may be necessary to enforce our
patents, to protect our trade secrets or know-how or to defend against claimed
infringement of the rights of others and to determine the scope and validity of
the proprietary rights of others. Any such litigation could result in
substantial cost and diversion of our resources, which could have a material
adverse effect on our financial condition and results of operations. Adverse
determinations in such litigation could result in the loss of our proprietary
rights, subject us to significant liabilities to third parties, require us to
seek licenses from third parties or prevent us from manufacturing or selling our
systems or products, any of which could have a material adverse effect on our
financial condition and results of operations. In addition, there can be no
assurance that a license under a third party’s intellectual property rights will
be available on reasonable terms, if at all.
GOVERNMENT
REGULATIONS
The
Federal Food, Drug, and Cosmetic Act, or FFDCA, and the U.S. Food and Drug
Administration, (“FDA”), regulations govern the marketing of our
products.
The FFDCA
provides the statutory framework governing the manufacturing, distribution,
composition and labeling of dietary supplements for human consumption. These
requirements apply to our products trademarks TheraFoods® and
ProCeutical®.
Marketers
of dietary supplements may make three different types of claims in labeling:
nutrient content claims; nutritional support claims; and health
claims.
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Nutrient
content claims are those claims that state the nutritional content of a
dietary supplement and include claims such as “high in calcium” and “a
good source of vitamin C.” The FFDCA prescribes the form and content of
nutritional labeling of dietary supplements and requires the marketer to
list all of the ingredients contained in each product. A manufacturer is
not required to file any information with the FDA regarding nutrient
content claims, but must have adequate data to support any such
claims.
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Nutritional
support claims may be either statements about classical nutritional
deficiency diseases, such as “vitamin C prevents scurvy” or statements
regarding the effect of a nutrient on the structure or function of the
body, such as “calcium builds strong bones.” The FFDCA requires that any
claim regarding the effect of a nutrient on a structure or function of the
body must be substantiated by the manufacturer as true and not misleading.
In addition, the label for such products must bear the prescribed
disclaimer: “This statement has not been evaluated by the Food and Drug
Administration. This product is not intended to diagnose, treat, cure, or
prevent any disease.”
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Health
claims state a relationship between a nutrient and a disease or a
health-related condition. FDA’s regulations permit certain health claims
regarding the consumption of fiber and the reduction of risk for certain
diseases, such claims may relate to rice bran
ingredients.
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The FDA
has broad authority to enforce the provisions of federal law applicable to
dietary supplements, including the power to seize adulterated or misbranded
products or unapproved new drugs, to request product recall, to enjoin further
manufacture or sale of a product, to issue warning letters, and to institute
criminal proceedings. In the future, we may be subject to additional laws or
regulations administered by the FDA or other regulatory authorities, the repeal
of laws or regulations that we might consider favorable or more stringent
interpretations of current laws or regulations. We are not able to predict the
nature of such future laws or regulations, nor can it predict the effect of such
laws or regulations on its operations. We may be required to reformulate certain
of its products, recall or withdraw those products that cannot be reformulated,
keep additional records, or undertake expanded scientific substantiation. Any or
all of such requirements could have a material adverse effect on our business
and financial condition.
The
Federal Trade Commission, or FTC, regulates the advertising of dietary
supplement and other health-related products. The FTC’s primary concern is that
any advertising must be truthful and not misleading, and that a company must
have adequate substantiation for all product claims. The FTC actively enforces
requirements that companies possess adequate substantiation for product claims.
FTC enforcement actions may result in consent decrees, cease and desist orders,
judicial injunctions, and the payment of fines with respect to advertising
claims that are found to be unsubstantiated.
In
addition to the foregoing, our operations will be subject to federal, state, and
local government laws and regulations, including those relating to zoning,
workplace safety, and accommodations for the disabled, and its relationship with
its employees are subject to regulations, including minimum wage requirements,
anti-discrimination laws, overtime and working conditions, and citizenship
requirements.
We
believe that we are in substantial compliance with all material governmental
laws and regulations.
COMPETITION
Although
we believe that we are the only company to use non-chemical methods to stabilize
all natural rice bran so that the bran has a shelf life of over one year, we
compete with other companies attempting to stabilize rice bran, as well as
companies producing other food ingredients and nutritional supplements. We
believe that our only significant competitor currently for rice bran products is
Producer’s Rice Mill, Stuttgart, AR. We believe that the product it is offering
is inferior in many ways to our products. For instance, Producer’s Rice Mill
includes certain additives in the stabilization process that markets the
finished product more unpalatable for the animal recipients. Regardless, there
can be no assurance that we will be able to compete successfully in the rice
bran industry. We believe that our major nutritional supplement competitors
include producers of wheat bran and oat bran, particularly in the functional
food ingredients market segment.
We
compete with other companies that offer products incorporating stabilized rice
bran as well as companies that offer other food ingredients and nutritional
supplements. Suppliers of nutritional supplements and other products that use
other ingredients provided by other suppliers are subject to the higher costs of
shorter shelf life and the seasonal availability of stabilized rice bran
ingredients. We also face competition from companies providing products that use
oat bran and wheat bran in the nutritional supplements as well as health and
beauty aids. Many consumers may consider such products to be a replacement for
the products manufactured and distributed by us even though they have a higher
incidence of allergic reactions and adverse health indications. Many of our
competitors have greater marketing, research, and capital resources than we do,
and may be able to offer their products at lower costs because of their greater
purchasing power or the lower cost of oat and wheat bran ingredients. There are
no assurances that our products will be able to compete
successfully.
Research
and Development Expenditures
During
fiscal years 2007, 2006 and 2005, we spent $878,000, $377,000, and $191,000,
respectively, on product research and development.
Employees
As of
March 3, 2008, we had a total of 95 full-time domestic employees. Our new
subsidiary, Irgovel, in Pelotas, Brazil, acquired in February, 2008, has
approximately 185 employees. Our employee count may change periodically. From
year to year we experience normal variable labor fluctuation at our production
facilities around the world. We consider that our relations with our employees
are good.
Description
of Property
We
currently lease approximately 50,000 square feet of office space in our
corporate headquarters in Phoenix, AZ under a lease which expires in 2016, and
28,000 of office, laboratory and warehouse space in West Sacramento, CA, under a
lease which expires in 2011. We also lease a 2,000 square foot office facility
in Burly, Idaho, a 1,264 square foot office in Scottsdale, Arizona. We own a
15,000 square foot manufacturing plant in Mermentau, LA, and are constructing a
50,000 square foot manufacturing plant in Lake Charles, LA. We are planning a
second rice bran derivative manufacturing facility in Phoenix that will be over
100,000 square feet and have signed a letter of intent for the purchase of a
building for that plant. Our subsidiary RiceX Nutrients, Inc., owns a 15,700
square foot production facility in Dillon, Montana. Our newly acquired rice bran
oil facility in Pelotas, Brazil encompasses several operations and buildings on
approximately 20 acres.
We
believe that our facilities are adequate for our anticipated needs through 2008
but we anticipate the Company will need to add additional manufacturing capacity
for 2009. We plan to build another production facility in 2008 to meet
anticipated needs in 2009. The properties are adequately covered by
insurance.
Legal
Proceedings
From time
to time we are involved in litigation incidental to the conduct of our business.
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.
Executive
Officers and Directors
The
names, the ages as of March 3, 2008 and certain other information about our
executive officers and directors are set forth below:
|
Name
|
|
Age
|
|
Position
|
|
Bradley
D. Edson
|
|
48
|
|
Chief
Executive Officer, President and Director
|
|
Todd
C. Crow
|
|
59
|
|
Chief
Financial Officer
|
|
Leo
G. Gingras
|
|
50
|
|
Chief
Operating Officer
|
|
Margie
D. Adelman
|
|
47
|
|
Secretary
and Senior Vice President
|
|
Kody
Newland
|
|
51
|
|
Senior
Vice President of Sales
|
|
David
Bensol (1)(2)(3)
|
|
52
|
|
Director
and Chairman of the Board
|
|
Wesley
K. Clark
|
|
63
|
|
Director
|
|
James
C. Lintzenich (1)(2)
|
|
54
|
|
Director
|
|
Edward
L. McMillan (1)(3)
|
|
62
|
|
Director
|
|
Steven
W. Saunders
|
|
52
|
|
Director
|
|
Kenneth
L. Shropshire (2)(3)
|
|
53
|
|
Director
|
|
(1)
|
Member
of the Audit Committee.
|
|
(2)
|
Member
of the Compensation Committee.
|
|
(3)
|
Member
of the Nominating and Governance
Committee
|
Bradley D. Edson, has served
as our Chief Executive Officer and President since October 2005 and as our
President and as one of our directors since December 2004. Since October 2005,
Mr. Edson also serves as Chief Executive Officer of our subsidiary, The RiceX
Company. From January 2004 to December 2004, he has an independent management
consultant in the nutrition industry. From February 1999 to January
2004 Mr. Edson was the Chief Executive Officer and a director of Vital Living
Inc. (OTC BB: VTLV), a company that primarily developed and marketed
nutraceuticals. Prior to Vital Living, Mr. Edson spent a decade developing a
nationwide insurance agency focused on distribution channels for specialty
products for the retail market. Prior to that, Mr. Edson was a former principal
and officer of a NASD broker/dealer firm.
Todd C. Crow, has served as
our Chief Financial Officer since October 2005. Mr. Crow has served as Vice
President of Finance and Chief Financial Officer of The RiceX Company since
November 1998 and as Secretary of The RiceX Company from January 1999 to October
2005. From September 1997 to November 1998, Mr. Crow was Controller of The RiceX
Company and from May 1996 to September 1997, he was The RiceX Company’s Chief
Financial Officer. Prior to joining The RiceX Company, Mr. Crow held senior
financial positions with the Morning Star Group, an agri-business holding
company, and Harter, Inc., a food-processing manufacturer.
Leo G. Gingras, has served as
our Chief Operating Officer since April 2007. Prior to joining NutraCea, Mr.
Gingras served as Vice President of Soy Processing and Technical Services for
Riceland Foods, a major rice and soybean processor, from November 2000 until
March 2007. Before November 2000, Mr. Gingras held various positions at Riceland
Foods, including Manager of Oil Operations and Quality Assurance Manager. During
his appointments at Riceland Foods, Mr. Gingras oversaw several hundred
employees and business units with sales over $320 million. Prior to Mr. Gingras’
employment at Riceland Foods, he was the Research and Development Manager at Lou
Ana Foods, Inc., a company with annual sales of $120 million that processes,
packages and markets edible oils.
Kody K. Newland, has served
as our Senior Vice President of Sales and Marketing since February 2006. From
1997 to 2006 Mr. Newland was a Vice President of Sales for American Modern
Insurance Group Inc., a subsidiary of The Midland Company (Nasdaq: MLAN). From
1983 to 1997 Mr. Newland held various sales and marketing positions with the
Foremost Corporation of America (now a division of the Zurich
Company).
Margie D. Adelman, was
appointed Senior Vice President in January 2005 and Secretary of NutraCea in
February 2005. From 2000 to 2004 Ms. Adelman owned and operated Adelman
Communications, a full service public relations firm based in Boca Raton,
Florida. From 1994 to 2000 Ms. Adelman was President of TransMedia Group, the
largest public relations firm in Florida.
David S. Bensol, has served
as one of our directors since March 2005. Mr. Bensol has been President of
Bensol Realty Corp, a commercial real estate company, since 1978, and a
management consultant since January 2000. Mr. Bensol was the former CEO of
Critical Home Care, a home medical equipment provider which recently merged with
Arcadia Resources, Inc. (AMEX: KAD) Mr. Bensol was the Executive Vice President
and Director of Arcadia Resources, Inc. from May 2004 until his resignation from
those positions in December 2004. In 2000, Mr. Bensol founded what eventually
became Critical Home Care, through a series of acquisitions and mergers. From
1979 to 1999 Mr. Bensol founded several public and private companies which
became industry leaders in the areas of home medical equipment providers, acute
care pharmacy providers and specialty support surface providers. Mr. Bensol
received a BS Pharm. from St. Johns University, New York, and became a
registered pharmacist in 1978.
Wesley K. Clark, has served
as one of our directors since June 2007. Since March 2003 he has been the
Chairman and Chief Executive Officer of Wesley K. Clark & Associates, a
business services and development firm based in Little Rock, Arkansas. Mr. Clark
is a Senior Fellow at UCLA’s Burkle Center for International Relations and is
Chairman of the Board of Rodman & Renshaw Holding, LLC, the parent company
of Rodman & Renshaw, LLC. Mr. Clark also serves as a general partner in Four
Seasons Ventures, an investment fund dedicated to commercializing military
technology. From March 2001 to February 2003 he was a Managing Director of the
Stephens Group Inc., an emerging company development firm. From July 2000 to
March 2001 he was a consultant for Stephens Group Inc. Prior to that time, Mr.
Clark served as the Supreme Allied Commander of NATO and Commander-in-Chief for
the United States European Command and as the Director of the Pentagon’s
Strategic Plans and Policy operation. Mr. Clark retired from the United States
Army as a four-star general in July 2000 after 38 years in the military and
received many decorations and honors during his military career. Mr. Clark is a
graduate of the United States Military Academy and studied as a Rhodes Scholar
at the Magdalen College at the University of Oxford. Mr. Clark is a director of
Argyle Security Acquisition Corp., Summit Global Logistics, Inc. and Enthrust
Financial Services, Inc.
James C. Lintzenich, has
served as one of our directors since October 2005. Mr. Lintzenich has been a
director of The RiceX Company since June 2003. Mr. Lintzenich has been an
independent management consultant since April 2001. From August 2000 to April
2001 Mr. Lintzenich served as President and Chief Operating Officer of SLM
Corporation (Sallie Mae), an educational loan institution. From December 1982 to
July 2000, Mr. Lintzenich held various senior management and financial positions
including Chief Executive Officer and Chief Financial Officer of USA Group,
Inc., a guarantor and servicer of educational loans. Mr. Lintzenich currently
serves on the Board of Directors of the Lumina Foundation for
Education.
Edward L. McMillan, has
served as one of our directors since October 2005. Mr. McMillan has been a
director of The RiceX Company since July 2004. From January 2000 to present Mr.
McMillan has owned and managed McMillan LLC., a transaction consulting firm
which provides strategic consulting services and facilitates mergers and/or
acquisitions predominantly to food and agribusiness industry sectors. From June
1969 to December 1987 he was with Ralston Purina, Inc. and Purina Mills, Inc.
where he held various senior level management positions including marketing,
strategic planning, business development, product research, and business segment
management. From January 1988 to March 1996, McMillan was President and CEO of
Purina Mills, Inc. From August 1996 to July 1997, McMillan presented a graduate
seminar at Purdue University. From August 1997 to April 1999 he was with Agri
Business Group, Inc. Mr. McMillan currently serves on the boards of directors of
Balchem, Inc. (AMEX:BCP); Durvet, Inc.; Newco Enterprises, Inc.; Marical, Inc.;
and Hintzsche, Inc.
Steven W. Saunders, has
served as one of our directors since October 2005. He has been a director of The
RiceX Company since August 1998. Mr. Saunders has been President of Saunders
Construction, Inc., a commercial construction firm, since February 7, 1991, and
President of Warwick Corporation, a business-consulting firm, since 1992. Mr.
Saunders currently serves on the board of directors of Nano-Life Sciences, Inc.,
a cancer research and treatment company.
Kenneth L. Shropshire, has
served as one of our directors since April 2006. Mr. Shropshire has been a
professor at the Wharton School of the University of Pennsylvania since 1986;
serving as a David W. Hauck professor since 2001, the chair of the Department of
Legal Studies from 2000 to 2005, and the faculty director of the Sports Business
Initiative since 2004. Mr. Shropshire was of counsel at the law firm of Van
Lierop, Burns & Bassett, LLP, from 1998 to 2004 and has been a practicing
attorney in Los Angeles, California, focusing on sports and entertainment law.
Mr. Shropshire has also taught coursework at the University of Pennsylvania
School of Law, the University of San Diego School of Law and Southwestern
University School of Law. Mr. Shropshire currently is a member of the board of
directors of Valley Green Bank.
Board
Composition
Our board
of directors currently consists of 7 members. Mssrs. Bensol, Clark, Lintzenich,
McMillan and Shropshire qualify as independent directors in accordance with the
listing requirements of NASDAQ. The NASDAQ definition of independence includes a
series of objective tests, such as that the director is not, and has not been
for at least three years, one of our employees and that neither the director,
nor any of his family members, has engaged in various types of business dealings
with us. In addition, as further required by the NASDAQ rules, our board of
directors has made a subjective determination as to each independent director
that no relationships exist that, in the opinion of our board of directors,
would interfere with his exercise of independent judgment in carrying out the
responsibilities of a director. In making these determinations, our directors
reviewed and discussed information provided by the directors and us with regard
to each director’s business and personal activities as they may relate to us and
our management.
Our
directors are elected annually and hold office until their successors have been
elected or qualified or until the earlier of their death, resignation,
retirement, disqualification or removal. The remaining directors, though less
than a quorum, may fill board vacancies, and persons elected to fill vacancies
serve until the next annual meeting of shareholders unless they die, resign or
are removed.
There are
no family relationships among our directors and executive officers.
Board
Committees
Audit
Committee
The Audit
Committee assists the full Board of Directors in its general oversight of our
financial reporting, internal controls, and audit functions, and is responsible
for the appointment, compensation and oversight of the work of our independent
registered public accounting firm. Our Audit Committee consists of Jim
Lintzenich, David Bensol and Ed McMillan, each an independent director as
defined under Rule 10A-3(b)(i) under the Securities and Exchange Act of 1934, as
well as the listing standards of NASDAQ. Our board of directors has determined
that Mr. Lintzenich meets the requirements of an “audit committee financial
expert” under applicable federal securities laws and regulations, and has the
“financial sophistication” required under the listing standards of
NASDAQ.
Compensation
Committee
The
Compensation Committee establishes our executive compensation policy, determines
the salary and bonuses of our executive officers and recommends to the Board of
Directors stock option grants for our executive officers. The members of the
Compensation Committee are David Bensol, chairman, James C. Lintzenich and
Kenneth L. Shropshire, each an “independent” director as defined under the rules
of NASDAQ.
Governance
and Nominating Committee
The
Governance and Nominating Committee is responsible for matters relating to the
corporate governance of our company and the nomination of members of the board
and committees thereof. The members of the Governance and Nominating Committee
are David Bensol, Ed McMillan and Kenneth L. Shropshire, each an “independent”
director as defined under the rules of NASDAQ.
Compensation
Committee Interlocks and Insider Participation
During
2007, David Bensol, James C. Lintzenich and Kenneth L. Shropshire served on our
compensation committee. No member of the compensation committee simultaneously
served both as a member of the compensation committee and as an officer or
employee of ours during 2007. None of our executive officers serves as a member
of the board of directors or the compensation committee, or committee performing
an equivalent function, of any other entity that has one or more of its
executive officers serving as a member of our board of directors or compensation
committee.
Code
of Business Conduct and Ethics
Our board
of directors has approved and we have adopted a Code of Business Conduct and
Ethics that applies to all our directors, officers and employees. We will
provide any person, without charge, a copy of this Code. Requests for a copy of
the Code may be made by writing to NutraCea at 1261 Hawk’s Flight Court, El
Dorado Hills, California 95762, Attention: Chief Financial Officer.
Executive
Compensation
Compensation
Discussion and Analysis
Overview
of Compensation Program and Philosophy
Our
compensation program is intended to support the achievement of our specific
annual and long-term operational and strategic goals by attracting and rewarding
superior management personnel to achieve the ultimate objective of improving
shareholder value. The compensation committee of our board of directors has
responsibility for establishing, implementing and monitoring adherence to our
compensation philosophy. Our compensation committee seeks to ensure that the
total compensation paid to our executive officers is fair, reasonable and
competitive.
Our
compensation committee evaluates both performance and compensation in an effort
to ensure that we maintain our ability to attract and retain individuals of
superior ability and managerial talent in key positions and that compensation
provided to key employees remains competitive relative to the compensation paid
to similarly situated executives of our peer companies. To that end, our
compensation committee believes executive compensation packages we provide to
our executive officers should include both cash and stock-based compensation
that rewards individual and corporate performance as measured against
established goals.
Before
the establishment of our compensation committee in 2006, our board of directors
established our compensation policies. Other than for Leo Gingras, who was hired
in 2007, the compensation of our executive officers through 2007 was determined
by our board of directors at the time we hired our executive
officers.
Role
of Executive Officers in Compensation Decisions
Our
compensation committee makes all compensation decisions for our executive
officers. On at least an annual basis, the compensation committee approves all
compensation and awards to our executive officers that are not already
determined pursuant to existing employment agreements. Our chief executive
officer, Bradley Edson, provides input and arranges for our compensation
committee to have access to our records and personnel for purposes of its
deliberations. Mr. Edson reviews the performance of each executive officer
(other than his own, which is reviewed by our compensation committee) and
provides input and observations to our compensation committee. The conclusions
reached and recommendations based on these reviews are presented to our
compensation committee. Our compensation committee can exercise its discretion
in modifying any recommended adjustments or awards to executive
officers.
Setting
Executive Compensation
Based on
the foregoing objectives, our compensation committee has structured our annual
and long-term incentive-based cash and non-cash executive compensation in an
effort to motivate our executive officers to achieve the business goals set by
us and reward them for achieving such goals. Our compensation committee believes
that we compete with many companies for top executive-level talent. Accordingly,
our compensation committee strives to implement compensation packages for our
executive officers that are competitive. Variations to this objective may occur
as dictated by the experience level of the individual and market factors. A
significant percentage of total compensation for our executive officers is
allocated to incentives as a result of the philosophy mentioned above.
Nevertheless, strictly speaking, there is no pre-established policy or target
for the allocation between either cash and non-cash or short-term and long-term
incentive compensation. Income from such incentive compensation is realized as a
result of our performance or the individual’s performance, depending on the type
of award, compared to established goals. Our compensation committee has not used
industry benchmarks nor hired compensation consultants when determining the
compensation to be paid to executive officers.
Principal
Components of Compensation of Our Executive Officers
The
principal components of the compensation paid to our executives consist
of:
|
|
·
|
Signing
bonuses, paid in cash;
|
|
|
·
|
cash
incentive compensation under the terms of individual senior management
incentive compensation plans established for our executive officers;
and
|
|
|
·
|
equity
compensation, generally in the form of grants of stock
options.
|
Base
Salary
Our
Chief Executive Officer
We hired
Brad Edson as our president in December 2004, and he became our chief executive
officer in October 2005 concurrently with our acquisition of RiceX. Mr. Edson’s
employment agreement with us provides for an initial base salary of $50,000 per
year in year one, $150,000 in year two and $250,000 in year three, with base
salary thereafter being subject to an annual increase of 10% each year that Mr.
Edson is employed with us. When structuring Mr. Edson’s salary, our board
considered the salary of our then chief executive officer, the amount of equity
compensation that Mr. Edson required, the value that Mr. Edson could bring to
NutraCea and our low cash position at the time. Based upon these criteria, the
Board determined that providing Mr. Edson with base salary that started low and
that grew substantially over time would allow NutraCea to preserve its available
cash while ultimately providing Mr. Edson with the cash compensation appropriate
for his position. The base salary paid to Mr. Edson in 2007 reflects his base
salary under his original employment agreement. In January 2008, our
compensation committee and our board of directors approved an amendment to Mr.
Edson’s employment contract to extend the term through December 31, 2010. The
amendment did not change the base salary terms of Mr. Edson’s original
employment agreement.
Our
Chief Financial Officer
We hired
Todd C. Crow as our as our chief financial officer in October 2005 concurrent
with our acquisition of RiceX. Mr. Crow had served as the chief financial
officer of RiceX and we assumed his employment contract with RiceX pursuant to
the terms of the acquisition. Mr. Crow’s base salary in 2007 reflects his base
salary under his original employment agreement that we assumed.
Our
Chief Operating Officer
We hired
Leo Gingras in February 2007 to serve as a special assistant to our then chief
operating officer, and Mr. Gingras became our chief operating officer in April
2007. In determining Mr. Gingras’ annual base salary of $220,000 under his
employment agreement, our compensation committee and our board of directors
considered the compensation sought by Mr. Gingras in order to accept employment
with us, his extensive experience directly related to our business and the base
salaries of our other executive officers. In January 2008, our compensation
committee and our board of directors approved an amendment to Mr. Gingras’
employment contract to extend the term through February 8, 2010. The amendment
did not change the base salary terms of Mr. Gingras’ employment
agreement.
Our
Senior Vice President of Sales
We hired
Kody Newland in February 2006 to serve as our senior vice president of sales and
entered into an employment agreement with him that provides for a base salary of
$150,000 with annual cost of living adjustments. The base salary paid to Mr.
Newland in 2007 reflects his base salary under this employment agreement. When
determining Mr. Newland’s compensation in February 2006, our board of directors
considered the base salary sought by Mr. Newland, Mr. Newland’s wide-ranging
sales experience and the base salaries of our other executive officers. In
January 2008, our compensation committee and our board of directors approved an
amendment to Mr. Newland’s employment contract to extend the term through
February 28, 2010. The amendment did not change the base salary terms of Mr.
Newland’s employment agreement.
Our
Secretary and Senior Vice President
We hired
Margie Adelman as our senior vice president in January 2005. Our three-year
employment agreement with Ms. Adelman provides for an initial annual salary of
$150,000 with annual cost of living adjustments. The base salary paid to Ms.
Adelman in 2007 reflects her base salary under this agreement. In determining
her base salary in January 2005, our board of directors considered the base
salary sought by Ms. Adelman, our weak financial position at that time, her
educational background that directly related to our business, her relevant
professional experience and the compensation then being paid to our executive
officers.
Bonus
Compensation
We have
not historically paid automatic or guaranteed bonuses to our executive officers.
However, we have from time to time paid signing or retention bonuses in
connection with our initial hiring or appointment of an executive officer.
Whether a signing bonus and relocation expenses are paid and the amount thereof
is determined on a case-by-case basis under the specific hiring circumstances.
For example, we will consider paying signing bonuses to compensate for amounts
forfeited by an executive upon terminating prior employment or to create
additional incentive for an executive to join our company in a position for
which there is high market demand. In 2007 we paid to Mr. Gingras a $150,000
signing bonus when he became an employee. As Mr. Gingras’ signing bonus was
significant, the compensation committee required that he forfeit a pro rata
portion of the bonus if he is employed with us for less than three
years.
In
addition to Mr. Gingras’ $150,000 signing bonus, when Mr. Gingras began
employment with us we agreed to pay him $20,000 at the end of 2007 if he
remained employed by us through 2007. The compensation committee determined that
this bonus was appropriate given the experience that Mr. Gingras would bring to
our team and our desire for him to begin work promptly to replace our then chief
operating officer, Ike Lynch, who we expected would be retiring from this
position soon.
In
December 2007, our compensation committee approved the payment of a holiday
bonus to all employees equal to three days’ pay. Our executive officers
participated in the bonus.
Compensation
under Individual Senior Management Incentive Compensation Plans
We
entered into an employee incentive compensation plan with Brad Edson when Mr.
Edson executed his employment agreement with us. Under the plan, Mr. Edson is
entitled to an annual incentive bonus based upon objective performance criteria
of NutraCea during a fiscal year. The annual bonus is equal to one percent of
our gross sales over $25,000,000 in a year, but only if we report a positive
EBITDA (earnings before interest, taxes, depreciation and amortization) for the
year, disregarding the effect of non-cash charges. The bonus amount is limited
to a maximum of $750,000 in any calendar year. Mr. Edson has not earned a bonus
under the incentive compensation plan because we have not had gross sales of
$25,000,000 in any year. Given his low initial base salary, Mr. Edson required
that we provide him with incentive compensation plan as a condition to his
accepting employment with us in December 2004. Also, since low sales were a
primary impediment to our success at the time, our board determined that paying
compensation to Mr. Edson that was tied to our revenues would align NutraCea’s
and Mr. Edson’s goals. In January 2008, our compensation committee approved an
amendment to Mr. Edson’s incentive compensation plan to remove the $750,000
annual cap on this bonus. The compensation committee determined that since
NutraCea and our shareholders would benefit from greater sales, Mr. Edson’s
sales-based incentive compensation should provide marginal benefit to Mr. Edson,
regardless of how large our sales grew.
Equity
Compensation
Our board
of directors’ historical practice has been to grant equity-based awards to
attract, retain, motivate and reward our employees, particularly our executive
officers, and to encourage their ownership of an equity interest in us. Through
March 12, 2008, such grants have consisted primarily of stock options,
specifically non-qualified stock options, that is, options that do not qualify
as incentive stock options under Section 422 of the Internal Revenue Code of
1986, as amended. Prior to 2008, we granted awards of stock options to our
executive officers only upon their appointment as executive officers, with our
obligation to grant the options typically memorialized in the offer letter or
employment agreement, or an addendum to an employment agreement, entered into
with the applicable executive officer. In 2004, 2005, 2006 and 2007, each of Mr.
Edson, Ms. Adelman, Mr. Newland and Mr. Gingras received stock option grants
under these circumstances.
The terms
of the initial stock options granted to our executives varied executive by
executive. Mr. Edson’s initial stock option was fully vested when granted as
required by Mr. Edson in order to begin employment with us. Ms. Adelman’s
initial stock option grant vested as to 25% of the shares when she was hired and
vested as to 25% of the shares on the one year anniversary of her hire date. Our
board of directors determined that the remainder of her shares should only vest
if we achieved certain performance results. Accordingly, the remaining 50% of
the shares underlying her initial option grant will vest only if we achieve
during her employment with us both (i) gross sales over $25,000,000 in a year
and (ii) a positive EBITDA (earnings before interest, taxes, depreciation and
amortization) for the year, disregarding the effect of non-cash charges. We did
not grant a new stock option to Mr. Crow when he became our chief financial
officer. However, pursuant to the terms of the RiceX acquisition we assumed all
outstanding RiceX stock options, including the stock options held by Mr. Crow.
The terms of the stock options initially granted to Mssrs. Gingras and Newland
were determined based upon negotiations with Mr. Gingras and Mr. Newland and
were consistent with the stock options granted to and held by our other
executive officers.
In
January 2008, our compensation committee and directors approved the grant of new
stock options to each of our executive officers (the “2008 Options”). Mr. Edson
received an option to purchase 1,000,000 shares, Mr. Gingras received and option
to purchase 350,000 shares and Todd Crow, Kody Newland and Margie Adelman each
received an option to purchase 100,000 shares. Our compensation committee and
board of directors determined the number of option shares underlying each
executives options based upon the relative positions and responsibilities of the
executives. The current level of option holdings by the executives was not
considered when these grants were made. Each of the 2008 option grants to
executives is performance based in order to incentivize the executives to
achieve positive financial results and to align the interests of our executives
with our shareholders. One half of the underlying shares will vest only if our
gross revenues exceeds 85% of targeted gross revenues in 2008 and 2009 and the
other half of the underlying shares will vest only if our net income exceeds 85%
of targeted net income for 2008 and 2009. We believe that these performance
targets are achievable in 2008 and 2009.
We do not
have any program, plan or practice that requires us to grant equity-based awards
on specified dates. Authority to make equity-based awards to executive officers
rests with our compensation committee, which considers the recommendations of
our chief executive officer. If we become listed on a national securities
exchange like NASDAQ in the future, we will be subject to NASDAQ listing
standards that, in general, require shareholder approval of equity-based
plans.
Each of
our executive officers are eligible to receive stock option grants under our
2005 Equity Incentive Plan, or the 2005 Plan.
Severance
and Change of Control Payments
In 2007
and 2008, our board of directors and compensation committee approved severance
arrangements in the amended employment agreements of Mr. Edson, Mr. Gingras and
Mr. Newland and accelerated vesting provisions for the 2008 Options upon our
change in control. We believe that we should provide reasonable severance
benefits to key employees, recognizing that it may be difficult for them to find
comparable employment within a short period of time. We further want our
executive officers to be free to think creatively and promote our best interests
without worrying about the impact of those decisions on their employment.
Accordingly, we implement severance and change of control arrangements in our
executives’ compensation packages to align executive and shareholder interests
by enabling executives to consider corporate transactions that are in the best
interests of our shareholders without undue concern about whether the
transaction may jeopardize their employment or the continued vesting of their
stock options. For a description of the termination and change in control
arrangements that we have made with our executive officers, see “Executive
Employment Agreements” and “Potential Payments Upon Termination or Change in
Control.”
Other
Benefits
We
believe establishing competitive benefit packages for our employees is an
important factor in attracting and retaining highly qualified personnel.
Executive officers are eligible to participate in all of our employee benefit
plans, such as medical, dental, long-term disability, group life insurance and
our 401(k) plan, in each case on the same basis as other employees. We provide a
matching contribution under our 401(k) plan, but we do not offer other
retirement benefits.
Perquisites
Each of
our executive officers receives similar perquisites. Under the terms of the
employment agreements with our executive officers, we are obligated to reimburse
each executive officer for all reasonable travel, entertainment and other
expenses incurred by the officer in connection with the performance of his
duties and obligations under the agreement. When necessary and appropriate, upon
the hire of new executives, we may pay additional amounts in reimbursement of
relocations costs. The most significant ongoing perquisite that our executive
officers receive is an automobile allowance and other automobile expenses,
including insurance costs.
Tax
and Accounting Considerations
All
equity-based awards have been reflected in our consolidated financial
statements, based upon the applicable accounting guidance. Previously, we
accounted for equity compensation paid to our employees under SFAS No. 123 and
compensation was recorded for option grants based on the excess of the estimated
fair value of the common stock on the vesting date over the exercise price.
Effective January 1, 2006, we adopted FAS 123R using the modified prospective
transition method. Under this method, stock-based compensation expense is
recognized using the fair-value based method for all awards granted on or after
the date of adoption of FAS 123R. FAS 123R requires us to estimate and record an
expense over the service period of the stock-based award. In 2007, our
compensation committee, conscious of the less favorable accounting treatment for
stock options resulting from adoption of FAS 123R, took a more deliberate
approach to the granting of awards of stock options.
We
currently intend that all cash compensation paid to our executive officers will
be tax deductible for us. However, with respect to equity-based awards, while
any gain recognized by our executive officers and other employees from
non-qualified stock options generally should be deductible, subject to
limitations imposed under Section 162(m) of the Internal Revenue Code, to the
extent that in the future we grant incentive stock options, any gain recognized
by the optionee related to such options will not be deductible by us if there is
no disqualifying disposition by the optionee.
We may
not be able to deduct a portion of the equity compensation earned by our
executive officers. Section 162(m) of the Internal Revenue Code generally
prohibits us from deducting the compensation of an executive officer that
exceeds $1,000,000 in a year unless that compensation is based on the
satisfaction of objective performance goals. None of the stock options held by
our executive officers qualify as performance based compensation under Section
162(m). Accordingly, if any of our executive officers recognizes income in
excess of $1,000,000, including amounts includible in income from the exercise
of stock options currently outstanding, this excess will not be tax deductible
by us.
Under
certain circumstances, an accelerated vesting or the cash out of stock options
or the payment of severance awards in connection with a change of control might
be deemed an “excess parachute payment” under Section 280G of the Internal
Revenue Code. To the extent payments are considered to be “excess parachute
payments,” the executive receiving the benefit may be subject to an excise tax
and we may be denied a tax deduction. We do not consider the potential impact of
Section 280G when designing our compensation programs.
Compensation
Committee Interlocks and Insider Participation
The
members of the Compensation Committee for the 2007 fiscal year were David
Bensol, James Lintzenich and Kenneth L. Shropshire. All members of the
Compensation Committee during 2007 were independent directors, and none of them
were our employees or former employees. During 2007, none of our executive
officers served on the compensation committee (or equivalent), or the board of
directors, of another entity whose executive officer(s) served on our
Compensation Committee or Board of Directors.
Summary
Compensation Table
The
following table sets forth information regarding compensation earned in or with
respect to our fiscal year 2007 by:
|
|
·
|
each person who served as our
chief executive officer in
2007;
|
|
|
·
|
each person who served as our
chief financial officer in 2007;
and
|
|
|
·
|
our three most highly compensated
executive officers, other than our chief executive officer and our chief
financial officer, who were serving as executive officers at the end of
2007 and, at that time, were our only other executive
officers.
|
We refer
to these officers collectively as our named executive officers.
|
Name and Principal Position
|
|
Year
|
|
Salary ($)
|
|
|
Bonus ($)
|
|
|
Option Awards ($)
(1)
|
|
|
All
Other Compensation ($)(2)(3)
|
|
|
Total ($)
|
|
|
Bradley
Edson, President and Chief Executive Officer
|
|
2007
|
|
|
255,769 |
|
|
|
3,173 |
|
|
|
— |
|
|
|
24,909 |
|
|
|
283,851 |
|
|
|
|
2006
|
|
|
159,723 |
|
|
|
— |
|
|
|
— |
|
|
|
22,307 |
|
|
|
182,030 |
|
|
Todd
C. Crow, Chief Financial Officer
|
|
2007
|
|
|
159,362 |
|
|
|
1,863 |
|
|
|
— |
|
|
|
26,584 |
|
|
|
187,809 |
|
|
|
|
2006
|
|
|
153,427 |
|
|
|
— |
|
|
|
— |
|
|
|
19,062 |
|
|
|
172,489 |
|
|
Leo
G. Gingras, Chief Operating Officer
|
|
2007
|
|
|
177,479 |
|
|
|
152,538 |
|
|
|
438,550 |
|
|
|
13,051 |
|
|
|
781,618 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Margie
D. Adelman, Secretary and Senior Vice President
|
|
2007
|
|
|
157,901 |
|
|
|
1,830 |
|
|
|
— |
|
|
|
22,352 |
|
|
|
182,083 |
|
|
|
|
2006
|
|
|
154,504 |
|
|
|
— |
|
|
|
— |
|
|
|
16,324 |
|
|
|
170,828 |
|
|
Kody
Newland, Senior Vice President of Sales
|
|
2007
|
|
|
152,412 |
|
|
|
1,793 |
|
|
|
182,488 |
|
|
|
18,711 |
|
|
|
336,944 |
|
|
|
|
2006
|
|
|
121,754 |
|
|
|
— |
|
|
|
250,228 |
|
|
|
14,545 |
|
|
|
386,526 |
|
|
(1)
|
The amounts in this column
represent the dollar amount recognized for financial statement reporting
purposes with respect to the fiscal year in accordance with SFAS 123(R).
The assumptions used to calculate the value of option awards are set forth
in Note 17 of the Notes to Consolidated Financial Statements contained
elsewhere in this
prospectus.
|
|
(2)
|
Consists of the following amounts
for 2006: (i) for Mr. Edson, an automobile allowance ($7,200), life
insurance premium payments ($381), payment for unused personal time
($8,294) and a matching 401(k) contribution ($6,432); (ii) for Mr. Crow,
an automobile allowance ($9,600), automobile insurance payments ($1,000),
life insurance premium payments ($400), payment for unused personal time
($3,362) and a matching 401(k) contribution ($4,700); (iii) for Ms.
Adelman, an automobile allowance ($7,200), life insurance premium payments
($381), payment for unused personal time ($2,522) and a matching 401(k)
contribution ($6,221); and (iv) for Mr. Newland, an automobile allowance
($7,200), life insurance premium payments ($318), payment for unused
personal time ($3,606) and a matching 401(k) contribution
($3,421).
|
|
(3)
|
Consists of the following amounts
for 2007: (i) for Mr. Edson, an automobile allowance ($7,200), life
insurance premium payments ($381), payment for unused personal time
($3,222) and a matching 401(k) contribution ($14,106); (ii) for Mr. Crow,
an automobile allowance ($9,600), automobile insurance payments ($852),
life insurance premium payments ($381), payment for unused personal time
($3,105) and a matching 401(k) contribution ($12,646); (iii) for Mr.
Gingras, an automobile allowance ($6,300), life insurance premium payments
($381), payment for unused personal time ($3,966.35) and a matching 401(k)
contribution ($2,403.64); (iv) for Ms. Adelman, an automobile allowance
($7,200), life insurance premium payments ($381), payment for unused
personal time ($3,813) and a matching 401(k) contribution ($10,958); and
(v) for Mr. Newland, an automobile allowance ($7,200), life insurance
premium payments ($381), payment for unused personal time ($2,988) and a
matching 401(k) contribution
($8,142).
|
2007
Grants Of Plan-Based Awards
Set forth
in the table below is information regarding a stock option award granted to a
named executive officer in 2007. This stock option grant represents all of the
grants of awards to our named executive officers under any plan during or with
respect to 2007.
|
Name
|
|
Grant Date
|
|
All
Other Option
Awards: # of
Shares Underlying Options
|
|
|
Exercise
Price of
Options ($/Sh)
|
|
|
Close
Price on
Grant Date
($/Sh)
|
|
|
Grant
Date Fair
Value of
Option Awards
|
|
|
Leo
G. Gingras
|
|
2/08/2007
|
|
|
|
250,000 |
|
|
$ |
2.63 |
|
|
$ |
2.63 |
|
|
$ |
438,560 |
|
The fair
market value that is used to determine the exercise price for option grants is
the closing price of NutraCea’s stock on the last market trading day prior to
the grant date as reported on the OTC Bulletin Board. The stock
option granted to Mr. Gingras during 2007 expires on February 8, 2017, and the
shares subject to the option vest as to 1/36th of the
shares at the end of each successive calendar month in which Mr. Gingras remains
a service provider for us. The grant date fair value of the option awards is
calculated using the Black-Scholes valuation model using the following
assumptions:
|
Assumption
|
|
Rate
|
|
|
Average
risk free interest rate
|
|
|
4.75
|
% |
|
Average
expected term (years)
|
|
|
6.2 |
|
|
Average
expected volatility
|
|
|
69
|
% |
Outstanding
Equity Awards As Of December 31, 2007
The
following table provides information as of December 31, 2007 regarding
unexercised stock options held by each of our named executive
officers.
|
|
Outstanding
Equity Awards at 12/31/07
|
|
Name
|
# of
Securities Underlying
Unexercised
Options
(#
Exercisable)
|
|
# of
Securities Underlying
Unexercised
Options
(#
Un-exercisable)
|
|
Option
Exercise
Price
($/sh)
|
|
Option
Expiration
Date
|
|
Bradley
Edson
|
6,000,000
|
|
—
|
|
$
|
0.30
|
|
12/16/2014
|
|
Todd
C. Crow(1)
|
46,079
|
|
—
|
|
|
0.30
|
|
10/04/2008
|
|
|
38,399
|
|
—
|
|
|
0.30
|
|
10/04/2008
|
|
|
691,191
|
|
—
|
|
|
0.30
|
|
10/31/2009
|
|
|
76,799
|
|
—
|
|
|
0.30
|
|
2/22/2011
|
|
|
38,399
|
|
—
|
|
|
0.30
|
|
2/22/2011
|
|
|
38,399
|
|
—
|
|
|
0.30
|
|
1/28/2012
|
|
|
95,998
|
|
—
|
|
|
0.30
|
|
1/02/2012
|
|
|
507,807
|
|
29,871
|
|
|
0.30
|
|
3/31/2015
|
|
Leo
G. Gingras(2)
|
76,389
|
|
173,602
|
|
|
2.63
|
|
2/08/2017
|
|
Margie
Adelman(3)
|
1,000,000
|
|
—
|
|
|
0.30
|
|
1/24/2015
|
|
|
—
|
|
1,000,000
|
|
|
0.30
|
|
1/24/2015
|
|
Kody Newland(4)
|
450,000
|
|
50,000
|
|
|
1.00
|
|
12/31/2015
|
|
(1)
|
For the option expiring on March
31, 2015, one half of the shares subject to the option vested upon grant
and 1/36th of the remaining shares vest
monthly over three years.
|
|
(2)
|
For the option expiring on
February 8, 2017, 1/36th of the shares subject to the
option vest monthly over three
years.
|
|
(3)
|
The un-exercisable option vests
as to all 1,000,000 shares if we achieve while Ms. Adelman is employed
with us, annual gross sales of at least $25,000,000 and a positive EBITDA,
disregarding noncash charges, over the same
period.
|
|
(4)
|
100,000 of the shares subject to
the option vested upon grant and 50,000 shares vest each calendar quarter
thereafter over two years.
|
2007
Option Exercises and Stock Vested
In 2007,
none of our named executive officers exercised any stock options or similar
awards we granted to them, nor did any stock or similar award granted by us to
any of our named executive officers vest.
Pension
Benefits
None of
our named executive officers are covered by a pension plan or other similar
benefit plan that provides for payments or other benefits at, following, or in
connection with retirement.
Nonqualified
Deferred Compensation
None of
our named executive officers are covered by a defined contribution or other plan
that provides for the deferral of compensation on a basis that is not
tax-qualified.
Executive
Employment Agreements
Brad
Edson
On
December 17, 2004, we entered into an employment agreement with our current
President and Chief Executive Officer, Bradley D. Edson, pursuant to which we
agreed to pay Mr. Edson a base salary of $50,000 in year one; a base salary of
$150,000 in year two; a base salary of $250,000 in year three; and a base salary
that increases by 10% a year each year thereafter. The initial term of this
agreement was three years and automatically extends for up to two additional one
year terms unless either NutraCea or Mr. Edson gives written notice to terminate
this agreement at least 180 days before the end of the preceding term. This
agreement provided that Mr. Edson be entitled to an annual incentive bonus based
upon performance (“Edson Incentive Bonus”) and to be provided a car allowance of
$600 per month. The incentive bonus is payable annually within 10 days of the
completion of our annual independent audit. The bonus is one percent of our
“Gross Sales over $25,000,000,” but only if we report a positive EBITDA for the
period. The bonus amount was limited to a maximum of $750,000 in any calendar
year. In addition, Mr. Edson was issued a warrant to purchase 6,000,000 shares
of our common stock at an exercise price of $0.30 per share in connection with
his initial employment with us. The warrant is immediately exercisable as to all
underlying shares and expires ten years from the date of issuance.
On
January 8, 2008, we amended the employment agreement to remove the $750,000 cap
on the Edson Incentive Bonus and extended the initial term of the agreement to
December 31, 2010. In connection with this amendment, we granted to Mr. Edson an
option to purchase 1,000,000 shares of our common stock at an exercise price per
share of $1.49. This option will vest as follows so long as Mr. Edson is
employed by us on each vesting date: (1) ¼ of the option shares vest on December
31, 2008 so long as we achieve for 2008 gross revenue that equals or exceeds 85%
of gross revenue budgeted for 2008, (2) ¼ of the option shares vest on December
31, 2009 so long as we achieve for 2009 gross revenue that equals or exceeds 85%
of gross revenue budgeted for 2009, (3) ¼ of the option shares vest on December
31, 2008 so long as we achieve for 2008 net income that equals or exceeds 85% of
net income budgeted for 2008, and (4) ¼ of the option shares vest on December
31, 2009 so long as we achieve for 2009 net income that equals or exceeds 85% of
net income budgeted for 2009.
For a
description of the termination and change in control provisions of Mr. Edson’s
employment agreement, see “Potential Payments Upon Termination or Change in
Control.”
Todd
C. Crow
In
September 2005, we entered into a first amendment to employment agreement with
Todd C. Crow, pursuant to which we assumed the employment agreement between Mr.
Crow and The RiceX Company. The employment agreement, as amended, provides that
Mr. Crow will serve as Chief Financial Officer
of NutraCea and the RiceX Company. Mr. Crow’s employment agreement, as amended,
provides that Mr. Crow will receive an annual base salary of $150,000, which
salary will be reviewed annually and be adjusted to compensate for cost of
living adjustments in the Sacramento metropolitan area. The agreement terminates
on October 4, 2008. The term will be automatically extended for an additional
one-year term unless either party delivers notice of election not to extend the
employment at least 90 days prior to the expiration of the initial term. On
January 8, 2008, we issued to Mr. Crow an option to purchase 100,000 shares of
our common stock at an exercise price per share of $1.49. This option will vest
as follows so long as Mr. Crow is employed by us on each vesting date: (1) 1/2
of the option shares vest on December 31, 2008 so long as we achieve for 2008
gross revenue that equal or exceed 85% of gross revenue budgeted for 2008, (2)
1/2 of the option shares vest on December 31, 2009 so long as we achieve for
2009 net income that equals or exceeds 85% of net income budgeted for
2009.
For a
description of the termination and change in control provisions of Mr. Crow’s
employment agreement, see “Potential Payments Upon Termination or Change in
Control.”
Leo
Gingras
On
February 8, 2007, we entered into an employment agreement with Leo Gingras, our
current Chief Operating Officer. Leo served as special assistant to our former
Chief Operating Officer until he became our Chief Operating Officer on April 11,
2007. Pursuant to the employment agreement, we agreed to pay Mr. Gingras an
annual salary of $220,000. In addition, we paid to Mr. Gingras a sign-on bonus
of $150,000. If Mr. Gingras voluntarily resigns before March 15, 2010, Mr.
Gingras will be required to repay to NutraCea a proportionate amount of this
sign-on bonus based upon the time he is employed by us between March 15, 2007
and March 15, 2010. The employment agreement further requires that NutraCea pay
to Mr. Gingras a bonus of $20,000 for 2007 and a $600 per month car allowance.
In connection with him becoming one of our employees, Mr. Gingras was issued an
option to purchase 250,000 shares of NutraCea’s common stock at an exercise
price of $2.63 per share that vested monthly as to 1/36th of the underlying
shares over three years.
On
January 8, 2008, Mr. Gingras’ employment agreement was amended to provide an
employment term that ends on February 8, 2010, to increase the monthly car
allowance to $850 and to provide for an annual cost of living adjustment for his
base salary. Concurrently with the execution of this amendment, we granted to
Mr. Gingras an option to purchase 350,000 shares of our common stock at an
exercise price per share of $1.49. This option will vest as follows so long as
Mr. Newland is employed by us on each vesting date: (1) ¼ of the option shares
vest on December 31, 2008 so long as we achieve for 2008 gross revenue that
equals or exceeds 85% of gross revenue budgeted for 2008, (2) ¼ of the option
shares vest on December 31, 2009 so long as we achieve for 2009 gross revenue
that equals or exceeds 85% of gross revenue budgeted for 2009, (3) ¼ of the
option shares vest on December 31, 2008 so long as we achieve for 2008 net
income that equals or exceeds 85% of net income budgeted for 2008, and (4) ¼ of
the option shares vest on December 31, 2009 so long as we achieve for 2008 net
income that equals or exceeds 85% of net income budgeted for 2008.
For a
description of the termination and change in control provisions of Mr. Gingras’
employment agreement, see “Potential Payments Upon Termination or Change in
Control.”
Kody
Newland
On
February 27, 2006, NutraCea entered into a two year employment agreement with
Kody Newland, NutraCea’s Senior Vice President of Sales, pursuant to which
NutraCea is to pay Mr. Newland a base salary of $150,000 per year which will be
reviewed annually and adjusted to compensate for cost of living adjustments in
the Sacramento metropolitan area. The term of agreement may be extended by
mutual agreement of the parties on a month to month basis. The agreement
provides that Mr. Newland is eligible for future incentive bonuses based solely
on the discretion of NutraCea’s Chief Executive Officer or President and the
approval of NutraCea’s Compensation Committee. In addition, the agreement
includes a car allowance of $600 per month. In connection with Mr. Newland’s
employment with us, we issued to him an option to purchase 500,000 shares of
NutraCea’s common stock at an exercise price of one dollar per
share.
On
January 8, 2008, we amended Mr. Newland’s employment agreement to extend the
initial term to February 27, 2010 and to increase the monthly car allowance to
$850. In connection with this amendment, we granted to Mr. Newland an option to
purchase 100,000 shares of our common stock at an exercise price per share of
$1.49. This option will vest as follows so long as Mr. Newland is employed by us
on each vesting date: (1) ¼ of the option shares vest on December 31, 2008 so
long as we achieve for 2008 gross revenue that equals or exceeds 85% of gross
revenue budgeted for 2008, (2) ¼ of the option shares vest on December 31, 2009
so long as we achieve for 2009 gross revenue that equals or exceeds 85% of gross
revenue budgeted for 2009, (3) ¼ of the option shares vest on December 31, 2008
so long as we achieve for 2008 net income that equals or exceeds 85% of net
income budgeted for 2008, and (4) ¼ of the option shares vest on December 31,
2008 so long as we achieve for 2009 net income that equals or exceeds 85% of net
income budgeted for 2009.
For a
description of the termination and change in control provisions of Mr. Newland’s
employment agreement, see “Potential Payments Upon Termination or Change in
Control.”
Margie
D. Adelman
On
January 25, 2005, we entered into a three year employment agreement with Margie
D. Adelman, our Senior Vice President and Secretary, pursuant to which we agreed
to pay Ms. Adelman a base salary of $150,000 per year. The agreement also
provides that Ms. Adelman is entitled to a one-time initial bonus of $25,000 and
will be eligible for future incentive bonuses based solely on the discretion of
our Chief Executive Officer or President and the approval of our Compensation
Committee. Ms. Adelman was issued a warrant to purchase 1,000,000 shares of our
common stock at an exercise price of $0.30 per share, 500,000 shares of which
vested upon signing and 500,000 shares of which vested on January 25, 2006. In
addition, Ms Adelman was issued a warrant to purchase 1,000,000 shares of
NutraCea’s common stock at an exercise price of $0.30 that will vest if we
achieve both annual gross sales over $25,000,000 and report a positive annual
EBITDA, excluding the effect of noncash charges, during Ms. Adelman’s employment
with NutraCea. All warrants expire ten years from the date of issuance. On
February 26, 2006, the agreement was modified to include a car allowance of $600
per month and a cost of living increase for the balance of the term of her
agreement. On January 8, 2008, we issued to Ms. Adelman an option to purchase
100,000 shares of our common stock at an exercise price per share of $1.49. This
options will vest as follows so long as Ms. Adelman is employed by us on each
vesting date: (1) 1/2 of the option shares vest on December 31, 2008 so long as
we achieve for 2008 gross revenue that equal or exceed 85% of gross revenue
budgeted for 2008, (2) 1/2 of the option shares vest on December 31, 2009 so
long as we achieve for 2009 net income that equals or exceeds 85% of net income
budgeted for 2009.
For a
description of the termination and change in control provisions of Ms. Adelman’s
employment agreement, see “Potential Payments Upon Termination or Change in
Control.”
Potential
Payments Upon Termination or Change in Control
We have
entered into employment agreements and stock option agreements with our named
executive officers that require us to provide compensation to them upon
termination of their employment with us or a change in control of NutraCea.
Regardless of the manner in which a named executive officer’s employment
terminates, the executive officer will be entitled to receive amounts earned
during the term of employment. Such amounts include:
|
|
·
|
the portion of the officer’s
current annual base salary which has accrued through the date of
termination;
|
|
|
·
|
vested stock options;
and
|
|
|
·
|
payment for accrued but unused
vacation.
|
In
addition to these payments, the amount of compensation payable to each named
executive officer upon voluntary termination, involuntary termination without
cause, termination following a changer of control and in the event of disability
or death of the executive is discussed below.
Bradley
Edson
Resignation
for Good Reason. In the event Mr. Edson resigns for “good reason,” Mr.
Edson is entitled to:
|
|
·
|
100% of his base salary through
the end of the term of the agreement, but no less than the base salary
paid to him in the previous 12 months, to be paid immediately following
termination;
|
|
|
·
|
a proportionate share of any
bonus he would be entitled to receive for the year in which the
termination occurred, based upon the time he was employed by us that year,
payable at the regular time such bonus is paid;
and
|
|
|
·
|
immediate vesting of all his
unvested stock options.
|
“Good
reason” is defined as (i) the assignment to Mr. Edson of duties that are
inconsistent with his position and nature of employment, (ii) the reduction of
the duties which are inconsistent with his position and nature of employment,
(iii) a change in Mr. Edson’s title, (iv) a reduction in Mr. Edson’s
compensation and benefits, (v) a successor company not agreeing to assume the
agreement or (vi) a “change of control.”
“Change
of control” is defined as (i) a merger or consolidation approved by our
shareholders in which shares possessing more than 50% of the total combined
voting power of our outstanding stock are transferred to a person or persons
different from the persons holding those shares immediately before such merger
or consolidation, (ii) the transfer of more than 50% of the total combined
voting power of our outstanding stock to a person or persons different from the
persons holding those shares immediately before such transaction, or (iii) the
sale, transfer or other disposition of all or substantially all of our assets in
our complete liquidation or dissolution.
Disability
or Death. In the
event Mr. Edson is terminated because of his disability or death, Mr. Edson is
entitled to:
|
|
·
|
six months of his base salary
payable in regular
installments;
|
|
|
·
|
incentive compensation through
the end of the fiscal year;
and
|
|
|
·
|
six months vesting of unvested
options.
|
“Disability”
is defined as Mr. Edson’s inability to carry on substantially all of his normal
duties and obligations under the agreement for a continuous period of one
hundred eighty (180) days due to accident, illness or other
disability.
Resignation
Without Good Reason and Termination for Cause. In the event Mr. Edson
resigns without “good reason” or is terminated by us for “cause,” Mr. Edson is
entitled to:
|
|
·
|
a proportionate share of any
bonus he would be entitled to receive for the year in which the
termination occurred, based upon the time he was employed by us that year,
payable at the regular time such bonus is paid;
and
|
“Cause”
is defined as the conviction of a felony, a crime involving moral turpitude
causing material harm to our standing and reputation or fraud against
us.
Termination
Without Cause. In the event the agreement is terminated by reason of Mr.
Edson’s termination without “cause,” Mr. Edson is entitled to:
|
|
·
|
100% of his base salary through
the end of the term of the agreement, but no less than the base salary
paid to him in the previous 12 months, to be paid immediately following
termination;
|
|
|
·
|
incentive compensation through
the end of the term of the agreement, payable at the regular time for such
incentive compensation;
|
|
|
·
|
immediate vesting of all his
unvested stock options.
|
Change
of Control Benefit (Option for 1,000,000 Shares). In the event of a
“change of control”, Mr. Edson’s stock option to purchase 1,000,000 shares of
our common stock, which was granted to him on January 8, 2008, will immediately
vest as to all unvested shares.
“Change
of control” is defined as (i) our merger or consolidation with any other
corporation which results in our voting stock outstanding immediately before the
transaction failing to represent more than fifty percent (50%) of the total
voting power represented by the surviving entity immediately after the merger or
consolidation or (ii) our sale or disposal of all or substantially all of our
assets.
Todd
Crow
Termination
Without Cause. In the event Mr. Crow is terminated without “cause,” Mr.
Crow is entitled to:
|
|
·
|
the greater of (i) Mr. Crow’s
monthly base salary times the number of months remaining on the terms of
the agreement or (ii) one year of Mr. Crow’s base
salary.
|
“Cause”
is defined as (i) Mr. Crow’s willful and continued failure substantially to
perform his duties and obligations under the agreement after written demand for
substantial performance has been delivered to him by us which sets forth with
reasonable specificity the deficiencies in Mr. Crow’s performance and giving Mr.
Crow at least thirty (30) days to correct such deficiencies, (ii) Mr. Crow
committing fraud or making intentionally material misrepresentations, (iii) Mr.
Crow’s unauthorized disclosure or use of our trade secrets or confidential
information, (iv) Mr. Crow’s conviction of a felony, (v) theft or conversion of
our property by Mr. Crow, or (vi) Mr. Crow’s habitual misuse of alcohol, illegal
narcotics, or other intoxicant.
Termination
in Connection with a Change in Control. In the event Mr. Crow is
terminated as a result of a “change in control” and Mr. Crow is not employed in
the same capacity or being paid the same base salary by the successor entity,
Mr. Crow is entitled to:
|
|
·
|
the greater of (i) two years of
base salary or (ii) the base salary remaining to be paid through the term
of the agreement;
|
|
|
·
|
continued medical and dental
benefits for two years after the change of control;
and
|
|
|
·
|
immediate vesting of any unvested
shares under his option to purchase 537,678
shares.
|
“Change
in control” is defined as (i) a merger or acquisition in which we are not the
surviving entity, except for (a) a transaction the principal purpose of which is
to change the state of our incorporation, or (b) a transaction in which our
shareholders immediately before such transaction hold, immediately after such
transaction, at least 50% of the voting power of the surviving entity; (ii) a
shareholder approved sale, transfer or other disposition of all or substantially
all of our assets; (iii) a transfer of all or substantially all of our assets
pursuant to a partnership or joint venture agreement or similar arrangement
where our resulting interest is less than fifty percent (50%); (iv) any reverse
merger in which we are the surviving entity but in which fifty percent (50%) or
more of our outstanding voting stock is transferred to holders different from
those who held the stock immediately before such merger; (v) a change in
ownership of our stock through an action or series of transactions, such that
any person is or becomes the beneficial owner, directly or indirectly, of our
stock representing fifty percent (50%) or more of the voting power of our
outstanding stock; or (vi) a majority of the members of our board of directors
are replaced during any twelve (12) month period by directors whose appointment
or election is not endorsed by a majority of the members of our board of
directors before the date of such appointment of election.
Change
of Control Benefit (Option for 100,000 shares). In the event of a “change
of control”, Mr. Crow’s stock option to purchase 100,000 shares of our common
stock, which was granted to him on January 8, 2008, will vest as to all unvested
shares.
“Change
of control” is defined as (i) our merger or consolidation with any other
corporation which results in our voting stock outstanding immediately before the
transaction failing to represent more than fifty percent (50%) of the total
voting power represented by the surviving entity immediately after the merger or
consolidation or (ii) our sale or disposal of all or substantially all of our
assets.
Leo
Gingras
Termination
Without Cause. In the event we terminate Mr. Gingras’ without “cause,”
Mr. Gingras is entitled to:
|
|
·
|
an amount equal to twelve months
of his base salary.
|
“Cause”
is defined as (i) a material breach of the terms of his employment agreement,
(ii) a determination by the board of directors that Mr. Gingras has been grossly
negligent or has engaged in material willful or gross misconduct in the
performance of his duties, (iii) Mr. Gingras having failed to meet written
standards established by us for performance of duties under the employment
agreement, (iv) Mr. Gingras has committed, as determined by our board of
directors, or has been convicted of fraud, moral turpitude, embezzlement, theft,
or dishonesty or other criminal conduct, (v) Mr. Gingras has taken or failed to
take any actions such that such action or failure constitutes legal cause for
termination under California law, or (vi) Mr. Gingras misuses alcohol or any non
prescribed drug.
Termination
in Connection with a Change of Control (Option for 250,000 Shares). If
Mr. Gingras is terminated other than for “cause”, “death”, or “disability” in
the 12 month period following a “change of control”, Mr. Gingras’ stock option
to purchase 250,000 shares of our common stock will vest as to all unvested
shares.
Under
this option to purchase 250,000 shares:
“change
of control” is defined as (i) our merger or consolidation with any other
corporation which results in our voting stock outstanding immediately before the
transaction failing to represent more than fifty percent (50%) of the total
voting power represented by the surviving entity immediately after the merger or
consolidation or (ii) our sale or disposal of all or substantially all of our
assets;
“cause”
is defined as (i) Mr. Gingras’ failure to perform his assigned duties or
responsibilities after notice thereof from us describing his failure to perform
such duties or responsibilities; (ii) Mr. Gingras engages in any act of
dishonesty, fraud or misrepresentation; (iii) Mr. Gingras’ violation of any
federal or state law or regulation applicable to our business; (iv) Mr. Gingras’
breach of any confidentiality agreement or invention assignment agreement; or
(v) Mr. Gingras being convicted of, or entering a plea of nolo contendere to, any crime
or committing any act of moral turpitude; and
“disability”
is defined as an inability to engage in any substantial gainful activity by
reason of any medically determinable physical or mental impairment which can be
expected to result in death or which has lasted or can be expected to last for a
continuous period of not less than 12 months.
Change
of Control Benefit (Option for 350,000 Shares). In the event of a “change
of control”, Mr. Gingras’ stock option to purchase 350,000 shares of our common
stock, which was granted to him on January 8, 2008, will immediately vest as to
all unvested shares. Under this option, “change of control” has the same
definition for such term as is set forth in the 250,000 share
option.
Kody
Newland
Termination
Without Cause. In the event we terminate Mr. Newland without “cause,” Mr.
Newland is entitled to:
|
|
·
|
an amount equal to his base
salary for the remainder of the term of his employment agreement, not to
exceed 12 months.
|
“Cause”
is defined in his employment agreement as (i) a determination by the board of
directors that Mr. Newland has been grossly negligent or has engaged in material
willful or gross misconduct in the performance of his duties and we have filed a
civil lawsuit against him for the same claims, (ii) Mr. Newland has taken or
failed to take any actions such that such action or failure constitutes legal
cause for termination under California law, (iii) Mr. Newland has been convicted
by a court of law of fraud, moral turpitude, embezzlement, theft, or dishonesty
or other criminal conduct, (iv) Mr. Newland having materially breached the terms
of his employment agreement and not cured the breach in 10 days after receipt of
written notice or (v) Mr. Newland having failed to meet written standards
established by us for performance of duties and not cured this failure within 10
days after receipt of written notice.
Change
of Control Benefit (Options to Purchase 500,000 and 100,000 Shares). In
the event of a “change of control”, Mr. Newland’s stock options to purchase
500,000 shares and 100,000 shares of our common stock, respectively, will vest
as to all unvested shares.
“Change
of control” is defined as (i) our merger or consolidation with any other
corporation which results in our voting stock outstanding immediately before the
transaction failing to represent more than fifty percent (50%) of the total
voting power represented by the surviving entity immediately after the merger or
consolidation or (ii) our sale or disposal of all or substantially all of our
assets.
Margie
Adelman
Termination
Without Cause. In the event Ms. Adelman is terminated by us without
“cause,” Ms. Adelman is entitled to:
|
|
·
|
an amount equal to 12 months of
her then base salary, to be paid immediately following
termination.
|
“Cause”
is defined as (i) a determination by the board of directors that Ms. Adelman has
been grossly negligent or has engaged in material willful or gross misconduct in
the performance of her duties and we have filed a civil lawsuit against her for
the same claims, (ii) Ms. Adelman has taken or failed to take any actions such
that such action or failure constitutes legal cause for termination under
California law, (iii) Ms. Adelman has been convicted by a court of law of fraud,
moral turpitude, embezzlement, theft, or dishonesty or other criminal conduct,
(iv) Ms. Adelman having materially breached the terms of her employment
agreement and not cured the breach in 10 days after receipt of written notice or
(v) Ms. Adelman having failed to meet written standards established by us for
performance of duties and not cured this failure within 10 days after receipt of
written notice.
Disability. In the event the agreement
is terminated by reason of Ms. Adelman’s “disability,” Ms. Adelman is entitled
to:
|
|
·
|
twelve months of his base salary
payable in a lump sum; and
|
|
|
·
|
continued benefits for six months
following termination.
|
Under the
agreement, Ms. Adelman is considered “disabled” if she is incapable of
substantially fulfilling her duties because of physical, mental or emotional
incapacity from injury, sickness or disease for a period of three (3) months in
a twelve month period.
Change
of Control Benefit (Option for 100,000 Shares). In the event of a “change
of control”, Ms. Adelman’s stock option to purchase 100,000 shares of our common
stock, which was granted to her on January 8, 2008, will vest as to all unvested
shares.
“Change
of control” is defined as (i) our merger or consolidation with any other
corporation which results in our voting stock outstanding immediately before the
transaction failing to represent more than fifty percent (50%) of the total
voting power represented by the surviving entity immediately after the merger or
consolidation or (ii) our sale or disposal of all or substantially all of our
assets.
Quantified
Benefits
The
following tables indicate the potential payments and benefits to which our named
executive officers will be entitled upon termination of employment or upon a
change of control. Calculations for the following tables are based on the
following assumptions: (i) the triggering event occurred on December 31, 2007;
and (ii) salaries were paid through December 31, 2007.
Voluntary
Termination, Involuntary For Cause Termination
If on
December 31, 2007 we terminated our named executive officers with cause or they
voluntarily terminated their employment with us without good reason, they would
have be entitled to receive as compensation, all amounts earned during the term
of employment that were not previously paid.
Termination
Because of Death or Disability
|
Name
|
|
Salary
|
|
|
Bonus
|
|
|
Stock Options
|
|
|
Benefits
|
|
|
Total Benefits
|
|
|
Bradley
Edson
|
|
$ |
137,500 |
(1) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
137,500 |
|
|
Todd
C. Crow
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Leo
Gingras
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Kody
Newland
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Margie
Adelman(2)
|
|
$ |
161,460 |
(3) |
|
|
— |
|
|
|
— |
|
|
$ |
5,511 |
(4) |
|
$ |
166,971 |
|
|
|
(1)
|
Represents six months of base
salary.
|
|
|
(2)
|
Ms. Adelman’s benefits described
above are payable in the event of disability, but not
death.
|
|
|
(3)
|
Represents twelve months of base
salary.
|
|
|
(4)
|
Represents six months of health
and dental insurance
premiums.
|
Voluntary
or Involuntary Termination as a Result of or Following a Change of
Control
|
Name
|
|
Salary
|
|
|
Bonus
|
|
|
Stock Options
|
|
|
Benefits
|
|
|
Total Benefits
|
|
|
Bradley
Edson
|
|
$ |
255,769 |
(1) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
255,769 |
|
|
Todd
C. Crow
|
|
$ |
322,920 |
(2) |
|
|
— |
|
|
$ |
32,858 |
(3) |
|
$ |
21,643 |
(4) |
|
$ |
377,421 |
|
|
Leo
Gingras
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
(5) |
|
|
— |
|
|
Kody
Newland
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Margie
Adelman
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1)
|
Represents an amount equal to the
salary paid to Mr. Edson in 2007. Mr. Edson’s employment agreement was
amended on January 8, 2008 to extend the term of his employment through
December 31, 2010. If the amended employment agreement were in effect on
December 31, 2007 and Mr. Edson was terminated on December 31, 2007
without cause, he would have been entitled to receive an immediate payment
of all base salary under the remaining three years of the term ($825,000)
instead of an amount equal to the remaining eleven months of base salary
shown above.
|
|
|
(2)
|
Represents two years of base
salary.
|
|
|
(3)
|
Represents six months of health
and dental insurance
premiums.
|
|
|
(4)
|
Represents the benefit that Mr.
Crow would have received from the vesting of the 29,871 unvested shares
underlying his option to purchase 537,678 shares. The benefit to Mr. Crow
for the accelerated vesting of his stock option was calculated by
multiplying the 29,871 unvested shares by the difference between the
closing price of our common stock on December 31, 2007 ($1.40) and the per
share exercise price of the stock option
($0.30).
|
|
|
(5)
|
Mr. Gingras’ option to purchase
250,000 shares vests as to all unvested shares if Mr. Gingras is
terminated following a change of control other than for cause, disability
or death. The benefit that Mr. Gingras would have received upon the
vesting of these option shares is not included above because the exercise
price of his option exceeds the closing price of our common stock on
December 31, 2007.
|
Voluntary
Termination for Good Reason
|
Name
|
|
Salary
|
|
|
Bonus
|
|
|
Stock Options
|
|
|
Benefits
|
|
|
Total Benefits
|
|
|
Bradley
Edson
|
|
$ |
255,769 |
(1) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
255,769 |
|
|
Todd
C. Crow
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Leo
Gingras
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Kody
Newland
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Margie
Adelman
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1)
|
Represents an amount equal to the
salary paid to Mr. Edson in 2007. Mr. Edson’s employment agreement was
amended on January 8, 2008 to extend the term of his employment through
December 31, 2010. If the amended employment agreement were in effect on
December 31, 2007 and Mr. Edson was terminated on December 31, 2007
without cause, he would have been entitled to receive an immediate payment
of all base salary under the remaining three years of the term ($825,000)
instead of an amount equal to the remaining eleven months of base salary
shown above.
|
Involuntary
Not For Cause Termination
|
Name
|
|
Salary
|
|
|
Bonus
|
|
|
Stock Options
|
|
|
Benefits
|
|
|
Total Benefits
|
|
|
Bradley
Edson
|
|
$ |
255,769 |
(1) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
255,769 |
|
|
Todd
C. Crow
|
|
$ |
161,460 |
(3) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
161,460 |
|
|
Leo
Gingras
|
|
$ |
220,000 |
(3) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
220,000 |
|
|
Kody
Newland
|
|
$ |
25,900 |
(4) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
29,900 |
|
|
Margie
Adelman
|
|
$ |
161,460 |
(3) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
$ |
161,460 |
|
|
|
(1)
|
Represents an amount equal to the
salary paid to Mr. Edson in 2007. Mr. Edson’s employment agreement was
amended on January 8, 2008 to extend the term of his employment through
December 31, 2010. If the amended employment agreement were in effect on
December 31, 2007 and Mr. Edson was terminated on December 31, 2007
without cause, he would have been entitled to receive an immediate payment
of all base salary under the remaining three years of the term ($825,000)
instead of an amount equal to the remaining eleven months of base salary
shown above.
|
|
|
(2)
|
Assumes our gross revenue for
2008 will be the same is it was in
2007.
|
|
|
(3)
|
Represents one year of base
salary.
|
|
|
(4)
|
Represents the remaining two
months of salary under Mr. Newland’s employment agreement as of December
31, 2007. Mr. Newland’s employment agreement was amended on January 8,
2008 to extend the term of his employment by two years. If the amended
employment agreement were in effect on December 31, 2007 and Mr. Newland
was terminated on December 31, 2007 without cause, he would have been
entitled to receive an immediate payment of twelve months base salary
($155,400) instead of two months salary as shown
above.
|
Change
of Control Not Involving a Termination
|
Name
|
|
Salary
|
|
|
Bonus
|
|
|
Stock Options
|
|
|
Benefits
|
|
|
Total Benefits
|
|
|
Bradley
Edson
|
|
|
— |
|
|
|
— |
|
|
|
— |
(1) |
|
|
— |
|
|
|
— |
|
|
Todd
C. Crow
|
|
|
— |
|
|
|
— |
|
|
|
— |
(1) |
|
|
— |
|
|
|
— |
|
|
Leo
Gingras
|
|
|
— |
|
|
|
— |
|
|
|
— |
(1) |
|
|
— |
|
|
|
— |
|
|
Kody
Newland
|
|
|
— |
|
|
|
— |
|
|
$ |
20,000 |
(2) |
|
|
— |
|
|
$ |
20,000 |
|
|
Margie
Adelman
|
|
|
— |
|
|
|
— |
|
|
|
— |
(1) |
|
|
— |
|
|
|
— |
|
|
|
(1)
|
Mssrs. Edson, Crow, Gingras, and
Newland and Ms. Adelman were granted options to purchase 1,000,000,
100,000, 350,000, 100,000 and 100,000 shares of common stock,
respectively, on January 8, 2008. Each of these options vest as to all
unvested shares upon a change of control. As these options were granted
after December 31, 2007, the change of control benefits that they would
have received with respect to these options is not included in the
table.
|
|
|
(2)
|
Represents the benefit that Mr.
Newland would have received from the vesting of the 25,000 unvested shares
underlying his option to purchase 500,000 shares. The benefit to Mr.
Newland for the accelerated vesting of his stock option was calculated by
multiplying the 25,000 unvested shares by the difference between the
closing price of our common stock on December 31, 2007 ($1.40) and the per
share exercise price of the stock option
($1.00).
|
Equity
Incentive Plans
Our board
of directors adopted our 2003 Stock Compensation Plan, or the 2003 Plan, on
October, 2003. Under the terms of the 2003 Plan, we may grant options to
purchase common stock and shares of common stock to officers, directors,
employees or consultants providing services to us on such terms as are
determined by our board of directors. A total of 10,000,000 shares of our common
stock are reserved for issuance under the 2003 Plan. As of December 31, 2007 a
total of 9,996,207 shares were issued under the 2003 Plan, no shares underlie
outstanding stock option granted pursuant to the 2003 Plan and 3,793 shares were
available for future grants under the 2003 Plan. Our board of directors
administers the 2003 Plan and determines vesting schedules on plan awards. The
2003 Plan has a term of 10 years and stock options granted under the plan may
not have terms in excess of 10 years. The Board may accelerate unvested options
if we sell substantially all of our assets or are a party to a merger or
consolidation in which we are not the surviving corporation. All options will
terminate in their entirety to the extent not exercised on or prior to the date
specified in the written notice unless an agreement governing any change of
control provides otherwise.
Under the
terms of our 2005 Equity Incentive Plan, or 2005 Plan, NutraCea may grant
options to purchase common stock and shares of common stock to officers,
directors, employees or consultants providing services to NutraCea on such terms
as are determined by the board of directors. A total of 10,000,000 shares of our
common stock are reserved for issuance under the 2005 Plan. As of December 31,
2007, , options to purchase an aggregate of 210,000 shares have been granted
under the 2005 Plan and an additional 9,790,000 shares remain eligible for
future grants under the 2005 Plan. Our board of directors and compensation
committee administers the 2005 Plan, determines vesting schedules on plan awards
and may accelerate these schedules for award recipients. The 2005 Plan has a
term of 10 years and stock options granted under the plan may not have terms in
excess of 10 years. All options will terminate in their entirety to the extent
not exercised on or prior to the date specified in the written notice unless an
agreement governing any change of control provides otherwise.
Director
Compensation
Before
May 2007, non-employee directors received the following amounts:
|
|
·
|
$12,000
annual cash retainer;
|
|
|
·
|
$1,000
for each board meeting attended in
person;
|
|
|
·
|
$500
for each telephonic board meeting
attended;
|
|
|
·
|
$2,000
annual cash retainer for serving on the audit committee or the
compensation committee;
|
|
|
·
|
$4,000
annual cash retainer for the chairman of the board of
directors;
|
|
|
·
|
$1,000
annual cash retainer for serving as a committee chairman;
and
|
|
|
·
|
an
option to purchase 35,000 shares of common stock each year pursuant to our
2005 Equity Incentive Plan.
|
Beginning
in May 2007, the consideration payable to our non-employee directors changed to
the following:
|
|
·
|
$40,000
annual cash retainer;
|
|
|
·
|
$2,000
for each board meeting attended in
person;
|
|
|
·
|
$1,000
for each telephonic board meeting
attended;
|
|
|
·
|
$4,000
annual cash retainer for serving on the audit
committee;
|
|
|
·
|
$2,000
annual cash retainer for serving on the compensation committee or the
nominating and corporate governance
committee;
|
|
|
·
|
$25,000
annual cash retainer for the chairman of the board of
directors;
|
|
|
·
|
$10,000
annual cash retainer for serving as chairman of the audit
committee;
|
|
|
·
|
$7,000
annual cash retainer for serving as chairman of the compensation committee
or the nominating and corporate governance committee;
and
|
|
|
·
|
an
option to purchase 35,000 shares of common stock each year pursuant to our
2005 Equity Incentive Plan.
|
Directors
are reimbursed for reasonable expenses incurred in attending meetings of the
Board and Board committees. In addition, directors are eligible to receive
common stock and common stock options under our 2005 Equity Incentive Plan. In
January 2008, each non-employee director was granted an option to purchase
100,000 shares of common stock at an exercise price per share of
$1.49.
Director
Compensation Table
The
following Director Compensation Table sets forth summary information concerning
the compensation paid to our non-executive officer directors in 2007 for
services to our company.
|
Name
|
|
Fees Earned or Paid in Cash ($)
|
|
Option Awards ($)(1)(2)(3)
|
|
All Other Compensation
($)
|
|
Total ($)
|
|
David
Bensol
|
|
82,833
|
|
|
58,225
|
|
—
|
|
141,058
|
|
Eliot
Drell
|
|
4,258
|
|
|
—
|
(4)
|
—
|
|
4,258
|
|
Wesley
K. Clark
|
|
43,000
|
|
|
47,996
|
|
—
|
|
90,996
|
|
James
C. Lintzenich
|
|
67,667
|
|
|
58,228
|
|
—
|
|
125,895
|
|
Edward
L. McMillan
|
|
62,833
|
|
|
58,227
|
|
—
|
|
121,060
|
|
Patricia
McPeak
|
|
—
|
(5)
|
|
—
|
(5)
|
229,227
|
(6) |
229,227
|
|
Steven
W. Saunders
|
|
56,500
|
|
|
58,227
|
|
—
|
|
114,727
|
|
Kenneth L Shropshire
|
|
65,167
|
|
|
58,227
|
|
—
|
|
123,394
|
|
Total
|
|
382,258
|
|
|
339,130
|
|
229,227
|
(6) |
950,615
|
|
|
(1)
|
Amounts
shown do not reflect compensation actually received by the directors.
Instead, the amounts shown are the compensation costs recognized by
NutraCea in 2007 for option awards as determined pursuant to Statement of
Financial Accounting Standards No. 123(R), or FAS 123R. The assumptions
used to calculate the value of option awards are set forth in Note 17 of
the Notes to Consolidated Financial Statements contained
herein.
|
|
|
(2)
|
The
compensation cost recognized by NutraCea in fiscal 2007 for each stock
option grant is based on the following fair values as of the grant date:
$89,066 for a stock option grant to each non-employee director other than
Mr. Clark to purchase 35,000 shares of common stock made on June 19, 2007
at an exercise price of $3.83 per share, and $86,629 for a stock option
grant to Mr. Clark to purchase 35,000 shares of common stock made on May
1, 2007 at an exercise price of $3.76 per
share.
|
|
|
(3)
|
At
the end of 2007, Mr. Bensol, Mr. Clark, Mr. Drell, Mr. Lintzenich, Mr.
McMillan, Ms. McPeak, Mr. Saunders and Mr. Shropshire held options to
purchase an aggregate of 70,000 shares, 35,000 shares, 35,000 shares,
70,000 shares, 70,000 shares, 0 shares, 70,000 shares and 70,000 shares,
respectively, as compensation for serving as NutraCea’s directors. Also,
at the end of 2007, Mr. Bensol, Mr. Clark, Mr. Drell, Mr. Lintzenich, Mr.
McMillan, Ms. McPeak, Mr. Saunders and Mr. Shropshire held an aggregate 0
shares, 0 shares, 35,000 shares, 0 shares, 0 shares, 35,000 shares, 0
shares and 0 shares, respectively, of common stock received as
compensation for serving as
directors.
|
|
|
(4)
|
Mr.
Drell ceased being a director on March 8,
2007.
|
|
|
(5)
|
Ms.
McPeak ceased being a director on June 19, 2007. Ms. McPeak did not
receive a stock option grant and was not paid for her services as a
director because she was an employee of NutraCea at the time she was a
director.
|
|
|
(6)
|
Reflects
compensation received by Ms. McPeak for serving as an employee of
NutraCea. Compensation consists of the following: $228,846 as salary and
$381 for payment of life insurance premiums. This amount does
include $1,029,000 paid to Ms. McPeak in November, 2007 reached as part of
a separation agreement (see Note 18 to the Consolidated Financial
Statements).
|
Review,
Approval or Ratification of Transactions with Related Parties
As
provided in our audit committee charter, our audit committee reviews and
approves, unless otherwise approved by our compensation committee, any
transaction or series of similar transactions to which we were or are to be a
party in which the amount involved exceeds $120,000 and in which any director,
director nominee, executive officer or holder of more than 5% of any class of
our capital stock, or members of any such person’s immediate family, had or will
have a direct or indirect material interest (each, a “Related Party
Transaction”). Before our adoption of an audit committee charter in
April 2007, Related Party Transactions were approved by our full board of
directors. Each of the transactions discussed below under “Related
Party Transactions” have been reviewed and approved either by our board of
directors or our audit committee.
Related
Party Transactions
Since
January 1, 2005, we believe that there has not been any transaction or series of
similar transactions to which we were or are to be a party in which the amount
involved exceeds $120,000 and in which any director, director nominee, executive
officer or holder of more than 5% of any class of our capital stock, or members
of any such person’s immediate family, had or will have a direct or indirect
material interest, other than the type of compensation described above in
“Executive Compensation,” and as set forth below.
|
|
·
|
In
April 2005, ITV Global, a direct response marketing company, agreed to pay
Patricia McPeak, our former Chief Executive Officer and one of our
directors, a royalty per unit of our products sold through infomercials
that demonstrate certain of our products. Pursuant to this agreement, Ms.
McPeak should have earned approximately $270,000, $270,000 and $311,000 in
2005, 2006 and 2007, respectively, from ITV Global. These payments are not
the obligations of NutraCea.
|
|
|
·
|
On
November 7, 2007, we entered into an agreement with Patricia McPeak, our
founder and former Chairman and CEO, concerning our business relationship.
Pursuant to the agreement, in consideration for a payment of $1 million,
we acquired certain inventions and intellectual property rights from Ms.
McPeak and acquired a right of first refusal to license, manufacture
and/or sell products that Ms. McPeak may formulate in the future for the
retail market and for feeding programs, subject to certain exceptions and
agreement on license terms. In addition Ms. McPeak agreed to assign to us
her interest as a co-inventor in certain patent applications. The
agreement also terminates her employment agreement with us and contains a
number of other customary provisions relating to termination of
employment, and also includes a general mutual release of all claims
concerning any past events or conduct. The agreement also grants Ms.
McPeak the non-exclusive right to sell stabilized rice bran products
formulated from NutraCea ingredients in Central and South America, and via
websites owned or controlled by Ms. McPeak. Additionally, we transferred
to her the vehicle we purchased for her in 2004 for $73,000 as part of the
separation agreement (see Note 18 to the Consolidated Financial
Statements).
|
|
|
·
|
In
May 2006, we sold approximately 17,560 shares of our Series C preferred
stock at a price of $1,000.00 per share, and warrants to purchase an
aggregate of 10,329,412 shares of our common stock with an exercise price
of $1.35 per share, to a small number of sophisticated investors in a
private placement transactions. Our Series C preferred stock can be
converted to shares of our common stock at a conversion rate of
approximately 1176 shares of common stock for each share of Series C
preferred Stock. Gross proceeds from the offering were approximately
$17.56 million. The investors included The Pinnacle Fund, L.P., funds
related to WS Management, Funds related to Enable Partners, Gryphon Master
Fund, Sherleigh Associates Profit Sharing Plan, Bushido Capital Master
Fund, Funds related to SRB Greenway Capital, Westpark Capital, Iroquois
Master Fund and Funds related to Xerion Partners Equity, which purchased
3,000, 2,000, 1,150, 1,000, 1,000, 1,000, 1,000, 1,000, 1,000 and 500
shares of Series C preferred stock, respectively. At the time of this
private placement, each of the aforementioned investors beneficially held
greater than either 5% of our outstanding common stock or 5% of our
outstanding preferred stock.
|
Limitation
of Liability and Indemnification of Officers and Directors
Our
articles of incorporation provide that it will indemnify its officers and
directors, employees and agents and former officers, directors, employees and
agents unless their conduct is finally adjudged as involving intentional
misconduct, fraud or a knowing violation of the law and were material to the
cause of action. This indemnification includes expenses (including attorneys’
fees), judgments, fines, and amounts paid in settlement actually and reasonably
incurred by these individuals in connection with such action, suit, or
proceeding, including any appeal thereof, subject to the qualifications
contained in California law as it now exists. Expenses (including attorneys’
fees) incurred in defending a civil or criminal action, suit, or proceeding will
be paid by NutraCea in advance of the final disposition of such action, suit, or
proceeding upon receipt of an undertaking by or on behalf of the director,
officer, employee or agent to repay such amount, unless it shall ultimately be
determined that he or she is entitled to be indemnified by NutraCea as
authorized in the Articles of Incorporation. This indemnification will continue
as to a person who has ceased to be a director, officer, employee or agent, and
will benefit their heirs, executors, and administrators. These indemnification
rights are not deemed exclusive of any other rights to which any such person may
otherwise be entitled apart from the Articles of Incorporation. California law
generally provides that a corporation shall have the power to indemnify persons
if they acted in good faith in a manner reasonably believed to be in, or not
opposed to, the best interests of NutraCea and, with respect to any criminal
action or proceeding, had no reasonable cause to believe the conduct was
unlawful. In the event any such person is judged liable for negligence or
misconduct, this indemnification will apply only if approved by the court in
which the action was pending. Any other indemnification shall be made only after
the determination by our board of directors (excluding any directors who were
party to such action), by independent legal counsel in a written opinion, or by
a majority vote of shareholders (excluding any shareholders who were parties to
such action) to provide such indemnification.
NutraCea
carries Officers and Directors insurance. The aggregate limit of liability for
the policy period (inclusive of costs of defense) is $5,000,000.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to directors, officers and controlling persons of NutraCea pursuant to
the foregoing provisions, or otherwise, NutraCea has been advised that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable.
The
following table set forth certain information regarding beneficial ownership of
our common stock as of February 27, 2008, by (i) each person or entity who is
known by us to own beneficially more than 5% of the outstanding shares of that
class or series of our stock, (ii) each of our directors, (iii) each of the
named executive officers, and (iv) all directors and executive officers as a
group.
The table
is based on information provided to us or filed with the Securities and Exchange
Commission (“SEC”) by our directors, executive officers and principal
shareholders. Beneficial ownership is determined in accordance with the rules of
the SEC, and includes voting and investment power with respect to shares. Shares
of common stock issuable upon exercise of options and warrants that are
currently exercisable or are exercisable within 60 days after February 27, 2008,
are deemed outstanding for purposes of computing the percentage ownership of the
person holding such options or warrants, but are not deemed outstanding for
computing the percentage of any other shareholder. Unless otherwise indicated,
the address for each shareholder listed in the following table is c/o NutraCea,
5090 North 40th Street,
Fourth Floor, Phoenix, Arizona 85018.
|
|
|
Shares of Common Stock Beneficially Owned
|
|
|
Name and Address of Beneficial
Owner
|
|
Number (1)
|
|
Percentage (1)
|
|
|
Patricia
McPeak (2)
|
|
13,040,249
|
|
|
8.61
|
%
|
|
Bradley
D. Edson (3)
|
|
6,181,000
|
|
|
4.08
|
%
|
|
James
C. Lintzenich (4)
|
|
2,983,436
|
|
|
2.03
|
%
|
|
Todd
C. Crow (5)
|
|
1,572,642
|
|
|
1.07
|
%
|
|
Margie
D. Adelman (6)
|
|
1,072,207
|
|
|
*
|
|
|
Steven
W. Saunders (7)
|
|
1,404,411
|
|
|
*
|
|
|
Kody
Newland (8)
|
|
526,700
|
|
|
*
|
|
|
Leo
G. Gingras(9)
|
|
107,167
|
|
|
*
|
|
|
Edward
L. McMillan (10)
|
|
271,754
|
|
|
*
|
|
|
David
Bensol (11)
|
|
145,417
|
|
|
*
|
|
|
Kenneth
L. Shropshire (12)
|
|
100,417
|
|
|
*
|
|
|
Wesley
K. Clark (13)
|
|
65,417
|
|
|
*
|
|
|
All
directors and executive officers as a group (11 persons)
(14)
|
|
14,430,568
|
|
|
9.17
|
%
|
|
(1)
|
Applicable
percentage of ownership is based on 145,418,965 shares of our common stock
outstanding as of February 27, 2008, together with applicable options and
warrants for such shareholder exercisable within 60 days of February 27,
2008.
|
|
(2)
|
Includes
2,002,882 shares issuable upon exercise of options held by reporting
person. Also includes 153,598
common shares held by a trust controlled by the reporting
person.
|
|
(3)
|
Includes
6,000,000 shares issuable upon exercise of
options.
|
|
(4)
|
Includes
1,587,025 shares issuable upon exercise of a warrants and
options.
|
|
(5)
|
Includes
1,562,942 shares issuable upon exercise of options and
warrants.
|
|
(6)
|
Includes
2,500 shares issuable upon exercise of options held by Adelman Global of
which the filing person is the owner. Also includes 1,000,000 shares
issuable upon exercise of options held by the reporting
person.
|
|
(7)
|
Includes
607,609 shares issuable upon exercise of options or
warrants.
|
|
(8)
|
Includes
500,000 shares issuable upon exercise of
options.
|
|
|
(9)
|
Includes
104,167 shares issuable upon exercise of
options.
|
|
(10)
|
Includes
177,215 shares issuable upon exercise of options held by the reporting
person. Also includes 76,799 shares issuable upon exercise of warrants
jointly held by the reporting person and his spouse. Also includes 17,740
shares of common stock held by reporting person and his
spouse.
|
|
(11)
|
Includes
100,417 shares issuable upon exercise of
options.
|
|
(12)
|
Includes
100,417 shares issuable upon exercise of
options.
|
|
(13)
|
Includes
65,417 shares issuable upon exercise of
options.
|
|
(14)
|
Includes
an aggregate of 11,884,508 shares issuable upon exercise of options and
warrants.
|
Our
authorized capital stock consists of 200,000,000 shares of common stock, no par
value, 20,000,000 shares of preferred stock, no par value, of which 3,000,000
shares are designated Series A Preferred Stock, 25,000 shares are designated
Series B Preferred Stock and 25,000 shares are designated Series C Preferred
Stock. As of April 18, 2008, there were 145,471,501 shares of common stock and
no shares of preferred stock were outstanding.
Common
Stock
Holders
of NutraCea common stock are entitled to receive ratably dividends when, as, and
if declared by NutraCea’s board of directors out of funds legally available
therefor. Upon the liquidation, dissolution, or winding up of NutraCea, the
holders of the common stock are entitled to receive ratably the net assets of
NutraCea available after the payment of all debts and other liabilities and
subject to the prior rights of outstanding NutraCea preferred shares, if any.
However, there are no assurances that upon any such liquidation or dissolution,
there will be any net assets to distribute to the holders of NutraCea common
stock.
The
holders of NutraCea common stock are entitled to one vote for each share held on
all matters submitted to a vote of NutraCea shareholders. Under certain
circumstances, California law permits the holders of NutraCea common stock to
cumulate their votes for the election of directors, in which case holders of
less than a majority of the outstanding shares of NutraCea common stock could
elect one or more of NutraCea’s directors. Holders of NutraCea common stock have
no preemptive, subscription, or redemption rights. The outstanding shares of
NutraCea common stock are fully paid and nonassessable. The rights and
privileges of holders of NutraCea common stock are subject to, and may be
adversely affected by, the rights of holders of shares of NutraCea preferred
stock that NutraCea may designate and issue in the future.
Preferred
Stock
NutraCea’s
board of directors is authorized to issue preferred stock in one or more series
and to fix the rights, preferences, privileges, qualifications, limitations and
restrictions thereof, including dividend rights and rates, conversion rights,
voting rights, terms of redemption, redemption prices, liquidation preferences
and the number of shares constituting any series or the designation of such
series, without any vote or action by NutraCea’s shareholders. Any preferred
stock to be issued could rank prior to the NutraCea common stock with respect to
dividend rights and rights on liquidation. NutraCea’s board of directors,
without shareholder approval, may issue preferred stock with voting and
conversion rights which could adversely affect the voting power of holders of
NutraCea common stock and discourage, delay or prevent a change in control of
NutraCea.
Transfer
Agent
American
Stock Transfer & Trust Company, New York, New York, serves as transfer agent
for the shares of common stock.
The table
below lists the selling shareholders and other information regarding the
beneficial ownership of the common stock by each of the selling shareholders.
The first column lists the name of each selling shareholder. The second column
lists the number of shares of common stock beneficially owned by each selling
shareholder prior to this offering on March 3, 2007. The third column lists the
number of shares of common stock that are covered by this prospectus. The fourth
and fifth columns list the number of shares of common stock owned and the
percentage of common stock owned, assuming the sale of all of the shares of
common stock covered by this prospectus. The following table assumes that the
number of shares beneficially owned, other than the shares offered hereby, do
not change after March 3, 2007. We do not know how long the selling shareholders
will hold the shares set forth in the following table or how many shares they
will ultimately sell or otherwise dispose of pursuant to this
offering.
|
|
|
|
|
|
|
|
|
Common
Shares Beneficially Owned After Offering
|
|
|
Name
of Selling Shareholder
|
|
Common
Shares Beneficially Owned Prior to Offering
|
|
|
Common
Shares Offered by this Prospectus
|
|
|
Number
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Iroquois
Master Fund, Ltd (1)
|
|
|
588,235 |
|
|
|
588,235 |
|
|
|
- |
|
|
|
*
|
|
|
SF
Capital Partners Ltd (2)
|
|
|
737,205 |
|
|
|
737,205 |
|
|
|
- |
|
|
|
*
|
|
|
Enable
Opportunity Partners, LP (3)
|
|
|
60,001 |
|
|
|
19,102 |
|
|
|
40,899 |
|
|
|
*
|
|
|
Enable
Growth Partners, LP (3)
|
|
|
510,000 |
|
|
|
222,663 |
|
|
|
287,337 |
|
|
|
*
|
|
|
SRB
Greenway Capital (QP) LP (4)
|
|
|
154,600 |
|
|
|
154,600 |
|
|
|
- |
|
|
|
*
|
|
|
SRB
Greenway Capital, LP (4)
|
|
|
15,100 |
|
|
|
15,100 |
|
|
|
- |
|
|
|
*
|
|
|
SRB
Greenway Offshore Operating Fund, LP (4)
|
|
|
5,600 |
|
|
|
5,600 |
|
|
|
- |
|
|
|
*
|
|
|
Sandor
Capital Master Fund, LP (5)
|
|
|
300,000 |
|
|
|
300,000 |
|
|
|
- |
|
|
|
*
|
|
|
Perella
Weinberg Partners Xerion Master Fund Ltd. (6)
|
|
|
644,118 |
|
|
|
294,118 |
|
|
|
350,000 |
|
|
|
*
|
|
|
Walker
Smith International Fund, Ltd. (7)
|
|
|
46,400 |
|
|
|
46,400 |
|
|
|
- |
|
|
|
*
|
|
|
Walker
Smith Capital (QP), LP (7)
|
|
|
29,400 |
|
|
|
29,400 |
|
|
|
- |
|
|
|
*
|
|
|
HHMI
Investments, LP (7)
|
|
|
17,600 |
|
|
|
17,600 |
|
|
|
- |
|
|
|
*
|
|
|
Walker
Smith Capital, LP (7)
|
|
|
4,900 |
|
|
|
4,900 |
|
|
|
- |
|
|
|
*
|
|
|
WS
Opportunity Fund (QP), LP (8)
|
|
|
79,447 |
|
|
|
79,447 |
|
|
|
- |
|
|
|
*
|
|
|
WS
Opportunity Fund, LP (8)
|
|
|
84,500 |
|
|
|
84,500 |
|
|
|
- |
|
|
|
*
|
|
|
WS
Opportunity Fund International, Ltd. (8)
|
|
|
218,647 |
|
|
|
218,647 |
|
|
|
- |
|
|
|
*
|
|
|
Gamma
Opportunity Capital Partners, LP (9)
|
|
|
147,059 |
|
|
|
147,059 |
|
|
|
- |
|
|
|
*
|
|
|
ClearView
Investment Fund, LP (10)
|
|
|
117,647 |
|
|
|
117,647 |
|
|
|
- |
|
|
|
*
|
|
|
Insiders
Trend Fund LP (11)
|
|
|
206,941 |
|
|
|
206,941 |
|
|
|
- |
|
|
|
*
|
|
|
Leo
E. Mindel Non-Est Exempt Family Trust II (12)
|
|
|
103,471 |
|
|
|
103,471 |
|
|
|
- |
|
|
|
*
|
|
|
Baruch
Halpern Revocable Trust, dated 6/13/06. (13)
|
|
|
1,279,200 |
|
|
|
400,000 |
|
|
|
879,200 |
|
|
|
*
|
|
|
Baruch
Halpern & Shoshana Halpern WROS (14)
|
|
|
849,900 |
|
|
|
50,000 |
|
|
|
799,900 |
|
|
|
*
|
|
|
David
Kolb (15)
|
|
|
50,000 |
|
|
|
50,000 |
|
|
|
- |
|
|
|
*
|
|
|
Diane
and Kieran Adams
|
|
|
3,169 |
|
|
|
3,169 |
|
|
|
- |
|
|
|
*
|
|
|
Bar
W, Inc (16)
|
|
|
37,578 |
|
|
|
37,578 |
|
|
|
- |
|
|
|
*
|
|
|
2000
Cecil Family Trust (17)
|
|
|
22,637 |
|
|
|
22,637 |
|
|
|
- |
|
|
|
*
|
|
|
Kathleen
Mehlschau
|
|
|
9,903 |
|
|
|
9,903 |
|
|
|
- |
|
|
|
*
|
|
|
Mehlschau
Trust (18)
|
|
|
13,072 |
|
|
|
13,072 |
|
|
|
- |
|
|
|
*
|
|
|
Maren
Newton
|
|
|
5,150 |
|
|
|
5,150 |
|
|
|
- |
|
|
|
*
|
|
|
Val
Otterson
|
|
|
14,261 |
|
|
|
14,261 |
|
|
|
- |
|
|
|
*
|
|
|
Dwan
O'Day
|
|
|
4,952 |
|
|
|
4,952 |
|
|
|
- |
|
|
|
*
|
|
|
Barry
Stone
|
|
|
9,903 |
|
|
|
9,903 |
|
|
|
- |
|
|
|
*
|
|
|
Catherine
A. Stone Revocable Trust (19)
|
|
|
9,903 |
|
|
|
9,903 |
|
|
|
- |
|
|
|
*
|
|
|
Winton
Family Trust (20)
|
|
|
9,111 |
|
|
|
9,111 |
|
|
|
- |
|
|
|
*
|
|
|
Wayne
and Carol Hodges
|
|
|
5,942 |
|
|
|
5,942 |
|
|
|
- |
|
|
|
*
|
|
|
*
|
Represents holdings of less than
one percent
|
|
(1)
|
Reported ownership includes
588,235 shares of common stock underlying immediately exercisable
warrants. The natural person who has voting and dispositive
power for such shares held by Iroquois Master Fund Ltd. is Joshua
Silverman, who is an authorized signatory of the fund. Mr.
Silverman disclaims beneficial ownership of the shares except for his
pecuniary interest.
|
|
(2)
|
Reported ownership includes
588,235 shares of common stock underlying immediately exercisable
warrants. The natural persons who have voting and dispositive
power for the shares held by SF Capital Partners Ltd. are Michael A. Roth
and Brian J. Stark. Each of Messrs. Roth and Stark disclaims
beneficial ownership of the shares, except to the extent if his pecuniary
interest. The selling security holder has indicated to the issuer that it
may be considered an affiliate of a broker-dealer. The selling security
holder has represented to the issuer that the securities were acquired in
the ordinary course of business, and that at the time of the acquisition
of securities, the selling security holder had no agreements or
understandings, directly or indirectly, with any party to distribute the
securities.
|
|
(3)
|
Reported ownership includes
510,000 shares of common stock underlying immediately exercisable warrants
held by Enable Growth Partners, LP (“Enable Growth”) and 60,000 shares of
common stock underlying immediately exercisable warrants held by Enable
Opportunity Partners, LP (“Enable Opportunity”). Mitch Levine
is the managing member of both funds and has voting and dispositive power
for such shares held by the funds. Each of Enable Growth,
Enable Opportunity and Mr. Levine disclaim beneficial ownership of the
shares except to the extent of its or his pecuniary
interest. The selling security holder has indicated to the
issuer that it may be considered an affiliate of a broker-dealer. The
selling security holder has represented to the issuer that the securities
were acquired in the ordinary course of business, and that at the time of
the various acquisitions of the securities, the selling security holder
had no agreements or understandings, directly or indirectly, with any
party to distribute the
securities.
|
|
(4)
|
Reported ownership includes
131,000 shares of common stock underlying immediately exercisable warrants
held by SRB Greenway QP; 15,100 shares of common stock underlying
immediately exercisable warrants held by SRB Greenway; and 5,600 shares of
common stock underlying immediately exercisable warrants held by SRB
Offshore. BC Advisors, LLC (“BCA”) is the general partner of
SRB Management, L.P. (“SRB Management”), which is the general partner of
SRB Offshore Operating Fund LP (“SRB Offshore”), SRB Greenway Capital (QP)
LP (“SRB Greenway QP”), and SRB Greenway Capital LP (“SRB Greenway”)
(collectively SRB Offshore, SRB Greenway QP and SRB Greenway are the “SRB
Funds”). Steven R. Becker is the sole principal of BCA and
through his control of BCA, Mr. Becker possesses sole voting and
investment control over the portfolio securities of the SRB
Funds. BCA and Mr. Becker disclaim beneficial ownership
of the shares, except to the extent of his or its pecuniary
interest.
|
|
(5)
|
Reported ownership includes
300,000 shares of common stock underlying immediately exercisable
warrants. John S. Lemak, General Partner of the fund, has
voting and dispositive power for such shares. Mr. Lemak
disclaims beneficial ownership with respect to such shares except for his
pecuniary interest.
|
|
(6)
|
Reported
ownership includes 644,118 shares of common stock underlying immediately
exercisable warrants. Perella Weinberg Partners Xerion Equity LP (the
"Manager") is the investment manager of Perella Weinberg Partners Xerion
Master Fund Ltd. (the "Master Fund"). Daniel J. Arbess, in his capacity as
the portfolio manager of the Master Fund and in his capacity as an
authorized signatory of the Manager, has voting and dispositive power with
respect to such shares. Each of the Manager, the Master Fund
and Mr. Arbess disclaims beneficial ownership of such shares, except to
the extent of his or its pecuniary
interest.
|
|
(7)
|
WSC Management is the general partner of WSCQP,
the agent and attorney-in-fact for WS International and the investment
manager of
HHMI. WS Capital is the general partner
of WSC Management. Reid S. Walker and G. Stacy Smith are the controlling principals of WS
Capital. Through their control of WS Capital,
Messrs. Walker and Smith share voting and
investment control over the portfolio securities of each of WSCQP, WS
International and HHMI. Pursuant to a letter agreement, Steven
R. Becker may collaborate with Messrs. Walker and Smith on investment
strategies from time to
time.
|
|
(8)
|
WS Ventures Management, L.P.
(“WSVM”) is the general partner of WS Opportunity Fund, L.P. (“WSO”) and
WS Opportunity Fund (Q.P.), L.P. (“WSOQP”) and is the agent and
attorney-in-fact for WS Opportunity Fund International, Ltd. (“WSO
International”). WSV Management, L.L.C. (“WSV Management”) is the general
partner of WSVM. Reid S. Walker, G. Stacy Smith and Patrick P.
Walker are the controlling principals of WSV Management. Through their
control of WSV Management, Messrs. R. Walker, Smith and P. Walker share
voting and investment control over the portfolio securities of each of
WSO, WSOQP and WSO International. Pursuant to a letter agreement, Steven
R. Becker may collaborate with Reid S. Walker, G. Stacy Smith and Patrick
P. Walker on investment strategies from time to
time.
|
|
(9)
|
Reported ownership includes
147,059 shares of common stock underlying immediately exercisable
warrants. Gamma Opportunity Capital Partners, LP Class A is the
general partner of Gamma Opportunity Capital Partners,
L.P. Jonathan P. Knight is an authorized signatory of Gamma
Opportunity Capital Partners, LP Class A and disclaims beneficial
ownership of the shares except for his pecuniary
interest.
|
|
(10)
|
Reported ownership includes
117,647 shares of common stock underlying immediately exercisable
warrants. Walter T. Beach, Managing Director of the partnership, has
voting and dispositive power for such shares. Mr. Beach
disclaims beneficial ownership of such shares except for his pecuniary
interest.
|
|
(11)
|
Reported ownership includes
117,647 shares of common stock underlying immediately exercisable
warrants. Anthony Marchese, General Partner, has voting and
dispositive power for such shares. Mr. Marchese disclaims
beneficial ownership of such shares except for his pecuniary
interest.
|
|
(12)
|
Reported ownership includes
58,824 shares of common stock underlying immediately exercisable
warrants. Meg Mindel, Trustee of the trust, has voting and
dispositive power for such shares. Ms. Mindel disclaims
beneficial ownership of the shares except for her pecuniary
interest.
|
|
(13)
|
Reported ownership includes
127,920 shares of common stock underlying immediately exercisable warrants
held by Joseph Halpern; 127,920 shares of common stock underlying
immediately exercisable warrants held by Yael Simpson and 1,023,360 shares
of common stock underlying immediately exercisable warrants held by Baruch
Halpern Rev. Trust, Dated 6/13/06. Baruch Halpern has voting
and investment power with respect to such
securities.
|
|
(14)
|
Reported ownership includes
409,900 shares of common stock underlying immediately exercisable
warrants. The selling security holder has indicated to the
issuer that it received such securities as compensation for investment
banking services. Baruch Halpern has indicated that he may be
considered an affiliate of a broker-dealer and that the securities were
acquired in the ordinary course of business, and that at the time of the
acquisitions of securities, the selling security holder had no agreements
or understandings, directly or indirectly, with any party to distribute
the securities.
|
|
(15)
|
Reported ownership includes
50,000 shares of common stock underlying immediately exercisable warrants
Mr. Kolb received such securities as compensation for investment banking
services. Mr. Kolb has indicated to the issuer that he may be
considered an affiliate of a broker-dealer. Mr. Kolb has represented to
the issuer that the securities were acquired in the ordinary course of
business, and that at the time of the purchase of shares, the selling
security holder had no agreements or understandings, directly or
indirectly, with any party to distribute the
shares.
|
|
(16)
|
Scott Wolcott has voting and
dispositive power for these shares. Mr. Wolcott disclaims beneficial
ownership of the shares except for his pecuniary
interest.
|
|
(17)
|
Calvert and Shirley Cecil,
Trustees of the 2000 Cecil Family Trust, have voting and dispositive power
for these shares. Calvert and Shirley Cecil disclaim beneficial
ownership of the shares except for their respective pecuniary
interest.
|
|
(18)
|
Donna and Howard Mehlschau,
Trustees of the Mehlschau Trust, have voting and dispositive power for
these shares. Donna and Howard Mehlschau disclaim beneficial ownership of
the shares except for their respective pecuniary
interest.
|
|
(19)
|
Barry Stone, Trustee of the
Catherine A. Stone Revocable Trust, has voting and dispositive power for
these shares. Mr. Stone disclaims beneficial ownership of the
shares except for his pecuniary
interest.
|
|
(20)
|
Margaret Winton, Trustee of the
Winton Family Trust, has voting and dispositive power for these shares.
Ms. Winton disclaims beneficial ownership of the shares except for her
pecuniary interest.
|
Each of
the selling shareholders, and any of their donees, pledgees, transferees or
other successors-in-interest selling shares of common stock or interests in
shares of common stock received after the date of this prospectus from a selling
shareholder as a gift, pledge, partnership distribution or other transfer, may,
from time to time, sell, transfer or otherwise dispose of any or all of their
shares of common stock or interests in shares of common stock on any stock
exchange, market or trading facility on which the shares are traded or in
private transactions. These dispositions may be at fixed prices, at prevailing
market prices at the time of sale, at prices related to the prevailing market
price, at varying prices determined at the time of sale, or at negotiated
prices. A selling shareholder will act independently of NutraCea in making
decisions with respect to the timing, manner and size of each sale.
Each of
the selling stockholders may use any one or more of the following methods when
selling shares:
|
|
·
|
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
|
|
|
·
|
block
trades in which the broker-dealer will attempt to sell the shares as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
|
|
|
·
|
purchases
by a broker-dealer as principal and resale by the broker-dealer for its
account;
|
|
|
·
|
an
exchange distribution in accordance with the rules of the applicable
exchange;
|
|
|
·
|
privately
negotiated transactions;
|
|
|
·
|
settlement
of short sales entered into after the effective date of the registration
statement of which this prospectus is a
part;
|
|
|
·
|
broker-dealers
may agree with the selling stockholders to sell a specified number of such
shares at a stipulated price per
share;
|
|
|
·
|
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or
otherwise;
|
|
|
·
|
a
combination of any such methods of sale;
or
|
|
|
·
|
any
other method permitted pursuant to applicable
law.
|
The
selling stockholders may also sell shares under Rule 144 under the Securities
Act of 1933, as amended (the "Securities Act"), if available, rather than under
this prospectus.
Broker-dealers
engaged by the selling stockholders may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the selling stockholders (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated. Each
selling stockholder does not expect these commissions and discounts relating to
its sales of shares to exceed what is customary in the types of transactions
involved.
In
connection with the sale of our common stock or interests therein, the selling
stockholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The selling
stockholders may also sell shares of our common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The selling
stockholders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
selling stockholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Discounts, concessions, commissions and
similar selling expenses, if any, that can be attributed to the sale of
securities will be paid by the selling stockholders and/or the purchasers. Each
selling stockholder has informed NutraCea that it does not have any agreement or
understanding, directly or indirectly, with any person to distribute the common
stock.
We are
required to pay certain fees and expenses incurred by us incident to the
registration of the shares. We have agreed to indemnify the selling stockholders
against certain losses, claims, damages and liabilities, including liabilities
under the Securities Act.
Because
selling stockholders may be deemed to be “underwriters” within the meaning of
the Securities Act, they will be subject to the prospectus delivery requirements
of the Securities Act. In addition, any securities covered by this prospectus
which qualify for sale pursuant to Rule 144 under the Securities Act may be sold
under Rule 144 rather than under this prospectus. Each selling stockholder has
advised us that they have not entered into any agreements, understandings or
arrangements with any underwriter or broker dealer regarding the sale of the
shares. There is no underwriter or coordinating broker acting in connection with
the proposed sale of the shares by the selling stockholders.
We agreed
to keep this prospectus effective until the earlier of (i) May 12, 2009, (ii)
the date on which the shares may be resold by the selling stockholders pursuant
to Rule 144(k) under the Securities Act or any other rule of similar effect or
(iii) all of the shares have been sold pursuant to this prospectus or Rule 144
under the Securities Act or any other rule of similar effect. The resale shares
will be sold only through registered or licensed brokers or dealers if required
under applicable state securities laws. In addition, in certain states, the
resale shares may not be sold unless they have been registered or qualified for
sale in the applicable state or an exemption from the registration or
qualification requirement is available and is complied with.
Under
applicable rules and regulations under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”), any person engaged in the distribution of the
resale shares may not simultaneously engage in market making activities with
respect to our common stock for a period of two business days prior to the
commencement of the distribution. In addition, the selling stockholders will be
subject to applicable provisions of the Exchange Act and the rules and
regulations thereunder, including Regulation M, which may limit the timing of
purchases and sales of shares of the common stock by the selling stockholders or
any other person. We will make copies of this prospectus available to the
selling stockholders and have informed them of the need to deliver a copy of
this prospectus to each purchaser at or prior to the time of the
sale.
Weintraub
Genshlea Chediak Law Corporation will pass upon legal matters in connection with
the validity of the shares of common stock offered hereby for
us. Certain members of, and persons associated with, Weintraub
Genshlea Chediak Law Corporation own or control less than 0.1% of the shares of
our common stock in the aggregate.
The
consolidated financial statements of NutraCea as of December 31, 2007 and 2006,
and for each of the years in the two-year period ended December 31, 2007, and
management’s assessment of the effectiveness of internal control over financial
reporting as of December 31, 2007 have been incorporated by reference herein in
reliance upon the reports of Perry-Smith, LLP, independent registered public
accounting firm, incorporated by reference herein and upon the authority of said
firm as experts in accounting and auditing.
The
consolidated financial statements of NutraCea as of December 31, 2005, and for
the year ended December 31, 2005, have been incorporated by reference herein in
reliance upon the reports Malone & Bailey, PC, independent registered public
accounting firm, incorporated by reference herein and upon the authority of said
firm as experts in accounting and auditing.
We file
annual, quarterly and special reports, proxy statements and other information
with the Securities and Exchange Commission. You may read and copy any reports,
statements or other information filed by us at the SEC’s public reference room
at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at
1-800-SEC-0330 for further information on the public reference room. Our filings
with the SEC are also available to the public from commercial document retrieval
services and at the SEC’s web site at “http://www.sec.gov.”
This
prospectus is part of a registration statement we have filed with the SEC
relating to the securities that may be offered by the selling shareholders. As
permitted by SEC rules, this prospectus does not contain all of the information
we have included in the registration statement and the accompanying exhibits and
schedules we file with the SEC. You may refer to the registration statement, the
exhibits and schedules for more information about our securities and us. The
registration statement, exhibits and schedules are available at the SEC’s Public
Reference Room.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Page
|
|
REPORT
OF PERRY-SMITH LLP, INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
|
F-2
|
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL
REPORTING
|
F-3
|
|
|
|
|
REPORT
OF MALONE & BAILEY, PC, INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
|
F-4
|
|
|
|
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
|
|
|
|
|
Consolidated
Balance Sheets as of December 31, 2007 and December 31,
2006
|
F-5
|
|
Consolidated
Statements of Operations for the three years ended December 31,
2007
|
F-6
|
|
Consolidated
Statement of Comprehensive Income (Loss) for the three years ended
December 31, 2007
|
F-7
|
|
Consolidated
Statement of Changes in Shareholder Equity for the three years ended
December 31, 2007
|
F-8
|
|
Consolidated
Statements of Cash Flows for the three years ended December 31,
2007
|
F-10
|
|
Notes
to Consolidated Financial Statements
|
F-11
|
REPORT
OF INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
Board of
Directors
NutraCea
and subsidiaries
Phoenix,
Arizona
We have
audited the accompanying consolidated balance sheet of NutraCea and subsidiaries
(the “Company”) as of December 31, 2007 and 2006, and the related consolidated
statements of operations, comprehensive income (loss), changes in shareholders’
equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of the Company as
of December 31, 2007 and 2006, and the consolidated results of their operations
and their cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
We have
also audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the Company's internal control over financial
reporting as of December 31, 2007, based on “criteria established in Internal Control-Integrated
Framework” issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Our report dated March 17, 2008 expressed an opinion
that the company had not maintained effective internal control over financial
reporting as of December 31, 2007, base on “criteria established in Internal
Control-Integrated Framework issued by the committee of Sponsoring Organizations
of the Treadway commission (COS)”.
/s/
Perry-Smith LLP
Perry-Smith
LLP
Sacramento,
California
March 17,
2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON
INTERNAL CONTROL OVER FINANCIAL REPORTING
The
Shareholders and Board of Directors
NutraCea,
Inc. and Subsidiaries
Phoenix,
Arizona
We have
audited NutraCea and subsidiaries (the "Company") internal control over
financial reporting as of December 31, 2007, based on criteria established in
Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also
included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinion.
A
company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A
material weakness is a deficiency, or a combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis. The following
material weaknesses have been identified and included in management’s
assessment. Policies were inadequate related to the retention of financial
experts providing assistance in financial transactions. Additionally, the
Company did not perform timely, comprehensive reviews of financial transactions,
the collectibility of accounts receivable or the potential impairment of
goodwill. These material weaknesses were considered in determining the nature,
timing, and extent of audit tests applied in our audit of the 2007 financial
statements, and this report does not affect our report dated March 17,
2008.
In our
opinion, because of the effect of the material weaknesses described above on the
achievement of the objectives of the control criteria, the Company has not
maintained effective internal control over financial reporting as of December
31, 2007, based on “criteria
established in Internal Control—Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).”
/s/
Perry-Smith LLP
Perry-Smith
LLP
Sacramento,
California
March 17,
2008
REPORT
OF INDEPENDENT REGISTERED
PUBLIC
ACCOUNTING FIRM
Board of
Directors
NutraCea
and subsidiaries
El Dorado
Hills, California
We have
audited the accompanying consolidated statement of operations, comprehensive
loss, changes in shareholders’ equity, and cash flows for year ended December
31, 2005. These financial statements are the responsibility of NutraCea’s
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of NutraCea as of December 31,
2005, and the results of its operations and its cash flows for the one year then
ended, in conformity with accounting principles generally accepted in the United
States of America.
/s/
Malone & Bailey, PC
MALONE
& BAILEY, PC
www.malone-bailey.com
Houston,
Texas
March 15,
2006
NUTRACEA
AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
|
As of December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
41,298,000 |
|
|
$ |
14,867,000 |
|
|
Restricted
cash
|
|
|
758,000 |
|
|
|
- |
|
|
Marketable
securities
|
|
|
- |
|
|
|
368,000 |
|
|
Trade
accounts receivables, net of allowance for doubtful accounts of $2,999,000
and $20,000, respectively
|
|
|
2,346,000 |
|
|
|
7,093,000 |
|
|
Inventories
|
|
|
1,808,000 |
|
|
|
796,000 |
|
|
Notes
receivable, current portion, net of allowance for doubtful notes
receivable of $250,000 and $0, respectively
|
|
|
2,936,000 |
|
|
|
1,694,000 |
|
|
Deposits
and other current assets
|
|
|
2,545,000 |
|
|
|
1,383,000 |
|
|
Total
current assets
|
|
|
51,691,000 |
|
|
|
26,201,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash
|
|
|
1,791,000 |
|
|
|
- |
|
|
Notes
receivable, net of current portion
|
|
|
5,039,000 |
|
|
|
682,000 |
|
|
Property
and equipment, net of accumulated depreciation
|
|
|
19,328,000 |
|
|
|
8,961,000 |
|
|
Investment
in joint venture
|
|
|
1,191,000 |
|
|
|
- |
|
|
Patents
and trademarks, net of accumulated amortization
|
|
|
5,743,000 |
|
|
|
5,097,000 |
|
|
Goodwill
|
|
|
39,510,000 |
|
|
|
32,314,000 |
|
|
Total
assets
|
|
$ |
124,293,000 |
|
|
$ |
73,255,000 |
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$ |
7,506,000 |
|
|
$ |
2,778,000 |
|
|
Deferred
revenue
|
|
|
90,000 |
|
|
|
103,000 |
|
|
Note
payable, current portion
|
|
|
23,000 |
|
|
|
- |
|
|
Total
current liabilities
|
|
|
7,619,000 |
|
|
|
2,881,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
|
Notes
payable, net of current portion
|
|
|
77,000 |
|
|
|
- |
|
|
Total
liabilities
|
|
|
7,696,000 |
|
|
|
2,881,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
Shareholder’s
equity:
|
|
|
|
|
|
|
|
|
|
Convertible,
series B preferred stock, no par value, $1,000 stated value 25,000 shares
authorized, 0 and 470 shares issued and outstanding
|
|
|
- |
|
|
|
439,000 |
|
|
Convertible,
series C preferred stock, no par value, $1,000 stated value 25,000 shares
authorized, 0 and 5,468 shares issued and outstanding
|
|
|
- |
|
|
|
5,051,000 |
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock, no par value, 350,000,000 shares authorized, 144,108,000 and
103,978,000 shares issued and outstanding
|
|
|
177,813,000 |
|
|
|
114,111,000 |
|
|
Accumulated
deficit
|
|
|
(61,216,000
|
) |
|
|
(49,305,000
|
) |
|
Accumulated
other comprehensive income, unrealized gain on marketable
securities
|
|
|
- |
|
|
|
78,000 |
|
|
Total
shareholders’ equity
|
|
|
116,597,000 |
|
|
|
70,374,000 |
|
|
Total
liabilities and shareholders’ equity
|
|
$ |
124,293,000 |
|
|
$ |
73,255,000 |
|
The
accompanying notes are an integral part of these financials
NUTRACEA
AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF OPERATIONS
|
|
|
For the Years Ended December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
Product
sales
|
|
$ |
18,372,000 |
|
|
$ |
17,105,000 |
|
|
$ |
5,545,000 |
|
|
Less
sales returns
|
|
|
(1,551,000
|
) |
|
|
- |
|
|
|
- |
|
|
Royalty,
label and licensing fees
|
|
|
5,340,000 |
|
|
|
985,000 |
|
|
|
19,000 |
|
|
Total
revenue
|
|
|
22,161,000 |
|
|
|
18,090,000 |
|
|
|
5,564,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
9,898,000 |
|
|
|
9,130,000 |
|
|
|
2,878,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
12,263,000 |
|
|
|
8,960,000 |
|
|
|
2,686,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
878,000 |
|
|
|
377,000 |
|
|
|
191,000 |
|
|
Selling,
general and administrative expenses
|
|
|
16,262,000 |
|
|
|
6,018,000 |
|
|
|
3,860,000 |
|
|
Allowance
for bad debt expense
|
|
|
3,233,000 |
|
|
|
9,000 |
|
|
|
— |
|
|
Impairment
of intangible assets
|
|
|
1,300,000 |
|
|
|
— |
|
|
|
— |
|
|
Separation
agreement with former chief executive officer
|
|
|
1,000,000 |
|
|
|
— |
|
|
|
— |
|
|
Professional
fees
|
|
|
4,720,000 |
|
|
|
1,504,000 |
|
|
|
1,627,000 |
|
|
Total
operating expenses
|
|
|
27,393,000 |
|
|
|
7,908,000 |
|
|
|
5,678,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss)
income from operations
|
|
|
(15,130,000
|
) |
|
|
1,052,000 |
|
|
|
(2,992,000
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
2,809,000 |
|
|
|
545,000 |
|
|
|
18,000 |
|
|
Gain
on settlement
|
|
|
1,250,000 |
|
|
|
- |
|
|
|
- |
|
|
Loss
on equity investment
|
|
|
(309,000
|
) |
|
|
- |
|
|
|
- |
|
|
Loss
on retirement of assets
|
|
|
(347,000
|
) |
|
|
- |
|
|
|
- |
|
|
Loss
on sale of marketable securities
|
|
|
(163,000
|
) |
|
|
- |
|
|
|
- |
|
|
Interest
expense
|
|
|
(1,000
|
) |
|
|
(7,000
|
) |
|
|
(896,000
|
) |
|
Total
(loss) income before income tax
|
|
|
(11,891,000
|
) |
|
|
1,590,000 |
|
|
|
(3,870,000
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
$ |
20,000 |
|
|
$ |
5,000 |
|
|
$ |
2,000 |
|
|
Net
(loss) income available to common shareholders
|
|
$ |
(11,911,000 |
) |
|
$ |
1,585,000 |
|
|
$ |
(3,872,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
(loss) income per share
|
|
$ |
(0.09 |
) |
|
$ |
0.02 |
|
|
$ |
(0.10 |
) |
|
Fully
diluted (loss) income per share
|
|
$ |
(0.09 |
) |
|
$ |
0.02 |
|
|
$ |
(0.10 |
) |
|
Weighted
average basic number of shares outstanding
|
|
|
125,938,000 |
|
|
|
76,692,000 |
|
|
|
38,615,000 |
|
|
Weighted
average diluted number of shares outstanding
|
|
|
125,938,000 |
|
|
|
102,636,000 |
|
|
|
38,615,000 |
|
The
accompanying notes are an integral part of these financials
NUTRACEA
AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF COMPREHENSIVE (LOSS) INCOME
|
|
|
For the Years Ended December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net
(loss) income available to common shareholders
|
|
$ |
(11,911,000 |
) |
|
$ |
1,585,000 |
|
|
$ |
(3,872,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
(loss) gain on marketable securities
|
|
|
(78,000
|
) |
|
|
78,000 |
|
|
|
(78,000
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
and comprehensive (loss) income
|
|
$ |
(11,989,000 |
) |
|
$ |
1,663,000 |
|
|
$ |
(3,950,000 |
) |
The
accompanying notes are an integral part of these financials
NUTRACEA
AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
|
|
|
Convertible, Redeemable Series A, B, C
Preferred
|
|
|
Common Stock
|
|
|
Deferred
|
|
|
Other Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Compensation
|
|
|
Income (Loss)
|
|
|
Deficit
|
|
|
Total
|
|
|
Balance,
January 1, 2005
|
|
|
- |
|
|
$ |
21,000 |
|
|
|
36,130,000 |
|
|
$ |
48,123,000 |
|
|
$ |
(16,000 |
) |
|
|
(2,012,000
|
) |
|
$ |
(44,928,000 |
) |
|
$ |
1,167,000 |
|
|
Amortization
of deferred compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,000 |
|
|
|
|
|
|
|
|
|
|
|
81,000 |
|
|
Common
stock issues for consultants service rendered
|
|
|
|
|
|
|
|
|
|
|
1,905,000 |
|
|
|
907,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
907,000 |
|
|
patent
incentive plan
|
|
|
|
|
|
|
|
|
|
|
30,000 |
|
|
|
13,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,000 |
|
|
officers
and directors
|
|
|
|
|
|
|
|
|
|
|
70,000 |
|
|
|
30,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000 |
|
|
settlements
|
|
|
|
|
|
|
|
|
|
|
97,000 |
|
|
|
98,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
98,000 |
|
|
Preferred
stock issued
|
|
|
8,000 |
|
|
|
7,301,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
RiceX
acquisition
|
|
|
|
|
|
|
(21,000
|
) |
|
|
28,272,000 |
|
|
|
40,029,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,029,000 |
|
|
Stock
options/warrants exercised for cash
|
|
|
|
|
|
|
|
|
|
|
531,000 |
|
|
|
104,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104,000 |
|
|
cashless
|
|
|
|
|
|
|
|
|
|
|
67,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
Stock
options/warrants issued for consultants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
349,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
349,000 |
|
|
employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130,000 |
|
|
|
(65,000
|
) |
|
|
|
|
|
|
|
|
|
|
65,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78,000
|
) |
|
|
|
|
|
|
(78,000
|
) |
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,872,000
|
) |
|
|
(3,872,000
|
) |
|
Balance,
December 31, 2005 as originally reported
|
|
|
8,000 |
|
|
|
7,301,000 |
|
|
|
67,102,000 |
|
|
|
89,783,000 |
|
|
|
— |
|
|
|
(2,090,000
|
) |
|
|
(48,800,000
|
) |
|
|
38,893,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Implementation
of SAB 108
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,090,000 |
|
|
|
(2,090,000
|
) |
|
|
|
|
|
Beginning
balance, January 1, 2006 as adjusted
|
|
|
8,000 |
|
|
|
7,301,000 |
|
|
|
67,102,000 |
|
|
|
89,783,000 |
|
|
|
— |
|
|
|
— |
|
|
|
(50,890,000
|
) |
|
$ |
38,893,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issues for consultants service rendered
|
|
|
|
|
|
|
|
|
|
|
30,000 |
|
|
|
30,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000 |
|
|
Preferred
stock issued, net of expense
|
|
|
17,000 |
|
|
|
15,934,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,490,000 |
|
|
Preferred
stock conversions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
series
B
|
|
|
(7,000
|
) |
|
|
(6,862,000
|
) |
|
|
14,760,000 |
|
|
|
6,862,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,862,000 |
|
|
series
C
|
|
|
(12,000
|
) |
|
|
(10,883,000
|
) |
|
|
14,226,000 |
|
|
|
10,883,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,883,000 |
|
|
Asset
acquisition
|
|
|
|
|
|
|
|
|
|
|
382,000 |
|
|
|
350,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
350,000 |
|
|
RiceX
options cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(642,000
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(642,000
|
) |
|
Stock
options/warrants exercised for cash
|
|
|
|
|
|
|
|
|
|
|
5,635,000 |
|
|
|
5,784,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,784,000 |
|
|
cashless
|
|
|
|
|
|
|
|
|
|
|
1,843,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
Stock
options/warrants issued for consultants
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
375,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
375,000 |
|
|
employees
and directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
686,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
686,000 |
|
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78,000 |
|
|
|
|
|
|
|
78,000 |
|
|
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,585,000 |
|
|
|
1,585,000 |
|
|
Balance,
December 31, 2006
|
|
|
6,000 |
|
|
|
5,490,000 |
|
|
|
103,978,000 |
|
|
|
114,111,000 |
|
|
|
|
|
|
|
78,000 |
|
|
|
(49,305,000
|
) |
|
|
70,374,000 |
|
The
accompanying notes are an integral part of these financials
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY - (CONTINUED)
|
|
|
Convertible, Redeemable Series A, B, C
Preferred
|
|
|
Common Stock
|
|
Deferred
|
|
Other Comprehensive
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
Compensation
|
|
Loss
|
|
Deficit
|
|
Total
|
|
|
Conversion
of Preferred to common stock
|
|
|
(6,000
|
) |
|
|
(5,490,000
|
) |
|
|
7,373,000 |
|
|
|
5,490,000 |
|
|
|
|
|
|
|
|
- |
|
|
Stock
options/warrants exercised for cash
|
|
|
|
|
|
|
|
|
|
|
9,927,000 |
|
|
|
9,240,000 |
|
|
|
|
|
|
|
|
9,240,000 |
|
|
Private
placement of common stock
|
|
|
|
|
|
|
|
|
|
|
20,000,000 |
|
|
|
46,805,000 |
|
|
|
|
|
|
|
|
46,805,000 |
|
|
Stock
options/warrants exercised (non-cash)
|
|
|
|
|
|
|
|
|
|
|
3,512,000 |
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
Cancellation
of certificates
|
|
|
|
|
|
|
|
|
|
|
(700,000
|
) |
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
Option
and warrant expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,111,000 |
|
|
|
|
|
|
|
|
2,111,000 |
|
|
Common
stock issued to director for outside services
|
|
|
|
|
|
|
|
|
|
|
18,000 |
|
|
|
55,000 |
|
|
|
|
|
|
|
|
55,000 |
|
|
Other
comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78,000
|
) |
|
|
|
(78,000
|
) |
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,911,000
) |
|
|
(11,911,000
|
) |
|
Balance,
December 31, 2007
|
|
|
- |
|
|
$ |
- |
|
|
|
144,108,000 |
|
|
$ |
177,813,000 |
|
-
|
|
$ |
- |
|
$(61,216,000) |
|
$ |
116,597,000 |
|
The
accompanying notes are an integral part of these financials
NUTRACEA
AND SUBSIDIARIES
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
|
|
For the Years Ended December
31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) income
|
|
$ |
(11,911,000 |
) |
|
$ |
1,585,000 |
|
|
$ |
(3,872,000 |
) |
|
Adjustments
to reconcile net (loss) income to net cash from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
2,202,000 |
|
|
|
1,150,000 |
|
|
|
1,091,000 |
|
|
Impairment
of goodwill
|
|
|
1,300,000 |
|
|
|
- |
|
|
|
- |
|
|
Provision
for doubtful accounts and notes receivable
|
|
|
3,229,000 |
|
|
|
- |
|
|
|
- |
|
|
Non-cash
issuances of common stock
|
|
|
- |
|
|
|
- |
|
|
|
1,017,000 |
|
|
Loss
on retirement of assets
|
|
|
347,000 |
|
|
|
|
|
|
|
|
|
|
Stock
based compensation
|
|
|
2,166,000 |
|
|
|
1,091,000 |
|
|
|
510,000 |
|
|
Loss
on equity investment
|
|
|
309,000 |
|
|
|
- |
|
|
|
- |
|
|
Loss
on sale of marketable securities
|
|
|
290,000 |
|
|
|
- |
|
|
|
- |
|
|
Net
changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase)
decrease in
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
|
(886,000
|
) |
|
|
(4,578,000
|
) |
|
|
(2,094,000
|
) |
|
Inventories
|
|
|
(971,000
|
) |
|
|
(202,000
|
) |
|
|
(107,000
|
) |
|
Deposits
and other current assets
|
|
|
(1,167,000
|
) |
|
|
(1,301,000
|
) |
|
|
(106,000
|
) |
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable, accrued liabilities
|
|
|
2,739,000 |
|
|
|
1,531,000 |
|
|
|
354,000 |
|
|
Advances
from related parties
|
|
|
- |
|
|
|
(3,000
|
) |
|
|
(71,000
|
) |
|
Customer
deposits
|
|
|
- |
|
|
|
98,000 |
|
|
|
(100,000
|
) |
|
Net
cash used in operating activities
|
|
|
(2,353,000
|
) |
|
|
(629,000
|
) |
|
|
(3,378,000
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of notes receivable
|
|
|
(7,828,000
|
) |
|
|
(2,376,000
|
) |
|
|
- |
|
|
Proceeds
of payments from notes receivable
|
|
|
5,410,000 |
|
|
|
- |
|
|
|
- |
|
|
Purchase
of The RiceX Company, net of $546,148 cash received
|
|
|
- |
|
|
|
- |
|
|
|
33,000 |
|
|
Purchase
of property and equipment
|
|
|
(11,652,000
|
) |
|
|
(4,682,000
|
) |
|
|
(14,000
|
) |
|
Investment
in Grainnovation, Inc.
|
|
|
(2,169,000
|
) |
|
|
- |
|
|
|
- |
|
|
Investment
in Vital Living, Inc.
|
|
|
(5,143,000
|
) |
|
|
- |
|
|
|
- |
|
|
Investment
in joint venture
|
|
|
(1,500,000
|
) |
|
|
- |
|
|
|
- |
|
|
Restricted
cash
|
|
|
(2,239,000
|
) |
|
|
|
|
|
|
|
|
|
Issuance
of long-term note
|
|
|
69,000 |
|
|
|
- |
|
|
|
- |
|
|
Proceeds
from sale of assets
|
|
|
16,000 |
|
|
|
- |
|
|
|
- |
|
|
Purchase
of other assets
|
|
|
(2,225,000
|
) |
|
|
(2,640,000
|
) |
|
|
(82,000
|
) |
|
Net
cash used in investing activities
|
|
|
(27,261,000
|
) |
|
|
(9,698,000
|
) |
|
|
(63,000
|
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Private
placement financing, net
|
|
|
46,805,000 |
|
|
|
15,934,000 |
|
|
|
7,301,000 |
|
|
Principal
payments on notes payable, net of discount
|
|
|
- |
|
|
|
(15,000
|
) |
|
|
(2,402,000
|
) |
|
Proceeds
from exercise of common stock options and warrants
|
|
|
9,240,000 |
|
|
|
5,784,000 |
|
|
|
105,000 |
|
|
Net
cash provided by financing activities
|
|
|
56,045,000 |
|
|
|
21,703,000 |
|
|
|
5,004,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase in cash and cash equivalents
|
|
|
26,431,000 |
|
|
|
11,376,000 |
|
|
|
1,563,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of year
|
|
|
14,867,000 |
|
|
|
3,491,000 |
|
|
|
1,928,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of year
|
|
$ |
41,298,000 |
|
|
$ |
14,867,000 |
|
|
$ |
3,491,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$ |
1,000 |
|
|
$ |
3,000 |
|
|
$ |
137,000 |
|
|
Cash
paid for income taxes
|
|
$ |
20,000 |
|
|
$ |
5,000 |
|
|
$ |
2,400 |
|
|
Non-cash
disclosures:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
for patents with common stock
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
13,000 |
|
|
Conversions
of preferred stock to common stock
|
|
$ |
5,490,000 |
|
|
$ |
17,835,000 |
|
|
$ |
- |
|
|
Accounts
receivable converted to note receivable
|
|
$ |
3,881,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
Accounts
receivable exchanged for an intangible assets
|
|
$ |
300,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
Settlement
of accounts receivable, net, to acquire intangible asset
|
|
$ |
284,000 |
|
|
$ |
- |
|
|
$ |
- |
|
|
Common
stock issued to acquire assets related to equine feed supplement
business
|
|
$ |
- |
|
|
$ |
350,000 |
|
|
$ |
- |
|
|
Adjustment
to allocation of RiceX purchase price of property and
equipment
|
|
$ |
- |
|
|
$ |
375,000 |
|
|
$ |
- |
|
|
Reduce
goodwill for RiceX options cancelled
|
|
$ |
- |
|
|
$ |
642,000 |
|
|
$ |
- |
|
|
Change
in fair value of marketable securities
|
|
$ |
- |
|
|
$ |
78,000 |
|
|
$ |
- |
|
The
accompanying notes are an integral part of these financials
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 — Organization and Line of Business
General
We are a
health-science company focused on the development and distribution of products
based upon the use of stabilized rice bran and proprietary rice bran
formulations. Rice bran is the outer layer of brown rice which is typically a
wasted by-product of the commercial rice industry. These products include food
supplements and medical foods which provide health benefits for humans and
animals (known as “nutraceuticals”) based on stabilized rice bran, rice bran
derivatives and the rice bran oils.
On
October 4, 2005, we consummated the acquisition of The RiceX Company (“RiceX”)
pursuant to the terms of an Agreement and Plan of Merger, dated April 4, 2005.
RiceX survived the merger as a wholly-owned subsidiary of NutraCea. RiceX
shareholders received .76799 of NutraCea common stock for each share of RiceX
common stock. RiceX shareholders received 28,272,064 shares of NutraCea common
stock, valued at $29,120,000 and NutraCea assumed the outstanding RiceX options
and warrants to purchase 11,810,496 shares NutraCea common stock, valued at
$11,422,000.
Due to
the acquisition of RiceX, and the subsequent reorganization, NutraCea and its
subsidiaries are operating as one segment.
Note
2 — Summary of Significant Accounting Policies
Principles of Consolidation -
The consolidated financial statements include the accounts of NutraCea and its
wholly-owned subsidiaries, NutraCea Technologies Incorporated, NutraGlo®
Incorporated, The RiceX Company, Infomaxx, LLC, Grainnovations, Inc., and our
interests in NutraCea-Cura LLC (10%), Rice RX LLC (50%), and Rice Science LLC
(80%), (collectively, the “Company”). Additionally, due to our ownership of
certain debt securities of Vital Living, Inc., we have included their results of
operations for the period from April 20th, 2007
to December 31, 2007 and their financial position at December 31, 2007 in our
financial statements. All significant inter-company accounts and transactions
are eliminated in consolidation.
Revenue Recognition - We
derive our revenue primarily from product sales. Product is shipped when an
approved purchase order is received. Products shipped by us are generally sold
FOB Origin, with the customer taking title to the product once it leaves our
plant via common carrier. At this point, the price to the customer is fixed and
determinable, and collectability is reasonably assured. On occasion, we receive
purchase orders for multiple product deliveries. In these situations, each
delivery is individually evaluated to determine appropriate revenue recognition.
Each delivery is generally considered to be a separate unit of accounting for
the purposes of revenue recognition and, in all instances, persuasive evidence
of an arrangement, delivery, pricing and collectability must be determined or
accomplished, as applicable, before revenue is recognized. In addition, if the
purchase order includes customer acceptance provisions, no revenue is recognized
until customer acceptance occurs. Revenue is accounted for at the point of
shipment FOB Origin, unless accompanied by a memorandum of understanding
detailing the requirement of customer acceptance in order to transfer title, in
which case revenue is recognized at the time of such acceptance.
Occasionally,
we will grant exclusive use of our labels by customers in specific territories
in exchange for a nonrefundable fee. Under EITF 00-21, Revenue Recognition with
Multiple Deliverables, each
label licensing provision is considered to be a separate unit of accounting.
Each grant is then individually evaluated to determine appropriate revenue
recognition in accordance with Staff Accounting Bulletin No. 104,
Revenue Recognition (SAB 104), SAB 104 requires that four basic criteria
must be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred; (3) the selling price is fixed
and determinable; and (4) collectability is reasonably assured. Determination of
criteria (3) and (4) are based on management’s judgments regarding the fixed
nature of the selling prices of the products delivered and the collectability of
those amounts.
Provisions
for allowances and other adjustments are provided for in the same period the
related sales are recorded. If all criteria are met, revenue is recognized in
the period in which the sale occurred and recorded in the financial statements
as label fees.
Our
royalty fees are generally recognized when it is probable that an economic
benefit will flow to us, the amount of the benefit can be reliably measured and
collectability is reasonably assured.
Cash and Cash Equivalents -
We consider all highly liquid investments purchased with an original maturity of
three months or less at the time of purchase to be cash equivalents. As of
December 31, 2007, the Company maintains its cash, including $2,549,000 of
restricted cash, and cash equivalents with a major investment firm and a major
bank.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies - (continued)
Cash Concentration - We
maintain our cash in bank accounts, which at times may exceed federally insured
limits. We have not experienced any losses on such accounts.
Short-Term Investments - As
part of our cash management program, we maintain a portfolio of commercial
paper. The securities are investment grade (AAA) and mature in thirty
days.
Accounts Receivable -
Accounts receivable consists of amounts due from customers for product sales,
net of an allowance for losses. We determine the allowance for doubtful accounts
by reviewing each customer account and specifically identifying any potential
for loss. The allowance for doubtful accounts at December 31, 2007 is $2,999,000
and at December 31, 2006 and 2005 was $20,000. Uncollected accounts are written
off after the customer has been past due in excess of twelve months. Past due
status is determined based on contractual terms. Actual losses related to
collection of accounts receivable for the years ended December 31, 2007, 2006
and 2005 were insignificant.
Marketable Securities -
Marketable securities are marked to market at each period end. Any unrealized
gains and losses on the marketable securities are excluded from operating
results and are recorded as a component of Other Comprehensive Income (Loss). If
declines in value are deemed other than temporary, losses are reflected in Net
Income (Loss).
Inventory - Inventory is
stated at the lower of cost (first-in, first-out) or market and consists of
stabilized rice bran manufactured by RiceX, and nutraceutical products
manufactured by NutraCea. We employ a full absorption procedure using standard
cost techniques. The standards are customarily reviewed and adjusted annually.
While the Company has an inventory of these products, any significant prolonged
shortage of these ingredients or of the supplies used to enhance these
ingredients could materially adversely affect the Company’s results of
operations.
Inventories
are composed of the following at December 31;
|
|
|
2007
|
|
|
2006
|
|
|
Finished
goods
|
|
$ |
1,396,000 |
|
|
$ |
533,000 |
|
|
Raw
materials
|
|
|
184,000 |
|
|
|
168,000 |
|
|
Packaging
supplies
|
|
|
228,000 |
|
|
|
95,000 |
|
|
|
|
$ |
1,808,000 |
|
|
$ |
796,000 |
|
Property and Equipment -
Property and equipment are stated at cost. The Company provides for depreciation
using the straight-line method over the estimated useful lives as
follows:
|
Furniture
and equipment
|
3-7
years
|
|
Automobile
|
5
years
|
|
Software
|
3
years
|
|
Leasehold
improvements
|
7
years
|
|
Property
and equipment
|
7-10
years
|
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 statements of operations.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies - (continued)
Impairment of Long-Lived
Assets - We assess the carrying value of long-lived assets which includes
property, plant and equipment, intangible assets and goodwill annually or
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Factors we consider important which could trigger an
impairment review include the following:
|
|
·
|
significant adverse change in
legal factors or in the business
climate;
|
|
|
·
|
unanticipated
competition;
|
|
|
·
|
a loss of key
personnel;
|
|
|
·
|
significant changes in the manner
of our use of the asset;
|
|
|
·
|
significant negative industry or
economic trends; and
|
|
|
·
|
our market capitalization
relative to net book value.
|
Annually
and upon the existence of one or more of the above indicators of impairment, we
would test such assets for a potential impairment. The carrying value of a
reporting unit, including goodwill, is considered impaired when the fair value
is less than the asset’s carrying value. In that event, an impairment loss is
recognized based on the amount by which the carrying value exceeds the fair
market value. Fair market value is determined primarily using quoted market
prices and cash flow projections. During the year ended December 31, 2007 events
indicated an impairment had occurred (see next paragraph). We have determined
that there was no impairment as of December 31, 2006.
In April,
2007, we purchased, for $5,226,000, certain debt securities and certain
preferred stock securities of Vital Living, Inc. (“VLI”) (see Note 10 to the
Consolidated Financial Statements). In September 2007, we entered into an asset
purchase agreement in which the company agrees to buy the assets of VLI for an
additional $1,500,000 and the forgiveness of the debt securities and certain
other indebtedness of VLI. We have recorded that contingent liability in our
financial statements. As a result, the total increase in goodwill on our books
associated with this transaction is $7,579,000. We have evaluated this
intangible and determined that the value based upon our analysis is $6,279,000.
Accordingly we have recorded an intangible impairment of
$1,300,000.
Patents and Trademarks - In
addition to patents filed and acquired directly by the Company, the Company owns
several patents, which were acquired from independent third parties and a
related party. All costs associated with the patents are capitalized. Patents
acquired from related parties are recorded at the carryover basis of the
transferor. The Company paid cash as consideration for all patents and
trademarks acquired, except the Via-Bran registered trademark, which was
acquired for 21,409 shares of common stock valued at $21,000.
In
conjunction with the RiceX acquisition, NutraCea has been assigned five U.S.
patents relating to the production or use of Nutraceutical or HVF products. The
patents include:
|
|
(1)
|
Patent Number 5,512,287
“PRODUCTION OF BETA-GLUCAN AND BETA-GLUCAN PRODUCT,” which issued on April
30, 1996;
|
|
|
(2)
|
Patent Number 5,985,344 “PROCESS
FOR OBTAINING MICRONUTRIENT ENRICHED RICE BRAN OIL,” which issued on
November 16, 1999;
|
|
|
(3)
|
Patent
Number 6,126,943 “METHOD FOR TREATING HYPERCHOLESTEROLEMIA,
HYPERLIPIDEMIA, AND ATHEROSCLEROSIS,” which issued on October 3,
2000;
|
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies - (continued)
|
|
(4)
|
Patent Number 6,303,586 B1
“SUPPORTIVE THERAPY FOR DIABETES, HYPERGLYCEMIA AND HYPOGLYCEMIA,” which
issued on October 15, 2001;
and
|
|
|
(5)
|
Patent Number 6,350,473 B1
“METHOD FOR TREATING HYPERCHOLESTEROLEMIA, HYPERLIPIDEMIA AND
ATHEROSCLEROSIS,” which issued on February 26,
2002.
|
We plan
to apply for additional patents in the future as new products, treatments, and
uses are developed.
Patents
and trademarks are stated at cost. Amortization is computed on the straight-line
method based on estimated useful lives as follows:
|
Patents
(Domestic)
|
17
years
|
|
Patents
(International)
|
20
years
|
|
Trademarks
(Domestic)
|
10
years
|
|
Trademarks
(International)
|
7
years
|
Fair Value of Financial
Instruments - The fair value of the Company’s financial instruments
approximated carrying value at December 31, 2007, and 2006. The Company’s
financial instruments include cash, marketable securities and accounts
receivable for which the carrying value approximates fair value due to the short
maturity of the instrument.
Research and Development -
Research and development expenses include internal and external costs. Internal
costs include salaries and employment related expenses and allocated facility
costs. External expenses consist of costs associated with product development.
All such costs are charged to expense as incurred.
Stock and Warrants Issued to Third
Parties - If the agreements do not have a disincentive for
nonperformance, the Company records a charge for the fair value of the stock and
the portion of the warrants earned from the point in time when vesting of the
stock or warrants becomes probable. The fair value of certain types of warrants
issued to customers is recorded as a reduction of revenue to the extent of
cumulative revenue recorded from that customer.
Stock-Based Compensation -
Management estimates the fair value of each option award as of the date of grant
using a Black-Scholes-Merton option pricing model. Expected volatility is based
on the historical volatility of the Company’s common stock. The expected term
represents the period that the stock-based awards are expected to be
outstanding. The risk free interest rate for the expected term of the option is
based on the U.S. Treasury yield curve in effect at the time of grant. The
expected dividend yield was not considered in the option pricing formula because
the Company has not paid cash dividends historically and had no plans to do so
at the grant date. In addition to these assumptions, management makes estimates
regarding pre-vesting forfeitures that will impact total compensation expense
recognized under the Plan.
As of
January 1, 2006, we adopted the provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 123(R), Accounting for Stock-Based
Compensation. Under the provisions of SFAS 123(R), we are required to
measure the cost of services received in exchange for an award of equity
instruments based on the grant-date fair value of the award. That cost is
recognized over the period during which services are provided in exchange for
the award, known as the requisite service period (usually the vesting period).
The Company applied the alternative transition method in calculating its pool of
excess tax benefits available to absorb future tax deficiencies as provided by
FSP FAS 123(R)-3, Transition
Election Related to Accounting for the Tax Effects of Share-Based Payment
Awards. Prior to January 1, 2006, the Company accounted for those
instruments under the recognition and measurement provisions of APB “Opinion”
No. 25, Accounting for Stock
Issued to Employees, and related Interpretations, as permitted by FASB Statement
No 123, Accounting for Stock-Based Compensation.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies - (continued)
We have
made the transition to SFAS 123(R) using the modified prospective method. Under
the modified prospective method, SFAS 123(R) is applied to new awards and to
awards modified, repurchased, or cancelled after
January
1, 2006. Additionally, compensation cost for the portion of awards for which the
requisite service has not been rendered (such as unvested options) that are
outstanding as of January 1, 2006 are being recognized over the period that the
remaining requisite services are rendered. The compensation cost relating to
unvested awards at January 1, 2006 is based on the grant-date fair value of
those awards. Under this method of implementation, no restatement of prior
periods has been made.
As a
result of adopting Statement 123(R) on January 1, 2006, the Company’s net income
for the year ended December 31, 2006 was $1,907,711 lower than if it had
continued to account for share-based compensation under Opinion 25. Basic and
diluted earnings per share for the year ended December 31, 2006 would have been
$(0.26), if the Company had not adopted Statement 123(R), compared to reported
basic and diluted earnings per share of $(0.29). We have not recorded income tax
benefits related to equity-based compensation expense as deferred tax assets are
fully offset by a valuation allowance. As a result, the implementation of SFAS
123(R) did not impact the Statement of Cash Flows for the year ended December
31, 2006.
The
following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of Statement 123(R) to
options granted under the company’s stock option plans for the year ended
December 31, 2005. For purposes of this pro forma disclosure, the value of the
options is estimated using a Black-Scholes option-pricing model and amortized to
expense over the options’ vesting periods.
|
|
|
For
The Year Ended
|
|
|
|
|
December 31, 2005
|
|
|
Net
loss, reported:
|
|
$ |
(3,872,000 |
) |
|
Deduct: stock-based compensation
expense included in reported net loss, net of $0 related tax
benefits
|
|
|
1,511,000 |
|
|
(Add): stock-based compensation
determined under fair value based method for all awards, net of $0 related
tax benefits
|
|
|
(387,000
|
) |
|
Pro
forma net loss
|
|
$ |
(2,748,000 |
) |
|
Basic
loss per common share (basic and diluted):
|
|
|
|
|
|
As
reported
|
|
$ |
(0.10 |
) |
|
Pro
forma
|
|
$ |
(0.07 |
) |
Shipping and Handling
Expenses - Expenses relating to shipping and handling are expensed and
reported as a cost of sale or a selling expense as appropriate.
Advertising Expense - The
Company expenses all advertising costs, including direct response advertising,
as they are incurred. Advertising expense for 2007, 2006 and 2005 was
$1,171,000, $307,000 and $8,000, respectively.
Income Taxes - The Company
accounts for its income taxes by recording a deferred tax asset or liability for
the recognition of future deductible or taxable amounts and operating loss and
tax credit carry-forwards. Deferred tax expense or benefit is recognized as a
result of timing differences between the recognition of assets and liabilities
for book and tax purposes during the year.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies - (continued)
Deferred
tax assets and liabilities are measured using enacted tax rates expected to
apply to taxable income in the years in which those temporary differences are
expected to be recovered or settled. Deferred tax assets are recognized for
deductible temporary differences and operating loss, and tax credit
carry-forwards. A valuation allowance is established, when necessary, to reduce
that deferred tax asset if it is “more likely than not” that the related tax
benefits will not be realized.
Net Income (Loss) per Common
Share - Basic earnings per share is computed using the weighted average
number of common shares outstanding during the period. Diluted earnings per
share is computed using the weighted average number of common and potentially
dilutive shares outstanding during the period. Potentially dilutive shares
consist of the incremental common shares issuable upon the exercise of stock
options and warrants. Potentially dilutive shares are excluded from the
computation if their effect is anti-dilutive.
We had a
net loss for 2007 and 2005 presented herein; therefore, none of the stock
options and warrants outstanding during each of the periods presented, as
discussed in Notes 16 and 17, were included in the computation of diluted loss
per share as they were anti-dilutive.
For 2006,
the dilutive effect of 5,873,738 outstanding options, 14,666,449 outstanding
warrants, 940,000 convertible Series B preferred stock, and 6,430,368
convertible Series C preferred stock is calculated using the treasury stock
method. Additionally, for 2,083,114 outstanding warrants and options there is no
dilutive effect because the average market price of the common stock during the
period is less than the exercise price of the warrants and options for
2006.
Estimates - The preparation
of financial statements requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
Concentrations of Credit Risk and
Major Customers - On August 24, 2005, NutraCea signed an agreement with a
direct response marketing company to market and sell products through
infomercials. The agreement is for two years and may be extended for an
additional year. The agreement covers pricing of specific products at wholesale
prices which will be private labeled for direct sale by the marketing company.
During the term of the agreement, NutraCea will not sell its products through
any other infomercials so long as the marketing company maintains minimum
quarterly orders beginning October 1, 2005 of $500,000. Additionally, NutraCea
granted the company an option to purchase 250,000 shares of restricted common
stock at a price of $1.275 per share. The options vest 50,000 shares upon
payment in full of the contract quarter minimum purchase orders during the term
of the agreement. At December 31, 2006, 100,000 options are fully vested. For
the year ended December 31, 2005, sales to this customer totaled $3,013,000 or
54% of total sales and receivables were $1,910,000, or 76% of total receivables.
For the year ended December 31, 2006, sales to this customer totaled $8,057,000
or 48% of total sales and receivables were $3,516,000, or 49% of total
receivables. For the year ended December 31, 2007, sales to this customer
totaled $1,946,000 or 11% of sales and the note receivable due from this
customer was $1,978,000.
Reclassifications - Certain
reclassifications have been made to the prior year statement of operations to
conform to the current year presentation.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies - (continued)
Recently Issued Accounting
Pronouncements - In June 2006, the FASB issued Interpretation No.48,
“Accounting for Uncertainty in Income Taxes — An Interpretation of FASB
Statement No. 109”, (FIN 48). FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise’s financial statements in accordance
with FASB Statement No. 109, “Accounting for Income Taxes”. FIN 48 also
prescribes a recognition threshold and measurement attribute for the financial
statement recognition and measurement of a tax position taken or expected to be
taken in a tax return that results in a tax benefit. Additionally, FIN 48
provides guidance on de-recognition, statement of operations classification of
interest and penalties, accounting in interim periods, disclosure, and
transition. This interpretation is effective for fiscal years beginning after
December 15, 2006. The Company adopted FIN 48 as of January 1, 2007, as
required. The Company has determined that there is no impact in adopting FIN
48.
In
September 2006, the SEC staff issued Staff Accounting Bulletin No. 108 (SAB
108), “Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements,” which addresses how
uncorrected errors in previous years should be considered when quantifying
errors in current-year financial statements. SAB 108 requires companies to
consider the effect of all carry over and reversing effects of prior-year
misstatements when quantifying errors in current-year financial statements and
the related financial statement disclosures. SAB 108 must be applied to annual
financial statements for the first fiscal year ending after November 15, 2006.
The impact of adopting SAB 108 is discussed in Note 3.
In
September 2006, the FASB issued Statement of Financial Accounting Standards No.
157, “Fair Value Measurement”, (FAS 157). This Standard defines fair value,
establishes a framework for measuring fair value in generally accepted
accounting principles and expands disclosures about fair value measurements. FAS
157 is effective for financial statements issued for fiscal years beginning
after November 15, 2007 and interim periods within those fiscal years. As of
December 1, 2007 the FASB has proposed a one-year deferral for the
implementation of the Statement for nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial
statements on a non-recurring basis. We have not determined the effect that the
adoption of FAS 157 will have on our consolidated results of operations,
financial condition or cash flows.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities - Including an amendment of FASB
Statement No. 115” (“FAS 159”). This statement provides all entities with an
option to report selected financial assets and liabilities at fair value. The
Statement is effective as of the beginning an entity’s first fiscal year
beginning after November 15, 2007, with early adoption available in certain
circumstances. We have not determined the effect that the adoption of FAS 159
will have on our consolidated results of operations, financial condition, or
cash flows, accordingly, we have not decided whether or not to adopt this
standard.
In
September 2007 the FASB issued SFAS No. 141(R), “Business Combinations”. This
statement requires all entity’s to recognize the assets acquired, liabilities
assumed, contractual contingencies, and contingent consideration at their fair
value on the acquisition date. It further requires that acquisition-related
costs be recognized separately from the acquisition and be expensed as incurred,
restructuring cost generally be expensed in period subsequent to the acquisition
date, and changes in accounting for deferred tax asset valuation allowances and
acquired income tax uncertainties after the measurement period impact income tax
expense. In addition, acquired in-process research and development is
capitalized as an intangible asset and amortized over its estimated useful life.
The adoption of this statement will change the accounting treatment for business
combinations on a prospective basis beginning in the first quarter of fiscal
year 2009.
In
December, 2007, the FASB issued SFAS No. 160, “Non-controlling Interests in
Consolidated Financial Statements”. This statement changes the accounting and
reporting for minority interests, which will be re-characterized as
non-controlling interests and classified as a component of equity. This
statement is effective for the Company on a prospective basis for business
combinations with an acquisition date beginning in the first quarter of fiscal
year 2009.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
2 — Summary of Significant Accounting Policies - (continued)
In
December 2007, the SEC issued Staff Accounting Bulleting (“SAB”) No. 110,
“Share-Based Payment”. This bulletin amends the SEC’s views discussed in SAB 107
regarding the use of the simplified method in developing an estimate of expected
life of share options in accordance with SFAS No. 123(R). SAB 110 is effective
beginning in the first quarter of fiscal year 2008.
Note
3 — Implementation of Staff Accounting Bulletin No. 108
In
preparing the financial statements for the year ended December 31, 2006, we
undertook an evaluation of uncorrected misstatements arising in prior years for
the purpose of implementing Staff Accounting Bulletin No. 108 (SAB 108). We
identified an uncorrected misstatement arising during 2004, which at the time
was considered to be immaterial relative to the net loss incurred for the
period. We believe that this uncorrected misstatement resulted from the
incorrect classification and recording of an investment’s decline in market
value as a temporary impairment with a corresponding increase in other
comprehensive loss. In accordance with the provisions of SAB 108, we have
decreased accumulated other comprehensive loss at January 1, 2006 by $2,090,000
and we have increased our accumulated deficit at January 1, 2006 by $2,090,000
to recognize the other than temporary nature of the investment
impairment.
Note
4 — Marketable Securities
On
September 8, 2004, NutraCea purchased 1,272,026 shares of Langley Park
Investment Trust, PLC (“Langley”), a United Kingdom closed-end mutual fund that
is actively traded on a London exchange. Per the Stock Purchase Agreement,
NutraCea paid with 7,000,000 shares of its own common stock. On September 8,
2006, NutraCea commenced a lawsuit against Langley in the United States District
Court for the Eastern District of California, Sacramento Division regarding this
transaction. The matter was settled on March 27, 2007. Pursuant to the
settlement, NutraCea received $1,250,000 from Langley in March 2007 and NutraCea
retained all of the Langley shares. The $1,250,000 settlement is included in our
December 31, 2007 statement of operations as other income.
During
the third quarter of 2007 Langley ceased trading and began the process of
liquidating the investments. NutraCea has received cash of $127,000 from this
liquidation. The realizable value of the balance of the funds is uncertain and
as a result we have recorded the fair market value of Langley as $0 at December
31, 2007, and recognized a loss of $163,000 (net of $169,000 of unrealized
income) on the disposition of the investment.
Any
unrealized holding gains and losses on the marketable securities are excluded
from operating results and are recognized as other comprehensive income. Prior
to liquidation the fair value of the securities is determined based on
prevailing market prices
Note 5 — Stock-based
Compensation
On
January 1, 2006, NutraCea adopted SFAS No. 123(R), “Share-Based Payment” (“SFAS
123(R)”). SFAS 123(R) replaced SFAS No. 123 and supersedes APB Opinion No. 25.
SFAS 123(R) requires all share-based payments to employees, including grants of
employee stock options, to be recognized in the financial statements based on
their fair values. The pro forma disclosures previously permitted under SFAS 123
are no longer an alternative to financial statement recognition. NutraCea
adopted SFAS 123(R) using the modified prospective method which requires the
application of the accounting standard as of January 1, 2006. The consolidated
financial statements as of and for the twelve months ended December 31, 2007 and
2006 reflect the impact of adopting SFAS 123(R).
For all
agreements where stock is awarded as partial or full consideration, the expense
is valued at the fair value of the stock. Expenses for stock options and
warrants issued to consultants and employees are calculated based upon fair
value using the Black-Scholes valuation method.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 — Stock-based Compensation -
(continued)
Stock-based
compensation expenses consisted of the following for the twelve months ended
December 31,
|
|
|
2007 (1)
|
|
|
2006 (2)
|
|
|
2005 (3)
|
|
|
Consultants
|
|
$ |
379,000 |
|
|
$ |
213,000 |
|
|
$ |
1,241,000 |
|
|
Directors
|
|
|
330,000 |
|
|
|
176,000 |
|
|
|
30,000 |
|
|
Employees
|
|
|
1,294,000 |
|
|
|
602,000 |
|
|
|
142,000 |
|
|
Research
and development
|
|
|
108,000 |
|
|
|
- |
|
|
|
- |
|
|
To
directors and former director for services outside of directors
duties
|
|
|
55,000 |
|
|
|
100,000 |
|
|
|
- |
|
|
Stock
issued for a settlement
|
|
|
- |
|
|
|
- |
|
|
|
98,000 |
|
|
Total
stock-based compensation expense
|
|
$ |
2,166,000 |
|
|
$ |
1,091,000 |
|
|
$ |
1,511,000 |
|
|
(1)
|
Includes
$55,000 fair value of common stock issued, all other amounts are the fair
value of options and warrants
issued
|
|
(2)
|
Includes
$30,000 fair value of common stock issued, all other Amounts are the fair
value of options and warrants issue
|
|
(3)
|
Includes
$949,000 fair value of common stock issued, all other amounts are the fair
value of options and warrants
issued
|
As of
December 31, 2007, there was $1,889,000 of total unrecognized compensation cost
related to non-vested options granted under the plans. That cost is expected to
be recognized over a weighted average period of one year.
The
weighted average grant date fair value of the stock options granted during the
twelve months ended December 31 2007, 2006 and 2005 was $3.43, $1.35, and $0.54
per share, respectively.
Note 6 — (Loss) Earnings Per
Share
Basic
(loss) earnings per share are computed by dividing net (loss) income by the
weighted average number of common shares outstanding during all periods
presented. Options and warrants are excluded from the basic (loss)
earnings per share calculation and are considered in calculating the diluted
(loss) earnings per share.
The
dilutive effect of outstanding options and warrants is calculated using the
treasury stock method and the dilutive effect of the convertible series B
preferred stock, and convertible series C preferred stock is calculated using
the as-if converted method.
As of
December 31, 2007 and 2005, options and warrants to purchase approximately
41,981,000 and 38,293.000 shares of our common stock, respectively, were
outstanding. Of these, approximately 25,915,000 and 33,602,000 were “in the
money” at December 31, 2007 and 2005, respectively. These are excluded from the
calculation of diluted loss per share at December 31, 2007 and 2005 because
their inclusion would have been anti-dilutive. The weighted average exercise
price of anti-dilutive options and warrants for the twelve months ended December
31, 2007 and 2005 was $0.60 and $0.45, respectively.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 5 — Stock-based Compensation -
(continued)
Components
of basic and diluted (loss) earnings per share were as follow for the twelve
months ended:
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net
(loss) income
|
|
$ |
(11,911,000 |
) |
|
$ |
1,585,000 |
|
|
$ |
(3,872,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average outstanding shares of common stock
|
|
|
125,938,000 |
|
|
|
76,692,000 |
|
|
|
38,615,000 |
|
|
Convertible
preferred stock
|
|
|
- |
|
|
|
5,045,000 |
|
|
|
- |
|
|
Common
stock equivalents
|
|
|
- |
|
|
|
20,899,000 |
|
|
|
- |
|
|
Total
diluted shares
|
|
|
125,938,000 |
|
|
|
102,636,000 |
|
|
|
38,615,000 |
|
|
(Loss)
earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.09 |
) |
|
$ |
0.02 |
|
|
$ |
(0.10 |
) |
|
Diluted
|
|
$ |
(0.09 |
) |
|
$ |
0.02 |
|
|
$ |
(0.10 |
) |
Note
7 — Property and Equipment
Property
and equipment consisted of the following at December 31:
|
|
|
2007
|
|
|
2006
|
|
|
Land
|
|
$ |
15,000 |
|
|
$ |
9,000 |
|
|
Furniture
and equipment
|
|
|
2,405,000 |
|
|
|
916,000 |
|
|
Automobile
|
|
|
- |
|
|
|
73,000 |
|
|
Software
|
|
|
402,000 |
|
|
|
389,000 |
|
|
Leasehold
improvements
|
|
|
700,000 |
|
|
|
430,000 |
|
|
Property
and plant
|
|
|
14,243,000 |
|
|
|
4,197,000 |
|
|
Construction
in progress
|
|
|
4,347,000 |
|
|
|
4,392,000 |
|
|
Subtotal
|
|
|
22,112,000 |
|
|
|
10,406,000 |
|
|
Less
accumulated depreciation
|
|
|
2,784,000 |
|
|
|
1,445,000 |
|
|
Total
|
|
$ |
19,328,000 |
|
|
$ |
8,961,000 |
|
Depreciation
expense was $1,431,000, $839,000 and $241,000 for 2007, 2006 and 2005,
respectively. Interest expense incurred during 2007 was nominal and no interest
was capitalized.
Note
8 — Patents and Trademarks
Patents
and trademarks consisted of the following at December 31:
|
|
|
2007
|
|
|
2006
|
|
|
Patents
|
|
$ |
2,657,000 |
|
|
$ |
2,540,000 |
|
|
Trademarks
|
|
|
3,288,000 |
|
|
|
2,987,000 |
|
|
Non-compete
agreement
|
|
|
650,000 |
|
|
|
- |
|
|
License
and supply agreement
|
|
|
220,000 |
|
|
|
- |
|
|
Subtotal
|
|
|
6,815,000 |
|
|
|
5,527,000 |
|
|
Less
Accumulated Amortization
|
|
|
1,072,000 |
|
|
|
430,000 |
|
|
Total
|
|
$ |
5,743,000 |
|
|
$ |
5,097,000 |
|
Amortization
expense was $642,000, $302,000 and $70,000 for 2007, 2006 and 2005,
respectively. Amortization expense for the next five years will be approximately
$3,200,000.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
9 — Notes Receivable
At
December 31, 2007, we have nine secured promissory notes outstanding to the
Company with an aggregate amount of $7,975,000; $2,936,000 reported as current
(net of a $250,000 allowance for doubtful notes receivable) and $5,039,000
reported as long-term. These secured promissory notes bear interest at annual
rates of either five (5%) or eight (8%) with the principals and all accrued
interest due and payable to us at dates ranging from October 2007 to October
2012.
During
the twelve months ended December 31, 2007 we loaned a total of $7,828,000, (net
of the conversion of $3,881,000 of accounts receivables to a promissory note) to
certain strategic customers, which loans were evidenced by promissory notes, and
received payments totaling $5,410,000 on existing promissory notes. During this
twelve month period we also accrued interest income of $472,000 and received
cash payments of $135,000 for accrued interest.
In
February 2007, we converted $3,516,000 of one customer’s accounts receivable to
a note receivable included in the above total, bearing interest at 7% and due in
December 2007. This note receivable was paid in full by January
2008.
In April
2007, we converted $365,000 of another customer’s accounts receivable to a note
receivable included in the above total, bearing interest at 10% and due in
October 2007. This note is past due as of December31, 2007. As of March 3, 2008
we have re-negotiated the settlement terms and extended the due date to April
2008 and received payment of the accrued interest due on this note. We have
recorded an allowance for doubtful notes of $250,000 against this receivable
which is included in our bad debt expense for the year ended December 31,
2007.
During
the second quarter of 2007, we granted to Pacific Holdings Advisors Limited
(“PAHL”) an exclusive, perpetual, royalty-free right and license to use and SRB
and SRB derivative products in certain Southeast Asian countries. PAHL paid a
one-time license fee of $5,000,000 for these rights. PAHL paid the license fee
by issuing to NutraCea an interest bearing promissory note due within five
years. In January 2008, in conjunction with another agreement (see Note 20 to
the Consolidated Financial Statements) the we amended the payment terms. PAHL
will pay NutraCea the license fee of $5,000,000 by March 31, 2008 in full
satisfaction of its obligations under the Note. In consideration for this
accelerated payment, NutraCea agrees to waive all accrued interest owed by PAHL
($118,000 at December 31, 2007).
During
August 2007 we exchanged one customer’s note receivable of $300,000 for a
certain trademark and associated rights to a product line (see Note 10 to the
consolidated financial statements).
In
December, 2007, we sold to one customer, $1,968,000 of infomercial products.
This customer paid us by issuing a to NutraCea a promissory note bearing 7%
interest, with even weekly payments, due in April 2008.
Note 10 — Acquisition and Joint
Ventures
Infomaxx,
LLC
In
December 2006, our wholly-owned subsidiary Nutramercials, Inc. became a 50%
member of Infomaxx, LLC (“INFMX”). In accordance with FIN46R, INFMX was
determined to be a variable interest entity and its’ financial position and
operations were included in our consolidated financial statements at December
31, 2006.
In August
2007, we became the sole member of INFMX after we purchased from the other
member of INFMX their 50% of INFMX’s outstanding membership interests by
canceling a $300,000 note payable to NutraCea by that member of INFMX. We
received along with the 50% interest, all rights to a certain trademark and
product line of that member. We recorded an intangible asset of $296,000 (net of
a valuation allowance of $280,000). Additionally, in order to consummate this
transaction we agreed to accept the return of $275,000 of inventory from the
other previous member of INFMX which we sold them in December 2006, for
$1,551,000. The $1,551,000 return is recorded as a sales return on our
consolidated statement of operations.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 — Acquisitions and Joint Ventures -
(continued)
For the
twelve months ended December 31, 2007 our Infomaxx subsidiary generated sales of
$315,000 which was not related to the product return mentioned
above.
NutraCea/Cura
LLC
In August
2007, we formed NutraCea/Cura, LLC (“NCC”) with Cura Pharmaceuticals (“CURA”).
We formed this LLC with CURA to jointly develop, produce through third-party
pharmaceutical-grade co-packers, market, and sell nutraceutical and
pharmaceutical products. In the initial agreement our interest was 60%. In
December we acquired from Cura 75% of their 40% interest, increasing our
interest to 90%. Accordingly, NCC is included in our consolidated financial
statements. For the twelve months ended December 31, 2007 NCC had sales of
$230,000.
Under the
agreement, NCC acquired the rights to a supply agreement for materials with
minimum purchase requirements of approximately $1,150,000 for the first year,
which increase 5% a year for 5 years. If the minimum purchase commitments are
not met in any year the co-packer of the products may terminate the supply
agreement. We recorded an intangible of $220,000 which we are amortizing on a
straight-line basis over five years.
Grainnovation,
Inc.
In April
2007, we acquired 100% of the outstanding stock of Grainnovation, Inc. (“GI”) a
privately held company that had equipment for pelletizing horse feed for equine
customers of strategic value to NutraCea, and certain assets used in GI’s
business for a total of $2,150,000, of which $1,605,000 of the purchase price
was paid at closing, with the balance (“holdback”) being due in payments of
$235,000 and $310,000 in six months and twelve months, respectively, subject to
reduction in the event of breaches of representations, warranties and covenants
contained in the transaction documents. The holdback is held in third-party
escrow and is included in our consolidated condensed balance sheet as restricted
cash and current liabilities. The investment is recorded in our financial
statements included herein at the aggregate purchase price and its results of
operations from the date of acquisition are reflected in our statement of
operations for the period ended December 31, 2007. In November, 2007, the second
installment of $235,000 due was distributed to the sellers from the third-party
escrow as agreed.
The
following table summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition. We incurred $20,000 in legal
fees relating to this purchase, which are added to the purchase price and
Goodwill. The Company is in the process of obtaining third-party valuations of
certain intangible assets; the allocation of the purchase price is subject to
refinement:
|
Cash
|
|
$ |
1,000 |
|
|
Accounts
receivable
|
|
|
26,000 |
|
|
Inventory
|
|
|
11,000 |
|
|
Property
and equipment
|
|
|
623,000 |
|
|
Covenant
not to compete
|
|
|
650,000 |
|
|
Goodwill
|
|
|
917,000 |
|
|
Total
Assets
|
|
|
2,228,000 |
|
|
|
|
|
|
|
|
Accrued
liabilities
|
|
|
58,000 |
|
|
|
|
|
|
|
|
Net
assets acquired
|
|
$ |
2,170,000 |
|
For the
eight months ended December 31, 2007 our Grainnovations subsidiary generated
$490,000 in sales.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 — Acquisitions and Joint Ventures -
(continued)
Grain Enhancements
LLC
In June
2007, we entered into a joint venture with PAHL to form Grain Enhancements LLC
(“GE”), a Delaware limited liability company. NutraCea and PAHL each hold a
47.5% share of Grain Enhancements. The remaining interest is held by Theorem
Group LLC (“Theorem”) (3.333%) and Ho’okipa Capital Partners, Inc. (1.667%). The
purpose of GE is to develop and market stabilized rice bran (“SRB”) and related
products in certain Southeast Asian countries. GE will purchase SRB exclusively
from NutraCea until its own facilities are in operation and NutraCea will lease
to GE at cost the necessary equipment for such facilities. Payments under the
equipment lease will be payable in full upon installation of the
equipment.
Under the
agreement, NutraCea and PAHL will contribute up to $5,000,000 each to Grain
Enhancements to fund the operations, of which $1,500,000 each was due on June
30, 2007. Both members made their initial contribution in July 2007.
Additionally, $2,000,000 each was to be contributed no later than October 2007,
and the remaining $1,500,000 from each member is due no later than August 2008.
Only the initial capital contribution due of $1,500,000 from each member has
been made. On January 24, 2008, NutraCea and PAHL amended certain terms of the
Operating Agreement. Pursuant to the modified agreement, the timing of mandatory
capital contributions of the members was changed from an agreed upon schedule to
a determination by the Finance Committee on an as-needed basis. In addition,
PAHL will no longer receive a monthly management fee.
Theorem
was paid $750,000 and $500,000 by NutraCea and GE, respectively, for services
relating to the formation of the joint venture. Through December 31, 2007, our
portion of Grain Enhancements net loss was $309,000.
Our
investment in Grain Enhancements is accounted for under the equity method of
accounting. At December 31, 2007 the value of our investment was
$1,191,000.
Summary
financial information of Grain Enhancements, LLC at December 31, 2007
is:
|
Assets
|
|
|
|
|
Cash
|
|
$ |
2,435,000 |
|
|
Liabilities
and equity
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$ |
54,000 |
|
|
Members
equity
|
|
|
3,000,000 |
|
|
Accumulated
deficit
|
|
|
(619,000
|
) |
|
Total
equity
|
|
|
2,381,000 |
|
|
Total
liabilities and equity
|
|
$ |
2,435,000 |
|
Vital Living,
Inc.
In April
2007, we acquired certain securities of Vital Living, Inc. (“VLI”), a publicly
traded company. VLI distributes nutritional supplements using similar processes
as NutraCea for manufacturing and distribution. We paid $1,000,000 for 1,000,000
shares of outstanding preferred stock and $4,226,000 for the outstanding Senior
Secured Notes (“Notes”). The Notes are convertible to VLI common stock and bear
interest at 12% per annum, payable June 15 and December 15 and mature in
December 2008. On September 11, 2007, NutraCea and VLI entered into a letter
agreement confirming their 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 will not be deemed to be in default under
the Notes as a result of not paying accrued interest in such
shares.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 — Acquisitions and Joint Ventures -
(continued)
On
September 28, 2007, NutraCea entered into an Asset Purchase Agreement (the
“Purchase Agreement”) with Vital Living. The Purchase Agreement
provides that NutraCea will purchase substantially all of Vital Living’s
intellectual property and other assets used by Vital Living 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, Vital Living will assign
to NutraCea its rights under various distribution and other agreements relating
to the products being acquired. NutraCea will not acquire inventory,
raw materials, cash or accounts receivable of Vital Living nor assume any
accounts payable, liabilities, or other obligations of VLI.
The
purchase price consists of (i) $1,500,000 to be paid by NutraCea at the closing,
(ii) cancellation of outstanding indebtednesses of Vital Living, its
subsidiaries and certain related entities to NutraCea, including all of the
Notes, and (iii) cancellation of all shares of Series D Preferred Stock of Vital
Living held by NutraCea.
Completion
of the transaction is subject to a variety of customary closing conditions,
including, among other things, approval of the transaction by the shareholders
of Vital Living at a special meeting of shareholders of Vital Living and the
absence of a material adverse effect on the assets between the date of the
agreement and the closing date. NutraCea anticipates that Vital
Living will prepare and file with the SEC a proxy statement relating to the
transaction. NutraCea expects that the transaction will close in the
second quarter of 2008, although the actual timing of the closing will depend on
many factors including preparation of the proxy statement and the SEC’s review
of the proxy statement, and the closing may occur later than the second quarter
of 2008.
The
Purchase Agreement contains customary representations and warranties of the
parties, covenants, closing conditions, and certain termination rights for both
NutraCea and Vital Living, and further provides that, upon termination of the
Purchase Agreement under specified circumstances, Vital Living may be required
to pay NutraCea a termination fee.
Our accounting for the
purchase of these securities of VLI qualifies as a Variable Interest Entity
(“VIE”) in accordance with FIN 46R . As the primary beneficiary, we have
consolidated VLI into our financial statements.
The
purchase price allocated to the assets and liabilities in April 2007 is 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
|
|
|
2,212,000 |
|
|
Net
assets acquired
|
|
$ |
5,226,000 |
|
The
purchase price allocation will change when the asset purchase agreement
anticipated to be consummated in 2008 and the additional cash payment of
$1,500,000 is made. Under that agreement, NutraCea is not purchasing the cash,
accounts receivable, inventory, other assets, nor any of the liabilities of
VLI.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 — Acquisitions and Joint Ventures -
(continued)
We have
included in our balance sheet at December 31, 2007 the financial position of VLI
for the period ended December 31, 2007, and VLI’s results of operations for the
period from April 20, 2007 through December 31, 2007 in our statement of
operations for the twelve months ended December 31, 2007, while eliminating
inter-company balances. The effect on our consolidated balance sheet at December
31, 2007 was an increase in total assets of $8,154,000 (before inter-company
eliminations), an increase in total liabilities of $2,762,000 (before
inter-company eliminations) and an increase in shareholder equity of $5,392,000
(before inter-company eliminations). The effect on our consolidated income
statement for the twelve months ended December 31, 2007 was an increase in
revenues of $601,000 (net of inter-company eliminations), an increase in cost of
goods sold of $378,000 (net of inter-company eliminations), an increase in
operating expenses of $1,508,000, an increase of other expenses of $49,000 (net
of inter-company eliminations), and an increase in net loss of $1,335,000.
Additionally, we have accrued the $1,500,000 payment to be made under the terms
of the asset purchase agreement which results in an increase in goodwill and
accrued liabilities associated with this transaction. The total increase in
goodwill associated with this transaction of $7,579,000. We evaluated this
intangible and based upon our analysis determined the value of this goodwill is
$6,279,000. Accordingly we have recorded an intangible impairment of
$1,300,000.
Rice Science
LLC
In
December 2007 we formed Rice Science, LLC (“RS”), a Delaware LLC with Herbal
Science Singapore PTe. Ltd. (“HS”), a Singapore corporation. We formed this LLC
with HS to acquire from Herbal Science certain Isolates License Rights and to
commercialize and sell the SRB Isolates. NutraCea and HS have an 80% and 20%
interest in the operating results, respectively, but HS has no interest in the
initial capital contributions.
We made
an initial capital contribution to RS in December 2007 of $1,200,000 as
specified in the LLC agreement. We may make an additional $1,000,000
contribution at our discretion and maintain our 80% holding. HS contributed
certain Licenses as their capital contribution with a deemed value of $440,000.
There are no further capital contributions required of either member. However HS
does not have an interest in the initial capital contributed by NutraCea and
will not have a minority interest until there are results of
operations.
NutraCea
holds an 80% interest in RS and therefore will account for the investment as a
fully consolidated subsidiary. As of December 31, 2007 the LLC had no sales,
operations or expenses. Summary financial information for RS as of December 31,
2007 is as follows:
|
Assets
|
|
|
|
|
Cash
|
|
$ |
1,200,000 |
|
|
Liabilities
and Equity
|
|
|
|
|
|
Members
equity - NutraCea, Inc.
|
|
|
1,200,000 |
|
|
Total
liabilities and equity
|
|
$ |
1,200,000 |
|
Rice RX
LLC
In
December 2007 we formed RICE Rx LLC (“RRX”), a Delaware LLC, with Herbal Science
Singapore PTe. Ltd. (“HS”), a Singapore corporation. We formed this LLC with HS
to obtain and commercialize certain patentable pharmaceutical license rights
from HS. NutraCea, Inc. and HS each have a 50% interest in RRX.
Commencing
in July 2008, if and to the extent the members determine that capital
contributions are necessary, each member agrees to contribute capital of up to
$150,000.
In
conjunction with the formation of RRX, NutraCea, Inc. 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 Bank of America prime rate of
interest and due within one year.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note 10 — Acquisitions and Joint Ventures -
(continued)
Our
investment in RRX is accounted for under the equity method of accounting. As of
December 31, 2007 no capital contributions had been made, the LLC had no
operations, expenses or income.
RiceX
In
November, 2005, NutraCea merged with RiceX. See Note 15 to the Consolidated
Financial Statements for a full discussion of the merger.
Note 11 — 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 for
sales to major customers. We perform credit evaluations on our customers’
financial condition and generally do not require collateral on accounts
receivable.
For the
twelve months ended December 31, 2007, six customers accounted for a total of
51% of sales: 15%, 14%, 11%, 5%, 3% and 3% respectively. No other customer was
responsible for more than 3% of total sales. At December 31, 2007, two of those
customers accounted for 65% of total accounts receivable: 34%, and 31%,
respectively. No other customer accounted for more than 3% of the total
outstanding accounts receivable.
For the
twelve months ended December 31, 2006, one customer accounted for a total of 48%
of sales. At December 31, 2006, accounts receivable due from this customer was
49% of the total outstanding accounts receivable.
Accounts
receivable:
We
maintain an allowance for doubtful accounts on our trade receivables based upon
expected collection of all accounts receivable. A summary of the activity in the
allowance for doubtful accounts for the three years ended December 31, 2007 is
summarized in the following table:
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Balance,
beginning of period
|
|
$ |
20,000 |
|
|
$ |
20,000 |
|
|
$ |
20,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for allowance for doubtful accounts charged to
operations
|
|
|
2,979,000 |
|
|
|
9,000 |
|
|
|
- |
|
|
Losses
charge against allowance
|
|
|
|
|
|
|
(9,000
|
) |
|
|
|
|
|
Recoveries
of accounts previously allowed for
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of period
|
|
$ |
2,999,000 |
|
|
$ |
20,000 |
|
|
$ |
20,000 |
|
During
the twelve months ended December 31, 2007, 2006 and 2005 we recorded an
allowance for doubtful accounts of $2,979,000, $0 and $0, respectively. The 2007
allowance consisted of provisions for doubtful accounts receivable of $1,601,000
and $1,378,000 for amounts due from two customers.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
11 — Concentration of Credit Risk- (continued)
Notes
receivable:
We
maintain an allowance for doubtful accounts on our notes receivables based upon
expected collection of individual notes receivable. A summary of the activity in
the allowance for doubtful accounts for the twelve ended December 31, 2007,
2006, and 2005 follows:
|
|
|
December 31,
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Balance,
beginning of period
|
|
$ |
- |
|
|
|
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for allowance for doubtful notes receivable charged to
operations
|
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
Losses
charged against allowance
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Recoveries
of accounts previously allowed for
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
end of period
|
|
$ |
250,000 |
|
|
$ |
- |
|
|
$ |
- |
|
During
the twelve months ended December 31, 2007, 2006 and 2005, we recorded an
allowance for doubtful notes receivable of $250,000, $0 and $0,
respectively.
Bad
debt expense:
Our bad
debt expense for the twelve months ended December 31, 2007, 2006, and 2005,
including the provisions for doubtful accounts receivable and doubtful notes
receivable was $3,229,000, $9,000 and $0 respectively. Additionally, we wrote
off $4,000 of accounts receivable we deemed to be un-collectible.
Note
12 — Notes Payable
In October 2007, we
executed a promissory note with the lessor of our new West Sacramento warehouse
for $105,000 at 8% due over four years in payments of $2,572 per month for the
build-out of tenant improvements. At December 31, 2007 the short-term portion of
this note was approximately $23,000 and the remaining long-term portion was
approximately $77,000. Future principle payments for the next four years are:
2008, $26,000; 2009, $26,000; 2010, $26,000; 2012, $22,000.
Note
13 — Income Taxes
Tax
expense consisting of minimum franchise and capital taxes for the years ended
December 31, 2007, 2006 and 2005 was of $20,000, $5,000 and $2,000,
respectively.
Deferred
tax assets (liabilities) are comprised of the following at December
31:
|
|
|
2007
|
|
|
2006
|
|
|
Net
operating loss carry forward
|
|
$ |
19,740,000 |
|
|
$ |
14,860,000 |
|
|
Allowance
for doubtful accounts
|
|
|
1,195,000 |
|
|
|
- |
|
|
Marketable
securities
|
|
|
- |
|
|
|
801,000 |
|
|
Stock
options and warrants
|
|
|
40,000 |
|
|
|
- |
|
|
Other
|
|
|
175,000 |
|
|
|
39,000 |
|
|
Intangible
assets
|
|
|
(622,000
|
) |
|
|
(275,000
|
) |
|
Property
and equipment
|
|
|
(1,343,000
|
) |
|
|
(1,341,000
|
) |
|
Capitalized
expenses
|
|
|
128,000 |
|
|
|
- |
|
|
Merger
expenses
|
|
|
70,000 |
|
|
|
- |
|
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
13 — Income Taxes - (continued)
|
|
|
|
19,383,000 |
|
|
|
14,084,000 |
|
|
Less
valuation allowance
|
|
|
(19,383,000
|
) |
|
|
(14,084,000
|
) |
|
|
|
$ |
— |
|
|
$ |
— |
|
Deferred
taxes arise from temporary differences in the recognition of certain expenses
for tax and financial reporting purposes. At December 31, 2007 and 2006,
management determined that realization of these benefits is not assured and has
provided a valuation allowance for the entire amount of such benefits. At
December 31, 2007, net operating loss carry-forwards were approximately
$51,915,956 for federal tax purposes that expire at various dates from 2011
through 2021 and $35,828,480 for state tax purposes that expire in 2010 through
2016.
Utilization
of net operating loss carry-forwards 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-forwards
before utilization.
The
Company is 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. We have not been audited by any jurisdiction since our
inception in 1998. We are open for audit by the U.S. Internal Revenue Service
and U.S. state tax jurisdictions from our inception in 2003 to
2006.
The
provision for income taxes differs from the amount computed by applying the U.S.
federal statutory tax rate (34%) to income taxes as follows for the year ended
December 31:
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Income
tax (benefit) expense at federal statutory rate
|
|
$ |
4,043,000 |
|
|
$ |
541,000 |
|
|
$ |
(1,316,000 |
) |
|
Increase
(decrease) resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State
franchise tax expense (benefit), net of federal tax effect
|
|
|
1,403,000 |
|
|
|
92,000 |
|
|
|
(224,000
|
) |
|
Change
in valuation allowance
|
|
|
5,299,000 |
|
|
|
(608,000
|
) |
|
|
(3,170,000
|
) |
|
Goodwill
impairment
|
|
|
442,000 |
|
|
|
- |
|
|
|
- |
|
|
True
up to 2006 tax return
|
|
|
(102,000
|
) |
|
|
- |
|
|
|
- |
|
|
Other,
net
|
|
|
(2,999,000
|
) |
|
|
(25,000
|
) |
|
|
- |
|
|
RiceX
acquisition
|
|
|
- |
|
|
|
- |
|
|
|
4,710,000 |
|
|
|
|
$ |
0 |
|
|
$ |
0 |
|
|
$ |
0 |
|
Note
14 — Commitments and Contingencies
Employment
contracts
Minimum
future payments for key employees as of December 31 are as follows:
|
2008
|
|
$ |
978,000 |
|
|
2009
|
|
|
1,032,000 |
|
|
Total
|
|
$ |
2,010,000 |
|
Generally,
if we terminate these agreements without cause or the employee resigns with good
reason, as defined, we will pay the employees’ salaries, bonuses, and benefits
payable for the remainder of the term of the agreements.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
14 — Commitments and Contingencies - (continued)
Leases
We lease
our office and laboratory space in Phoenix, AZ under a lease agreement with
Transwestern that expires in March 2016 and requires monthly payments that range
from $58,831 to $142,135 during the lease term. We also lease warehouse space in
West Sacramento, California, which expires in October 2011 for $11,000 per
month, and warehouse space in Lake Charles, LA, for $3,500 per month through
2013. Additionally, we have a number of operating leases for small office space
in Burley, ID, and Freeport, TX, and office equipment at all of our
locations.
Future
minimum payments under these leases at December 31, 2007 were as
follows:
|
Year Ending December 31,
|
|
|
|
|
2008
|
|
$ |
1,289,000 |
|
|
2009
|
|
|
1,593,000 |
|
|
2010
|
|
|
1,622,000 |
|
|
2011
|
|
|
1,639,000 |
|
|
2012
|
|
|
1,581,000 |
|
|
2013
|
|
|
1,630,000 |
|
|
Total
|
|
$ |
9,354,000 |
|
Rent
expense was $1,079,000, $124,000 and $111,000 for the years ended December 31,
2007, 2006 and 2005, respectively.
Litigation
Faraday
Financial, Inc.
On July
16, 2002, the Company was summoned to answer a Complaint filed by Faraday
Financial, Inc. (“Faraday”) in District Court, County of Salt Lake, Utah (Case
No. 020906477). The Complaint alleges that the Company issued convertible
promissory notes totaling $450,000 and a promissory note totaling $50,000. On
December 13, 2001, Faraday entered into a settlement agreement with the Company,
whereby Faraday agreed to cancel the promissory notes in exchange for 735,730
shares of preferred stock. Faraday claims that the settlement agreement required
that the Company effect a registration statement covering the preferred stock by
June 30, 2002, which the Company failed to do, and demands the Company
immediately forfeit to Faraday 735,730 shares of common stock owned by the Chief
Executive Officer of the Company. Faraday has filed its fourth claim for relief
for a judgment against the Company for $500,000, plus accrued, but unpaid
interest, attorneys’ fees and costs, and other such costs. A Settlement
Agreement was executed on December 10, 2003. In consideration for the mutual
releases, Faraday converted 735,730 preferred into 735,730 common shares and
$90,000 of accrued preferred dividends into 1,201,692 common shares. Within the
next year, if Faraday cannot realize $552,000 and approximately $10,000 in legal
expenses from the sale of the common shares, NutraCea will make up any
deficiency. If stock sale exceeds $562,000, Faraday is entitled to keep any
excess. Subsequent to December 31, 2003, the Company issued an additional
250,000 shares to Faraday. Concurrently, with the executed Settlement Agreement,
a joint stipulated motion to stay all proceedings was filed with the Court.
After all the above conditions are met, if Faraday has not lifted the stay
within 18 months of December 10, 2003, NutraCea shall deliver to Faraday an
executed stipulation for dismissal with prejudice of the Complaint and
Counterclaim. In 2005, we issued the final 97,000 shares, valued at $98,000, to
Faraday to settle in full the executed Settlement Agreement.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
14 — Commitments and Contingencies - (continued)
Langley
Park Investments
NutraCea
commenced a lawsuit on September 8, 2006 against Langley Park Investments, PLC,
a United Kingdom Corporation (“Langley”) in the United States District Court for
the Eastern District of California, Sacramento Division. The factual basis
underlying that case involved a private-placement transaction in which NutraCea
exchanged 7 million restricted shares of its common stock for 1,272,026 ordinary
shares of Langley common stock (the “Langley Shares”), half of which were
immediately saleable by NutraCea and half of which were placed in escrow subject
to certain conditions. After the commencement of the litigation, the parties
entered into a Pre-Settlement/Escrow Agreement, pursuant to which they agreed
that the proceeds from Langley’s sale of certain NutraCea shares, totaling $2.5
million, would be deposited into an escrow account. The matter has now been
settled. Pursuant to the settlement, NutraCea received $1.25 million in March
2007 from the $2.5 million held in escrow (Langley received the remainder), and
NutraCea retained all of the Langley Shares. During the third quarter of 2007
Langley ceased trading and began the process of liquidating the investments.
NutraCea has received cash of $127,000 from this liquidation.
In
addition to the matters discussed above, from time to time we are involved in
litigation incidental to the conduct of our business. 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.
Note
15 - The RiceX Acquisition
On
October 4, 2005, NutraCea merged with RiceX. The shareholders of RiceX received
28,272,064 shares of NutraCea common stock in exchange for 100% of the shares of
RiceX common stock, and NutraCea assumed the outstanding options and warrants to
purchase 11,810,496 shares of RiceX common stock.
On
October 4, 2005, certain investors purchased an aggregate of 7,850 shares of
Series B Convertible Preferred Stock at a price of $1,000 per share.
Additionally, the investors were issued warrants to purchase an aggregate of
7,850,000 shares of common stock at an exercise price of $0.70 per share. An
advisor for the financing received a customary fee based on aggregate gross
proceeds received from the investors and a warrant to purchase 1,099,000 shares
of common stock at an exercise price per share of $0.50 per share.
The
acquisition was accounted for using the purchase method of accounting. The
purchase price allocation included within these Consolidated Financial
Statements is based on a purchase price of $40,542,000 calculated as
follows:
|
NutraCea
shares issued
|
|
|
28,272,064 |
|
|
Price
per share (NutraCea closing price, October 4, 2005)
|
|
$ |
1.03 |
|
|
Aggregate
value of NutraCea common stock consideration
|
|
$ |
29,120,000 |
|
|
Value
of the RiceX warrants and options assumed
|
|
|
11,422,000 |
|
|
Total
consideration
|
|
$ |
40,542,000 |
|
|
|
|
|
|
|
|
Fair
value of identifiable net assets acquired:
|
|
|
|
|
|
Estimate
of fair value adjustment of property, plant and equipment
|
|
$ |
5,600,000 |
|
|
Acquired
other net tangibles assets
|
|
|
611,000 |
|
|
Estimate
of fair value adjustment of RiceX intellectual property
|
|
|
2,000,000 |
|
|
Goodwill
|
|
|
32,331,000 |
|
|
Total
|
|
$ |
40,542,000 |
|
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
15 — The RiceX Acquisition - (continued)
The
purchase price allocation is based on estimates and assumptions. This
information is presented for informational purposes only.
The
accompanying unaudited pro forma condensed combined consolidated statement of
operations for the year ended December 31, 2005 is presented for illustrative
purposes only and does not give effect to any cost savings, revenue synergies or
restructuring costs which may result from the integration of NutraCea and
RiceX’s operations. In addition, actual results may be different from the
projections set forth in this unaudited pro forma condensed combined
consolidated statement of operations.
Unaudited
Pro Forma Condensed Combined Consolidated
Statement
of Operations
Year
Ended December 31, 2005
|
|
|
HISTORICAL
|
|
|
PRO FORMA
|
|
|
Income Statement
|
|
NutraCea
|
|
|
RiceX
|
|
|
Adjustment
|
|
|
Combined
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
4,569,000 |
|
|
$ |
3,838,000 |
|
|
$ |
(325,000 |
(a) |
|
$ |
8,082,000 |
|
|
Total
Revenues
|
|
$ |
4,569,000 |
|
|
$ |
3,838,000 |
|
|
$ |
(325,000 |
) |
|
$ |
8,082,000 |
|
|
Cost
of Goods Sold
|
|
$ |
2,523,000 |
|
|
$ |
1,533,000 |
|
|
$ |
(325,000 |
(b) |
|
$ |
3,731,000 |
|
|
Gross
Profit
|
|
$ |
2,046,000 |
|
|
$ |
2,305,000 |
|
|
$ |
— |
|
|
$ |
4,351,000 |
|
|
Sales,
General and Administrative
|
|
$ |
2,853,019 |
|
|
$ |
5,085,000 |
|
|
$ |
(55,000 |
(c) |
|
$ |
7,883,019 |
|
|
Research
and Development
|
|
$ |
262,000 |
|
|
$ |
267,000 |
|
|
|
|
|
|
$ |
529,000 |
|
|
Stock
Option and Warrant Expense
|
|
$ |
1,511,000 |
|
|
$ |
— |
|
|
|
|
|
|
$ |
1,511,000 |
|
|
Investor
Relations
|
|
$ |
- |
|
|
$ |
41,000 |
|
|
|
|
|
|
$ |
41,000 |
|
|
Professional
Fees
|
|
$ |
109,000 |
|
|
$ |
914,029 |
|
|
|
|
|
|
$ |
1,023,029 |
|
|
Loss
From Operations
|
|
$ |
(2,689,019 |
) |
|
$ |
(4,002,029 |
) |
|
$ |
(55,000 |
) |
|
$ |
(6,636,048 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Income
|
|
|
|
|
|
$ |
10,000 |
|
|
$ |
— |
|
|
$ |
10,000 |
|
|
Interest
Expense
|
|
$ |
(878,000 |
) |
|
|
|
|
|
|
|
|
|
$ |
(878,000 |
) |
|
Provision
for income tax
|
|
$ |
— |
|
|
$ |
(2,000 |
) |
|
|
|
|
|
$ |
(2,000 |
) |
|
Total
other income (expense)
|
|
$ |
(878,000 |
) |
|
$ |
8,000 |
|
|
$ |
— |
|
|
$ |
(870,000 |
) |
|
Net
Loss
|
|
$ |
(3,567,019 |
) |
|
$ |
(3,994,029 |
) |
|
$ |
55,000 |
|
|
$ |
(7,506,048 |
) |
|
Cumulative
Preferred dividends
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
Net
Loss Available to Common Shareholders
|
|
$ |
(3,567,019 |
) |
|
$ |
(3,994,029 |
) |
|
$ |
55,000 |
|
|
$ |
(7,506,048 |
) |
|
Basic
and Diluted Loss per share
|
|
$ |
(0.10 |
) |
|
|
|
|
|
|
(0.01
|
) |
|
$ |
(0.11 |
) |
|
Basic
Shares Outstanding
|
|
|
38,830,015 |
|
|
|
|
|
|
|
28,272,064 |
(d) |
|
|
67,102,079 |
|
|
(a)
|
Represents the elimination of
intercompany sales
|
|
(b)
|
Represents the elimination of
intercompany cost of sales
|
|
(c)
|
Represents the elimination of
intercompany rent expense of
sublease
|
|
(d)
|
Represents the net change in
total combined common stock
outstanding
|
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
16 — Preferred and Common Stock
Convertible,
Series B Preferred Stock
On
October 4, 2005, certain investors purchased an aggregate of 7,850 shares of
Series B Convertible Preferred Stock at a price of $1,000 per share pursuant to
the Purchase Agreement. The preferred shares can be converted to shares of
common stock at a conversion rate of 2,000 shares of common stock for each
preferred share issued in the transaction. Additionally, pursuant to the
Purchase Agreement, the investors were issued warrants to purchase an aggregate
of 7,850,000 shares of common stock at an exercise price of $0.70 per share,
valued at $7,690,000. The warrants have a term of five years and are immediately
exercisable.
An
advisor for the financing received a customary fee based on aggregate gross
proceeds received from the investors and a warrant to purchase 1,099,000 shares
of common stock at an exercise price per share of $0.50 per share valued at
$1,086,000.
During
the year ended December 31, 2006, fourteen Series B shareholders converted 7,380
shares of preferred stock into 14,760,000 shares of common stock. The preferred
shares converted at a conversion rate of 2,000 shares of common stock for each
preferred shares.
During
the year ended December 31, 2007, four Series B Shareholders converted 470
shares of preferred stock into 940,000 shares of our common stock. The preferred
shares converted at a conversion rate of 2,000 shares of common stock for each
preferred shares.
At
December 31, 2007 there is no outstanding Series B preferred stock.
Convertible,
Series C Preferred Stock
On May
12, 2006, we sold an aggregate of 17,560 shares of our Series C Convertible
Preferred Stock at a price of $1,000.00 per share in connection with a private
placement for aggregate gross proceeds of approximately $17,560,000 ($15,934,000
net after offering and related expenses). The Series C preferred shares can be
converted to shares of our common stock at a conversion rate of approximately
1,176 shares of common stock for each preferred share. Additionally, the
investors were issued warrants to purchase an aggregate of 10,329,412 shares of
our common stock at an exercise price of $1.35 per share. The warrants have a
term of five years and are immediately exercisable.
Halpern
Capital, Inc. acted as advisor and placement agent for the financing and
received a customary fee based on aggregate gross proceeds received from the
investors and a warrant to purchase 500,000 shares of NutraCea’s common stock at
an exercise price per share of $1.35. The warrants have a five-year term and are
immediately exercisable.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
16 — Preferred and Common Stock - (continued)
During
the year ended December 31, 2006, thirty Series C Shareholders converted 12,092
shares of preferred stock into 14,225,854 shares of common stock. The preferred
shares converted at a conversion rate of 1,176 shares of common stock for each
preferred shares.
During
the year ended December 31, 2007, seventeen Series C Shareholders converted
5,486 shares of preferred stock into 6,432,932 shares of our common stock. The
preferred shares converted at a conversion rate of 1,176 shares of common stock
for each preferred shares.
At
December 31, 2007 there is no outstanding Series C preferred stock.
Common
Stock
During
the year ended December 31, 2005, we:
Issued
1,904,805 shares of common stock to seven consultants for services rendered,
valued at $907,000;
Issued
70,000 shares of common stock to two officers and directors, valued at
$30,000;
Issued a
total of 30,000 shares of common stock to two consultants under the Patent
Incentive Plan, valued at $13,000; and
Issued
97,000 shares of common stock, valued at $98,000, to Faraday, which was the last
required payment to Faraday under the Settlement Agreement dated December 10,
2003.
During
the year ended December 31, 2006, we:
Issued
29,999 shares of common stock to a consultant for services rendered, valued at
$30,000;
Issued
1,742,723 shares of common stock for the cashless exercise of
options/warrants.
During
the year ended December 31, 2007 we:
Issued
20,000,000 shares of common stock to investors pursuant to the 2007 Preferred
Private Placement, valued at $63,600,000:
Issued
17,500 shares of common stock to a past board member for past board service,
valued at $56,350:
Issued
11,927,280 shares of common stock to 45 investors for the exercise of options or
warrants:
Issued
1,512,218 shares of common stock to five employees for the exercise of options
or warrants:
Cancelled
615,199 shares of common stock, returned to us by an investor in an exercise of
options transaction:
Cancelled
84,889 shares of common stock which were returned to us because the holder did
not complete certain performance criteria.
Note
17 — Stock Options and Warrants
Expense
for stock options and warrants issued to consultants is calculated at fair value
using the Black-Scholes valuation method.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
17 — Stock Options and Warrants - (continued)
On
October 31, 2003, the Board of Directors approved and adopted the 2003 Stock
Compensation Plan and authorized the President of the Company to execute a
registration statement under the Securities Act of 1933 for 10,000,000
shares of common stock. As of December 31, 2007, 2006, and 2005, 9,966,208
shares of common stock and no options have been granted under the 2003 Stock
Compensation Plan.
Our board
of directors adopted our 2005 Equity Incentive Plan. or 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
to us on such terms as are determined by the board of directors. A total of
10,000,000 shares of our common stock are reserved for issuance under the 2005
Plan. As of December 31, 2007, no shares were issued under the 2005 Plan.
210,000 shares underlie outstanding stock option granted pursuant to the 2005
Plan and 9,790,000 shares were available for future grants under the 2005 Plan.
Our board of directors administers the 2005 Plan, determines vesting schedules
on plan awards and may accelerate these schedules for award recipients. The 2005
Plan has a term of 10 years and stock options granted under the plan may not
have terms in excess of 10 years. All options will terminate in their entirety
to the extent not exercised on or prior to the date specified in the written
notice unless an agreement governing any change of control provides
otherwise.
The
expense, if any, of stock options issued to employees is recognized over the
shorter of the term of service or vesting period. The expense of stock options
issued to consultants or other third parties are recognized over the term of
service. In the event services are terminated early or no specific future
performance is required by the Company, the entire amount is
recognized.
During
the year ended December 31, 2005, we:
Assumed
11,810,496 options and warrants with exercise prices between $0.15 and $1.66 per
share relating to the acquisition of RiceX. The warrants expire at varying times
between 9 months and 10 years;
Issued
1,305,000 options and warrants to purchase common stock to ten consultants
valued at $349,000. The warrants expire from three-five years, and have exercise
prices between $0.30 and $1.275 per share;
Issued
1,099,000 warrants to purchase common stock, valued at $1,086,000, for
commissions to the underwriter relating to the private placement of Series B
preferred stock. The warrants have an exercise price of $0.50 and expire in five
years;
Issued
7,850,000 warrants to purchase common stock to 17 investors in conjunction with
the Series B preferred stock private placement, valued at $7,690,000,
exercisable for $0.70 and expiring in five years;
Issued
2,200,000 options to 3 employees, which are exercisable between $0.30 and $0.46
per share, expiring in ten years;
Exercised
531,000 options and warrants for common stock for cash in the amount of
$105,000; and,
Issued
66,666 shares of common stock in exchange for 100,000 options and warrants for a
cashless exercise.
During
the year ended December 31, 2006, we:
Issued
17,560 shares of our Series C Convertible Preferred Stock at a price of $1,000
per share in connection with a private placement for aggregate gross proceeds of
approximately $17,560,000 ($15,934,000 net, after offering and related
expenses).
Issued
10,329,411 warrants to purchase common stock to 33 investors in conjunction with
the series C preferred private placement, valued at $13,524,000, immediately
exercisable for $1.35 and expiring in five years;
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
17 — Stock Options and Warrants - (continued)
Issued
500,000 warrants to purchase common stock, valued at $655,000, for commissions
relating to private placement of series C preferred stock. The warrants are
immediately exercisable at $1.35 and expire in five years;
Issued a
total of 1,600,000 options to purchase common stock to 17 employees,
non-employee directors and a medical advisor to the board of directors, vesting
from immediately to 2 years, expiring in 3-10 years, with exercise prices of
$1.00 to $2.50 per share;
Issued a
total of 700,000 warrants to purchase common stock to 12 consultants, vesting
from immediately to performance contingencies, expiring in 3-4 years, with
exercise prices of $1.00 to $2.40 per share;
Canceled
and/or expired 869,150 options and warrants, including 626,030 RiceX
options.
Exercised
5,635,064 options and warrants for common stock for cash in the amount of
$5,784,000; and
Issued
1,842,723 shares of common stock in exchange for 2,520,000 options and warrants
for a cashless exercise:
Issued
297,108 shares of common stock in connection with our equine feed assets
purchase, valued at $350,000;
Issued
5,635,064 shares of common stock for the exercise of options and warrants for
cash in the amount of $5,784.000;
During
the year ended December 31, 2007 we:
Issued
10,000,000 warrants to purchase common stock to twenty-three investors in
conjunction with the February 2007 Preferred Private Placement. The warrants are
immediately exercisable, have an exercise price of $3.25 and expire in five
years.
Issued
1,200,000 warrants to purchase common stock, for commissions to the underwriter
relating to the February 2007 Preferred Private Placement. The warrants are
immediately exercisable, have an exercise price of $3.25 and expire in five
years.
Issued
210,000 options to purchase common stock to six Directors for yearly board
service: The options vest monthly over a twelve month period, have an exercise
price between $3.76 and $3.83, and expire in ten years.
Issued
1,039,000 options to purchase common stock to thirty-two employees, with vesting
terms of up to three years that have exercise prices between $1.02 and $4.04 per
share and expire ten years from the date of grant: One employee received 250,000
of these shares at an exercise price of $2.63 which expire in ten
years.
Issued
1,815,000 warrants to purchase common stock to five consultants, with exercise
prices between $2.38 and $5.25 per share, expiring from one to five
years:.
Issued to
thirty-nine investors a total of 10,754,598 shares of our common stock for the
exercises of options and warrants for cash in the amount of $8,952,161 and the
surrender of our common stock of 615,199 shares:.
Issued to
three employees 960,747 shares of our common stock for the exercises of 960,747
options or warrants and cash of $288,224:
Issued to
eight investors 1,172,682 shares of common stock in cashless exercises of
1,638,352 options or warrants:
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
17 — Stock Options and Warrants - (continued)
Issued to
three employees 551,471 shares of common stock in cashless exercises of 603,933
options or warrants:
Cancelled
or expired 3,401,112 options or warrants, including 1,000,000 owned by an
officer of the company which expired due to performance goals of the company not
being met.
The
Company determines fair value at grant date using the Black-Scholes option
pricing model that takes into account the stock price at the grant date, the
exercise price, and the expected life of the option, the volatility of the
underlying stock and the expected dividend yield and the risk-free interest rate
over the expected life of the option.
The
weighted average assumptions used in the pricing model are noted in the table
below. The expected term of options is derived using the simplified method,
which is based on the average period between vesting term and expiration term of
the options. The risk free rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect at the time of the
grant. Expected volatility is based on the historical volatility of the
Company’s stock over a period commensurate with the expected term of the
options. The Company believes that historical volatility is indicative of
expectations about its future volatility over the expected term of the
options.
For
options granted after January 1, 2006, and valued in accordance with FAS 123 ®,
the Company expenses the fair value of the option on a straight-line basis over
the vesting period for each separately vesting portion of the award. The Company
estimates forfeitures and only recognizes expense for those shares expected to
vest. Based upon historical evidence, the Company has determined that an
expected forfeitures rate ranging from 5% to 10%. Assumptions used in the
Black-Scholes model in accordance with FAS 123 ® for the years ended December
31, 2007 and 2006 and summarized in the table below.
In the
year ended December 31, 2005, the fair value of compensation expense relating to
non-employees stock option grants was estimated on the date of the grant in
accordance with FAS123, using the Black-Scholes option-pricing model and the
following weighted average assumptions:
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Weighted
average fair value of options granted
|
|
$ |
3.43 |
|
|
$ |
1.35 |
|
|
$ |
.54 |
|
|
Risk-free
interest rate (2005)
|
|
|
n/a |
|
|
|
n/a |
|
|
|
2.0
|
% |
|
Federal
reserve treasury rates (2007 and 2006)
|
|
|
3.67-5.06
|
% |
|
|
3.83-5.08
|
% |
|
|
n/a |
|
|
Expected
life (years)
|
|
|
6.2 |
|
|
|
2-5 |
|
|
|
2-10 |
|
|
Expected
volatility
|
|
|
67.9
- 80.5 |
% |
|
|
124-305
|
% |
|
|
112-166
|
% |
|
Expected
dividends
|
|
|
0 |
|
|
|
0 |
|
|
|
0 |
|
The
Black-Scholes option valuation model requires the input of highly subjective
assumptions, including the expected life of the stock-based award and stock
price volatility. The assumptions listed above represent management’s best
estimates, but these estimates involve inherent uncertainties and the
application of management judgment. As a result, if other assumptions had been
used, the Company’s recorded stock-based compensation expense could have been
materially different from that previously reported in pro-forma disclosures. In
addition, the Company is required to estimate the expected forfeiture rate and
only recognize expense for those shares expected to vest. If the Company’s
actual forfeiture rate is materially different from the estimate, the
share-based compensation expense could be materially different.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
17 — Stock Options and Warrants - (continued)
A summary
of option activity under our equity-based compensation plans as of December 31,
2007, and changes during the year then ended is presented below:
|
|
|
Number of Options/Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
(Years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
Outstanding
at January 1, 2007
|
|
|
42,488,556 |
|
|
$ |
0.76 |
|
|
|
4.86 |
|
|
$ |
79,111,000 |
|
|
Granted
|
|
|
14,334,000 |
|
|
$ |
3.43 |
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(13,957,629
|
) |
|
$ |
0.86 |
|
|
|
|
|
|
|
29,642,000 |
|
|
Forfeited/Expired
|
|
|
(1,400,242
|
) |
|
$ |
0.77 |
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
41,464,685 |
|
|
$ |
1.65 |
|
|
|
4.57 |
|
|
$ |
20,916,000 |
|
|
Exercisable
at December 31, 2007
|
|
|
39,481,749 |
|
|
$ |
1.55 |
|
|
|
4.36 |
|
|
$ |
20,859,000 |
|
The
weighted-average grant-date fair value of options granted during 2007 and 2006
was $3.43 and $1.35, respectively. The weighted-average grant-date fair value of
options calculated in accordance with FAS 123 granted during 2005 was
$0.54.
The total
intrinsic value of options exercised during the years ended December 31, 2007,
2006, and 2005 was $29,642,000, $6,329,380, and $575,364
respectively.
The total
fair value of options vested during the years ended December 21, 2007, 2006, and
2005 was $2,950,000, $733,000, and $479,000, respectively.
The
Company’s stock options and warrants outstanding, exercisable, exercised and
forfeited categorized as employees/directors and consultants/investors are as
follows:
|
|
|
Employee and Directors
|
|
|
Consultants and Investors
|
|
|
Stock option and warrant
transactions:
|
|
Weighted
Average
Exercise Price
|
|
|
Number of
shares
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number
of shares
|
|
|
Outstanding
balance January 1, 2005
|
|
$ |
0.34 |
|
|
|
8,289,700 |
|
|
$ |
0.85 |
|
|
|
6,095,156 |
|
|
Granted
|
|
$ |
0.31 |
|
|
|
2,200,000 |
|
|
$ |
0.67 |
|
|
|
10,554,000 |
|
|
Expired
or canceled
|
|
$ |
- |
|
|
|
- |
|
|
$ |
0.01 |
|
|
|
(135,004
|
) |
|
Exercised
|
|
$ |
- |
|
|
|
- |
|
|
$ |
0.12 |
|
|
|
(531,000
|
) |
|
Assumed
|
|
$ |
0.36 |
|
|
|
8,047,765 |
|
|
$ |
0.69 |
|
|
|
3,762,742 |
|
|
Outstanding
balance December 31, 2005
|
|
$ |
0.34 |
|
|
|
18,537,465 |
|
|
$ |
0.75 |
|
|
|
19,745,894 |
|
|
Exercisable
balance December 31, 2005
|
|
$ |
0.35 |
|
|
|
16,837,465 |
|
|
$ |
0.74 |
|
|
|
19,115,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
balance January 1, 2006
|
|
$ |
0.34 |
|
|
|
18,537,465 |
|
|
$ |
0.75 |
|
|
|
19,745,894 |
|
|
Granted
|
|
$ |
1.36 |
|
|
|
1,600,000 |
|
|
$ |
1.35 |
|
|
|
11,629,411 |
|
|
Expired
or canceled
|
|
$ |
0.32 |
|
|
|
(693,244
|
) |
|
$ |
0.54 |
|
|
|
(175,906
|
) |
|
Exercised
|
|
$ |
- |
|
|
|
- |
|
|
$ |
0.65 |
|
|
|
(8,155,064
|
) |
|
Outstanding
balance December 31, 2006
|
|
$ |
0.43 |
|
|
|
19,444,221 |
|
|
$ |
1.03 |
|
|
|
23,044,335 |
|
|
Exercisable
balance December 31, 2006
|
|
$ |
0.35 |
|
|
|
17,589,504 |
|
|
$ |
1.01 |
|
|
|
22,443,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
balance January 1, 2007
|
|
$ |
0.43 |
|
|
|
19,444,221 |
|
|
$ |
1.03 |
|
|
|
23,044,335 |
|
|
Granted
|
|
$ |
2.97 |
|
|
|
1,319,000 |
|
|
$ |
3.47 |
|
|
|
13,015,000 |
|
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
17 — Stock Options and Warrants - (continued)
|
Expired
or canceled
|
|
$ |
0.68 |
|
|
|
(1,160,302
|
) |
|
$ |
1.40 |
|
|
|
(239,940
|
) |
|
Exercised
|
|
$ |
0.36 |
|
|
|
(1,564,679
|
) |
|
$ |
1.06 |
|
|
|
(12,392,950
|
) |
|
Outstanding
balance December 31, 2007
|
|
$ |
0.67 |
|
|
|
18,038,240 |
|
|
$ |
2.38 |
|
|
|
23,426,445 |
|
|
Exercisable
balance December 31, 2007
|
|
$ |
0.55 |
|
|
|
16,628,752 |
|
|
$ |
2.28 |
|
|
|
22,852,997 |
|
Cash
received from warrant and stock options exercises for the years ended December
31, 2007, 2006, and 2005 was $9,241,000, $5,784,000, and $105,000,
respectively.
There is
no tax effect on the exercise of options in the statement of cash flows because
the Company has a full valuation allowance against its deferred income tax
assets.
Note
18 — Related Party Transactions
Year
ended December 31, 2007
In
November 2004, the Board of Directors resolved to purchase a new automobile
valued at $73,000 for use by Patricia McPeak, the former Chief Executive
Officer. Ms. McPeak waived a car allowance in exchange for use of the
automobile. In the fourth quarter of 2007, this automobile was given to Ms.
McPeak as part of her separation agreement. The company recorded a loss of
$29,000 on this transaction which is included in our consolidated statements of
operations.
In
November 2007, we reached an agreement with our former Chief Executive Officer,
Ms. NutraCea, and paid her $1,000,000 in severance. She in turn, surrendered all
rights to any previous patents issued during her tenure with RiceX and Nutracea.
She also granted us the right of first refusal for the benefit of future patent
filings for ten years.
In
February 2007, we issued to one non-employee director an option to purchase
35,000 shares. The option expires in ten years, has an exercise price of $3.76
per share and vests evenly over twelve months.
In
February 2007, we issued to one executive officer an option to purchase 250,000
shares. The option expires in ten years, has an exercise price of $2.63 per
share and vests evenly over a 36 months.
In May
2007, we issued to one non-employee director an option to purchase 35,000 shares
of our common stock. The options expire in ten years, have an exercise price of
$3.76 per share and vest evenly over twelve months.
In June
2007, we issued to each of our five non-employee directors options to purchase
35,000 shares of our common stock (totaling 175,000 options). The options expire
in ten years, have an exercise price of $3.83 per share and vest evenly over
twelve months.
Year ended December 31,
2006:
In
February 2006, we issued a warrant to purchase 100,000 shares of common stock to
a member of our Board of Directors for services rendered outside of his
directors duties. The warrant expires in five years, has an exercise price of
$1.00 per share, and was charged to stock, stock option and warrant expense in
the amount of $100,000.
In May
2006, we issued to each of our six non-employee directors an option to purchase
35,000 shares (totaling 210,000 option shares). The options expire in ten years,
have an exercise price of $1.14 per share and vest evenly over twelve
months
In May
2006, we issued 381,996 shares of common stock to a customer in an asset
purchase agreement related to their trademarks associated with the equine market
valued at $450,000.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
18 — Related Party Transactions - (continued)
In
December 2006, we issued 75,000 warrant shares of common stock to a member of
our limited liability company, contingent upon certain performance. A portion of
these warrants were deemed to be probable of vesting. The value of the 25,000
probable vesting warrant shares was $16,000 and had an exercise price of $2.38.
They will expire in December of 2009.
Year
ended December 31, 2005:
In the
first quarter of 2005, 70,000 shares of common stock, valued at $30,000, were
issued to two directors.
Outside
compensation of former Chief Executive Officer:
In April
2005, a direct response marketing company agreed to compensate our former Chief
Executive Officer, Patricia McPeak, whereby she will receive a royalty per unit
sold resulting from infomercials that will demonstrate specific products of
ours. Pursuant to this agreement, Ms. McPeak should have earned approximately
$311,000, $1,176,000 and $270,000 in 2007, 2006 and 2005, respectively from this
direct marketing company. The agreement provides for royalty payments to be made
for two years by the direct response marketing company and is not an obligation
of ours.
Vital Living,
Inc.:
In
conjunction with our purchase of certain securities of VLI (Note 10), we
consolidated VLI financial results for the period April 20, 2007 to December 31,
2007 into our financial results for the year ending December 31, 2007. Also
during the three months ended June 30, 2007, we entered into a business
relationship with a new customer that is also the principle customer of VLI. The
CEO of VLI is also a principal partner with this new customer. During the twelve
months ended December 31, 2007, we recorded sales of $2,461,000 to this new
customer. At December 31, 2007 we had $1,465,000 due from this customer included
in our accounts receivable of $5,345,000. The entire amount is past due at
December 31, 2007 and we have recorded an allowance for doubtful accounts of
$1,378,000 against this receivable. We have agreed upon a payment plan and
received $65,000 in payments in February 2008 and continued to make sales on a
cash basis. We believe the receivable is ultimately collectable.
Also
included in the summary financial statements of VLI, which is included in our
consolidated balance sheet at December 31, 2007, is $557,000 of accounts
receivable, which includes $539,000 due from VLI’s principle customer. During
the year ended December 31, 2007 the CEO of VLI has advanced VLI $407,000 of
short-term, non-interest bearing loans which are included in the accrued
liabilities of VLI on our consolidated balance sheet. Because the CEO of VLI is
also a principle member of VLI’s major customer, and because under the terms of
the pending asset purchase agreement we will not be acquiring the receivables or
any liabilities of VLI, we have offset the $407,000 due to the officer of VLI
against the $539,000 of receivables due from the customer on our financial
statements.
Note
19 — 401(K) Profit Sharing Plan
At the
time of the merger with RiceX, we adopted RiceX’s 401(k) profit sharing plan
(the “Plan”) for the exclusive benefit of eligible employees and their
beneficiaries. Substantially all employees are eligible to participate in the
Plan. Safe harbor contributions to the Plan are a mandatory 3% of the qualified
employees’ gross salary, whether or not the employee is a participant in the
Plan. Also, in addition to any safe harbor contributions, the Company may
contribute to the Plan matching contributions, discretionary profit sharing
contributions and Qualified Non-Elective Contributions. For 2007, 2006 and 2005,
we made matching contributions of $113,000, $69,000, and $41,000,
respectively.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
20 — Subsequent Events
Medan,
LLC.
On
January 24, 2008, NutraCea, through a newly formed wholly-owned subsidiary,
Medan, LLC, a Delaware limited liability company (“Medan”), entered into a Stock
Purchase Agreement (“Purchase Agreement”) with Fortune Finance Overseas Ltd., a
British Virgin Islands company (“FFOL”). Pursuant to the Purchase Agreement,
Medan will purchase 9,700 shares of capital stock of PT Panganmas Inti
Nusantara, an Indonesian Company (“PIN”), from FFOL for $8,175,000 upon approval
of PIN’s Foreign Investment Application. In addition, following the closing,
Medan will purchase an additional 3,050 shares from PIN for $2,500,000. Upon
completion of these transactions, Medan will own 51% of the capital stock of PIN
and FFOL will own 49%. Medan and FFOL will enter a voting agreement where each
party will vote all of their shares in a manner that PIN’s Board of Directors
and Board of Commissioners shall consist of an even number of persons designated
by each party. NutraCea entered into this Purchase Agreement to construct and
operate a full scale, wheat bran stabilization facility in the Republic of
Indonesia.
Concurrently
with the Purchase Agreement, NutraCea entered into a Wheat Bran Stabilization
Equipment Lease (“Lease”) with PIN. Pursuant to the Lease, NutraCea will lease
to PIN wheat stabilization equipment developed by NutraCea for use at PIN’s
facility. The term of the lease will be for 15 years with an automatic extension
of 5 years if the facility is fully operational and the equipment is still being
used in the operations of the facility. The lease amount payable by PIN will be
the actual cost incurred for manufacturing and installing the equipment at the
facility.
In a
separate transaction, on January 24, 2008, NutraCea and Pacific Advisors
Holdings Limited (“PAHL”), a British Virgin Islands company and affiliate of
FFOL, amended certain terms of the Operating Agreement (“Amendment”) of Grain
Enhancement, LLC, a Delaware limited liability company (“Joint Entity”). The
Joint Entity was formed on June 22, 2007 by NutraCea and PAHL to construct and
operate multiple rice bran stabilization facilities in the Republic of
Indonesia, Vietnam, Malaysia, Singapore and Thailand and was granted an
exclusive license and distribution rights for the sale of NutraCea’s stabilized
rice bran (“SRB”) and other products throughout these countries, and Australia
and New Zealand (the “Territory”). Pursuant to the Amendment, the timing of
mandatory capital contributions of the members was changed from an agreed upon
schedule to a determination by the Finance Committee on an as needed basis. In
addition, PAHL will no longer receive a monthly management fee.
Concurrently
with the Amendment, NutraCea and PAHL amended the terms of the License and
Distribution Agreement dated June 22, 2007. In that agreement, NutraCea granted
PAHL a perpetual and exclusive license and distribution rights for the
production and sale of SRB and SRB derivative products in the Territory (the
“License”). PAHL agreed not to distribute or market any items competitive with
NutraCea’s SRB and SRB derivative products outside of the Territory. In exchange
for the License, PAHL agreed to pay NutraCea a fee in the amount of $5,000,000
(U.S.) on five year payment terms, together with interest. The parties have
agreed to amend the payment terms. PAHL now agrees to pay NutraCea the license
fee of $5,000,000 by March 31, 2008. In consideration for this payment, NutraCea
agrees to waive all accrued interest owed by PAHL ($118,000 at December 31,
2007).
Also
concurrently with the Amendment, NutraCea has agreed to issue to PAHL a new
warrant for the purchase of 1,000,000 shares of NutraCea common stock at an
exercise price of $2.50 per share (“Warrant”), and PAHL has agreed to cancel the
existing warrant currently held by PAHL for the purchase of 1,500,000 shares at
an exercise price of $5.25. NutraCea has agreed to register the shares
underlying the Warrant subject to certain cutback restrictions set forth in the
Warrant. The Warrant shall vest and become exercisable in full upon the Joint
Entity depending on certain conditions agreed to upon the parties.
Irgovel:
On
January 31, 2008, NutraCea entered into a Quotas Purchase and Sale Agreement
(“Purchase Agreement”) with the Quota Holders (“Sellers”) of Irgovel - Industria
Riograndens De Oleos Vegetais Ltda., a limited liability company organized under
the laws of the Federative Republic of Brazil (“Irgovel”). Irgovel, located in
Brazil, owns and operates a rice bran oil processing facility in South
America.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
20 — Subsequent events - (continued)
In
February 2008, we completed the purchase of Irgovel paying $14,080,000 for 100%
of the company. Additionally, we agreed to fund as necessary up to $5,300,000 to
pay deferred taxes due to the Brazilian government. These deferred taxes are
payable over a period of 10 years.
Purchase
commitments:
In
January 2008 we signed a letter of intent to purchase a building in Phoenix for
our planned SRB stage II processing facility for $8,250,000. We expect to close
escrow in March 2008. Additionally, we estimate our costs to equip the facility
for the production of our products to be $5,000,000. We plan for the facility to
be operational in the fourth quarter of 2008.
In March
2008, we entered an agreement to purchase a customer list from a supplier for
$3,000,000. We expect to finalize that purchase in the second quarter of
2008.
Options
and Warrants Issued
In
January 2008, we issued options to purchase 1,650,000 shares to five (5)
Executive Officers of the Company, with an exercise price of $1.49, vesting
contingent upon the certain performances of the company, all expire in
five.
In
January 2008, we issued options to purchase 600,000 shares to six outside
Directors with an exercise price of $1.49 per share, vesting monthly over a
twelve month period, all expire in five years.
In
January 2008, we issued warrants to purchase 100,000 shares to one consultant
with an exercise price of $1.21 per share, vesting over a five year period, and
expire in eight years.
In
January 2008, we issued warrants to purchase 1,000,000 shares to one consultant
with an exercise price of $2.50 per share, vesting is contingent upon certain
performances, expire in three years.
In
February 2008, we issued a warrant to purchase 100,000 shares to one consultant
with an exercise price of $1.45 per share, vesting over a six month period once
certain performance contingencies are met, and expire in three
years.
In
January and February 2008, we issued options to purchase 135,000 shares to four
employees with exercise prices from $1.26 to $1.47 per share, vesting over three
years, and expire in five years.,
Options
and Warrants Exercised
In
January and February 2008, we issued 1,096,316 shares of common stock to eleven
investors in an exercise of options or warrants for cash in the amount of
$623,821.
In
January, we issued 165,080 shares of common stock to two investors in cashless
exercises of 231,322 options or warrants.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
21 — Quarterly Financial Data (Unaudited)
|
|
|
2007
|
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
Revenues
|
|
$ |
1,997,000 |
|
|
$ |
12,996,000 |
|
|
$ |
1,520,000 |
|
|
$ |
5,648,000 |
|
|
Operating
(loss) income
|
|
|
(2,009,000
|
) |
|
|
1,770,000 |
|
|
|
(5,593,000
|
) |
|
|
(9,298,000
|
) |
|
Net
(loss) income
|
|
|
(247,000
|
) |
|
|
2,002,000 |
|
|
|
(4,784,000
|
) |
|
|
(8,882,000
|
) |
|
Basic
net income (loss) per common share
|
|
|
0.00 |
|
|
|
0.01 |
|
|
|
(0.03
|
) |
|
|
(0.07
|
) |
|
Diluted
net income (loss) per common share
|
|
|
0.00 |
|
|
|
0.01 |
|
|
|
(0.03
|
) |
|
|
(0.07
|
) |
|
|
|
2006
|
|
|
|
|
First Quarter
|
|
|
Second Quarter
|
|
|
Third Quarter
|
|
|
Fourth Quarter
|
|
|
Revenues
|
|
$ |
3,782,000 |
|
|
$ |
4,166,000 |
|
|
$ |
4,946,000 |
|
|
$ |
5,196,000 |
|
|
Operating
(loss) income
|
|
|
(254,000
|
) |
|
|
290,000 |
|
|
|
460,000 |
|
|
|
556,000 |
|
|
Net
(loss) income
|
|
|
(233,000
|
) |
|
|
399,000 |
|
|
|
641,000 |
|
|
|
778,000 |
|
|
Basic
net income (loss) per common share
|
|
|
0.00 |
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.00 |
|
|
Diluted
net income (loss) per common share
|
|
|
0.00 |
|
|
|
0.01 |
|
|
|
0.01 |
|
|
|
0.00 |
|
Note
22 — Geographic Operations
For
purposes of geographic reporting, revenues are attributed to the geographic
location of the sales organization. The following table presents net revenues
and long-lived assets by geographic area:
|
Fiscal Year Ended December
31,
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Net
revenue from customers:
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
21,209,000 |
|
|
$ |
17,748,000 |
|
|
$ |
5,564,000 |
|
|
International
|
|
|
952,000 |
|
|
|
342,000 |
|
|
|
- |
|
|
Total
revenues
|
|
$ |
22,161,000 |
|
|
$ |
18,090,000 |
|
|
$ |
5,564,000 |
|
|
Property,
plant and equipment, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
$ |
19,328,000 |
|
|
$ |
8,961,000 |
|
|
$ |
5,493,000 |
|
|
Other
countries
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
Total
property, plant and equipment
|
|
$ |
19,328,000 |
|
|
$ |
8,961,000 |
|
|
$ |
5,493,000 |
|
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
|
Item
13:
|
Other Expenses of
Issuance and Distributions.
|
The
estimated expenses of this offering in connection with the issuance and
distribution of the securities being registered, are as follows:
|
Registration
Fee
|
|
$ |
3,000 |
|
|
Blue
Sky Fees
|
|
|
2,500 |
|
|
Printing
|
|
|
2,000 |
|
|
Legal
Fees and Expenses
|
|
|
40,000 |
|
|
Accounting
Fees and Expenses
|
|
|
25,000 |
|
|
Miscellaneous
|
|
|
4,000 |
|
|
|
|
|
|
|
|
Total
|
|
$ |
76,500 |
|
|
Item 14:
|
Indemnification
of Directors and Officers.
|
The
California General Corporation Law and our Restated Articles of Incorporation
and Bylaws provide that we may indemnify our officers, directors, employees or
agents or former officers, directors, employees or agents, against expenses
actually and necessarily incurred by them, in connection with the defense of any
legal proceeding or threatened legal proceeding, except as to matters in which
such persons shall be determined to not have acted in good faith and in our best
interest. This means that if indemnity is determined by the Board of Directors
to be appropriate in any case we and not the individual might bear the cost of
any suit that is filed by a shareholder against the individual officer, director
or employee unless the court determines that the individual acted in bad faith.
These provisions are sufficiently broad to permit the indemnification of such
persons in certain circumstances against liabilities arising under the
Securities Act.
Insofar
as indemnification for liabilities arising under the Securities Act may be
permitted to our directors and officers, and to persons controlling our company
pursuant to the foregoing provisions, we have been informed that in the opinion
of the Securities and Exchange Commission, such indemnification is against
public policy as expressed in the Securities Act and is therefore
unenforceable.
|
Item
15:
|
Recent Sales of
Unregistered Securities.
|
The
following issuances of stock, warrants, and other equity securities were made
without any public solicitation to a limited number of investors or related
individuals or entities in separately negotiated transactions. Each investor
represented to us that the securities were being acquired for investment
purposes only and not with an intention to resell or distribute such securities.
Each of the individuals or entities had access to information about our business
and financial condition and was deemed capable of protecting their own
interests. The stock, warrants and other securities were issued pursuant to the
private placement exemption provided by Section 4(2) or Section 4(6) of the
Securities Act of 1933. These are deemed to be “restricted securities” as
defined in Rule 144 under the 1933 Act and the warrant certificates and the
stock certificates bear a legend limiting the resale thereof.
|
(a)
|
During
the year ended December 31, 2005,
we:
|
|
|
·
|
issued
70,000 shares of common stock to two officers and directors, valued at
$30,100;
|
|
|
·
|
issued
a total of 30,000 shares of common stock to two consultants under the
Patent Incentive Plan, valued at
$12,600;
|
|
|
·
|
issued
97,000 shares of common stock, valued at $97,655, to Faraday, which was
the last required payment to Faraday under the Settlement Agreement dated
December 10, 2003; and
|
|
|
·
|
issued
33,000 shares of common stock to three consultants, valued at
$21,800.
|
|
(b)
|
During
2005, we issued options and warrants to purchase an aggregate of 700,000
shares of our common stock to seven consultants, valued at
$301,598.
|
|
(c)
|
During
2005, we issued options to purchase an aggregate of 2,200,000 shares of
our common stock to three employees, valued at $130,000 and exercisable at
between $0.30 and $0.46 per share. These options expire in ten
years.
|
|
(d)
|
During
the quarter ended June 30, 2005, NutraCea issued 29,786 shares of its
common stock valued at $15,000 to a web design consultant in respect of
unpaid fees.
|
|
(e)
|
During
the quarter ended June 30, 2005, NutraCea issued 1,222,222 shares of its
common stock to repurchase technology and marketing rights valued at
$550,000.
|
|
(f)
|
During
the quarter ended June 30, 2005, NutraCea issued 359,183 shares of common
stock to a consulting company for patent and license analysis. One half of
the shares vested upon signing of the agreement while the balance will
vest upon certain milestones being achieved. The vested shares are valued
at $110,000.
|
|
(g)
|
During
the quarter ended June 30, 2005, NutraCea issued options to purchase
360,000 shares of its common stock to a technology firm for assistance in
developing an internet marketing system for NutraCea. The options have an
exercise price of $0.60 per share and became exercisable over 21 months.
The option was valued at $118,165 and expires in five years. The contract
was terminated on August 31, 2005 with 105,000 option shares
vested.
|
|
(h)
|
On
August 24, 2005, NutraCea entered into a Private Label Supply Agreement
and Strategic Alliance (“Supply Agreement”). In connection with the Supply
Agreement and in return for an agreement to purchase a minimum of $500,000
in NutraCea products, NutraCea issued to ITV Global, Inc. an option to
acquire up to 250,000 shares of the Company’s common
stock.
|
|
(i)
|
On
October 4, 2005, NutraCea completed a private placement of its securities
to certain investors for aggregate gross proceeds of approximately
$7,850,000. NutraCea issued an aggregate of 7,850 shares of Series B
Convertible Preferred Stock at a price of $1,000 per share, which may be
converted to shares of NutraCea common stock at a conversion rate of 2,000
shares of commons stock for each Preferred Share. Additionally, NutraCea
issued warrants to purchase an aggregate of 7,850,000 share of NutraCea
common stock at an exercise price of $0.70 per share. The placement agent
for the transaction, Halpern Capital, Inc., was paid a commission
consisting of $549,500 and warrants to purchases up to an aggregate of
1,099,000 shares of NutraCea common stock at an exercise price of $0.50
per share.
|
|
(j)
|
In
January and February 2006, we issued options to purchase and aggregate of
410,000 shares of our common stock to four consultants and one director,
valued at $168,394.
|
|
(k)
|
In
February 2006, we issued options to purchase an aggregate of 530,000
shares of our common stock to two employees valued at
$10,000.
|
|
(l)
|
On
May 12, 2006, NutraCea completed a private placement of its securities to
certain investors for aggregate gross proceeds of approximately
$17,560,000. NutraCea issued an aggregate of 17,560 shares of Series C
Convertible Preferred Stock at a price of $1,000 per share, which may be
converted to shares of NutraCea common stock at a conversion rate of
approximately 1,176 shares of commons stock for each Preferred Share.
Additionally, NutraCea issued warrants to purchase an aggregate of
10,329,412 share of NutraCea common stock at an exercise price of $1.35
per share. The placement agent for the transaction, Halpern Capital, Inc.,
was paid a commission consisting of $1.35 and warrants to purchases up to
an aggregate of 500,000 shares of NutraCea common stock at an exercise
price of $1.35 per share.
|
|
(m)
|
In
May 2006, NutraCea entered into a Supply Agreement and Asset Purchase
Agreement (collectively, the “Agreements”) with Natural Glo Investors,
L.P. In connection with the Agreement, NutraCea issued to certain
affiliates of Natural Glo Investors, L.P. 369,761 shares, some of which
are subject to forfeiture.
|
|
(n)
|
During
the quarter ended June 30, 2006, NutraCea issued to a consultant a warrant
to purchase 25,000 shares of common stock for consulting services. The
warrant has a per share exercise price of $1.35 and a term of three
years.
|
|
(o)
|
In
May 2006, NutraCea issued options to purchase 25,000 shares to each of six
non-employee directors (totaling 210,000 option shares). Each of these
options expire in 10 years, has an exercise price of $1.14 per share and
vests over 12 months.
|
|
(p)
|
During
the quarter ended September 30, 2006, NutraCea issued 381,996 shares of
common stock in connection with its acquisition of the equine feed
supplement business.
|
|
(q)
|
During
the quarter ended September 30, 2006, NutraCea issued to a consultant a
warrant to purchase 50,000 shares of common stock. The warrant vests over
12 months and has a per share exercise price of $1.20 and a term of three
years.
|
|
(r)
|
During
the quarter ended September 30, 2006, NutraCea issued to one employee an
option to purchase 50,000 shares of common stock, which starts to vest 90
days after the date of employment over a two year period. The option
expires 10 years from the date of grant and has a per share exercise price
of $1.20.
|
|
(s)
|
During
the quarter ended December 31, 2006, NutraCea issued to a consultant a
warrant to purchase 25,000 shares of common stock. The warrant vests over
5 months and has a per share exercise price of $2.30 and a term of three
years.
|
|
(t)
|
During
the quarter ended December 31, 2006, NutraCea issued to three entities
incentive and performance warrants to purchase 275,000 shares of common
stock. The shares will vest at various intervals when certain benchmarks
are achieved. The warrants expire three years from the date of grant and
have a per share exercise price ranging from $2.31 to
$2.38.
|
|
(u)
|
During
the quarter ended December 31, 2006, NutraCea issued to six employee
options to purchase an aggregate 370,000 shares of common stock, which
start to vest 90 days after their employment dates over a two year period.
The options expire 10 years from the date of grant and have a per share
exercise price ranging from $1.39 to
$2.38.
|
|
(v)
|
During
the quarter ended December 31, 2006, NutraCea issued to a medical advisor
to the board of directors an option to purchase 240,000 shares of common
stock. The shares will vest monthly over a 12 month period and have a per
share exercise price of $1.63 and a term of three
years.
|
|
(w)
|
During
the quarter ended March 31, 2007:
|
|
|
·
|
We
issued 17,500 shares of our common stock valued at $54,775 to a former
member of our board of directors as payment for past services on our board
of directors;
|
|
|
·
|
We
issued to eleven (11) employees options to purchase a total of 635,000
shares of common stock with vesting periods ranging from immediately to
three years. The options expire in ten years and have exercise prices per
share ranging from $2.45 to $3.39;
and
|
|
|
·
|
We
issued to three (3) consultants three warrants to purchase a total of
290,000 shares of common stock, with vesting periods ranging from 3 months
to two years. These warrants expire after three to five years and have
exercise prices per share ranging from $2.38 to
$3.03.
|
|
(x)
|
In
addition, in February 2007 we issued common stock and warrants to
twenty-three (23) investors in a private placement transaction for
aggregate gross proceeds of approximately $50,000,000. We issued an
aggregate of 20,000,000 shares of common stock at a price of $2.50 per
share and warrants to purchase an aggregate of 10,000,000 shares of our
common stock at an exercise price of $3.25 per shares. The placement agent
for the private placement also received a warrant to purchase 1,200,000
shares of common stock at an exercise price per share of $3.25. Each of
the warrants issued in the transaction has a term of five
years.
|
|
(y)
|
During
the quarter ended June 30, 2007:
|
|
|
·
|
we
issued to thirteen (13) employees options to purchase a total of 276,000
shares of common stock with vesting periods ranging from zero to three
years. The options expire in ten years and have exercise prices per share
ranging from $3.03 to $4.04.
|
|
|
·
|
we
issued to six (6) outside directors options to purchase a total of 210,000
shares of common stock that vest evenly over one year. The options expire
in ten years and have exercise prices per share ranging from $3.76 to
$3.83.
|
|
|
·
|
we
issued to one (1) consultant a warrant to purchase a total of 25,000
shares of common stock, with a vesting period of fifteen months. This
warrant expires after three years and has an exercise price per share of
$3.27.
|
|
|
·
|
we
granted Pacific Advisors Holdings Limited a warrant to purchase 1,500,000
shares of common stock at $5.25 per share. This warrant vests at 375,000
per quarter beginning July 1, 2007 except that such warrant will not be
exercisable until such time as Grain Enhancements LLC has met certain
conditions mutually agreed upon by the
parties.
|
|
(z)
|
During
the quarter ended September 30, 2007, we issued to six (6) employees
options to purchase a total of 65,000 shares of common stock with vesting
periods ranging from 90 days to three years. The options expire in ten
years and have exercise prices per share ranging from $1.44 to
$3.22.
|
|
(aa)
|
During
the quarter ended December 31, 2007, we issued to four employees options
to purchase an aggregate of 123,000 shares of our common stock. The
options vest quarterly over periods ranging from three to four years, have
per exercise prices between $1.02 and $1.50, and expire in ten
years.
|
The
following issuances of stock were made without any public solicitation upon
exercise of options and warrants. Each holder of an option or warrant
represented to us that the securities were being acquired for investment
purposes only and not with an intention to resell or distribute such securities.
Each of the individuals or entities had access to information about our business
and financial condition and was deemed capable of protecting their own
interests. As such, the stock was issued pursuant to the private placement
exemption provided by Section 4(2) of the Securities Act of 1933. These are
deemed to be “restricted securities” as defined in Rule 144 under the 1933 Act
and the stock certificates bear a legend limiting the resale
thereof.
|
(a)
|
During
2005, we issued an aggregate of 531,000 shares of our common stock upon
exercise of outstanding options and
warrants.
|
|
(b)
|
From
January 1, 2006 to March 3, 2006, we issued 42,576 shares of our common
stock upon the cashless exercise of outstanding options and
warrants.
|
|
(c)
|
From
March 4, 2006 to May 23, 2006, we issued 1,214,051 shares of our common
stock upon the cashless exercise of outstanding options and
warrants.
|
|
(d)
|
From
April 1, 2006 to June 30, 2006, we issued an aggregate of 655,610 shares
of our common stock upon the cashless exercise of outstanding options and
warrants.
|
|
(e)
|
From
July 1, 2006 to September 30, 2006, we issued an aggregate of 300,000
shares of our common stock upon exercise of outstanding options and
warrants for the aggregate exercise price of
$172,500.
|
|
(f)
|
From
October 1, 2006 to December 31, 2006, we issued an aggregate of 5,335,064
shares of our common stock upon exercise of outstanding warrants for the
aggregate exercise price of
$5,611,588.
|
|
(g)
|
From
January 1, 2007 to March 31, 2007, we issued a total of 3,451,959 shares
of common stock to twenty one security holders upon the exercise of
outstanding warrants for a total purchase price of
$3,929,979.
|
|
(h)
|
From
April 1, 2007 to June 30, 2007, we issued a total of 5,400,199 shares of
common stock to thirty security holders upon the exercise of outstanding
warrants for a total purchase price of
$2,947,000.
|
|
(i)
|
From
July 1, 2007 to September 30, 2007, we issued a total of 2,291,183 shares
of common stock to eighteen security holders upon the exercise of
outstanding warrants for a total purchase price of
$2,089,000.
|
|
(j)
|
From
October 1, 2007 to December 31, 2007, we issued a total of 2,296,157
shares of common stock to three security holders upon the exercise of
outstanding warrants for a total purchase price of $274,000 and the
cancellation of shares of common stock in a cashless
exercise.
|
The
following issuances of stock, warrants, and other equity securities were
exchanged by us with our existing security holders exclusively in transactions
in which no commission or other remuneration was paid or given directly or
indirectly to any person. As such, the issuance of the following securities was
exempt from registration under Section 3(a)(9) of the Securities Act of 1933, as
amended.
|
(a)
|
In
February of to March 3, 2006, we issued a total of 1,200,000 shares of our
common stock upon conversion our 600 shares of our Series B Convertible
Preferred Stock. From March 4, 2006 to May 23, 2006, we issued a total of
2,250,000 shares of our common stock upon conversion our 1,125 shares of
our Series B Convertible Preferred
Stock.
|
|
(b)
|
From
April 1, 2006 to June 30, 2006, we issued a total of 2,100,000 shares of
our common stock upon conversion of 1,050 shares of our Series B
Convertible Preferred Stock.
|
|
(c)
|
From
July 1, 2006 to September 30, 2006, we issued a total of 4,550,000 shares
of our common stock upon conversion of 2,275 shares of our Series B
Convertible Preferred Stock.
|
|
(d)
|
From
July 1, 2006 to September 30, 2006, we issued 8,053,513 shares of our
common stock upon conversion of 6,854 shares of our Series C Convertible
Preferred Stock.
|
|
(e)
|
From
October 1, 2006 to December 31, 2006, we issued 5,360,000 shares of our
common stock upon conversion of 2,680 shares of our Series B Convertible
Stock.
|
|
(f)
|
From
October 1, 2006 to December 31, 2006, we issued 6,162,341 shares of our
common stock upon conversion of 5,238 shares of our Series C Convertible
Preferred Stock.
|
|
(g)
|
During
2007, we issued a total of 940,000 shares of our common stock to four
shareholders upon conversion of 470 shares of our Series B Convertible
Stock held by such shareholders.
|
|
(h)
|
During
2007, we issued a total of 6,432,932 shares of our common stock to 17
shareholders upon conversion of 5,468 shares of our Series C Convertible
Stock held by such shareholders.
|
The
following issuances of stock and assumption of options and warrants were made
pursuant to an exemption provided by Section 3(a)(10) of the Securities Act of
1933 after a fairness hearing before the California Department of
Corporations.
|
(a)
|
On
October 4, 2005, NutraCea completed its merger with The RiceX Company. In
connection with the merger, NutraCea issued 28,272,064 shares of its
common stock to holders of RiceX common stock. In addition, NutraCea
assumed each outstanding option and warrant to purchase RiceX common stock
and converted those options and warrants into options and warrants to
purchase an aggregate of 11,810,507 shares of NutraCea common
stock.
|
Item
16: EXHIBITS
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Exhibit Number
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Exhibit Description
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|
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|
2.01(1)
|
|
Plan
and Agreement of Exchange.
|
|
|
|
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|
2.02(2)
|
|
Agreement
and Plan of Merger and Reorganization, dated as of April 4, 2005, by and
among the NutraCea, The RiceX Company and Red Acquisition
Corporation.
|
|
|
|
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2.03(3)
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|
Asset
Purchase Agreement, dated as of September 28, 2007, between NutraCea and
Vital Living, Inc.
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|
|
|
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2.04(30)
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|
Quotas
Purchase and Sale Agreement, dated January 31, 2008, between NutraCea and
Quota Holders of Irgovel - Industria Riograndens De Oleos Begetais
Ltda.
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|
|
|
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3.01.1(4)
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|
Restated
and Amended Articles of Incorporation as filed with the Secretary of State
of California on December13, 2001.
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|
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3.01.2(5)
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|
Certificate
of Amendment of Articles of Incorporation as filed with the Secretary of
State of California on August 4, 2003.
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|
|
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3.01.3(6)
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|
Certificate
of Amendment of Articles of Incorporation as filed with the Secretary of
State of California on October 31, 2003.
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|
|
|
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3.01.4(5)
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|
Certificate
of Amendment of Articles of Incorporation as filed with the Secretary of
State of California on September 29, 2005.
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|
|
|
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3.01.5(7)
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|
Certificate
of Amendment of Articles of Incorporation.
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|
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3.02(8)
|
|
Certificate
of Designation of the Rights, Preferences, and Privileges of the Series A
Preferred Stock as filed with the Secretary of State of California on
December 13, 2001.
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|
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3.03(9)
|
|
Certificate
of Determination, Preferences and Rights of Series B Convertible Preferred
Stock as filed with the Secretary of State of California on October 4,
2005.
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|
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3.04(10)
|
|
Certificate
of Determination, Preferences and Rights of Series C Convertible Preferred
Stock as filed with the Secretary of State of California on May 10,
2006.
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|
|
|
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3.05.1(11)
|
|
Bylaws
of NutraCea.
|
|
|
|
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3.05.2(12)
|
|
Amendment
of Bylaws of NutraCea.
|
|
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4.01(9)
|
|
Form
of warrant issued to subscribers in connection with NutraCea’s October
2005 private placement.
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|
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4.02(10)
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|
Form
of warrant issued to subscribers in connection with NutraCea’s May 2006
private placement.
|
|
|
|
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4.03(13)
|
|
Form
of warrant issued to subscribers in connection with NutraCea’s February
2007 private placement.
|
|
|
|
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5.01*
|
|
Opinion
of Counsel.
|
|
|
|
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1010.01(9)
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|
Securities
Purchase Agreement, dated September 28, 2005, by and among NutraCea and
the investors named therein.
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|
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10.02(9)
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Registration
Rights Agreement, dated September 28, 2005, by and among NutraCea and the
investors named therein.
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|
|
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10.03(10)
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|
Securities
Purchase Agreement, dated May 12, 2006, by and among NutraCea and the
investors named therein.
|
|
Exhibit Number
|
|
Exhibit Description
|
| |
|
|
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10.04(10)
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|
Registration
Rights Agreement, dated May 12, 2006, by and among NutraCea and the
investors named therein.
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|
|
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10.05(13)
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Securities
Purchase Agreement, dated February 15, 2007, by and among NutraCea and the
investors named therein.
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10.06(13)
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Registration
Rights Agreement, dated February 15, 2007, by and among NutraCea and the
investors named therein.
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10.07(14)±
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Private
Label Supply Agreement and Strategic Alliance between NutraCea and ITV
Global.
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|
|
|
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10.08(15)±
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|
W.F.
Young Distribution Agreement.
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1010.10(5)±
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|
Production
Facility Development and Rice Bran Supply and Purchase Agreement dated
September 13, 2005 between NutraCea and Food Trading Company Dominicana,
S.A.
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|
|
|
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10.11(5)±
|
|
Assignment
dated April 12, 2005 from W.F. Young, Inc. to NutraCea.
|
|
|
|
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10.12(5)±
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|
Distribution
Agreement dated April 12, 2005 between W.F. Young, Inc. and
NutraCea.
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|
|
|
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10.13(5)
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|
Manufacturing
Agreement dated April 12, 2005 between W.F. Young, Inc. and
NutraCea.
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|
|
|
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10.14(7)±
|
|
Limited
Liability Company Agreement for Grain Enhancements,
LLC.
|
|
|
|
|
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10.15(30)+
|
|
Amendment
of Limited Liability Company Agreement for Grain Enhancements,
LLC.
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|
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10.16(7)±
|
|
Supply
Agreement.
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|
|
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10.17(7)±
|
|
License
and Distribution Agreement.
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|
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10.18(30)+
|
|
Amendment
of License and Distribution Agreement.
|
|
|
|
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10.19(7)±
|
|
Equipment
Lease Agreement.
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|
|
|
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|
10.20(7)
|
|
Form
of non-statutory Stock Option Agreement between the Company and the
non-employee members of the Board of Directors dated May 1,
2007.
|
|
|
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10.21(16)
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|
Form
of Senior Secured Convertible Note of Vital Living,
Inc.
|
|
|
|
|
|
10.22(17)
|
|
Form
of securities purchase letter agreement, dated April 2007, by and between
NutraCea and the holder of notes and/or preferred stock of Vital Living,
Inc.
|
|
|
|
|
|
10.23(17)
|
|
Form
of securities purchase letter agreement, dated April 2007, by and between
NutraCea and the holder of notes and/or preferred stock of Vital Living,
Inc.
|
|
|
|
|
|
10.24(18)
|
|
Letter
dated September 10, 2007, from Vital Living, Inc. to
NutraCea.
|
|
|
|
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|
10.25(30)
|
|
Stock
Purchase Agreement, dated January 24, 2008, between Fortune Finance
Overseas Ltd., and Medan, LLC.
|
|
Exhibit Number
|
|
Exhibit
Description
|
| |
|
|
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10.26(30)+
|
|
Wheat
Bran Stabilization Equipment Lease, dated January 24, 2008, between
NutraCea and PT Panganmas Inti Nusantara.
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|
|
|
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10.27(15)
|
|
Executive
Employment Agreement between NutraCea and Bradley D.
Edson.
|
|
|
|
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|
10.28(30)
|
|
First
Amendment to Employment Agreement between NutraCea and Bradley D.
Edson.
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|
|
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10.29(5)
|
|
Executive
Employment Agreement between The RiceX Company and Todd C.
Crow.
|
|
|
|
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10.30(5)
|
|
Amendment
No. 1 to Employment Agreement between NutraCea, Todd C. Crow and The RiceX
Company.
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|
|
|
|
|
10.31(30)
|
|
Employment
Agreement between NutraCea and Leo Gingras.
|
|
|
|
|
|
10.32(19)
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|
Executive
Employment Agreement between NutraCea and Kody Newland.
|
|
|
|
|
|
10.33(30)
|
|
First
Amendment to Employment Agreement between NutraCea and Kody
Newland.
|
|
|
|
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|
10.34(15)
|
|
Executive
Employment Agreement between NutraCea and Margie D.
Adelman.
|
|
|
|
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10.35(20)
|
|
NutraCea
2003 Stock Compensation Plan.
|
|
|
|
|
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10.36(5)
|
|
NutraCea
2005 Equity Incentive Plan.
|
|
|
|
|
|
10.36(30)
|
|
Form
of Non-Employee Director Stock Option Agreement under the NutraCea 2005
Equity Incentive Plan.
|
|
|
|
|
|
10.37(30)
|
|
Stock
Option Agreement dated February 8, 2007 between NutraCea and Leo
Gingras.
|
|
|
|
|
|
10.38(14)
|
|
Warrant
Agreement between NutraCea and Steven Saunders dated February 27,
2006.
|
|
|
|
|
|
10.39(21)
|
|
Form
of non-statutory Stock Option Agreement between NutraCea and the
non-employee members of the Board of Directors dated May 23,
2006.
|
|
|
|
|
|
10.40(22)
|
|
The
RiceX Company 1997 Stock Option Plan.
|
|
|
|
|
|
10.41(23)
|
|
Form
of Directors Stock Option Agreement for The RiceX
Company.
|
|
|
|
|
|
10.42(23)
|
|
Form
of Non-statutory Stock Option Agreement not issued under The RiceX Company
1997 Stock Option Plan, governing options granted to The RiceX Company
employees.
|
|
|
|
|
|
10.43(24)
|
|
Form
of non-statutory Stock Option Agreement issued under The RiceX Company
1997 Stock Option Plan between The RiceX Company and The RiceX Company
employees dated October 1, 1999.
|
|
|
|
|
|
10.44(24)
|
|
Form
of non-statutory Stock Option Agreement issued under The RiceX Company
1997 Stock Option Plan between The RiceX Company and Ike Lynch dated
November 1, 1999. Identical Agreements with Daniel McPeak, Jr. and Todd C.
Crow.
|
|
|
|
|
|
10.45(25)
|
|
Form
of Board Member Non-statutory Stock Option Agreement issued under The
RiceX Company 1997 Stock Option Plan between The RiceX Company and the
Board Members of the RiceX Company dated February 22, 2001, September 23
and 29, 2001.
|
|
Exhibit Number
|
|
Exhibit Description
|
| |
|
|
|
10.46(26)
|
|
Form
of Non-statutory Stock Option Agreement issued under The RiceX Company
1997 Stock Option Plan between The RiceX Company and employees dated
January 2, 2000.
|
|
|
|
|
|
10.47(27)
|
|
Form
of Non-statutory Stock Option Agreement issued September 23, 2002 between
The RiceX Company and the members of The RiceX Company’s Board of
Directors.
|
|
|
|
|
|
10.48(27)
|
|
Form
of Non-statutory Stock Option Agreement issued July 1, 2004 between The
RiceX Company and Edward McMillan.
|
|
|
|
|
|
10.49(28)
|
|
Form
of Non-statutory Stock Option Agreement issued October 18, 2004 between
The RiceX Company and two members of The RiceX Company Board
Directors.
|
|
|
|
|
|
10.50(29)
|
|
Form
of Non-statutory Stock Option Agreement issued under the 1997 Stock Option
Plan between The RiceX Company and certain non-employee RiceX Directors
dated March 31, 2005.
|
|
|
|
|
|
10.51(29)
|
|
Form
of Non-statutory Stock Option Agreement issued under the 1997 Stock Option
Plan between The RiceX Company and certain employees of RiceX dated March
31, 2005.
|
|
|
|
|
|
10.52(5)
|
|
Form
of Option Assumption Agreement between NutraCea and Option Holders
relating to assumed Options granted under The RiceX Company 1997 Stock
Option Plan.
|
|
|
|
|
|
10.53(5)
|
|
Form
of Option Assumption Agreement between NutraCea and Option Holders
relating to assumed non-plan RiceX Options.
|
|
|
|
|
|
10.54(5)
|
|
Form
of Option Assumption Agreement between NutraCea and former Directors of
The RiceX Company.
|
|
|
|
|
|
21.01(30)
|
|
List
of subsidiaries.
|
|
|
|
|
|
23.1
|
|
Consent
of Malone & Bailey, PC, Independent Registered Public Accounting
Firm.
|
|
|
|
|
|
23.2
|
|
Consent
of Perry-Smith LLP, Independent Registered Public Accounting
Firm.
|
|
|
|
|
|
23.3*
|
|
Consent
of Weintraub Genshlea Chediak Law Corporation (included in Exhibit
5.1)
|
|
|
|
|
|
24.1*
|
|
Power
of Attorney (See signature page).
|
|
±
|
Confidential treatment granted as
to certain portions.
|
|
+
|
Confidential treatment requested
as to certain portions.
|
|
(1)
|
incorporated herein by reference
to exhibits previously filed on Registrant’s Current Report on Form 8-K,
filed on November 19, 2001.
|
|
(2)
|
incorporated herein by reference
to exhibits previously filed on Registrant’s Current Report on Form 8-K,
filed on April 4, 2005.
|
|
(3)
|
incorporated herein by reference
to exhibits previously file on registrant’s Current Report on Form 8-K,
filed on October 4, 2007.
|
|
(4)
|
incorporated herein by reference
to exhibits previously filed on Registrant’s Annual Report on Form 10-KSB,
filed on April 16, 2002.
|
|
(5)
|
incorporated
herein by reference to exhibits previously filed on Registrant’s
Registration Statement on Form SB-2, filed on November 18,
2005.
|
|
(6)
|
incorporated herein by reference
to exhibits previously filed on Registrant’s Quarterly Report on Form
10-QSB, filed on November 19,
2003.
|
|
(7)
|
incorporated herein by reference
to exhibits previously filed on Registrant’s Quarterly Report on Form
10-Q, filed on August 14,
2007.
|
|
(8)
|
incorporated herein by reference
to exhibits previously filed on Registrant’s Registration Statement on
Form SB-2, filed on June 4,
2002.
|
|
(9)
|
incorporated herein by reference
to exhibits previously filed on Registrant’s Current Report on Form 8-K,
filed on October 4, 2005.
|
|
(10)
|
incorporated herein by reference
to exhibits previously filed on Registrant’s Current Report on Form 8-K,
filed on May 15, 2006.
|
|
(11)
|
incorporated herein by reference
to exhibits previously filed on Registrant’s Registration Statement on
Form SB-2, filed on June 12,
2006.
|
|
(12)
|
incorporated herein by reference
to exhibits previously filed on The RiceX Company’s Report on Form 10-KSB,
filed on March 31, 2003.
|
|
(13)
|
incorporated herein by reference
to exhibits previously filed on Registrant’s Current Report on Form 8-K,
filed on February 20, 2007.
|
|
(14)
|
incorporated herein by reference
to exhibits previously filed on Registrant’s Quarterly Report on Form
10-QSB, filed on May 15,
2006.
|
|
(15)
|
incorporated herein by reference
to exhibits previously filed on Registrant’s Annual Report on Form 10-KSB,
filed on March 31, 2005.
|
|
(16)
|
incorporated herein by reference
to exhibit 4.2 to the Current Report on Form 8-K filed by Vital Living,
Inc. on December 19, 2003.
|
|
(17)
|
incorporated herein by reference
to exhibits previously filed on Registrant’s Current Report on Form 8-K,
filed on June 1, 2007.
|
|
(18)
|
incorporated herein by reference
to exhibits previously filed on Amendment No. 1 to Schedule 13D filed by
the Registrant on September 12,
2007.
|
|
(19)
|
incorporated herein by reference
to exhibits previously filed on Registrant’s Annual Report on Form 10-K,
filed on April 2, 2007.
|
|
(20)
|
incorporated herein by reference
to exhibits previously filed on Registrant’s Registration Statement on
Form S-8, filed on November 18,
2003.
|
|
(21)
|
incorporated herein by reference
to exhibits previously filed on Registrant’s Quarterly Report on Form
10-QSB, filed on August 14,
2006.
|
|
(22)
|
incorporated herein by reference
to exhibits previously filed on The RiceX Company’s Registration Statement
Number Statement No. 000-24285, filed on May 18,
1998.
|
|
(23)
|
incorporated herein by reference
to exhibits previously filed on The RiceX Company’s Registration Statement
No. 000-24285, filed on May 18,
1998.
|
|
(24)
|
incorporated herein by reference
to exhibits previously filed on The RiceX Company’s Report on Form 10-KSB,
filed on March 30, 2000.
|
|
(25)
|
incorporated herein by reference
to exhibits previously filed on The RiceX Company’s Report on Form 10-QSB,
filed on August 10, 2001.
|
|
(26)
|
incorporated herein by reference
to exhibits previously filed on The RiceX Company’s Report on Form 10-QSB,
filed on August 12, 2002.
|
|
(27)
|
incorporated herein by reference
to exhibits previously filed on The RiceX Company’s Report on Form 10-QSB,
filed on November 15, 2003.
|
|
(28)
|
incorporated herein by reference
to exhibits previously filed on The RiceX Company’s Report on Form 10-KSB,
filed on March 30, 2005.
|
|
(29)
|
incorporated herein by reference
to exhibits previously filed on The RiceX Company’s Report on Form 10-QSB,
filed on May 16, 2005.
|
|
(30)
|
Incorporated
herein by reference to exhibits previously filed on Registrant’s Annual
Report on Form 10-K, filed on March 17,
2008.
|
The
undersigned registrant hereby undertakes:
1. To
file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
i. To
include any prospectus required by section 10(a)(3) of the Securities Act of
1933;
ii. To
reflect in the prospectus any facts or events arising after the effective date
of the registration statement (or the most recent post-effective amendment
thereof) which, individually or in the aggregate, represent a fundamental change
in the information set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated maximum
offering range may be reflected in the form of prospectus filed with the
Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the effective
registration statement.
iii. To
include any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change to
such information in the registration statement;
2. That,
for the purpose of determining any liability under the Securities Act of 1933,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
3. To
remove from registration by means of a post-effective amendment any of the
securities being registered which remain unsold at the termination of the
offering.
4. That,
for the purpose of determining liability under the Securities Act of 1933 to any
purchaser:
i. If
the registrant is relying on Rule 430B (Sec. 230.430B of this
chapter):
A. Each
prospectus filed by the registrant pursuant to Rule 424(b)(3) shall be deemed to
be part of the registration statement as of the date the filed prospectus was
deemed part of and included in the registration statement; and
B. Each
prospectus required to be filed pursuant to Rule 424(b)(2), (b)(5), or (b)(7) as
part of a registration statement in reliance on Rule 430B relating to an
offering made pursuant to Rule 415(a)(1)(i), (vii), or (x) for the purpose of
providing the information required by section 10(a) of the Securities Act of
1933 shall be deemed to be part of and included in the registration statement as
of the earlier of the date such form of prospectus is first used after
effectiveness or the date of the first contract of sale of securities in the
offering described in the prospectus. As provided in Rule 430B, for liability
purposes of the issuer and any person that is at that date an underwriter, such
date shall be deemed to be a new effective date of the registration statement
relating to the securities in the registration statement to which that
prospectus relates, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof. Provided, however, that no
statement made in a registration statement or prospectus that is part of the
registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of the
registration statement will, as to a purchaser with a time of contract of sale
prior to such effective date, supersede or modify any statement that was made in
the registration statement or prospectus that was part of the registration
statement or made in any such document immediately prior to such effective date;
or
ii. If
the registrant is subject to Rule 430C, each prospectus filed pursuant to Rule
424(b) as part of a registration statement relating to an offering, other than
registration statements relying on Rule 430B or other than prospectuses filed in
reliance on Rule 430A, shall be deemed to be part of and included in the
registration statement as of the date it is first used after effectiveness.
Provided, however, that no statement made in a registration statement or
prospectus that is part of the registration statement or made in a document
incorporated or deemed incorporated by reference into the registration statement
or prospectus that is part of the registration statement will, as to a purchaser
with a time of contract of sale prior to such first use, supersede or modify any
statement that was made in the registration statement or prospectus that was
part of the registration statement or made in any such document immediately
prior to such date of first use.
5. Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may
be permitted to directors, officers and controlling persons of the registrant
pursuant to the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
SIGNATURES
In
accordance with the requirements of the Securities Act of 1933, the Registrant
has duly caused this Post-Effective Amendment No. 3 on Form S-1 to the
Registration Statement on Form SB-2 to be signed on its behalf by the
undersigned thereto duly authorized, in the City of El Dorado Hill, State of
California, on this 25th day of April, 2008.
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NUTRACEA
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BY:
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/s/ Bradley D. Edson
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Bradley
D. Edson
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Chief
Executive Officer
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Pursuant
to the requirements of the Securities Act of 1933, this Post-Effective Amendment
No. 3 on Form S-1 to the Registration Statement on Form SB-2 has been signed by
the following persons in the capacities and on the dates indicated.
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Signature
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Title
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Date
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Principal
Executive Officer:
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/s/ Bradley D. Edson
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President,
Chief Executive Officer and Director
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April
25, 2008
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Bradley
D. Edson
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Principal
Financial Officer
and
Principal Accounting Officer:
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/s/ Todd C. Crow
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Chief
Financial Officer
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April
25, 2008
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Todd
C. Crow
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Additional
Directors:
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/s/ David Bensol*
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Director
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April
25, 2008
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David
Bensol
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/s/ James C. Lintzenich*
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Director
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April
25, 2008
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James
C. Lintzenich
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/s/ Edward L. McMillan*
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Director
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April
25, 2008
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Edward
L. McMillan
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Director
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Wesley
K. Clark
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/s/ Steven W. Saunders*
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Director
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April
25, 2008
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Steven
W. Saunders
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/s/ Kenneth L. Shropshire*
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Director
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April
25, 2008
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Kenneth
L. Shropshire
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*By /s/ Todd C. Crow
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April
25, 2008
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Todd
C. Crow
Attorney-in-fact
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EXHIBIT
INDEX
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Exhibit Number
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Exhibit Description
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2.01(1)
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Plan
and Agreement of Exchange.
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2.02(2)
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Agreement
and Plan of Merger and Reorganization, dated as of April 4, 2005, by and
among the NutraCea, The RiceX Company and Red Acquisition
Corporation.
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2.03(3)
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Asset
Purchase Agreement, dated as of September 28, 2007, between NutraCea and
Vital Living, Inc.
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2.04(30)
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Quotas
Purchase and Sale Agreement, dated January 31, 2008, between NutraCea and
Quota Holders of Irgovel - Industria Riograndens De Oleos Begetais
Ltda.
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3.01.1(4)
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Restated
and Amended Articles of Incorporation as filed with the Secretary of State
of California on December13, 2001.
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3.01.2(5)
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Certificate
of Amendment of Articles of Incorporation as filed with the Secretary of
State of California on August 4, 2003.
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3.01.3(6)
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Certificate
of Amendment of Articles of Incorporation as filed with the Secretary of
State of California on October 31, 2003.
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3.01.4(5)
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Certificate
of Amendment of Articles of Incorporation as filed with the Secretary of
State of California on September 29, 2005.
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3.01.5(7)
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Certificate
of Amendment of Articles of Incorporation.
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3.02(8)
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Certificate
of Designation of the Rights, Preferences, and Privileges of the Series A
Preferred Stock as filed with the Secretary of State of California on
December 13, 2001.
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3.03(9)
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Certificate
of Determination, Preferences and Rights of Series B Convertible Preferred
Stock as filed with the Secretary of State of California on October 4,
2005.
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3.04(10)
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Certificate
of Determination, Preferences and Rights of Series C Convertible Preferred
Stock as filed with the Secretary of State of California on May 10,
2006.
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3.05.1(11)
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Bylaws
of NutraCea.
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3.05.2(12)
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Amendment
of Bylaws of NutraCea.
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4.01(9)
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Form
of warrant issued to subscribers in connection with NutraCea’s October
2005 private placement.
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4.02(10)
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Form
of warrant issued to subscribers in connection with NutraCea’s May 2006
private placement.
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4.03(13)
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Form
of warrant issued to subscribers in connection with NutraCea’s February
2007 private placement.
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5.01*
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Opinion
of Counsel.
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Exhibit Number
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Exhibit Description
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1010.01(9)
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Securities
Purchase Agreement, dated September 28, 2005, by and among NutraCea and
the investors named therein.
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10.02(9)
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Registration
Rights Agreement, dated September 28, 2005, by and among NutraCea and the
investors named therein.
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10.03(10)
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Securities
Purchase Agreement, dated May 12, 2006, by and among NutraCea and the
investors named therein.
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10.04(10)
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Registration
Rights Agreement, dated May 12, 2006, by and among NutraCea and the
investors named therein.
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10.05(13)
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Securities
Purchase Agreement, dated February 15, 2007, by and among NutraCea and the
investors named therein.
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10.06(13)
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Registration
Rights Agreement, dated February 15, 2007, by and among NutraCea and the
investors named therein.
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10.07(14)±
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Private
Label Supply Agreement and Strategic Alliance between NutraCea and ITV
Global.
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10.08(15)±
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W.F.
Young Distribution Agreement.
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1010.10(5)±
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Production
Facility Development and Rice Bran Supply and Purchase Agreement dated
September 13, 2005 between NutraCea and Food Trading Company Dominicana,
S.A.
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10.11(5)±
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Assignment
dated April 12, 2005 from W.F. Young, Inc. to NutraCea.
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10.12(5)±
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Distribution
Agreement dated April 12, 2005 between W.F. Young, Inc. and
NutraCea.
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10.13(5)
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Manufacturing
Agreement dated April 12, 2005 between W.F. Young, Inc. and
NutraCea.
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10.14(7)±
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Limited
Liability Company Agreement for Grain Enhancements,
LLC.
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10.15(30)+
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Amendment
of Limited Liability Company Agreement for Grain Enhancements,
LLC.
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10.16(7)±
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Supply
Agreement.
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10.17(7)±
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License
and Distribution Agreement.
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10.18(30)+
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Amendment
of License and Distribution Agreement.
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10.19(7)±
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Equipment
Lease Agreement.
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10.20(7)
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Form
of non-statutory Stock Option Agreement between the Company and the
non-employee members of the Board of Directors dated May 1,
2007.
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10.21(16)
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Form
of Senior Secured Convertible Note of Vital Living,
Inc.
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10.22(17)
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Form
of securities purchase letter agreement, dated April 2007, by and between
NutraCea and the holder of notes and/or preferred stock of Vital Living,
Inc.
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Exhibit Number
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Exhibit Description
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10.23(17)
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Form
of securities purchase letter agreement, dated April 2007, by and between
NutraCea and the holder of notes and/or preferred stock of Vital Living,
Inc.
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10.24(18)
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Letter
dated September 10, 2007, from Vital Living, Inc. to
NutraCea.
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10.25(30)
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Stock
Purchase Agreement, dated January 24, 2008, between Fortune Finance
Overseas Ltd., and Medan, LLC.
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10.26(30)+
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Wheat
Bran Stabilization Equipment Lease, dated January 24, 2008, between
NutraCea and PT Panganmas Inti Nusantara.
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10.27(15)
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Executive
Employment Agreement between NutraCea and Bradley D.
Edson.
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10.28(30)
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First
Amendment to Employment Agreement between NutraCea and Bradley D.
Edson.
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10.29(5)
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Executive
Employment Agreement between The RiceX Company and Todd C.
Crow.
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10.30(5)
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Amendment
No. 1 to Employment Agreement between NutraCea, Todd C. Crow and The RiceX
Company.
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10.31(30)
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Employment
Agreement between NutraCea and Leo Gingras.
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10.32(19)
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Executive
Employment Agreement between NutraCea and Kody Newland.
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10.33(30)
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First
Amendment to Employment Agreement between NutraCea and Kody
Newland.
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10.34(15)
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Executive
Employment Agreement between NutraCea and Margie D.
Adelman.
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10.35(20)
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NutraCea
2003 Stock Compensation Plan.
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10.36(5)
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NutraCea
2005 Equity Incentive Plan.
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10.36(30)
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Form
of Non-Employee Director Stock Option Agreement under the NutraCea 2005
Equity Incentive Plan.
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10.37(30)
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Stock
Option Agreement dated February 8, 2007 between NutraCea and Leo
Gingras.
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10.38(14)
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Warrant
Agreement between NutraCea and Steven Saunders dated February 27,
2006.
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10.39(21)
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Form
of non-statutory Stock Option Agreement between NutraCea and the
non-employee members of the Board of Directors dated May 23,
2006.
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10.40(22)
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The
RiceX Company 1997 Stock Option Plan.
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10.41(23)
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Form
of Directors Stock Option Agreement for The RiceX
Company.
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10.42(23)
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Form
of Non-statutory Stock Option Agreement not issued under The RiceX Company
1997 Stock Option Plan, governing options granted to The RiceX Company
employees.
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10.43(24)
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Form
of non-statutory Stock Option Agreement issued under The RiceX Company
1997 Stock Option Plan between The RiceX Company and The RiceX Company
employees dated October 1, 1999.
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Exhibit Number
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Exhibit Description
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10.44(24)
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Form
of non-statutory Stock Option Agreement issued under The RiceX Company
1997 Stock Option Plan between The RiceX Company and Ike Lynch dated
November 1, 1999. Identical Agreements with Daniel McPeak, Jr. and Todd C.
Crow.
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10.45(25)
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Form
of Board Member Non-statutory Stock Option Agreement issued under The
RiceX Company 1997 Stock Option Plan between The RiceX Company and the
Board Members of the RiceX Company dated February 22, 2001, September 23
and 29, 2001.
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10.46(26)
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Form
of Non-statutory Stock Option Agreement issued under The RiceX Company
1997 Stock Option Plan between The RiceX Company and employees dated
January 2, 2000.
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10.47(27)
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Form
of Non-statutory Stock Option Agreement issued September 23, 2002 between
The RiceX Company and the members of The RiceX Company’s Board of
Directors.
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10.48(27)
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Form
of Non-statutory Stock Option Agreement issued July 1, 2004 between The
RiceX Company and Edward McMillan.
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10.49(28)
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Form
of Non-statutory Stock Option Agreement issued October 18, 2004 between
The RiceX Company and two members of The RiceX Company Board
Directors.
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10.50(29)
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Form
of Non-statutory Stock Option Agreement issued under the 1997 Stock Option
Plan between The RiceX Company and certain non-employee RiceX Directors
dated March 31, 2005.
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10.51(29)
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Form
of Non-statutory Stock Option Agreement issued under the 1997 Stock Option
Plan between The RiceX Company and certain employees of RiceX dated March
31, 2005.
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10.52(5)
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Form
of Option Assumption Agreement between NutraCea and Option Holders
relating to assumed Options granted under The RiceX Company 1997 Stock
Option Plan.
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10.53(5)
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Form
of Option Assumption Agreement between NutraCea and Option Holders
relating to assumed non-plan RiceX Options.
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10.54(5)
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Form
of Option Assumption Agreement between NutraCea and former Directors of
The RiceX Company.
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21.01(30)
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List
of subsidiaries.
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Consent
of Malone & Bailey, PC, Independent Registered Public Accounting
Firm.
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Consent
of Perry-Smith LLP, Independent Registered Public Accounting
Firm.
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23.3*
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Consent
of Weintraub Genshlea Chediak Law Corporation (included in Exhibit
5.1)
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24.1*
|
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Power
of Attorney (See signature page).
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±
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Confidential treatment granted as
to certain portions.
|
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+
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Confidential treatment requested
as to certain portions.
|
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(1)
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incorporated herein by reference
to exhibits previously filed on Registrant’s Current Report on Form 8-K,
filed on November 19, 2001.
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(2)
|
incorporated
herein by reference to exhibits previously filed on Registrant’s Current
Report on Form 8-K, filed on April 4,
2005.
|
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(3)
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incorporated herein by reference
to exhibits previously file on registrant’s Current Report on Form 8-K,
filed on October 4, 2007.
|
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(4)
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incorporated herein by reference
to exhibits previously filed on Registrant’s Annual Report on Form 10-KSB,
filed on April 16, 2002.
|
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(5)
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incorporated herein by reference
to exhibits previously filed on Registrant’s Registration Statement on
Form SB-2, filed on November 18,
2005.
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(6)
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incorporated herein by reference
to exhibits previously filed on Registrant’s Quarterly Report on Form
10-QSB, filed on November 19,
2003.
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(7)
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incorporated herein by reference
to exhibits previously filed on Registrant’s Quarterly Report on Form
10-Q, filed on August 14,
2007.
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(8)
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incorporated herein by reference
to exhibits previously filed on Registrant’s Registration Statement on
Form SB-2, filed on June 4,
2002.
|
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(9)
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incorporated herein by reference
to exhibits previously filed on Registrant’s Current Report on Form 8-K,
filed on October 4, 2005.
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(10)
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incorporated herein by reference
to exhibits previously filed on Registrant’s Current Report on Form 8-K,
filed on May 15, 2006.
|
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(11)
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incorporated herein by reference
to exhibits previously filed on Registrant’s Registration Statement on
Form SB-2, filed on June 12,
2006.
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(12)
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incorporated herein by reference
to exhibits previously filed on The RiceX Company’s Report on Form 10-KSB,
filed on March 31, 2003.
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(13)
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incorporated herein by reference
to exhibits previously filed on Registrant’s Current Report on Form 8-K,
filed on February 20, 2007.
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(14)
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incorporated herein by reference
to exhibits previously filed on Registrant’s Quarterly Report on Form
10-QSB, filed on May 15,
2006.
|
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(15)
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incorporated herein by reference
to exhibits previously filed on Registrant’s Annual Report on Form 10-KSB,
filed on March 31, 2005.
|
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(16)
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incorporated herein by reference
to exhibit 4.2 to the Current Report on Form 8-K filed by Vital Living,
Inc. on December 19, 2003.
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(17)
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incorporated herein by reference
to exhibits previously filed on Registrant’s Current Report on Form 8-K,
filed on June 1, 2007.
|
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(18)
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incorporated herein by reference
to exhibits previously filed on Amendment No. 1 to Schedule 13D filed by
the Registrant on September 12,
2007.
|
|
(19)
|
incorporated herein by reference
to exhibits previously filed on Registrant’s Annual Report on Form 10-K,
filed on April 2, 2007.
|
|
(20)
|
incorporated herein by reference
to exhibits previously filed on Registrant’s Registration Statement on
Form S-8, filed on November 18,
2003.
|
|
(21)
|
incorporated herein by reference
to exhibits previously filed on Registrant’s Quarterly Report on Form
10-QSB, filed on August 14,
2006.
|
|
(22)
|
incorporated herein by reference
to exhibits previously filed on The RiceX Company’s Registration Statement
Number Statement No. 000-24285, filed on May 18,
1998.
|
|
(23)
|
incorporated herein by reference
to exhibits previously filed on The RiceX Company’s Registration Statement
No. 000-24285, filed on May 18,
1998.
|
|
(24)
|
incorporated herein by reference
to exhibits previously filed on The RiceX Company’s Report on Form 10-KSB,
filed on March 30, 2000.
|
|
(25)
|
incorporated herein by reference
to exhibits previously filed on The RiceX Company’s Report on Form 10-QSB,
filed on August 10, 2001.
|
|
(26)
|
incorporated herein by reference
to exhibits previously filed on The RiceX Company’s Report on Form 10-QSB,
filed on August 12, 2002.
|
|
(27)
|
incorporated herein by reference
to exhibits previously filed on The RiceX Company’s Report on Form 10-QSB,
filed on November 15, 2003.
|
|
(28)
|
incorporated herein by reference
to exhibits previously filed on The RiceX Company’s Report on Form 10-KSB,
filed on March 30, 2005.
|
|
(29)
|
incorporated herein by reference
to exhibits previously filed on The RiceX Company’s Report on Form 10-QSB,
filed on May 16, 2005.
|
|
(30)
|
Incorporated
herein by reference to exhibits previously filed on Registrant’s Annual
Report on Form 10-K, filed on March 17,
2008.
|