Notes to Consolidated Financial Statements
NOTE 1. LIQUIDITY AND MANAGEMENT’S PLAN
Our multi-year history of operating losses and negative operating cash flows from continuing operations raised substantial doubt about our ability to continue as a going concern before consideration of management’s plans, however after consideration of management’s plans and the factors below, we believe substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued has been alleviated. The factors that alleviated the substantial doubt are summarized below:
Cash Reserves - As of December 31, 2022, we had $3.9 million in cash and cash equivalents.
Improving Operating Cash Flows - We expect an improvement in operating cash flows in 2023 due to the full year impact of two 2022 events: (i) effective October 1, 2022, we transitioned sourcing and selling activities for our Arkansas mill (Golden Ridge) to Gander Foods, LLC, a service provider with local expertise, and (ii) we made major capital investments in capacity expansion at our Minnesota mill (MGI) during 2022. Golden Ridge has been a significant source of operating losses for us since its acquisition in 2018, however it made its first positive quarterly contribution to operating cash flows in the fourth quarter of 2022 as a result of the transition to the service provider. MGI, which has been consistently profitable since its acquisition in 2019, saw a significant increase in sales and profit contribution in the fourth quarter of 2022 due to the additional capacity coming online in the third quarter of 2022. The transition of Golden Ridge to positive operating cash flows and expansion in MGI’s contribution to operating cash flows, together with (i) the steps we have taken to lower our run rate for selling and general administrative expenses and (ii) recovery of our SRB derivatives business, should provide us with a pathway to improved operating cash flows in 2023.
Access to Equity Funding - We could raise additional capital from offerings of equity, including common equity and equivalents once the restrictions discussed in Note 10 lapse in September 2023. We successfully completed equity raises in both 2022 and 2021 as further described in Note 10.
Ability to Leverage and/or Sell Real Property - We have been able to supplement liquidity by borrowing against our real property located in Wynne, Arkansas. We also own our facilities in Mermentau, Louisiana, Dillon, Montana, and North Grand Forks, Minnesota, with no existing liens. We could sell or mortgage these facilities to provide additional liquidity.
Strategic Review Process - In light of our challenges in achieving our operating and financial targets in 2022, we are currently undergoing a strategic review of all the possible alternatives to generate improved returns to our shareholders.
NOTE 2. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 four locations: two facilities located within supplier-owned rice mills in California; and two company-owned facility in the Louisiana and Arkansas delta region. We produce SRB derivatives at our Dillon, Montana, facility and we operate 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 one reporting unit and one operating segment, as defined in applicable accounting guidance, specialty ingredients.
RiceBran Technologies
Notes to Consolidated Financial Statements
Recent Accounting Guidance
Recent accounting standards not yet adopted
The following discusses the accounting standard(s) not yet adopted that will, or are expected to, result in a significant change in practice and/or have a significant financial impact on our financial position, results of operations or cash flows.
In June 2016, the FASB issued guidance ASU No. 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which changes the accounting for credit losses for certain instruments, including trade receivables, from an incurred loss method to a current expected loss method. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts. The guidance, and subsequent guidance related to the topic, is effective for our annual and interim periods beginning in 2023 and must be adopted on a modified retrospective approach through cumulative-effect adjustment to retained earnings as of January 1, 2023. Based on the nature of our current receivables and our credit loss history, we do not expect the adoption of the guidance to have a significant impact on our results of operations, financial position, or cash flows.
Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation – The accompanying consolidated financial statements have been prepared in U.S. dollars and in accordance with accounting principles generally accepted in the United States (GAAP). The accompanying consolidated financial statements include the accounts of RiceBran Technologies and all subsidiaries in which we have a controlling interest. All significant inter-company balances are eliminated in consolidation.
Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reporting period. Because of the uncertainty inherent in such estimates, actual results could differ from those estimates.
Reclassifications – 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.
Cash and Cash Equivalents – We consider all highly liquid investments purchased with an original maturity of three months or less at the time of purchase to be cash equivalents. In all periods presented, we maintained our cash and cash equivalents with major banks. We maintain cash in bank accounts in amounts which at times may exceed federally insured limits. At times we invest in money market funds which are also not federally insured. We have not experienced any losses on such accounts.
Accounts Receivable and Allowance for Doubtful Accounts – Accounts receivable represent amounts receivable on trade accounts. The allowance for doubtful accounts is based on our assessment of the collectability of customer accounts and the aging of accounts receivable. We analyze the aging of customer accounts, customer concentrations, customer creditworthiness, current economic trends and changes in our customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts. From period to period, differences in judgments or estimates utilized may result in material differences in the amount and timing of the provision for doubtful accounts. We periodically evaluate our credit policy to ensure that customers are worthy of terms and support our business plans. We generally do not require collateral.
Inventories – We state inventories at the lower of cost or net realizable value. We employ a full absorption procedure using standard cost techniques for most of our operations. The standards are customarily reviewed and adjusted so that they are materially consistent with actual purchase and production costs. We make provisions for potentially obsolete or slow-moving inventory based upon our analysis of inventory levels, historical obsolescence and future sales forecasts. We write-off inventory determined to be obsolete immediately.
Property and Equipment – Property and equipment are stated at cost less accumulated depreciation. We compute depreciation on the straight-line basis and recognize it over the estimated useful lives of the assets. We expense maintenance and repairs as incurred and capitalize renewals and betterments. We include gains or losses on the sale of property and equipment in net income (loss).
RiceBran Technologies
Notes to Consolidated Financial Statements
Impairment of Long-lived Assets – We review our long-lived assets, such as property and equipment and right-of-use assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We recognize an impairment loss when the undiscounted future cash flows estimated to be generated by the asset to be held and used are not sufficient to recover the unamortized balance of the asset. The impairment loss is the difference between the carrying value and the estimated fair value. We determine the estimated fair value based on either the discounted future cash flows or other appropriate fair value methods with the amount of any such deficiency charged to operations in the current year. Estimates of future cash flows are based on many factors, including current operating results, expected market trends and competitive influences. We report assets to be disposed of by sale at the lower of the carrying amount or fair value, less estimated costs to sell.
Intangible Assets – We amortize recognized intangible assets over the useful lives of the assets unless that life is determined to be indefinite. All of our intangible assets are finite lived. We evaluate the remaining useful life of an intangible asset each reporting period to determine whether events or circumstances may indicate that a revision to the useful life is warranted to reflect the remaining expected use of the asset. If an intangible asset’s useful life is determined to be finite, but the precise length of that life is not known, the intangible asset is amortized over our best estimate of the asset’s useful life in a manner that reflects the pattern in which the asset’s economic benefits are consumed or expected to be realized. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We recognize an impairment loss when the undiscounted future cash flows estimated to be generated by the asset to be held and used are not sufficient to recover the unamortized balance of the asset. Our primary intangible asset is a customer relationship intangible which derives its value from future cash flows expected from the acquired customers. Changes in the actual or estimated future cash flows of these customers could result in a material adjustment to amortization expense, an impairment loss, or both. Estimates of future cash flows are based on many factors, including current cash flows, expected market trends and competitive influences.
Leases – We lease certain buildings, land and corporate office space under operating leases with monthly or annual rent payments. We lease certain machinery and equipment under finance leases with monthly rent payments. We determine if an arrangement is a lease at inception. We present operating lease assets as operating lease right-of-use assets and the related liabilities as operating lease liabilities in our consolidated balance sheets. We include finance lease right-of-use assets in property and equipment, net, and the related liabilities as finance lease liabilities in our consolidated balance sheets.
We recognize right-of-use assets and lease liabilities based on the present value of the future minimum lease payments over the lease term, beginning at the commencement date, for leases exceeding a year. Minimum lease payments include the fixed lease components of the lease and any variable rate payments that depend on an index, initially measured using the index at the lease commencement date. Lease terms may include options to renew when it is reasonably certain that we will exercise that option. We combine lease and nonlease components and account for them as a single lease component. Certain leases contain rent escalation clauses, rent holidays, capital improvement funding or other lease concessions.
In determining our right-of-use assets and lease liabilities, we apply a discount rate to the minimum lease payments within each lease. When we cannot readily determine the discount rate implicit in a lease, we utilize our incremental borrowing rate, the rate of interest that we would incur to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. To estimate the incremental borrowing rate, we reference a market yield curve consistent with our assessment of our credit quality.
We recognize operating lease expense related to the minimum lease payments on a straight-line basis over the lease term. For finance leases, we recognize amortization expense related to the minimum lease payments on a straight-line basis over the lease term while interest expense is recognized using the effective interest method. Expense related to variable lease payments that do not depend on a rate or index and short-term rentals, on leases with terms less than a year, are expensed as incurred.
RiceBran Technologies
Notes to Consolidated Financial Statements
Revenue Recognition – We account for a contract with a customer when the written contract is committed, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable of collection. Substantially all of our revenue is derived by fulfilling customer orders for the purchase of our products under contracts which contain a single performance obligation, to supply continually defined quantities of product at fixed prices. We account for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment cost rather than as an additional promised service. We recognize revenue at the point in time that control of the ordered product(s) is transferred to the customer, which is upon delivery to the customer, or its designee at our location, a customer location or other customer-designated delivery point. For substantially all of our contracts, control of the ordered product(s) transfers at our location. We report amounts invoiced to customers for shipping and handling are reported as revenues and the related costs incurred to deliver product to the customer are reported as cost of goods sold.
We measure revenue as the amount of consideration we expect to receive in exchange for fulfilling product orders. Incidental items that are immaterial in the context of the contract are recognized as expense. Our contracts do not include a significant financing component. Our contracts may include terms that could cause variability in the transaction price, including, for example, rebates and volume discounts, or other forms of contingent revenue. The amount of consideration we expect to receive and revenue we recognize includes estimates of variable consideration, including costs for rebates and discounts. If the consideration promised in a contract includes a variable amount, we estimate the amount to which we expect to be entitled using either the expected value or most likely amount method. Changes in judgments and estimates regarding probability of collection and variable consideration might result in a change in the timing or amount of revenue recognized.
We capitalize the incremental costs of obtaining a revenue contract and amortized those costs on a straight-line basis over the expected customer relationship period if we expect to recover those costs. As a practical expedient, we expense costs to obtain a contract as incurred if the amortization period would have been a year or less. Typically, costs to incur revenue contracts are not significant.
Selling, General and Administrative Expenses – Selling, general and administrative expenses include salaries and wages, bonuses and incentives, share-based compensation expense, employee-related expenses, facility-related expenses, marketing and advertising expense, depreciation of non-operating property and equipment, professional fees, amortization of intangible assets, provisions for losses on accounts receivable and other operating expenses.
Share-Based Compensation – For awards of nonvested common stock and common stock units to employees and directors, share-based compensation is measured based on the fair value of our common stock on the date of grant and the corresponding expense is recognized over the period during which the holder is required to provide service in exchange for the award. Compensation expense related to service-based awards are recognized on a straight-line basis over the requisite service period for the award. In the event we require no specific future performance, the entire amount of compensation is recognized immediately.
We have outstanding common stock options as of December 31, 2022 and 2021. We have not granted any stock options since 2020. Share-based compensation expense for common stock options granted to employees and directors was calculated at the grant date using the Black-Scholes-Merton valuation model and is expensed on a straight-line basis over the service period of the award. The Black-Scholes-Merton option pricing model required us to estimate key assumptions such as expected life, volatility, risk-free interest rates and dividend yield to determine the fair value of share-based awards, based on both historical information and management’s judgment regarding market factors and trends.
We recognize forfeitures of employee and director awards as they occur. In the event an employee or director terminates service prior to the vesting of an award, we reverse the entire amount of previously recognized compensation expense related to the award.
Share-based compensation for awards to nonemployees is calculated as of the grant date, taking into consideration the probability of satisfaction of performance conditions, in a manner consistent with awards to employees. The expense associated with share-based awards for service is recognized over the term of service. In the event services are terminated early or we require no specific future performance, the entire amount of unrecognized compensation is expensed. The expense associated with share-based awards made in exchange for goods is generally attributed to expense in the same manner as if the vendor had been paid in cash.
Income Taxes – We account for income taxes by recording a deferred tax asset or liability for the recognition of future deductible or taxable amounts and operating loss and tax credit carryforwards. We recognize a deferred tax expense or benefit as a result of timing differences between the recognition of assets and liabilities for financial reporting and tax purposes.
RiceBran Technologies
Notes to Consolidated Financial Statements
We measure deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. We recognized deferred tax assets for deductible temporary differences and operating loss and tax credit carryforwards. When necessary, we establish a valuation allowance to reduce that deferred tax asset if it is more likely than not that the related tax benefits will not be realized. The realization of deferred tax assets can be affected by, among other things, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the length of statutory carryforward periods, our experience with utilizing operating losses and tax credit carryforwards by jurisdiction, and tax planning alternatives that may be available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that may be different from current estimates of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities may result in income tax benefits being recognized in the period when it is determined that the liabilities are no longer necessary.
We recognize interest and penalties related to uncertain tax positions, if any, in selling, general and administrative expenses.
Derivative Warrant Liability – We have an outstanding warrant agreement that provides for cash settlement of the warrant in certain circumstances. We account for this warrant as a liability instrument. This warrant is carried at fair value as a derivative warrant liability in our consolidated balance sheets at the end of each reporting period and any resultant changes in fair value are recorded in the consolidated statements of operations in other income (expense) as change in fair value of derivative warrant liability.
Fair Value – Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Certain assets and liabilities may be presented in the financial statements at fair value. Assets and liabilities measured at fair value on a non-recurring basis may include property and equipment.
We assess the inputs used to measure fair value using a three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the market:
| ● | Level 1 – inputs include quoted prices for identical instruments and are the most observable. |
| ● | Level 2 – inputs include quoted prices for similar assets and observable inputs such as interest rates, currency exchange rates and yield curves. |
| ● | Level 3 – inputs are not observable in the market and include management’s judgments about the assumptions market participants would use in pricing the asset or liability. |
NOTE 3. CASH AND CASH EQUIVALENTS
As of December 31, 2022, we had $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 4. ACCOUNTS RECEIVABLE AND REVENUES
We classify amounts billed as accounts receivable on our consolidated balance sheets and require payment on a short-term basis. Invoices are generally issued at the point control transfers and substantially all of our invoices are due within 30 days or less, however certain customers have terms of up to 120 days. For substantially all of our contracts, control of the ordered product(s) transfers at our location. Periodically, we require payment prior to the point in time we recognize revenue. We classify amounts received from customers prior to revenue recognition on a contract as customer prepayments liability on our consolidated balance sheets. We typically apply customer prepayments to an invoice within 30 days of the prepayment. Revenues in 2022 and 2021 include $0.1 million, or less, in unearned revenue as of the end of the prior year.
RiceBran Technologies
Notes to Consolidated Financial Statements
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.
| | Customer | |
| | A | | | B | | | C | |
% of revenue, 2022 | | | 14.0 | % | | | 8.5 | % | | | 6.8 | % |
% of revenue, 2021 | | | 11.9 | % | | | 0.3 | % | | | 11.4 | % |
| | | | | | | | | | | | |
% of accounts receivable, as of December 31, 2022 | | | 11.6 | % | | | 18.6 | % | | | 0.2 | % |
% of accounts receivable, as of December 31, 2021 | | | 17.2 | % | | | 0.0 | % | | | 9.0 | % |
The following table presents revenues by geographic area shipped to (in thousands).
| | 2022 | | | 2021 | |
United States | | $ | 40,267 | | | $ | 29,637 | |
Other countries | | | 1,350 | | | | 1,494 | |
Revenues | | $ | 41,617 | | | $ | 31,131 | |
NOTE 5. INVENTORIES
The following table details the components of inventories (in thousands).
| | December 31 | |
| | 2022 | | | 2021 | |
Finished goods | | $ | 1,737 | | | $ | 1,560 | |
Raw materials | | | 423 | | | | 718 | |
Packaging | | | 218 | | | | 166 | |
Inventories | | $ | 2,378 | | | $ | 2,444 | |
NOTE 6. PROPERTY AND EQUIPMENT
The following table details the components of property and equipment (amounts in thousands).
| | December 31 | | | |
| | 2022 | | | 2021 | | | Estimated Useful Lives (Years) |
Land | | $ | 730 | | | $ | 730 | | | | | |
Furniture and fixtures | | | 259 | | | | 265 | | | 5 | - | 10 |
Plant | | | 10,095 | | | | 10,457 | | | 20 | - | 40 or life of lease |
Computer and software | | | 450 | | | | 452 | | | 3 | - | 5 |
Leasehold improvements | | | 1,838 | | | | 1,828 | | | 4 | - | 15 or life of lease |
Machinery and equipment | | | 15,703 | | | | 15,115 | | | 5 | - | 15 |
Property and equipment, cost | | | 29,075 | | | | 28,847 | | | | | |
Less accumulated depreciation | | | 14,868 | | | | 13,403 | | | | | |
Property and equipment, net | | $ | 14,207 | | | $ | 15,444 | | | | | |
Amounts payable for property and equipment included in accounts payable totaled $0.1 million at December 31, 2022, and $0.2 million at December 31, 2021. Assets which had not yet been placed in service, included in property and equipment, totaled $1.2 million at December 31, 2022, and $0.9 million at December 31, 2021.
RiceBran Technologies
Notes to Consolidated Financial Statements
NOTE 7. INTANGIBLE ASSETS AND GOODWILL
Intangible assets, excluding goodwill, consist of the following (in thousands).
| | | | | | December 31, 2022 | | | December 31, 2021 | |
| | Estimated Useful Life | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Carrying Value | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Carrying Value | |
Customer relationships | | | 15 | | | $ | 930 | | | $ | 564 | | | $ | 366 | | | $ | 930 | | | $ | 423 | | | $ | 507 | |
Trademarks | | | 10 | | | | 13 | | | | 5 | | | | 8 | | | | 13 | | | | 3 | | | | 10 | |
Non-compete agreement | | | 5 | | | | 22 | | | | 16 | | | | 6 | | | | 22 | | | | 12 | | | | 10 | |
Total intangible assets | | | | | | $ | 965 | | | $ | 585 | | | $ | 380 | | | $ | 965 | | | $ | 438 | | | $ | 527 | |
The customer relationship intangible is amortizing over the 15-year period of expected future economic benefit, in proportion to the discounted expected future cash flows used to estimate the value of the intangible at acquisition in 2019. It is amortizing at a more rapid rate in the earlier periods than in later periods. Other finite-lived intangible assets are amortizing on a straight-line basis.
As of December 31, 2022, the weighted-average remaining amortization period for intangibles other than goodwill is 9.9 years and future intangible amortization is expected to total the following (in thousands):
2023 | | $ | 111 | |
2024 | | | 80 | |
2025 | | | 58 | |
2026 | | | 42 | |
2027 | | | 31 | |
Thereafter | | | 58 | |
Total amortization | | $ | 380 | |
We performed our annual impairment testing of goodwill as of December 31, 2021. We estimated the fair value of our company by a discounted cash flow method, reconciled to our market capitalization. We determined the fair value of our equity, based on our market capitalization, was substantially below our carrying value. As a result, in 2021, we recorded a non-cash, non-tax-deductible impairment charge equal to the entire amount of our goodwill, $3.9 million.
NOTE 8. LEASES
The components of lease expense and cash flows from leases (in thousands) follow.
| | 2022 | | | 2021 | |
Finance lease cost: | | | | | | | | |
Amortization of right-of use assets, included in cost of goods sold | | $ | 97 | | | $ | 89 | |
Interest on lease liabilities | | | 21 | | | | 11 | |
Operating lease cost, included in selling, general and administrative expenses: | | | | | | | | |
Fixed leases cost | | | 515 | | | | 515 | |
Variable lease cost | | | 168 | | | | 149 | |
Short-term lease cost | | | 85 | | | | 61 | |
Total lease cost | | $ | 886 | | | $ | 825 | |
| | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
Operating cash flows from finance leases | | $ | 21 | | | $ | 11 | |
Operating cash flows from operating leases | | $ | 515 | | | $ | 515 | |
Financing cash flows from finance leases | | $ | 104 | | | $ | 96 | |
As of December 31, 2022, variable lease payments do not depend on a rate or index. As of December 31, 2022, property and equipment, net, includes $0.6 million of finance lease right-of-use-assets, with an original cost of $0.9 million. During 2022, we financed the purchase of $0.4 million of property and equipment in noncash finance lease transactions. During 2021, we financed the purchase of $0.1 million of property and equipment in noncash finance lease transactions.
RiceBran Technologies
Notes to Consolidated Financial Statements
As of December 31, 2022, we do not believe it is certain that we will exercise any lease renewal options. The remaining terms of our leases and the discount rates used in the calculation of the fair value of our leases as of December 31, 2022, follows.
| | Operating Leases | | | Finance Leases | |
Remaining leases terms (in years) | | | 0.8 | - | 10.2 | | | | 0.3 | - | 4.8 | |
Weighted average remaining lease terms (in years) | | | | | 5.5 | | | | | | 4.0 | |
Discount rates | | | 6.3% | - | 9.0% | | | | 2.8% | - | 10.4% | |
Weighted average discount rate | | | | | 7.8% | | | | | | 8.2% | |
As of December 31, 2022, operating leases have maturities extending through 2032. Maturities of lease liabilities as of December 31, 2022, follows (in thousands).
| | Operating | | | Finance | |
| | Leases | | | Leases | |
2023 | | $ | 528 | | | $ | 158 | |
2024 | | | 429 | | | | 117 | |
2025 | | | 439 | | | | 102 | |
2026 | | | 451 | | | | 99 | |
2027 | | | 232 | | | | 60 | |
Thereafter | | | 346 | | | | - | |
Total lease payments | | | 2,425 | | | | 536 | |
Amounts representing interest | | | (477 | ) | | | (86 | ) |
Present value of lease obligations | | $ | 1,948 | | | $ | 450 | |
NOTE 9. DEBT
We finance certain amounts owed for annual insurance premiums under financing agreements. As of December 31, 2022, amounts due under insurance premium financing agreements are due in monthly installments of principal and interest through March 31, 2023, at an interest rate of 3.9% per year.
We also borrow under a factoring agreement with a lender (the Lender), which provides a $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 0.5% above the prime rate, in no event to be less than 5.5%, on any advances, as well as a service fee on average net funds borrowed. The lender has a security interest in our personal property assets and the right to demand repayment of the advances at any time.
The Lender advanced us $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 is the greater of 7.0% above the Lender's prime rate (14.5% at December 31 2022). and 10.3% until it was repaid in January 2023. As of December 31, 2022, the Over-advance is 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.
| | 2022 | | | 2021 | |
Average borrowings outstanding (in thousands) | | $ | 3,179 | | | $ | 1,622 | |
Amortization of debt issuance costs (in thousands) | | $ | - | | | $ | 75 | |
Fees paid, as a percentage of average outstanding borrowings | | | 5.8 | % | | | 6.2 | % |
Interest paid, as a percentage of average outstanding borrowings | | | 7.0 | % | | | 6.4 | % |
RiceBran Technologies
Notes to Consolidated Financial Statements
Long-term debt consists of the following (in thousands).
| | December 31, | |
| | 2022 | | | 2021 | |
Mortgage promissory note - Originally dated July 2020 and modified in December 2021 and January 2023. As modified, interest accrues at an annual rate which is the greater of 7.0% above the Lender's prime rate (14.5% at December 31, 2022) and 10.3%. Payable in monthly installments through January 2025. Face amount $2.5 million. Secured by certain real property in Wynne, Arkansas. | | $ | 2,211 | | | $ | 2,469 | |
Progress payment agreement - Dated August 2022. Original principal $37. Interest is payable monthly at the rate of 25.2% per year. Due on demand, until a finance lease is executed with the lender before that date for the related equipment. | | | 39 | | | | - | |
Equipment note - Dated May 2021. Original principal $46. Due in monthly installments through June 2025. Interest accrues at the effective discount rate of 3.6% per year. | | | 24 | | | | 33 | |
Equipment note - Dated December 2019. Original principal $40. Due in monthly installments through December 2024. Interest accrues at the effective discount rate of 9.3% per year. | | | 18 | | | | 26 | |
Other | | | | | | | 11 | |
Total long-term debt, net | | $ | 2,292 | | | $ | 2,539 | |
In December 2021, we entered into agreements with the Lender to effect a modification of the terms of our mortgage promissory note. This modification involved entering into a new mortgage promissory note in the principal amount of $2.5 million, with terms as indicated in the table above. We received $1.2 million in cash from the lender and the lender applied the remainder of the principal to the $1.3 million principal and interest then outstanding under our old promissory note. We recognized no gain or loss with the modification. At modification, the carrying amount of the new note equaled the total of (i) the $1.3 million carrying amount of the old note prior to modification (ii) the $1.2 million advanced by the lender at modification and (iii) the debt issuance costs associated with the modification. Under the terms of the original note, (i) interest accrued at an annual rate which was the greater of 11.0% above the 1ender’s prime rate and 14.3% and (ii) principal and interest were payable in monthly installments through May 2022 and a final payment of $1.0 million was due in June 2022. This December 2021 note was replaced with a new note in January 2023.
In January 2023, we entered into agreements with the Lender to effect a modification of the terms of the December 2021 note. This modification involved us entering into a new mortgage promissory note in the principal amount of $2.5 million. We received $0.3 million in cash and the Lender applied the remainder of the new principal to the $1.3 million then outstanding on the December 2021 term note and the $0.9 million Over-advance on the factoring agreement. Under the terms of the January 2023 note, (i) interest accrues at an annual rate which is the greater of 7.0% above the 1ender’s prime rate and 10.3% and (ii) principal and interest are payable in equal monthly installments through January 2025. 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 at December 31, 2022, reflecting the January 2023 modification of the mortgage promissory note, follow (in thousands).
2023 | | $ | 996 | |
2024 | | | 1,194 | |
2025 | | | 111 | |
Principal maturities | | | 2,301 | |
Debt issuance costs | | | (9 | ) |
Total long-term debt, net | | $ | 2,292 | |
NOTE 10. EQUITY, SHARE-BASED COMPENSATION, WARRANTS AND SECURITIES OFFERINGS
In August 2022, our board of directors approved a 1 for 10 reverse split of our common stock. Our common stock began trading on a post-split basis on August 26, 2022. All share and per share information has been retrospectively adjusted for all prior periods presented giving retroactive effect to the reverse stock split. Such adjustments include calculations of our weighted average number of shares outstanding and loss per share, as well as disclosures regarding our share-based compensation and warrants.
Preferred Stock
Our board of directors, without further action or vote by holders of our common stock, has the right to establish the terms, preference, rights and restrictions and issue shares of preferred stock. We previously designated and issued six series of preferred stock of which no shares remain outstanding. In addition, we designated and issued a seventh series of preferred stock, Series G, of which 150 shares remain outstanding as of December 31, 2022.
RiceBran Technologies
Notes to Consolidated Financial Statements
The Series G preferred stock is non-voting and may be converted into shares of our common stock at the holders’ election at any time, subject to certain beneficial ownership limitations, at a ratio of 1 preferred share for 94.89915 shares of common stock. The Series G preferred stock is entitled to receive dividends if we pay dividends on our common stock, in which case the holders of the preferred stock are entitled to receive the amount and form of dividends that they would have received if they held the common stock that is issuable upon conversion of the Series G preferred stock. If we are liquidated or dissolved, the holders of Series G preferred stock are entitled to receive, before any amounts are paid in respect of our common stock, an amount per share of preferred stock equal to $1,000, plus any accrued but unpaid dividends thereon.
Securities Offerings
In October 2022, we issued and sold 675,000 shares of our common stock and a prefunded warrant (the 2022 Prefunded Warrant) exercisable into 325,000 shares of our common stock pursuant to our effective “shelf” registration statement on Form S-3. The holder exercised the 2022 Prefunded Warrant with an exercise price of $0.0001 per share (net of the $1.4999 per share prefunded) in full in 2022. In a concurrent private placement, we issued and sold warrants for the purchase up to 2,000,000 shares of our common stock at an exercise price of $1.60 per share, which are exercisable in April 2023, and expire in October 2025. The net proceeds from the concurrent offerings of $1.0 million, after deducting placement agent fees and other offering expenses of $0.5 million, were allocated to equity. As of December 31, 2022, $0.3 million of these offering costs were unpaid. We determined the exercise price of the 2022 Prefunded Warrant was nominal and, as such, we will consider the shares underlying that warrant to be outstanding effective October 20, 2022, for the purposes of calculating basic earnings (loss) per share (EPS). We intend to use the net proceeds from the October 2022 offerings for general corporate purposes, which may include funding capital expenditures, working capital and repaying indebtedness. In addition, we issued warrants for the purchase of up to 63,000 shares of our common stock to the placement agent at an exercise price of $1.875 per share which expire in October 2027.
In September 2021, we issued and sold 230,750 shares of common stock, a warrant for the purchase of up to 230,769 shares of common stock (Warrant A), and a prefunded warrant (the 2021 Prefunded Warrant) for the purchase of up to 230,786 shares of common stock pursuant to our effective “shelf” registration statement on Form S-3. The initial $10.00 per share exercise price of Warrant A was subject to adjustment in September 2022, and will be subject to adjustment again in September 2023, if 110% of the 5-day volume weighted average price of our common stock is less than the then-current exercise price. The 2021 Prefunded Warrant, which the holder exercised in full in 2021, had an exercise price of $0.001 (net of the $6.499 per share prefunded). We determined that the 2021 Prefunded Warrant qualified for equity accounting, however, Warrant A did not qualify for equity accounting because the holder may elect cash settlement of this warrant in the event of a change of control. As a result, we carry Warrant A as a liability at fair value in our consolidated balance sheets and the change in fair value of this warrant is recorded in our consolidated statements of operations. The net proceeds from the offering of $2.8 million, after deducting commissions and other cash offering expenses of $0.2 million were allocated to derivative warrant liability, in an amount equal to the $0.6 million estimated fair value of Warrant A as of September 13, 2021, with the remainder of the proceeds recorded in equity. We determined the exercise price of the Prefunded Warrant was nominal and, as such, considered the 230,786 shares initially underlying the 2021 Prefunded Warrant to be outstanding effective September 13, 2021, for the purposes of calculating basic EPS. We used the net proceeds from the September 2021 offering for general corporate purposes, which included funding capital expenditures and working capital and repaying indebtedness.
On March 30, 2020, we entered into an at market issuance (ATM) sales agreement with respect to an at-the-market offering program through B. Riley FBR, Inc, as sales agent. The issuances and sales of our common stock under the ATM sales agreement are made pursuant to our effective “shelf” registration statement on Form S-3. During 2021, we issued and sold 75,490 shares of common stock under an at market issuance sales agreement, at an average price of $8.00 per share. Proceeds from those 2021 sales of $0.5 million are recorded in equity, net of $0.1 million of stock issuance costs.
Under the terms of the securities purchase agreement related to the September 2021 offering, we are prohibited from entering into an agreement to effect any ATM issuance until September 13, 2023. Under the terms of the securities purchase agreement related to the October offerings, we are generally prohibited from entering into an agreement to effect an offering of our common stock or common stock equivalents until May 20, 2023, or a variable rate transaction, as defined in the agreement, until October 20, 2023.
RiceBran Technologies
Notes to Consolidated Financial Statements
Equity Incentive Plan
Our board of directors adopted our Amended and Restated 2014 Equity Incentive Plan (the 2014 Plan) after shareholders approved the plan, and amendments thereto. On July 14, 2022, shareholders approved an increase in the number of shares of common stock authorized for issuance under the 2014 Plan of 600,000 shares. The total shares of common stock now authorized for issuance under the 2014 Plan is 1,230,000 shares. Under the terms of the plan, we may grant stock options, shares of common stock and share-based awards to officers, directors, employees or consultants providing services on such terms as are determined by the board of directors. Our board of directors administers the plan, determines vesting schedules on plan awards and may accelerate the vesting schedules for award recipients. The stock options granted under the 2014 Plan have terms of up to 10 years and vesting periods of up to 4 years. The restricted stock units granted under the plan vest over periods of up to 5 years. As of December 31, 2022, awards for the purchase of 1,088,457 shares of common stock have been granted and remain outstanding (common stock options, common stock and restricted stock units) and 141,543 shares of common stock are reserved for future grants under the 2014 Plan.
Share-based compensation expenses related to employees and directors are included in selling, general and administrative expenses. Share-based compensation by type of award follows (in thousands).
| | 2022 | | | 2021 | |
Restricted stock units | | $ | 1,160 | | | $ | 866 | |
Stock options | | | 101 | | | | 140 | |
Common stock | | | - | | | | 108 | |
Compensation expense related to common stock awards issued under equity incentive plan | | $ | 1,261 | | | $ | 1,114 | |
Information regarding common stock issued under the 2014 Plan, including shares issued upon vesting of restricted stock units follows. All shares of common stock issued in 2022 or 2021 were vested as of the date issued.
| | 2022 | | | 2021 | |
| | Shares Issued | | | Weighted Average Grant Date Fair Value Per Share | | | Shares Issued | | | Weighted Average Grant Date Fair Value Per Share | |
Directors | | | 34,875 | | | $ | 6.71 | | | | 13,608 | | | $ | 7.95 | |
Employees | | | 89,307 | | | | 5.75 | | | | 57,250 | | | | 5.52 | |
Consultant | | | 13,516 | | | | 6.47 | | | | - | | | | | |
| | | 137,698 | | | | | | | | 70,858 | | | | | |
In the period from January1, 2023 to March 16, 2023, we issued 68,693 shares of common stock upon the vesting of restricted stock units.
RiceBran Technologies
Notes to Consolidated Financial Statements
Restricted Stock Units
We have outstanding (i) restricted stock units issued under the 2014 Plan (RSUs) to employees and directors and (ii) other restricted stock units issued to a service provider (SUs). Each RSU and SU represents a contingent right to receive one share of common stock. Summaries of nonvested and vested stock unit and activity follow.
| | RSUs | | | SUs | |
| | Number of Units | | | Unrecognized Compensation (in thousands) | | | Average Grant Date Fair Value per share | | | Weighted Average Expense Period (Years) | | | Number of Units | | | Unrecognized Compensation (in thousands) | | | Average Grant Date Fair Value per share | | | Weighted Average Expense Period (Years) | |
Nonvested at January 1, 2021 | | | 149,540 | | | $ | 730 | | | $ | 4.88 | | | | 1.4 | | | | - | | | $ | - | | | $ | - | | | $ | - | |
Granted | | | 82,469 | | | | 796 | | | | 9.65 | | | | 1.0 | | | | - | | | | - | | | | - | | | | - | |
Forfeited | | | (291 | ) | | | (3 | ) | | | 10.31 | | | | 0.7 | | | | - | | | | - | | | | - | | | | - | |
Vested with service | | | (105,115 | ) | | | - | | | | | | | | - | | | | - | | | | - | | | | - | | | | - | |
Expensed | | | - | | | | (865 | ) | | NA | | | | - | | | | - | | | | - | | | | - | | | | - | |
Nonvested at December 31, 2021 | | | 126,603 | | | | 658 | | | | 5.20 | | | | 0.9 | | | | - | | | | - | | | | - | | | | - | |
Granted | | | 527,871 | | | | 1,680 | | | | 3.18 | | | | 2.7 | | | | 160,000 | | | | 216 | | | | 1.35 | | | | 3.0 | |
Impact of Modification: | | | | | | | | | | | | | | | | | | | - | | | | - | | | | - | | | | - | |
Before modification | | | (17,050 | ) | | | (150 | ) | | | 8.77 | | | | 0.6 | | | | - | | | | - | | | | - | | | | - | |
After modification | | | 17,050 | | | | 64 | | | | 3.73 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Forfeited | | | (11,744 | ) | | | (68 | ) | | | 5.77 | | | | 1.1 | | | | - | | | | - | | | | - | | | | - | |
Vested with Service | | | (275,912 | ) | | | - | | | | | | | | - | | | | - | | | | - | | | | - | | | | - | |
Expensed | | | - | | | | (1,160 | ) | | NA | | | | - | | | | - | | | | (15 | ) | | NA | | | | - | |
Nonvested at December 31, 2022 | | | 366,818 | | | $ | 1,024 | | | $ | 2.79 | | | | 2.8 | | | | 160,000 | | | $ | 201 | | | $ | 1.26 | | | | 2.7 | |
| | Number of RSUs | |
Vested at January 1, 2021 | | | 38,640 | |
Vested with service | | | 105,115 | |
Issued at vesting | | | (57,250 | ) |
Vested at December 31, 2021 | | | 86,505 | |
Vested with service | | | 275,912 | |
Issued at vesting | | | (83,725 | ) |
Issued at termination of service | | | (53,967 | ) |
Vested at December 31, 2022 | | | 224,725 | |
At December 31, 2022, unvested RSUs had an intrinsic value of $0.3 million. unvested SUs had an intrinsic value of $0.1 million, and vested RSUs had an intrinsic value of $0.2 million. As of December 31, 2022, the intrinsic value of all RSUs and SUs outstanding was $0.6 million, unrecognized compensation was $1.2 million and the remaining vesting period was 2.8 years. At December 31, 2022, issuance of 165,790 shares of common stock subject to the unvested RSUs and 224,725 shares of common stock subject to the vested RSUs, is deferred to the date the holder is no longer providing service to our company.
We issued 160,000 SUs to a service provider in 2022, which the service provider elected to purchase with a $0.2 million cash signing fee. The SUs vest in three annual installments ending in September 2025 and we are expensing the fair value of the SUs over three years. The service provider may also earn performance-based cash compensation beginning October 1, 2022, if certain performance criteria are met. The performance compensation will be paid quarterly in an amount of cash which may then be used to purchase, at the election of the service provider, a number of fully vested SUs equal to (a) the performance compensation, divided by (b) the volume weighted average closing price of our common stock over the 90 consecutive trading days ending on the last day of the applicable performance period. The aggregate number of SUs purchased by the service provider, including the initial 160,000 SUs issued in 2022 may not exceed 1,000,000.
In 2022, we modified RSUs held by resigning directors and an employee such that the awards vested on the date of their termination of service. Prior to the modification, the resigning directors and employee would have forfeited the unvested RSUs on the date service terminated. As a result of the modifications, we adjusted cumulative expense on the RSUs to equal the fair value of the awards on the modification dates in accordance with applicable accounting guidance, as indicated in the table above.
RiceBran Technologies
Notes to Consolidated Financial Statements
Options
As of December 31, 2022 and 2021, we had outstanding options for the purchase of up 55,424 and 64,396 shares of common stock. We granted no stock options in 2022 and 2021. Stock options for the purchase of up to 8,972 and 3,107 shares of common stock forfeited or expired in 2022 and 2021. As of December 31, 2022, outstanding stock options had an intrinsic value of zero, a weighted average exercise price of $19.42 per share, a weighted average remaining vesting period of 1.1 years and a weighted average contractual remaining term of 5.9 years. As of December 31, 2022, unrecognized stock option compensation cost was $70 thousand. As of December 31, 2022, exercisable options had an intrinsic value of zero.
Unrecognized Compensation
As of December 31, 2022, the total amount of unrecognized compensation for all outstanding common stock awards (options, RSUs and SUs was $1.3 million, and the remaining average expense period was 2.7 years (including unrecognized compensation on SUs of $0.2 million with a remaining average expense period of 2.7 years.)
Warrants
The 2022 Prefunded Warrant was exercised in its entirety in 2022 and we issued 325,000 shares of common stock upon the cash exercises. The 2021 Prefunded Warrant was cashless exercised in its entirety in 2021 and we issued 230,750 shares of common stock upon the cashless exercises. The initial $10.00 per share exercise price of Warrant A adjusted, pursuant to its original terms, to $2.72 per share in September 2022, and will be subject to adjustment again in September 2023, if 110% of the 5-day volume weighted average price of our common stock is less than the then-current exercise price.
Warrant activity, excluding activity related to prefunded warrants follows.
| | 2022 | | | 2021 | |
| | Shares Under Warrants | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life (Years) | | | Shares Under Warrants | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life (Years) | |
Outstanding at January 1 | | | 875,067 | | | $ | 9.76 | | | | 1.4 | | | | 664,592 | | | $ | 9.82 | | | | 1.1 | |
Issued | | | 2,063,000 | | | | 1.61 | | | | 3.1 | | | | 230,769 | | | $ | 10.00 | | | | 5.0 | |
Impact of Warrant A exercise price adjustment: | | | | | | | | | | | | | | | | | | | | | | | | |
Before adjustment | | | 230,769 | | | | 10.00 | | | | 4.0 | | | | | | | | | | | | | |
After adjustment | | | (230,769 | ) | | | 2.72 | | | | 4.0 | | | | | | | | | | | | | |
Cash exercised | | | | | | | | | | | | | | | (17,794 | ) | | | 9.60 | | | | 0.8 | |
Expired | | | (639,298 | ) | | | 9.60 | | | | - | | | | (2,500 | ) | | | 52.50 | | | | - | |
Outstanding at December 31 | | | 2,298,769 | | | $ | 1.76 | | | | 2.9 | | | | 875,067 | | | $ | 9.76 | | | | 1.4 | |
The following table summarizes information related to exercisable and outstanding warrants as of December 31, 2022.
| | | | Outstanding | | | Exercisable | |
Exercise Prices | | | Shares Under Warrants | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life (Years) | | | Shares Under Warrants | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life (Years) | |
$ | 1.60 | | | | 2,000,000 | | | $ | 1.60 | | | | 2.8 | | | | - | | | $ | - | | | | - | |
$ | 1.88 | | | | 63,000 | | | | 1.88 | | | | 4.8 | | | | - | | | | - | | | | - | |
$ | 2.72 | | | | 230,769 | | | | 2.72 | | | | 3.7 | | | | 230,769 | | | | 2.72 | | | | 3.7 | |
$ | 20.00 | | | | 5,000 | | | | 20.00 | | | | 0.1 | | | | 5,000 | | | | 20.00 | | | | 0.1 | |
| | | | | 2,298,769 | | | $ | 1.76 | | | | 2.9 | | | | 235,769 | | | $ | 3.09 | | | | 3.6 | |
RiceBran Technologies
Notes to Consolidated Financial Statements
NOTE 11. INCOME TAXES
Deferred tax asset (liability) is comprised of the following (in thousands):
| | December 31 | |
| | 2022 | | | | 2021 | |
Net operating loss carryforwards | | $ | 14,264 | | | | $ | 13,385 | |
Stock options and warrants | | | 1,151 | | | | | 832 | |
Property and equipment | | | (46 | ) | | | | 16 | |
Intangible assets | | | 875 | | | | | 950 | |
Capitalized expenses | | | 117 | | | | | 105 | |
Other | | | 655 | | | | | 64 | |
Operating right-of-use lease assets | | | (478 | ) | | | | (566 | ) |
Operating right-of-use lease liabilities | | | 645 | | | | | 670 | |
Net deferred tax assets | | | 17,183 | | | | | 15,456 | |
Less: Valuation allowance | | | (17,183 | ) | | | | (15,456 | ) |
Deferred tax asset (liability) | | $ | - | | | | $ | - | |
We have determined it is more likely than not that our deferred tax assets will not be realized. Accordingly, we have provided a valuation allowance for deferred tax assets.
The following table summarizes the change in the valuation allowance (in thousands):
| | 2022 | | | 2021 | |
Valuation allowances, beginning of year | | $ | 15,456 | | | $ | 12,421 | |
Net operating loss and other temporary differences | | | 1,997 | | | | 2,926 | |
Expiration of net operating losses and limitations | | | (90 | ) | | | - | |
Adjustment to deferred taxes | | | (197 | ) | | | 67 | |
Impact of state tax rate change | | | 22 | | | | 42 | |
Other | | | (5 | ) | | | - | |
Valuation allowance, end of year | | $ | 17,183 | | | $ | 15,456 | |
As of December 31, 2022, net operating loss (NOL) carryforwards for U.S. federal tax purposes totaled $54.4 million. NOLs generated after December 31, 2017, do not expire. Federal NOLs of $9.9 million expire at various dates from 2023 through 2037 and the remainder do not expire. NOL carryforwards for state tax purposes totaled $46.0 million at December 31, 2022, and expire at various dates from 2023 through 2042.
Our ability to utilize previously accumulated NOL carryforwards is subject to substantial annual limitations due to the changes in ownership provisions of the Internal Revenue Code (IRC) of 1986, as amended, and similar state regulations. Prior to 2020, we experienced several ownership changes as defined in IRC Section 382(g). In general, the annual limitation is equal to the value of our stock immediately before the ownership change, multiplied by the long-term tax-exempt rate for the month in which the ownership change occurred. Any unused annual limitation may generally be carried over to later years until the NOL carryforwards expire. Accordingly, we have reduced our NOL in the table above to reflect these limitations.
We are subject to taxation in the U.S. federal jurisdiction and various state and local jurisdictions. We record liabilities for income tax contingencies based on our best estimate of the underlying exposures. We are open for audit by the IRS for years after 2018 and, generally, by U.S. state tax jurisdictions after 2017.
RiceBran Technologies
Notes to Consolidated Financial Statements
Reconciliations between the amounts computed by applying the U.S. federal statutory tax rate to loss before income taxes, and income tax expense (benefit) follows (in thousands):
| | 2022 | | | 2021 | |
Income tax benefit at federal statutory rate | | $ | (1,646 | ) | | $ | (1,875 | ) |
Increase (decrease) resulting from: | | | | | | | | |
State tax benefit, net of federal tax effect | | | (421 | ) | | | (605 | ) |
Effect of change in state tax rate | | | (22 | ) | | | (42 | ) |
Change in valuation allowance | | | 1,727 | | | | 3,035 | |
Expirations of net operating losses and application of IRC 382 limitation | | | 90 | | | | - | |
PPP loan forgiveness, nontaxable | | | - | | | | (376 | ) |
Change in fair value of derivative warrant liability, nontaxable | | | 5 | | | | (81 | ) |
Other nondeductible expenses | | | 89 | | | | 32 | |
Adjustments to deferreds | | | 197 | | | | (67 | ) |
Income tax expense | | $ | 19 | | | $ | 21 | |
Based on an analysis of tax positions taken on income tax returns filed, we determined no material liabilities related to uncertain income tax positions existed as of December 31, 2022 or 2021. Although we believe the amounts reflected in our tax returns substantially comply with applicable U.S. federal, state and local tax regulations, the respective taxing authorities may take contrary positions based on their interpretation of the law. A tax position successfully challenged by a taxing authority could result in an adjustment to our provision or benefit for income taxes in the period in which a final determination is made.
NOTE 12. INCOME (LOSS) PER SHARE (EPS)
Basic EPS is calculated 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.
Diluted EPS is computed 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. The dilutive effects of outstanding options, warrants, nonvested shares of common stock and nonvested restricted stock units that vest solely on the basis of a service condition are calculated using the treasury stock method. The dilutive effects of the outstanding preferred stock are calculated using the if-converted method.
Below are reconciliations of the numerators and denominators in the EPS computations.
| | 2022 | | | 2021 | |
NUMERATOR (in thousands): | | | | | | | | |
Basic and diluted - net loss | | $ | (7,858 | ) | | $ | (8,949 | ) |
| | | | | | | | |
DENOMINATOR: | | | | | | | | |
Weighted average number of shares of shares of common stock outstanding | | | 5,414,079 | | | | 4,710,567 | |
Weighted average number of shares of common stock underlying vested restricted stock units | | | 100,592 | | | | 63,328 | |
Basic EPS - weighted average number of shares outstanding | | | 5,514,671 | | | | 4,773,895 | |
Effect of dilutive securities outstanding | | | - | | | | - | |
Diluted EPS - weighted average number of shares outstanding | | | 5,514,671 | | | | 4,773,895 | |
No effects of potentially dilutive securities outstanding were included in the calculation of diluted EPS for 2022 and 2021, because to do so would be anti-dilutive due to our net loss. Potentially dilutive securities outstanding during 2022 and 2021 included our outstanding convertible preferred stock, options, warrants and nonvested restricted stock units. Those potentially dilutive securities, further described in Note 10, could potentially dilute EPS in the future.
RiceBran Technologies
Notes to Consolidated Financial Statements
NOTE 13. FAIR VALUE MEASUREMENT
The fair value of cash and cash equivalents, restricted cash, accounts and other receivables, accounts payable, commodities payable and short-term debt approximated their carrying value due to shorter maturities. As of December 31, 2022, the fair value of our operating lease liabilities was approximately $0.2 million lower than their carrying values, based on current market rates for similar debt and leases with similar maturities (Level 3 measurements). As of December 31, 2022, 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):
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
As of December 31, 2022: | | | | | | | | | | | | | | | | |
Derivative warrant liability | | $ | - | | | $ | - | | | $ | 69 | | | $ | 69 | |
Total liabilities at fair value | | $ | - | | | $ | - | | | $ | 69 | | | $ | 69 | |
| | | | | | | | | | | | | | | | |
As of December 31, 2021: | | | | | | | | | | | | | | | | |
Derivative warrant liability | | $ | - | | | $ | - | | | $ | 258 | | | $ | 258 | |
Total liabilities at fair value | | $ | - | | | $ | - | | | $ | 258 | | | $ | 258 | |
The following tables summarize the changes in level 3 items measured at fair value on a recurring basis (in thousands):
| | Fair Value as of Beginning of Period | | | Total Realized and Unrealized Gains (Losses) | | | Issuance of New Instruments | | | Net Transfers (Into) Out of Level 3 | | | Fair Value, at End of Period | | | Change in Unrealized Gains (Losses) on Instruments Still Held | |
2022: | | | | | | | | | | | | | | | | | | | | | | | | |
Derivative warrant liability | | $ | 258 | | | $ | (189 | ) | | $ | - | | | $ | - | | | $ | 69 | | | $ | (189 | ) |
Total Level 3 fair value | | $ | 258 | | | $ | (189 | ) | | $ | - | | | $ | - | | | $ | 69 | | | $ | (189 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
2021: | | | | | | | | | | | | | | | | | | | | | | | | |
Derivative warrant liability | | $ | - | | | $ | - | | | $ | 647 | | | $ | - | | | $ | 258 | | | $ | (389 | ) |
Total Level 3 fair value | | $ | - | | | $ | - | | | $ | 647 | | | $ | - | | | $ | 258 | | | $ | (389 | ) |
The derivative warrant liability in the tables above relates to Warrant A, discussed further in Note 10. Warrant A is carried in our consolidated balance sheets as derivative warrant liability because the holder may elect cash settlement of the warrant in the event of a change of control. We estimated the fair value of Warrant A using the Black-Scholes. Changes in the estimated fair value of Warrant A are included in other income (loss) in our consolidated statements of operations. The following are the assumptions used in valuing Warrant A.
| | December 31, 2022 | | | December 31, 2021 | | | September 30, 2021 | |
Assumed exercise price, per share | | $ | 2.72 | | | $ | 10.00 | | | $ | 10.00 | |
Assumed volatility | | | 92.2 | % | | | 69.5 | % | | | 71.0 | % |
Assumed risk free interest rate | | | 4.3 | % | | | 0.8 | % | | | 0.4 | % |
Expected life of options (in years) | | | 4.0 | | | | 4.8 | | | | 5.0 | |
Expected dividends | | | - | | | | - | | | | - | |
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 December 31, 2022, a $0.10 increase in our stock price would have resulted in an approximate $10 thousand increase in the Black Scholes fair value of Warrant A.
RiceBran Technologies
Notes to Consolidated Financial Statements
NOTE 14. COMMITMENTS AND CONTINGENCIES
PPP Audit Contingency
In April 2020, we received $1.8 million on a Small Business Administration (SBA) Paycheck Protection Program (PPP) loan as provided for in the Coronavirus Aid, Relief and Economic Security Act, enacted into U.S. law in March 2020. Under certain conditions, the loan and accrued interest were forgivable, if we used the loan proceeds for maintaining workforce levels. We used the loan proceeds for maintaining workforce levels and the SBA forgave the entire loan and related accrued interest in January 2021. The SBA may audit any PPP loan at its discretion through January 2027, six years after the date the SBA forgave the loan. The SBA may review any or all of the following when auditing a PPP loan: whether the borrower qualified for the PPP loan, whether the PPP loan amount was appropriately calculated and the proceeds used for allowable purposes, and whether the loan forgiveness amount was appropriately determined. The SBA could deem us ineligible for the PPP loan received in 2020 upon audit by the SBA. We believe the SBA’s stated intention is to focus its reviews on borrowers with loans greater than $2 million, thereby mitigating our future risk of an audit. The SBA continues to develop and issue new and updated guidance regarding required borrower certifications and requirements for forgiveness of loans made under the program.
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. Defense costs are expensed as incurred and are included in professional fees. While the outcome of lawsuits and other proceedings against us cannot be predicted with certainty, in the opinion of management, individually or in the aggregate, no such lawsuits and other proceedings had or are expected to have a material effect on our financial position or results of operations in 2022 and 2021.
In January 2023, we received $0.3 million in restitution payments from a former employee. The payments were ordered by a federal court in 2012.
PART II
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