SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
____________________
FORM
10-Q
(Mark
one)
[x]
|
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934
|
For
the
quarterly period ended March 31, 2007
[
]
|
TRANSITION
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF
1934
|
For
the
transition period from ________ to
________
Commission
File Number 0-32565
____________________
NUTRACEA
(Exact
Name of Registrant as Specified in its Charter)
California
(State
or other jurisdiction of
incorporation
or organization)
|
87-0673375
(I.R.S.
Employer Identification No.)
|
5090
North 40th
St., Suite 400
Phoenix,
AZ
(Address
of Principal Executive Offices)
|
85018
(Zip
Code)
|
Issuer’s
telephone number, including area code: (602)
522-3000
1261
Hawk’s Flight Court, El Dorado Hills, California
95762
(Former
Name, Former Address and Former Fiscal Year, if Changed Since Last
Report)
____________________
|
Check
whether the issuer (1) filed all reports required to be filed by Section
13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
X
No
______
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
l2b-2 of the Exchange Act). Yes
No
_X_
APPLICABLE
ONLY TO CORPORATE ISSUERS
State
the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: 135,626,000 as of April 27,
2007.
FORM
10-QSB
Index
PART
I.
|
FINANCIAL
INFORMATION
|
|
|
|
|
Item
1.
|
Financial
Statements
|
|
|
|
|
|
(a)
|
Consolidated
Condensed Balance Sheets at March 31, 2007 (Un-audited) and
December 31,
2006
|
4
|
|
|
|
|
(b)
|
Consolidated
Condensed Statements of Operations for the quarters ended March
31, 2007
and 2006 (Un-audited)
|
5
|
|
|
|
|
|
(c)
|
Consolidated
Condensed Statements of Comprehensive Loss for the quarters
ended March
31, 2007 and 2006 (Un-audited)
|
6
|
|
|
|
|
(d)
|
Consolidated
Condensed Statements of Cash Flows for the quarters ended March
31, 2007
and 2006 (Un-audited)
|
7
|
|
|
|
|
(e)
|
Notes
to Un-audited Consolidated Condensed Financial Statements
|
8
|
|
|
|
Item
2.
|
Management’s
Discussion and Analysis or Plan of Operation
|
14
|
|
|
|
Item
3.
|
Controls
and Procedures
|
17
|
|
|
|
PART
II.
|
OTHER
INFORMATION
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
17
|
|
|
|
Item
1A.
|
Risk
Factors
|
17
|
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
23
|
|
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
24
|
|
|
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
24
|
|
|
|
Item
5.
|
Other
Information
|
24
|
|
|
|
Item
6.
|
Exhibits
|
24
|
|
|
|
Signatures
|
|
|
26
|
|
|
|
|
Certifications
|
|
|
|
FORWARD-LOOKING
STATEMENTS
This
quarterly report on Form 10-Q contains “forward-looking statements” within the
meaning of the Private Securities Litigation Reform Act of 1995. All statements
other than statements of historical fact are “forward-looking statements” for
purposes of federal and state securities laws, including, but not limited
to,
any projections of earnings, revenue or other financial items; any statements
of
the plans, strategies and objectives of management for future operations;
any
statements concerning proposed new services or developments; any statements
regarding future economic conditions or performance; any statements of belief;
and any statements of assumptions underlying any of the foregoing.
Forward-looking
statements may include the words “may,” “could,” “will,” “estimate,” “intend,”
“continue,” “believe,” “expect” or “anticipate” or other similar words. The
forward-looking statements contained herein reflect our current views with
respect to future events and are subject to certain risks, uncertainties
and
assumptions. Actual results may differ materially from those projected. in
such
forward-looking statements due to a number of factors, risks and uncertainties,
including the factors that may affect future results set forth in this Current
Report on Form 10-Q and in our annual Report on Form 10-K for the year ended
December 31, 2006. We disclaim any obligation to update any forward looking
statements as a result of developments occurring after the date of this
quarterly report.
PART
1. |
FINANCIAL
INFORMATION
|
Item
1. |
Financial
Statements
|
NUTRACEA
AND SUBSIDIARIES
|
|
March
31,
2007
(Un-audited)
|
|
December
31,
2006
|
|
ASSETS
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
61,769,000
|
|
$
|
14,867,000
|
|
Marketable
securities
|
|
|
368,000
|
|
|
368,000
|
|
Trade
accounts receivable, net
|
|
|
3,214,000
|
|
|
7,093,000
|
|
Inventories
|
|
|
1,343,000
|
|
|
796,000
|
|
Notes
receivable, net of discount, current portion
|
|
|
4,928,000
|
|
|
1,694,000
|
|
Deposits
and other current assets
|
|
|
2,061,000
|
|
|
1,383,000
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
73,683,000
|
|
|
26,201,000
|
|
|
|
|
|
|
|
|
|
Notes
receivable, net of current portion
|
|
|
648,000
|
|
|
682,000
|
|
Property
and equipment, net
|
|
|
11,139,000
|
|
|
8,961,000
|
|
Patents,
trademarks, and other intangible assets, net
|
|
|
5,021,000
|
|
|
5,097,000
|
|
Goodwill
|
|
|
32,314,000
|
|
|
32,314,000
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
122,805,000
|
|
$
|
73,255,000
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
Accounts
payable and accrued liabilities
|
|
$
|
1,399,000
|
|
$
|
2,778,000
|
|
Deferred
revenue
|
|
|
34,000
|
|
|
103,000
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
1,433,000
|
|
|
2,881,000
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible,
series B preferred stock, no par value, $1,000 stated value 20,000,000
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, 2 and 5,468 shares issued and
outstanding
|
|
|
2,000
|
|
|
5,051,000
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity
|
|
|
|
|
|
|
|
Common
stock, no par value 200,000,000
shares authorized, 134,817,754
and 103,792,827 shares issued and outstanding in
2007 and 2006, respectively
|
|
|
170,844,000
|
|
|
114,111,000
|
|
Accumulated
deficit
|
|
|
(49,552,000
|
)
|
|
(49,305,000
|
)
|
Accumulated
other comprehensive income, unrealized gain on marketable
securities
|
|
|
78,000
|
|
|
78,000
|
|
Total
shareholders’ equity
|
|
|
121,370,000
|
|
|
64,884,000
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
122,805,000
|
|
$
|
73,255,000
|
|
The
accompanying notes are an integral part of these consolidated condensed
financial statements.
NUTRACEA
AND SUBSIDIARIES
(Un-audited)
|
|
Quarters
ended
|
|
|
|
March
31, 2007
|
|
March
31, 2006
|
|
Revenues
|
|
|
|
|
|
Net
product sales
|
|
$
|
1,987,000
|
|
$
|
3,773,000
|
|
Royalty
|
|
|
10,000
|
|
|
9,000
|
|
Total
revenue
|
|
|
1,997,000
|
|
|
3,782,000
|
|
|
|
|
|
|
|
|
|
Cost
of goods sold
|
|
|
1,113,000
|
|
|
2,100,000
|
|
|
|
|
|
|
|
|
|
Gross
Margin
|
|
|
884,000
|
|
|
1,682,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research
and development expenses
|
|
|
121,000
|
|
|
98,000
|
|
Selling,
general and administrative expenses
|
|
|
2,313,000
|
|
|
1,535,000
|
|
Professional
fees
|
|
|
459,000
|
|
|
308,000
|
|
Total operating expenses
|
|
|
2,893,000
|
|
|
1,941,000
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(2,009,000
|
)
|
|
(259,000
|
)
|
Other
income (expense)
|
|
|
|
|
|
|
|
Interest
and other income
|
|
|
512,000
|
|
|
26,000
|
|
Gain
on settlement
|
|
|
1,250,000
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(247,000
|
)
|
$
|
(233,000
|
)
|
|
|
|
|
|
|
|
|
Basic
and diluted earnings per share:
|
|
|
|
|
|
|
|
Basic
loss per share
|
|
$
|
0.00
|
|
$
|
(0.00
|
)
|
Fully
diluted loss per share
|
|
$
|
0.00
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
Weighted
average basic number of shares outstanding
|
|
|
111,959,000
|
|
|
67,119,000
|
|
Weighted
average fully diluted number of shares outstanding
|
|
|
111,959,000
|
|
|
67,119,000
|
|
The
accompanying notes are an integral part of these
consolidated condensed financial statements.
NUTRACEA
AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF COMPREHENSIVE LOSS
(Un-audited)
|
|
Quarters
ended
|
|
|
|
March
31, 2007
|
|
March
31, 2006
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(247,000
|
)
|
$
|
(233,000
|
)
|
|
|
|
|
|
|
|
|
Other
comprehensive loss:
|
|
|
|
|
|
|
|
Unrealized
loss on marketable securities
|
|
|
-
|
|
|
(8,000
|
)
|
|
|
|
|
|
|
|
|
Net
comprehensive loss
|
|
$
|
(247,000
|
)
|
$
|
(241,000
|
)
|
The
accompanying notes are an integral part of these
consolidated condensed financial statements.
NUTRACEA
AND SUBSIDIARIES
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
(Un-audited)
|
|
Quarters
ended
|
|
|
|
March
31, 2007
|
|
March
31, 2006
|
|
Cash
flow from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(247,000
|
)
|
$
|
(233,000
|
)
|
Adjustments
to reconcile net loss to net cash from operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
278,000
|
|
|
263,000
|
|
Stock-based
compensation
|
|
|
438,000
|
|
|
389,000
|
|
Recognition
of deferred income
|
|
|
(69,000
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
Net
changes in operating assets and liabilities
|
|
|
|
|
|
|
|
Trade
accounts receivable
|
|
|
363,000
|
|
|
(541,000
|
)
|
Inventories
|
|
|
(547,000
|
)
|
|
(104,000
|
)
|
Deposits
and other current assets
|
|
|
(678,000
|
)
|
|
(33,000
|
)
|
Accounts
payable and accrued liabilities
|
|
|
(1,379,000
|
)
|
|
471,000
|
|
Net
cash provided (used in) provided by operating activities
|
|
|
(1,841,000
|
)
|
|
212,000
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities
|
|
|
|
|
|
|
|
Proceeds
from payments of notes receivable
|
|
|
625,000
|
|
|
-
|
|
Issuance of
notes receivable
|
|
|
(309,000 |
)
|
|
|
|
Purchases
of property and equipment, and other assets
|
|
|
(2,356,000
|
)
|
|
(731,00
|
)
|
Purchases
of patents, trademarks, and other intangible assets
|
|
|
(24,000
|
)
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(2,064,000
|
)
|
|
(731,000
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities
|
|
|
|
|
|
|
|
Proceeds
from private placement financing, net of expenses
|
|
|
46,877,000
|
|
|
-
|
|
Proceeds
from exercise of common stock options
|
|
|
3,930,000
|
|
|
-
|
|
Payment
on long-term debt
|
|
|
-
|
|
|
(2,000
|
)
|
Net
cash provided by (used in) financing activities
|
|
|
50,807,000
|
|
|
(1,000
|
)
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
46,902,000
|
|
|
(521,000
|
)
|
|
|
|
|
|
|
|
|
Cash,
beginning of period
|
|
|
14,867,000
|
|
|
3,491,000
|
|
|
|
|
|
|
|
|
|
Cash,
end of period
|
|
$
|
61,769,000
|
|
$
|
2,970,000
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
-
|
|
$
|
-
|
|
Cash
paid for income taxes
|
|
$
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Non-cash
disclosures of investing and financing activities:
|
|
|
|
|
|
|
|
Accounts
receivable converted to note receivable
|
|
$
|
3,516,000
|
|
$
|
-
|
|
Conversion
of preferred stock to common stock
|
|
$
|
5,488,000
|
|
$
|
1,375,000
|
|
The
accompanying notes are an integral part of these
consolidated condensed financial statements.
NUTRACEA
AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED CONEDNSED FINANCIAL STATEMENTS
1. BASIS
OF PRESENTATION
The
accompanying un-audited interim consolidated condensed financial statements
of
NutraCea have been prepared in accordance with accounting principles generally
accepted in the United States of America and the rules of the Securities
and
Exchange Commission (“SEC”), and should be read in conjunction with the audited
consolidated financial statements and notes thereto contained in NutraCea’s
Annual Report filed with the SEC on Form 10-K. In the opinion of management,
all
adjustments, consisting of normal recurring adjustments, necessary for a
fair
presentation of financial position and the results of operations for the
interim
periods presented have been reflected herein. The results of operations for
interim periods are not necessarily indicative of the results to be expected
for
the full year. Notes to the consolidated financial statements that would
substantially duplicate the disclosures contained in the audited financial
statements for 2006 as reported in the 10-K have been omitted.
2. 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 quarters ended March 31, 2007 and
2006
reflect the impact of adopting SFAS 123(R).
Stock-based
compensation expenses totaled $438,000 for the quarter ended March 31, 2007,
of
which approximately $55,000 related to the issuance of common stock to a
former
director for services (see Note 11) and a total of $383,000 related to the
vesting of options and warrants issued to employees and consultants for services
rendered. In the quarter ended March 31, 2006, stock-based compensation
expenditures totaled $389,000, of which $15,000 related to the issuance of
common stock to consultants and directors and a total of $374,000 related
to the
vesting of warrants and options issued to consultants and employees. 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.
The
weighted average grant date fair value of the stock options granted during
the
three months ended March 31, 2007 and 2006 was $2.50 and $1.31 per share,
respectively. Variables used in the Black-Scholes option-pricing model include
(1) risk-free discount rates from 4.51% to 4.84%, (2) expected option life
is
the actual remaining life of the options as of each period end, (3) expected
volatility is 99.9% to 324.1% and (4) zero expected dividends.
3. 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.
Per
the
agreement with Langley, NutraCea may sell 636,013 shares of Langley at any
time,
and the remaining 636,013 shares of Langley and the 7,000,000 shares of NutraCea
are escrowed together for a 2-year period ending October 7, 2006. At the
end of
the period, Langley’s NutraCea shares are measured for any loss in market value
and if so, NutraCea must give up that pro-rata portion of its Langley shares
up
to the escrowed 636,013 shares.
As
of
March 31, 2007, the NutraCea shares have not lost any value. However, the
Langley shares are marked down to their fair market value of $368,000, with
the
entire amount shown as a current asset because the escrow period has passed
and
we may now sell all 1,272,026 shares at any time.
Any
unrealized holding gains and losses on the marketable securities are excluded
from operating results and are recognized as other comprehensive income.
The
fair value of the securities is determined based on prevailing market
prices.
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 the income statement as other income.
4. INVENTORY
Inventories
are composed of the following;
|
|
March
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Finished
goods
|
|
$
|
1,131,000
|
|
$
|
533,000
|
|
Raw
materials
|
|
|
64,000
|
|
|
168,000
|
|
|
|
|
148,000
|
|
|
95,000
|
|
|
|
$
|
1,343,000
|
|
$
|
$
796,000
|
|
5. NOTES
RECEIVABLE
At
March
31, 2007, we have eight (8) secured promissory notes outstanding to the Company
with an aggregate amount of $5,576,000 (net of note discount of $3,000);
$4,928,000 is reported as current and $648,000 as long-term. These secured
promissory notes bear interest at annual rates from five (5%) to eight (8%)
with
the principal and all accrued interest due and payable to us at dates ranging
from February 2007 to October 2012. During the current quarter we extended
notes
to certain strategic customers totaling $3,832,000 and received payments
against
existing notes of $625,000.
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.
6. PROPERTY
AND EQUIPMENT
Land,
property and equipment consists of the following:
|
|
March
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Land
|
|
$
|
9,000
|
|
$
|
9,000
|
|
Furniture
and fixtures
|
|
|
1,377,000
|
|
|
916,000
|
|
Vehicles
|
|
|
73,000
|
|
|
73,000
|
|
Software
|
|
|
389,000
|
|
|
389,000
|
|
Leasehold
improvements
|
|
|
868,000
|
|
|
430,000
|
|
Property,
plant and equipment
|
|
|
4,197,000
|
|
|
4,197,000
|
|
Construction
in progress
|
|
|
5,849,000
|
|
|
4,392,000
|
|
Total
property, plant, and equipment
|
|
|
12,762,000
|
|
|
10,406,000
|
|
|
|
|
|
|
|
|
|
Less
accumulated depreciation
|
|
|
(1,623,000
|
)
|
|
(1,445,000
|
)
|
Total
property, plant, and equipment, net
|
|
$
|
11,139,000
|
|
$
|
8,961,000
|
|
Depreciation
expense for the three months ended March 31, 2007 and 2006 was $178,000 and
$228,000, respectively.
7. PATENTS
AND TRADEMARKS AND OTHER INTANGIBLE ASSETS
Patents
and trademarks consisted of the following at:
|
|
March
31,
|
|
December
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Patents
|
|
$
|
2,560,000
|
|
$
|
2,540,000
|
|
Trademarks
|
|
|
2,991,000
|
|
|
2,787,000
|
|
Sub-total
|
|
|
5,551,000
|
|
|
5,327,000
|
|
Less
accumulated amortization
|
|
|
(530,000
|
)
|
|
(430,000
|
)
|
Total
patents and trademarks
|
|
$
|
5,021,000
|
|
$
|
4,897,000
|
|
Amortization
expense for the three months ended March 31, 2007 and 2006 was $100,000 and
$35,000, respectively.
8. LOSS
PER SHARE
Basic
net
loss per share is computed by dividing net loss by the weighted average number
of common shares outstanding during all periods presented. Options and
warrants are excluded from the basic net loss per share calculation and are
considered in calculating the diluted net loss per share.
The
dilutive effect of outstanding options, 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.
Components
of basic and diluted earnings per share were as follows:
|
|
Three
Months Ended
March
31,
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(247,000
|
)
|
$
|
(233,000
|
)
|
|
|
|
|
|
|
|
|
Weighted
average outstanding shares of common stock
|
|
|
111,959,000
|
|
|
67,119,000
|
|
Dilutive
effect of preferred stock
|
|
|
-
|
|
|
-
|
|
Dilutive
effect of employee stock options and awards
|
|
|
-
|
|
|
-
|
|
Common
stock and common stock equivalents
|
|
|
111,959,000
|
|
|
67,119,000
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
Basic
|
|
$
|
(0.00
|
)
|
$
|
(0.00
|
)
|
Diluted
|
|
$
|
(0.00
|
)
|
$
|
(0.00
|
)
|
At
March
31, 2007 there were approximately 51,444,000 options and warrants to purchase
one (1) share of common stock, and 2 shares of Series C preferred stock
convertible into 1,176 shares each of common stock outstanding. These are
excluded from the calculation of diluted earnings per share because their
inclusion would have been anti-dilutive.
At
March
31, 2006, there were approximately 37,082,000 options and warrants to purchase
one (1) share of common stock outstanding, 470 shares of Series B Convertible
Preferred Stock convertible into 940,000 common shares, and 5,468 shares
of
Series C Convertible Preferred Stock convertible into 6,430,368 common shares,
These are excluded from the calculation of diluted earnings per share because
their inclusion would have been anti-dilutive.
9. CONCENTRATION
OF CREDIT RISK
Financial
instruments that potentially subject us to significant concentrations of
credit
risk consist primarily of trade accounts receivable for sales to major
customers. We perform credit evaluations on our customers’ financial condition
and generally do not require collateral on accounts receivable. We maintain
an
allowance for doubtful accounts on our receivables based upon expected
collection of all accounts receivable. Uncollected accounts have not been
significant.
For
the
three months ended March 31, 2007, five customers accounted for a total of
42%
of sales: 13%, 9%, 8%, 6% and 6% respectively. No other customer was responsible
for more than 5% of total sales. At March 31, 2007, three customers accounted
for 64% of total accounts receivable: 48%, 11%, and 5%, respectively. No
other
customer accounted for more than 4% of the total outstanding accounts
receivable.
For
the
three months ended March 31, 2006, four customers accounted for a total of
80%
of sales: 69%, 4%, 4%, and 3% respectively. At March 31, 2006, accounts
receivable due from these four customers were 76%, 1%, 1%, and 4%, respectively,
of the total outstanding accounts receivable.
10. COMMITMENTS
AND CONTINGENCIES
Employment
Agreement
In
the
first quarter of 2007, we entered into an employment agreement for a Chief
Operating Officer. This contract is for three years and includes options
to
purchase 250,000 shares of our common stock vesting evenly over the 36 months.
The cash compensation commitment under this employment contract is $220,000
per
year. Our Chief Operating Officer received a cash signing bonus of $150,000
in
April 2007.
For
all
agreements where stock is awarded partial or full consideration, the expense
is
valued at the fair value of the stock.
11. STOCKHOLDERS
EQUITY
Common
Stock
During
the three months ended March 31, 2007:
Four
(4)
stockholders converted 470 shares of Series B Convertible 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
share.
Seventeen
(17) stockholders converted 5,466 shares of Series B Convertible preferred
Stock
into 6,430,580 shares of our common stock. The preferred shares converted
at a
conversion rate of 1,176 shares of common stock for each preferred
share.
Twenty-one
(21) stockholders exercised options or warrants and received a total of
3,451,959 shares of common stock for an aggregate purchase price of
$3,929.979.
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.
Options
and Warrants
During
the three months ended March 31, 2007:
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. For this period a stock option expense of $27,000 was charged for
the
vesting options.
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. These warrants vest in periods after March 31,
2007
therefore no expense was recognized in the current quarter.
The
expense for stock options and warrants issued to consultants and employees
are
calculated at fair value using the Black-Scholes valuation method.
February 2007
Private Placement
In
addition to the foregoing issuances of our securities, 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. The fair value of these
11,200,000 warrants using the Black-Scholes method is approximately $29,153,000.
If exercised the company would receive $36,400,000.
12. SUBSEQUENT
EVENTS
During
April and May 2007;
Five
(5)
stockholders exercised options or warrants and received for a total of 808,095
shares of common stock for an aggregate purchase price of approximately
$467,000.
Six
(6)
employees were issued options to purchase a total of 190,000 shares of common
stock with vesting periods ranging from immediately to two years. The options
expire in ten years and have exercise prices per share of $3.03 to $4.05.
We
issued
to one (1) consultant a warrant to purchase a total of 25,000 shares of common
stock at an exercise price of $3.27 that vest as to 5,000 warrant shares
each
calendar quarter.
In
April,
we acquired shares of convertible preferred stock and secured convertible
notes
of a customer from the holders of those outstanding securities, for an aggregate
of approximately $5,200,000. Commencing in July 2007, the notes can be converted
into shares of common stock of the customer.
In
April 2007, we extended a $500,000 note to another
customer. This note included the conversion of $365,000 of that customer's
accounts receivable and bears interest at 10%, is secured by over $4,000,000
of
the customer's assets, and is due in less than one year.
On
May 1,
2007 we purchased a facility located in the southwest that included machinery
and customer lists which enables us to produce equine pellets using
our stabilized rice bran, and would result in our being able to provide
the only source of Stabilized Rce Bran ("SRB") pellets in the equine feed
marketplace. The purchase price was $2,150,000 in cash with a put option
back to the seller’s shareholders if representations and performance
do not meet levels specified in the agreement during the initial six
months of operations. The initial outlay of cash was $1,605,000 with
the balance payable after 6 and 12 months as hold backs.
13. IMPLEMENTATION
OF RECENT ACCOUNTING PRONOUNCEMENTS
During
the first fiscal quarter of 2007, we implemented the following new critical
accounting policies;
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 158,
Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106, and
123(R)
(SFAS
158).
Under
SFAS 158, companies must: a) recognize a net liability or asset to report
the
funded status of their plans on their statement of financial position, b)
measure a plan’s assets and its obligations that determine its funded status as
of the end of the employer’s fiscal year, and c) recognize changes in the funded
status of a defined benefit postretirement plan in the year in which the
changes
occur in comprehensive income. The Company adopted the measurement date
provisions of SFAS 158 effective October 1, 2006. The Company will adopt
the recognition provisions of SFAS 158 as of the end of fiscal year 2007
as
required by SFAS 158.
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 adoption
of FIN 48 did not have a material impact on the Company’s financial position or
results of operations.
In
December 2006, the FASB issued FASB Staff Position EITF 00-19-2,
Accounting
for Registration Payment Arrangements
(“FSP
EITF 00-19-2”), which provides guidance on the accounting for registration
payment arrangements. FSP EITF 00-19-2 specifies that the contingent
obligation to make future payments or otherwise transfer consideration under
a
registration payment arrangement, whether issued as a separate agreement
or
included as a provision of a financial instrument or other agreement, should
be
separately recognized and measured in accordance with FASB Statement No. 5,
Accounting
for Contingencies.
A
registration payment arrangement is defined in FSP EITF 00-19-2 as an
arrangement with both of the following characteristics: (1) the
arrangement specifies that the issuer will endeavor (a) to file a
registration statement for the resale of specified financial instruments
and/or
for the resale of equity shares that are issuable upon exercise or conversion
of
specified financial instruments and for that registration statement to be
declared effective by the Securities and Exchange Commission within a specified
grace period, and/or (b) to maintain the effectiveness of the registration
statement for a specified period of time (or in perpetuity); and (2) the
arrangement requires the issuer to transfer consideration to the counterparty
if
the registration statement for the resale of the financial instrument or
instruments subject to the arrangement is not declared effective or if
effectiveness of the registration statement is not maintained. FSP
EITF 00-19-2 is effective for registration payment arrangements and the
financial instruments subject to those arrangements that are entered into
or
modified subsequent to December 21, 2006. For registration payment
arrangements and financial instruments subject to those arrangements that
were
entered into prior to the issuance of FSP EITF 00-19-2, this guidance is
effective for financial statements issued for fiscal years beginning after
December 15, 2006, and interim periods within those fiscal years. The
adoption of FSP EITF 00-19-2 on January 1, 2007 did not have a
material impact on the Company’s financial position or results of
operations.
Recent
Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS
159). SFAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value that are not currently required to
be
measured at fair value. SFAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
SFAS 159 is effective for the Company’s year ending September 30, 2009. The
Company is currently evaluating the impact of SFAS 159 on the Company’s
financial statements.
Item
2. |
Management’s
Discussion and Analysis or Plan of
Operation
|
NutraCea
is 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 until recently
was 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") as well as cosmetics and beauty aids
based
on stabilized rice bran, rice bran derivatives and the rice bran
oils.
The
following is a discussion of the consolidated financial condition of our
results
of operations for the quarters ended March 31, 2007 and 2006.
QUARTERS
ENDED MARCH 31, 2007 AND 2006
For
the
three months ended March 31, 2007, the Company’s net loss was $247,000, or $0.00
per share, compared to a $233,000 net loss, or $0.00 per share, in the same
period of 2006, showing an additional loss of $14,000. The additional loss
for
the quarter was primarily due to a $1,250,000 gain on the settlement of a
lawsuit (see Note 3), and an increase of $486,000 in interest income, offset
by
a $798,000 decrease in gross margins and an increase of $952,000 in total
operating expenses.
Consolidated
revenues through March 31, 2007 of $1,997,000 decreased $1,785,000, or 47%,
from
the same period last year. The revenue decrease is primarily attributed to
decreased infomercial sales and not recognizing $2,600,000 of purchase orders
(see below).
During
quarter ended March 31, 2007 we received $2,600,000 of purchase orders for
product that we produced for to three new customers but we did not
recognize revenues for reasons including the timing of the acceptance of
delivery by the customers and labels not being completed by the third-party
co-packer. The labeling is the responsibility of the customer. We
anticipate recognizing the revenue from these orders in the second
quarter of 2007 when we receive payment.
Gross
margins in the quarter ended March 31, 2007 were $884,000, or 44%, compared
to
$1,682,000, or 45%, during the same period last year. Gross margins 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.
Research
and Development (“R&D”) expenses increased from $98,000 for the quarter
ended March 31, 2006 to $122,000 for the quarter ended March 31, 2007, or
an
increase of $23,000. The increase was attributed to higher product development
costs and employee related expenses due to increased R&D activities and
expanded scientific staff compared to the same period last year. The Company
expects to continue research and development expenditures to establish the
scientific basis for health claims of existing products and to develop new
products and applications.
Sales,
General and Administrative expenses were $2,313,000 and $1,535,000 in the
quarterly periods ended March 31, 2007 and 2006 respectively, an increase
of
$778,000, or 51%. The increase was largely due to growth in payroll and
marketing related costs. Salaries and benefits costs increased $417,000 during
the period ended March 31, 2007 compared to this period last year and marketing
costs due to increased tradeshow participation increased $198,000, reflecting
necessary investments in personnel and marketing to sustain the anticipated
growth in sales.
Professional
fees increased $151,000 from $308,000 for the quarter ended March 31, 2006
to
$459,000 for the quarter ended March 31, 2007. The higher professional fees
in
2007 primarily relate to consulting fees incurred in connection with marketing
and business development activities. Professional fees include costs related
to
accounting, legal and consulting services.
LIQUIDITY
AND CAPITAL RESOURCES
As
of
March 31, 2007, our source of liquidity was cash in the amount of $61,769,000.
Our cash was $14,867,000 at December 31, 2006, an increase of $46,902,000
for
the quarter ended March 31, 2007. For the first quarter of 2007, net cash
used
in operations was $1,841,000, compared to net cash provided by operations
in the
same period of 2006 of $212,000, a decrease of $2,053,000. This increase
in cash
used in operations resulted primarily from the $1,379,000 reduction in accounts
payable, a $678,000 increase in deposits and other current assets, a $547,000
increase in inventories, offset by the $363,000 decrease in accounts receivable
during the period (net of a conversion of a customers’ accounts receivable of
$3,516,000 to a short-term note receivable, see Note 5).
Cash
used
in investing activities in the first quarter of 2007 was $2,064,000, compared
to
$731,000 for the same period of 2006. This increase was primarily caused
by our
current plant expansion expenditures of $2,356,000 offset by payments against
notes receivable of $316,000 to certain strategic partners (net of a conversion
of a customers’ accounts receivable of $3,516,000 to a short-term note
receivable, see Note 5).
Cash
provided by financing activities for the period ended March 31, 2007, was
approximately $50,807,000, which reflects proceeds from our private placement
financing (see below) and exercises of common stock options and warrants.
Our
working capital position as of March 31, 2007 was $72,250,000 compared to
$23,320,000 reported in our annual report of December 31, 2006.
On
February 15, 2007, we sold an aggregate of 20,00,000 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 (approximately $47,000,000 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, and 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.
In
April
2007, we acquired shares of convertible preferred stock and secured convertible
notes of a customer from the holders of those outstanding securities, for
an
aggregate of approximately $5,200,000. Commencing in July 2007, the notes
can be
converted into shares of common stock of the customer.
On
May 1,
2007 we purchased a facility located in the southwest that included machinery
and customer lists which enables us to produce stabilized rice bran pellets
and
provide the only source of SRB pellets in the equine feed marketplace.
The purchase price was $2,150,000 in cash with a put option back to
the seller’s shareholders if representations and performance not
measure up during the initial six months of operations. The initial
outlay of cash was $1,605,000 with the balance payable after 6 and 12
months as hold backs.
We
have
sufficient cash reserves to meet all anticipated short-term operating
requirements. We believe we can increase our production capacity to meet
our
sales demand with our current cash reserves and results of
operations.
CRITICAL
ACCOUNTING POLICIES
Our
discussion and analysis of our financial condition and results of operations
are
based upon unaudited consolidated condensed financial statements, which have
been prepared in accordance with accounting principles generally accepted
in the
United States of America. The preparation of financial statements requires
management to make estimates and judgments that affect the reported amounts
of
assets and liabilities, revenues and expenses and disclosures on the date
of the
financial statements. On an on-going basis, our accountants evaluate the
estimates, including, but not limited to, those related to revenue recognition.
We use authoritative pronouncements, historical experience and other assumptions
as the basis for making judgments. Actual results could differ from those
estimates.
For
further information about other critical accounting policies, see the discussion
of critical accounting policies in our 2006 Form 10-K for the fiscal year
ended
December 31, 2006.
During
the first fiscal quarter of 2007, we implemented the following new critical
accounting policies;
In
September 2006, the FASB issued Statement of Financial Accounting Standards
(“SFAS”) No. 158,
Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans, an amendment of FASB Statements No. 87, 88, 106, and
123(R)
(SFAS
158).
Under
SFAS 158, companies must: a) recognize a net liability or asset to report
the
funded status of their plans on their statement of financial position, b)
measure a plan’s assets and its obligations that determine its funded status as
of the end of the employer’s fiscal year, and c) recognize changes in the funded
status of a defined benefit postretirement plan in the year in which the
changes
occur in comprehensive income. The Company adopted the measurement date
provisions of SFAS 158 effective October 1, 2006. The Company will adopt
the recognition provisions of SFAS 158 as of the end of fiscal year 2007
as
required by SFAS 158.
In
February 2007, the FASB issued SFAS No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS
159). SFAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value that are not currently required to
be
measured at fair value. SFAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
SFAS 159 is effective for the Company’s year ending September 30, 2009. The
Company is currently evaluating the impact of SFAS 159 on the Company’s
financial statements.
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 SFAS No. 109,
“Accounting
for Income Taxes”.
FIN 48
also prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of an uncertain 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 adoption of FIN 48 did not have a
material impact on the Company’s financial position or results of
operations.
In
December 2006, the FASB issued FASB Staff Position EITF 00-19-2,
Accounting
for Registration Payment Arrangements
(“FSP
EITF 00-19-2”), which provides guidance on the accounting for registration
payment arrangements. FSP EITF 00-19-2 specifies that the contingent
obligation to make future payments or otherwise transfer consideration under
a
registration payment arrangement, whether issued as a separate agreement
or
included as a provision of a financial instrument or other agreement, should
be
separately recognized and measured in accordance with FASB Statement No. 5,
Accounting
for Contingencies.
A
registration payment arrangement is defined in FSP EITF 00-19-2 as an
arrangement with both of the following characteristics: (1) the
arrangement specifies that the issuer will endeavor (a) to file a
registration statement for the resale of specified financial instruments
and/or
for the resale of equity shares that are issuable upon exercise or conversion
of
specified financial instruments and for that registration statement to be
declared effective by the Securities and Exchange Commission within a specified
grace period, and/or (b) to maintain the effectiveness of the registration
statement for a specified period of time (or in perpetuity); and (2) the
arrangement requires the issuer to transfer consideration to the counterparty
if
the registration statement for the resale of the financial instrument or
instruments subject to the arrangement is not declared effective or if
effectiveness of the registration statement is not maintained. FSP
EITF 00-19-2 is effective for registration payment arrangements and the
financial instruments subject to those arrangements that are entered into
or
modified subsequent to December 21, 2006. For registration payment
arrangements and financial instruments subject to those arrangements that
were
entered into prior to the issuance of FSP EITF 00-19-2, this guidance is
effective for financial statements issued for fiscal years beginning after
December 15, 2006, and interim periods within those fiscal years. The
adoption of FSP EITF 00-19-2 on January 1, 2007 did not have a
material impact on the Company’s financial position or results of
operations.
Recent
accounting pronouncements
In
February 2007, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities
(SFAS
159). SFAS 159 permits entities to choose to measure many financial instruments
and certain other items at fair value that are not currently required to
be
measured at fair value. SFAS 159 also establishes presentation and disclosure
requirements designed to facilitate comparisons between entities that choose
different measurement attributes for similar types of assets and liabilities.
SFAS 159 is effective for the Company’s year ending September 30, 2009. The
Company is currently evaluating the impact of SFAS 159 on the Company’s
financial statements. Put in recent pronouncements
Item
3. |
Controls
and Procedures
|
We
carried out an evaluation, under the supervision and with the participation
of
management, including the Company’s principal executive officer and principal
financial officer, of the effectiveness of the design and operation of the
Company’s disclosure controls and procedures (as defined under Rules 13a-15(e)
and 15d-15(e) under the Securities Exchange Act of 1934, as amended) as of
the
end of the period covered by this quarterly report. Based upon that evaluation,
our chief executive officer and our chief financial officer concluded that,
as
of March 31, 2007, NutraCea’s disclosure controls and procedures were adequate
to ensure that information required to be disclosed by NutraCea in reports
filed
or submitted under the Exchange Act were timely recorded, processed and reported
within the time periods specified in the Securities and Exchange Commission
rules and forms.
During
the quarter covered by this report, there was no change in NutraCea’s internal
control over financial reporting that has materially affected, or is reasonably
likely to materially effect, the Company’s internal control over financial
reporting.
PART
2. |
OTHER
INFORMATION
|
Item
1. |
Legal
Proceedings
|
As
previously disclosed in our Annual Report on Form 10-K for the year ended
December 31, 2006, NutraCea commenced a lawsuit on September 8, 2006 against
Langley Park Investments, PLC, a United Kingdom Corporation (“Langley”) in the
United State 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 which were place 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
was
settled in the first quarter of 2007. Pursuant to the settlement,
NutraCea received $1.25 million from the $2.5 million held in escrow
(Langley received the remainder), and NutraCea retained all of the
Langley shares.
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.
Investors
or potential investors in our stock should carefully consider the risks
described below. Our stock price will reflect the performance of our business
relative to, among other things, our competition, expectations of securities
analysts or investors, and general economic market conditions and industry
conditions. One should carefully consider the following factors in connection
with any investment in our stock. Our business, financial condition and results
of operations could be materially adversely affected if any of the following
risks occur. Should any or all of the following risks materialize, the trading
price of our stock could decline, and investors could lose all or part of
their
investment.
Risks
Related to Our Business
We
have a limited operating history and have just generated our first profits
since
we began operations.
We
began
operations in February 2000 and incurred losses in each reporting period
until
2006. 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
2006, we received approximately 67% of product sales revenue from five customers
and approximately 48% of our revenue from one customer. During the first
quarter
of 2007, we received approximately 42% of our revenue from five customers,
with
the largest customer accounting for approximately 13% of our revenue. A loss
of
any of these customers could have a material adverse effect on our revenues
and
results of operations.
We
rely upon a limited number of product offerings.
All
of
our products are 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 products, as well as the products of
other
companies utilizing our 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
(“FRC”) and our single value-added products plant in Dillon, Montana. Between
the Dillon, Montana plant and the facility at FRC, we currently are capable
of
producing just enough finished products to meet current demand. The existing
plants do not allow for dramatic expansion of product demand, therefore domestic
production capacity is needed. Anticipating incremental demand for NutraCea
Products, we completed the first phase of an expansion of the Dillon, Montana
facility in 2006. We have also entered into a new raw rice bran supply agreement
with Louisiana Rice Mill (“LRM”) in Louisiana. The supply agreement led to the
construction of a new Stabilization plant in Mermentau which became operational
in April 2007. These facilities plus another Stabilization and value-added
plant
scheduled to be operational by the end of 2007 should meet our production
needs
for 2007, 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,
although we have not entered into any definitive agreements other than the
agreements with Farmers Rice Cooperative and Louisiana Rice Mill. 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
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
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.
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. 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 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.
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. We raised in private placements of equity
approximately $50,000,000 in February 2007, $17,560,000 in May 2006, and
$8,000,000 in October 2005, and paid off all short and long term debt
obligations, strengthening our balance sheet and positioning us for the growth
in sales we are anticipating. 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 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
sales prices of a share of common stock for the following periods
were:
|
|
High
|
|
Low
|
|
|
|
|
|
|
|
Three
months ended March 31, 2007
|
|
$
|
3.39
|
|
$
|
2.21
|
|
|
|
|
|
|
|
|
|
Twelve
months ended December 31, 2006
|
|
$
|
2.74
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
Twelve
months ended December 31, 2005
|
|
$
|
1.81
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
The
market price of a share of our common stock may continue to fluctuate in
response to a number of factors, including:
|
·
|
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
April 27, 2007, NutraCea had approximately 135,626,000 shares of common stock
outstanding. Additionally, as of April 27, 2007, options and warrants to
purchase approximately 50,549,000 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 April 27, 2007,
approximately 13,088,000 shares of our common stock remained eligible for
resale
pursuant to outstanding registration statements filed for these 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
April 27, 2007, there were outstanding options and warrants to purchase
approximately 50,549,000 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.
We
may engage in future acquisitions that dilute our shareholders and cause
us to
incur debt or assume contingent liabilities.
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:
|
·
|
issue
stock that would dilute current shareholders’ percentage
ownership;
|
These
purchases also involve numerous risks, including:
|
·
|
problems
combining the purchased operations, technologies or
products;
|
|
·
|
diversion
of management’s attention from our core
business;
|
|
·
|
adverse
effects on existing business relationships with suppliers and
customers;
|
|
·
|
risks
associated with entering markets in which we have no or limited
prior
experience; and
|
|
·
|
potential
loss of key employees of purchased
organizations.
|
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.
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.
Item
2. |
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
During
the quarter ended March 31, 2007, NutraCea issued the following securities
without registration under the Securities Act of 1933:
Common
Stock
During
the three months ended March 31, 2007:
Four
(4)
stockholders converted 470 shares of Series B Convertible 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
share.
Seventeen
(17) stockholders converted 5,466 shares of Series B Convertible preferred
Stock
into 6,430,580 shares of our common stock. The preferred shares converted
at a
conversion rate of 1,176 shares of common stock for each preferred
share.
Twenty-one
(21) stockholders exercised options or warrants and received a total of
3,451,959 shares of common stock for an aggregate purchase price of
$3,929.979.
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.
Options
and Warrants
During
the three months ended March 31, 2007:
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. For this period a stock option expense of $27,000 was charged for
the
vesting options.
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. These warrants vest in periods after March 31,
2007
therefore no expense was recognized in the current quarter.
The
expense for stock options and warrants issued to consultants and employees
are
calculated at fair value using the Black-Scholes valuation method.
February 2007
Private Placement
In
addition to the foregoing issuances of our securities, 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. The fair value of these
11,200,000 warrants using the Black-Scholes method is approximately $55,390,000.
When exercised the company would receive $36,400,000.
All
of
the above issuances were made without any public solicitation, to a limited
number of employees, consultants and shareholders and were acquired for
investment purposes only. The securities were issued pursuant to the private
placement exemption provided by Section 4(2) of the Securities Act of 1933.
Item
3. |
Defaults
Upon Senior Securities
|
None
Item
4. |
Submission
of Matters to a Vote of Security
Holders
|
None
Item
5. |
Other
Information
|
None
The
following exhibits are attached hereto and filed herewith:
Exhibit
Number
|
Description
of Exhibit
|
31.1
|
Certification
of Chief Executive Officer Pursuant to §302 of the Sarbanes-Oxley Act of
2002.
|
31.2
|
Certification
of Chief Financial Officer Pursuant to §302 of the Sarbanes-Oxley Act of
2002.
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Office Pursuant
to 18
U.S.C. §1350 and §906 of the Sarbanes-Oxley Act of
2002.
|
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934,
the
Registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
|
NUTRACEA
|
|
|
|
Dated:
May 15, 2007 |
|
/s/ Bradley
Edson |
|
Bradley
Edson |
|
Chief Executive Officer |
|
|
|
|
|
|
Dated:
May 15, 2007 |
|
/s/ Todd
C.
Crow |
|
Todd
C. Crow, |
|
Chief
Financial Officer
(Principal
Accounting Officer)
|