NOTE 1. BASIS OF PRESENTATION

In the opinion of management, the accompanying unaudited condensed consolidated financial statements (interim financial statements) of RiceBran Technologies and its subsidiaries were prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) and the rules and regulations of the Securities and Exchange Commission (the SEC) for reporting on Form 10-Q; therefore, they do not include all of the information and notes required by GAAP for complete financial statements. The interim financial statements contain all adjustments necessary to present fairly the interim results of operations, financial position and cash flows for the periods presented of a normal and recurring nature necessary to present fairly the interim results of operations, financial position and cash flows for the periods presented.

These interim financial statements should be read in conjunction with the consolidated audited financial statements and notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2022, which included all disclosures required by generally accepted accounting principles.

The results reported in these interim financial statements are not necessarily indicative of the results to be expected for the full fiscal year, or any other future period, and have been prepared based on the realization of assets and the satisfaction of liabilities in the normal course of business. 

Certain reclassifications have been made to amounts reported for the prior year to achieve consistent presentation with the current year. Such reclassifications had no impact on previously reported net loss or shareholders’ equity.

NOTE 2. BUSINESS

We are a specialty ingredient company focused on the development, production, and marketing of products derived from traditional and ancient small grains. We create and produce products utilizing proprietary processes to deliver improved nutrition, ease of use, and extended shelf-life, while addressing consumer demand for all natural, non-GMO and organic products.

Notably, we convert raw rice bran into stabilized rice bran (SRB), and high value-added derivative products including: RiBalance, a rice bran nutritional package derived from SRB; RiSolubles, a nutritious, carbohydrate and lipid rich fraction of RiBalance; RiFiber, a fiber rich insoluble derivative of RiBalance and ProRyza, a rice bran protein-based product.

SRB is an additive used in human and animal foods. SRB has certain attractions compared to additives based on the by-products of other agricultural commodities, such as corn, soybeans, wheat, and yeast. Our SRB and SRB derivatives are healthy, natural, hypoallergenic, gluten free, and non-genetically modified ingredients used in a variety of applications.

We produce SRB from  i four locations:  i two facilities located within supplier-owned rice mills in California; and  i two company-owned facilities in Louisiana and the Arkansas delta region. We produce SRB derivatives at our Dillon, Montana, facility and we operate  i two specialty milling facilities, a rice mill in Arkansas, Golden Ridge, and a barley and oats mill in Minnesota, MGI.

Segment Reporting

Given the integrated nature of the products we produce and the facilities in which we produce them, we have  i one reporting unit and  i one operating segment, as defined in applicable accounting guidance, specialty ingredients.

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

NOTE 4. CASH AND CASH EQUIVALENTS

As of March 31, 2023, we have $ i 2.7 million of cash and cash equivalents invested in a money market fund with net assets invested in U.S. Dollar denominated money market securities of domestic and foreign issuers, U.S. Government securities and repurchase agreements. We consider all liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.

We have cash on deposit in excess of federally insured limits at a bank. We do not believe that maintaining substantially all such assets with the bank or investing in a liquid mutual fund represent material risks.

NOTE 5. ACCOUNTS RECEIVABLE AND REVENUES

Revenues in the three months ended March 31, 2023 and 2022, include $ i 0.1 million, or less, in unearned revenue as of the end of the prior year.

Our accounts receivable potentially subject us to significant concentrations of credit risk. Revenues and accounts receivable from significant customers (customers with revenue or accounts receivable in excess of 10% of consolidated totals) are stated below as a percent of consolidated totals.

The following table presents revenues by geographic area shipped to (in thousands).

NOTE 6. INVENTORIES

The following table details the components of inventories (in thousands).

NOTE 7. PROPERTY AND EQUIPMENT

The following table details the components of property and equipment (amounts in thousands).

Amounts payable for property and equipment included in accounts payable and accrued liabilities totaled $ i 0.1 million at March 31, 2023, and December 31, 2022. Assets which had not yet been placed in service, included in property and equipment, totaled $ i 1.7 million at March 31, 2023, and $ i 1.2 million at December 31, 2022.

NOTE 8. LEASES

The components of lease expense and cash flows from leases (in thousands) follow.

As of March 31, 2023, variable lease payments do not depend on a rate or index. As of March 31, 2023, property and equipment, net, includes $ i 0.6 million of finance lease right-of-use-assets, with an original cost of $ i 1.1 million. As of December 31, 2022, property and equipment, net, includes $ i 0.2 million of finance lease right-of-use-assets, with an original cost of $ i 0.9 million. During the three months ended March 31, 2023, we financed the purchase of $ i 0.2 million of property and equipment in noncash finance lease transactions. During the three months ended March 31, 2022, we financed the purchase of less than $ i 0.1 million of property and equipment in noncash finance lease transactions.

As of March 31, 2023, we do not believe it is certain that we will exercise any renewal options. The remaining terms of our leases and the discount rates used in the calculation of our lease liabilities as of March 31, 2023, follows.

Maturities of lease liabilities as of March 31, 2023, follow (in thousands).

NOTE 9. DEBT

We finance certain amounts owed for annual insurance premiums under financing agreements. As of March 31, 2023, amounts due under insurance premium financing agreements are due in monthly installments of principal and interest through November 30, 2023, at an interest rate of  i 7.3% per year.

We borrow under a factoring agreement with a lender (the Lender), which provides a $ i 7.0 million credit facility. We may only borrow to the extent we have qualifying accounts receivable to use as collateral as defined in the agreement. The facility had an initial two-year term and automatically renews for successive annual periods until delivery of a proper termination notice. The facility term automatically extended to October 2023. We incur recurring fees under the agreement, including a funding fee of  i 0.5% above the prime rate, in no event to be less than  i 5.5%, on any advances, and a service fee on average net funds borrowed. The Lender has a security interest in our assets and the right to demand repayment of the advances at any time.

The Lender also advanced us $ i 0.9 million effective September 30, 2022 (the Over-advance), pending restructuring of our mortgage promissory note with the Lender. The Over-advance accrued interest at an annual rate which was the greater of  i 7.0% above the Lender's prime rate ( i 14.5% at December 31, 2022) and  i 10.3% until it was repaid in January 2023. As of December 31, 2022, the Over-advance was classified as long-term debt in our consolidated balance sheet as it was refinanced on a long-term basis in January 2023, as discussed below.

Additional information related to our factoring obligation (exclusive of the Over-advance) follows.

As of  March 31, 2023, we had $ i 1.9 million outstanding under a line of credit with a bank. The borrowing was secured by our cash on deposit with the bank and bears interest at prime ( i 7.8% at  March 31, 2023). There were no stipulated repayment terms for the line as long as we maintained sufficient cash collateral. We repaid the amounts borrowed under the line of credit in full in April 2023. Our borrowings under the line of credit averaged $ i 1.8 million in the three months ended  March 31, 2023, at an average annual interest rate of  i 7.7%.

Long-term debt consists of the following (in thousands).

In January 2023, we entered into agreements with the Lender to effect a modification of the terms of the mortgage promissory note. This modification involved us entering into a new mortgage promissory note in the principal amount of $ i 2.5 million. We received $ i 0.3 million in cash and the Lender applied the remainder of the new principal to the $ i 1.3 million then outstanding on the prior mortgage promissory note and the $ i 0.9 million Over-advance. Under the terms of the January 2023 note, (i) interest accrues at the same rate as the prior note, an annual rate which is the greater of  i 7.0% above the 1ender’s prime rate and  i 10.3%, and (ii) principal and interest are payable in equal monthly installments through January 2025. Prior to the modification, principal and interest were payable in equal monthly installments through December 2023. The new note is secured by a mortgage on our real property in Arkansas. The current portion of long-term debt on the consolidated balance sheet as of December 31, 2022, reflects the terms of the January 2023 modification.

Future principal maturities of long-term debt outstanding as of  March 31, 2023, follow (in thousands).

NOTE 10. EQUITY, SHARE-BASED COMPENSATION AND WARRANTS

A summary of equity activity for the three months ended March 31, 2023 and 2022, follows (in thousands, except share amounts).

Share-based compensation by type of award for the three months ended March 31, 2023, follows (in thousands).

We have outstanding (i) restricted stock units issued under the 2014 Plan (RSUs) to employees and directors and (ii) other restricted stock units held by a service provider (SUs). Each RSU and SU represents a contingent right to receive one share of common stock. Summaries of nonvested and vested restricted stock unit activity follow.

As of March 31, 2023, issuance of  i 466,603 shares of common stock subject to certain RSUs,  i 320,813 of which are vested, is deferred to the date the holder is no longer providing service to RiceBran Technologies.

In April 2023,  i 89,143 RSUs were forfeited upon the resignation of our former chief financial officer, resulting in a $ i 0.3 million reduction in unrecognized compensation.

NOTE 11. INCOME TAXES

Our tax expense for the three months ended  March 31, 2023 and 2022, differs from the tax expense computed by applying the U.S. statutory tax rate to loss before income taxes as no tax benefits were recorded for tax losses generated in the U.S. As of March 31, 2023, we had deferred tax assets primarily related to U.S. federal and state tax loss carryforwards. We provided a full valuation allowance against our deferred tax assets as future realization of such assets is not more likely than not to occur.

NOTE 12. LOSS PER SHARE (EPS)

We calculate basic EPS under the two-class method under which all earnings (distributed and undistributed) are allocated to each class of common stock and participating securities based on their respective rights to receive dividends. Our outstanding convertible preferred stock are considered participating securities as the holders may participate in undistributed earnings with holders of common shares and are not obligated to share in our net losses.

We calculate diluted EPS by dividing the net income attributable to RiceBran Technologies common shareholders by the weighted average number of common shares outstanding during the period increased by the number of additional common shares that would have been outstanding if the impact of assumed exercises and conversions is dilutive. We calculate the dilutive effects of outstanding options, warrants and nonvested restricted stock units that vest solely on the basis of a service condition using the treasury stock method. We calculate the dilutive effects of outstanding preferred stock using the if-converted method.

Reconciliations of the numerators and denominators in the EPS computations follow.

No effects of potentially dilutive securities outstanding were included in the calculation of diluted EPS for the three months ended March 31, 2023 and 2022, because to do so would be antidilutive as a result of our net loss. Potentially dilutive securities outstanding at March 31, 2023, included our outstanding convertible preferred stock, options, warrants and nonvested restricted stock units.

NOTE 13. FAIR VALUE MEASUREMENTS

The fair value of cash and cash equivalents, accounts receivable, accounts payable. commodities payable and short-term debt approximates their carrying value due to shorter maturities. As of March 31, 2023, the fair value of our operating lease liabilities was approximately $ i 0.3 million lower than their carrying values, based on current market rates for similar debt and leases with similar maturities (Level 3 measurements), and the fair values of our long-term debt and finance lease liabilities approximated their carrying values, based on current market rates for similar debt and leases with similar maturities (Level 3 measurements).

The following tables summarize the fair values by input hierarchy of items measured at fair value on a recurring basis on our consolidated balance sheets (in thousands):

The following tables summarize the changes in level 3 items measured at fair value on a recurring basis for the three months ended March 31, 2023, (in thousands):

The derivative warrant liability relates to a warrant issued in September 2021 for the purchase of up to  i 230,769 shares of common stock (Warrant A), The current $ i 2.72 per share exercise price of Warrant A is subject to adjustment in September 2023 to  i 110% of the 5-day volume weighted average price of our common stock if that price is less than $ i 2.72 per share. We classify Warrant A in our consolidated balance sheets as derivative warrant liability because the holder may elect cash settlement of this warrant in the event of a change of control. We estimated the fair value of Warrant A as of March 31, 2023, and December 31, 2022, using the Black-Scholes value of a warrant with an exercise price of $ i 2.72 per share. The changes in the estimated fair value of Warrant A are included in other income (loss) in our consolidated statements of operations. The assumptions used in valuing Warrant A follow.

The fair value of Warrant A approximates the cash settlement the holder could elect to be paid in the event of a change in control. At March 31, 2023, a $ i 0.10 increase in our stock price would have resulted in approximately a $ i 15 thousand increase in the Black Scholes fair value of Warrant A.

NOTE 14. COMMITMENTS AND CONTINGENCIES

Employment Contracts and Severance Payments

In the normal course of business, we periodically enter into employment agreements which incorporate indemnification provisions. While the maximum amount to which we may be exposed under such agreements cannot be reasonably estimated, we maintain insurance coverage, which we believe will effectively mitigate our obligations under these indemnification provisions. No amounts have been recorded in our financial statements with respect to any obligations under such agreements.

We have employment contracts with certain officers and key management that include provisions for potential severance payments in the event of without-cause terminations or terminations under certain circumstances after a change in control. In addition, vesting of outstanding nonvested equity grants would accelerate following a change in control.

Legal Matters

From time to time, we are involved in litigation incidental to the conduct of our business. These matters may relate to employment and labor claims, patent and intellectual property claims, claims of alleged non-compliance with contract provisions and claims related to alleged violations of laws and regulations. When applicable, we record accruals for contingencies when it is probable that a liability will be incurred and the amount of loss can be reasonably estimated. While the outcome of lawsuits and other proceedings against us cannot be predicted with certainty, in the opinion of management, individually or in the aggregate, no such lawsuits are expected to have a material effect on our financial position or results of operations. We expense defense as incurred. Defense costs, when incurred, are included in selling, general and administrative expense.

In  January 2023, we received $ i 0.3 million in restitution payments from a former employee. The payments were ordered by a federal court in 2012. Other income in the three months ended March 31, 2023, includes a $ i 0.3 million gain as a result of collecting the restitution payment.