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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
x      ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the year ended December 31, 2010
 
o        TRANSITION REPORT PURSUANT TO 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
87-0673375
(State of Incorporation)
(I.R.S. Employer Identification No.)
 
 
6720 N. Scottsdale Road, Suite # 390
85253
Scottsdale, AZ  
(Address of Principal Executive Offices)
(Zip Code)
 
Registrant’s Telephone Number, Including Area Code: (602) 522-3000
 
Securities registered under Section 12(b) of the Exchange Act:
NONE
 
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of Class)

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o No x

Indicate by check mark whether the registrant: (1) has 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 o No x

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes o No o

Indicate by check mark if disclosure of delinquent filers in response to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o
Accelerated filer o
Non-accelerated filer o
Smaller reporting company x

Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended).  YES o NO x

As of June 30, 2010, the aggregate market value of our common stock held by non-affiliates was $22,754,008.

As of March 15, 2011, there were 195,509,109 shares of common stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:

Portions of the registrant’s Definitive Proxy Statement for its annual meeting of shareholders, which Definitive Proxy Statement will be filed with the Commission not later than 120 days after the registrant’s fiscal year ended December 31, 2010, are incorporated by reference into Part III of this Annual Report on Form 10-K.
 


 
 

 

FORM 10-K


PART I
Page
 
Item 1.
4
 
Item 1A.
17
 
Item 1B.
24
 
Item 2.
25
 
Item 3.
25
 
Item 4.
26
PART II
 
 
Item 5.
26
 
Item 6.
27
 
Item 7.
27
 
Item 7A.
35
 
Item 8.
35
 
Item 9.
67
 
Item 9A.
67
 
Item 9B.
68
PART III
 
 
Item 10.
68
 
Item 11.
68
 
Item 12.
68
 
Item 13.
68
 
Item 14.
68
PART IV
 
 
 
Item 15.
69

 
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FORWARD-LOOKING STATEMENTS

This Annual Report includes forward-looking statements that involve substantial risks and uncertainties.  These forward-looking statements are not historical facts, but are based on current expectations, estimates and projections about our industry, our beliefs and our assumptions.  Words such as “believes,” “anticipates,” “expects,” “intends” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.  These forward-looking statements are not guarantees of future performance and concern matters that could subsequently differ materially from those described in the forward-looking statements.  Actual events or results may also differ materially from those discussed in this Annual Report.  These risks and uncertainties include those described in “Risk Factors” and elsewhere in this Annual Report.  Except as required by law, we undertake no obligation to revise any forward-looking statements in order to reflect events or circumstances that may arise after the date of this Annual Report.

 
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PART I


Significant Events

The filing of our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2010, June 30, 2010 and September 30, 2010, have been delayed as a result of two primary matters.  The first matter is the restatement of our financial statements for 2006, 2007 and first thee quarters of 2008.  The October 20, 2009, filing of our Annual Report on Form 10-K for the year ended December 31, 2008, concluded our restatement for those periods.  Significant time and resources were devoted to the restatement, which created a delay in required filings for subsequent periods.  The second matter is the voluntary filing for reorganization under Chapter 11 of the United Bankruptcy Code as described below under the heading “Chapter 11 Reorganization”.  We have devoted substantial internal and external resources to bankruptcy related matters.

The Annual Report on Form 10-K for 2009 and the Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2009, June 30, 2009, and September 30, 2009, were filed in February 2011.  Filing of the 2009 reports had been delayed as a result of the same two matters discussed above.

Chapter 11 Reorganization

On November 10, 2009, NutraCea (the Parent Company) filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (Bankruptcy Code) in the United States Bankruptcy Court for the District of Arizona (the Bankruptcy Court), in the proceeding entitled In re:  NutraCea, Case No. 2:09-bk-28817-CGC (the Chapter 11 Reorganization).  None of the Parent Company’s subsidiaries, including its Brazilian rice bran oil operation, Irgovel, were included in the bankruptcy filing.  The Parent Company continued to manage its assets and operate its business as “debtor-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.  Under the Bankruptcy Code, certain claims against the Parent Company in existence prior to the filing of the bankruptcy petition were stayed during the pendency of the Chapter 11 Reorganization.  Additional claims arose subsequent to the filing date from the Parent Company’s business operations, its secured borrowing from Wells Fargo Bank, N.A. (Wells Fargo), its employment of professionals, its disposition of certain non-core assets (as described below) and its treatment of certain executory contracts.  The claim of Wells Fargo, the primary secured creditor of the Parent Company, was secured by perfected liens against the Parent Company’s real and personal property, including, without limitation, its plant and equipment, trade receivables and inventory.

On August 10, 2010, the Parent Company and the Official Unsecured Creditors Committee filed with the Bankruptcy Court an amended plan of reorganization (the Amended Plan) in accordance with the Bankruptcy Code.  The Amended Plan calls for the payment in full of all allowed claims.  Creditors voted overwhelmingly in favor of the Amended Plan and, on October 27, 2010, the Bankruptcy Court entered its order confirming the Amended Plan.  The confirmation order became final on November 10, 2010, and the Amended Plan became effective on November 30, 2010.

In connection with the Chapter 11 Reorganization, we entered into a Senior Secured Super-Priority Debtor-In-Possession Credit and Security Agreement (DIP Credit Agreement), successor loan to the Wells Fargo secured borrowing, which was paid in full as of December 31, 2010.

The liabilities subject to compromise existing at December 31, 2009, became the Parent Company’s payment obligations under the Amended Plan of approximately $7.0 million when the Amended Plan became effective.  As of December 31, 2010, the portion of these obligations remaining unpaid is reflected as pre-petition liabilities in our consolidated balance sheets.  During 2010, $0.6 million of these obligations were paid with proceeds from the sale of the Phoenix, Arizona building.

The Parent Company intends to discharge the obligation to pay these pre-petition liabilities by selling non-core assets, possible equity financing transactions, collecting outstanding receivables, and borrowing on a secured basis.  To secure a portion of these payment obligations, unsecured creditors were granted a lien in all of the Parent Company’s assets.  The lien is administered and may be enforced by a plan agent, who was jointly selected by the Parent Company and the Official Unsecured Creditors Committee.  The plan agent may, among other things, sell specified assets if the payment benchmarks set forth in the Amended Plan are not met (for further information see Note 1 to the consolidated financial statements included herein).

 
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General

NutraCea (“we”, “us”, “our”, or the “Company”), a California corporation, is a food ingredient and health company focused on the procurement, processing and refinement of rice bran and derivative products.  We have proprietary intellectual property that allows us to process and convert rice bran, one of the world’s most underutilized food resources, into a highly nutritious ingredient, stabilized rice bran (SRB) that has applications in various food products.  Our target markets are food manufacturers, nutraceuticals and animal nutrition.  It is also used as a stand-alone product that can be sold through non-related entities with distribution into the market place, both domestically and internationally.  These products include food supplements and nutraceuticals which provide health benefits for humans and animals based on SRB and SRB derivatives.  We believe that SRB products can deliver beneficial physiological effects.  We are continuing to pursue ongoing clinical trials and third party analyses in order to further support the uses for and effectiveness of our products.  In addition, NutraCea has developed a bio-refining approach to processing stabilized rice bran into various value added constituents such as rice bran oil (RBO), defatted rice bran (DRB) and a variety of other valuable derivatives of rice bran.

We have three reportable business segments: (1) Corporate; (2) Stabilized Rice Bran (SRB), which manufactures and distributes SRB in various granulations along with products derived from bran via patented enzyme treatment processes including a fat and protein rich water soluble fraction and a fiber rich insoluble fraction; and (3) Bio-Refining, which separates rice bran into crude rice bran oil and defatted rice bran which are then further processed into a number of valuable food and feed products.  The Corporate segment includes selling, general and administrative expenses, litigation settlements, and other expenses not directly attributable to other segments.  No corporate allocations are made to the other segments.  Interest is not allocated.  For further information on segment results see Note 21 to the consolidated financial statements included herein)

The SRB segment consists of four locations in California and Louisiana that produce SRB.  Not included in these four locations is our Phoenix, Arizona facility, which became operational in February 2009 but was never brought into full production. The Phoenix facility was sold in September 2010.  Our Lake Charles, Louisiana facility has been idle since May 2009.  The SRB segment also includes our Dillon, Montana facility which produces RiSolubles (a highly nutritious, carbohydrate and lipid rich fraction), RiFiber (a fiber rich derivative) and RiBalance (a complete rice bran nutritional package).  The manufacturing facilities included in our SRB segment have specialized processing equipment and techniques for the treatment of rice grain products to cook, convert, isolate, dry and package finished food ingredients used in the formulation of health food and consumer food finished products.  In addition, we have the capability to custom manufacture various grain based products for human food ingredient companies at our Dillon facility.  In 2010, 48.5% of SRB segment revenue was from sales of human food products and 51.5% was from sales of animal feed products.

The Bio-Refining segment consists of our Irgovel operations in Brazil.  Irgovel manufactures RBO and DRB products for both the human and animal food markets in Brazil and internationally.  Irgovel owns the largest rice bran processing facility in South America and is the only Brazilian company to produce edible RBO for human consumption.  In refining RBO to an edible grade several co-products are obtained, including distilled fatty acids, a valuable raw material for the detergent industry.  DRB is compounded with a number of other ingredients to produce complex animal feeds which are packaged and sold under Irgovel brands in the Brazilian market.  For 2010, RBO segment revenue was derived 19.7% from sales of human food products, 46.9% from sales of industrial oils and 33.4% from animal food products.

The combined company is a vertically integrated company combining the manufacturing, product development, and marketing of a variety of products based upon the use of SRB, RBO and DRB formulations and derivatives.  We generated revenues of $31.6 million in 2010 and $33.2 million in 2009.  We reported a net loss of $15.7 million for 2010 and $32.2 million for 2009.  Our net operating loss, or NOL, carryforwards expire for federal tax purposes at various dates from 2011 through 2023, and expire for state tax purposes in 2011 through 2018 (see Note 15 to the consolidated financial statements included herein).

RiceX™ and RiceX Solubles™ are our registered trade names.  TheraFoods®, ProCeuticals®, NutraGlo®, NutraBeauticals®, Mirachol®, Max “E” ®, Max “E” Glo®, StaBran®, RiSolubles® and RiceMucil®, are some of our registered trademarks.  In total, we have twenty-four registered trademarks.  In addition to our trade names and our trademarks, we hold patents to the production of Beta Glucan and a micro nutrient enriched rice bran oil process.  We also hold patents to a method to treat high cholesterol, to a method to treat diabetes and on a process for producing higher value fractions (HVF) from SRB (see Patents and Trademarks section below).

 
5

 
We relocated our headquarters to Phoenix, Arizona in April 2007, replacing the office space previously occupied in El Dorado Hills, California.  We relocated our corporate offices again in December 2009 to our current location at 6720 N. Scottsdale Rd., Scottsdale, AZ 85253.  As of December 31, 2010, we occupy approximately 12,000 square feet of executive office space in Scottsdale, and 28,000 square feet of laboratory, warehouse and production facilities in West Sacramento, California. Additionally, we own a rice bran manufacturing facility in Mermentau, Louisiana and lease another in Lake Charles, Louisiana. We own a second stage (Stage II) production facility in Dillon, Montana.  We sold our Stage II Phoenix, Arizona facility in September 2010.  Two other rice bran manufacturing facilities are co-located within supplier rice mills in Arbuckle and West Sacramento, California.  Our Irgovel subsidiary is comprised of several facilities on approximately 20 acres in Pelotas, Brazil.  These facilities include a plant for extraction of RBO from rice bran, RBO refining processes, compounded animal feed manufacturing, consumer RBO bottling, distilled fatty acid manufacture and support systems including steam generation, maintenance, administrative offices and quality assurance laboratory.
 
History

We originally incorporated on March 18, 1998, in California as Alliance Consumer International, Inc.  We conduct the business previously carried on by NutraStar Technologies Incorporated (NTI), a Nevada corporation that was formed and started doing business in February 2000 and is now our wholly-owned subsidiary.  On December 14, 2001, the corporation effected a reorganization with the inactive publicly-held company, Alliance Consumer International, Inc., and the name was changed to NutraStar Incorporated.  As a result of the reorganization, NTI became a wholly owned subsidiary of NutraStar Incorporated and NutraStar Incorporated assumed the business of NTI.

In April 2000, NutraStar formed NutraGlo Incorporated (NutraGlo), a Nevada corporation, which was owned 80% by NutaStar Incorporated and 20% by NaturalGlo Investors L.P.  During 2001, NutraGlo started marketing, manufacturing and distributing one of our products to the equine market.  In 2002, we issued shares of our common stock to NaturalGlo Investors L.P. in exchange for the remaining 20% of the common stock of NutraGlo.  As a result, NutraGlo is now a wholly-owned subsidiary of NutraStar Incorporated.

In October 2003, NutraStar Incorporated changed its name to “NutraCea” and the common stock began trading on the OTCBB.  Our common stock stopped trading on the OTCBB in May 2009 and is currently trading in the over-the-counter “pink sheets” under the symbol “NTRZ.”

In October 2005, we acquired The RiceX Company (RiceX) in a merger transaction with RiceX surviving the merger as our wholly-owned subsidiary.  In the merger, the shareholders of RiceX received shares of our common stock in exchange for 100% of the shares of RiceX common stock.  Our acquisition of RiceX provided us with our first SRB manufacturing plant in West Sacramento, California, and our first Stage II facility in Dillon, Montana.

In April 2007, we acquired 100% ownership of Grainnovations, Inc., a privately held company in Freeport, Texas, which manufactures SRB pellets for equine customers and other SRB products.  In May 2009, we closed this leased facility and sold the related equipment.
 
In June 2007, we formed Grain Enhancement, LLC, a joint venture to produce and distribute SRB products in Southeast Asia.  We have a 47.5% ownership interest in Grain Enhancement.
 
In December 2007, we formed Rice Rx, LLC, and Rice Science, LLC, in which we held a 50%, and 80% interest, respectively, at December 31, 2010.  We formed Rice Rx, LLC and Rice Science, LLC with a minority partner, to develop, acquire, and commercialize certain SRB isolates.  Effective in March 2011, Rice Rx LLC and Rice Science, LLC became our wholly-owned subsidiaries.
 
In February 2008, we acquired Irgovel, our rice bran oil processing plant in Pelotas, Brazil.  In January 2011, we sold approximately 35.6% of our ownership of Nutra SA LLC, the 100% owner of Irgovel, to AF Bran Holdings-NL LLC and AF Bran Holding LLC (see Note 5 to the consolidated financial statements included herein).

In March and June 2008, we acquired a total of 51% interest in PT Panganmus Inti Nusantara (PIN), an Indonesian company in order to build a wheat mill incorporating our wheat stabilization technology.  PIN owns land and permits necessary for the construction of such a facility in Kuala Tnajung, Medan, and North Sumatra, Indonesia.  On July 23, 2009, we sold our entire interest in PIN.

 
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Products

The NutraCea Process stabilizes rice bran, which is the portion of the rice kernel that lays beneath the hull and envelopes the endosperm (white rice).  The NutraCea Process is an adaptation and refinement of standard food processing technology applied to the stabilization of rice bran.  Rice bran contains a significant portion of the nutritional value of rice.  However, without stabilization, the nutritional value of rice bran is lost shortly after the milling process.  This is due to the lipase-induced rancidity caused by the rice milling process.  Consequently, this rich nutrient resource is sold as low value animal feed.  The NutraCea Process deactivates the lipase enzyme and stabilizes the rice bran giving it a shelf life of a minimum of one year.  Other competing processes have the ability to inactivate lipases to various degrees and therefore provide stability for a limited amount of time.  However, unlike these other competing processes, the NutraCea Process thoroughly inactivates these enzymes leading to extended shelf stability while preserving the large array of antioxidants and other nutrients found in rice bran.

In addition, NutraCea has developed a bio-refining methodology for sequentially extracting valuable food and nutraceutical components from SRB.  This begins with the separation of RBO and DRB.  Subsequent processing and compounding yields a variety of valuable food and feed ingredients.

The NutraCea Processes have enabled us to develop a variety of nutritional food products, including our primary products:  NutraCea® stabilized rice bran, rice bran oil and defatted rice bran.  Our customers include consumer nutrition and healthcare companies, domestic and international food companies, and companion animal feed manufacturers.

We produce stabilized, nutrient-rich rice bran, rice bran oil and defatted rice bran and derivatives that are used in a wide variety of new products.  These include:

NutraCea SRB
 
Stable whole rice bran and germ.  This is our basic SRB product that is both a food supplement and an ingredient for cereals, baked goods, meat extenders, companion animal feed, health bars, etc.  It is also the base material for producing NutraCea Solubles, oils and NutraCea Fiber Complex.
     
NutraCea SRB Fine
 
This is the same product as the NutraCea SRB, except that it has been ground to a particle size that will pass 80% through a 35 mesh screen.  It is used primarily in baking and pasta applications.
 
 
 
NutraCea SRB Extra Fine
 
This is the same product as the NutraCea SRB, except that it has been ground to a particle size that will pass 80% through a 65 mesh screen.  It is used primarily in baking and pasta applications.
     
NutraCea RiBalance
 
An enzyme modified NutraCea SRB that is more functional in baking and mixed health drink applications.  This product contains all of the nutrient-rich components of NutraCea SRB.
 
 
 
NutraCea RiSolubles
 
A highly concentrated water dispersible carbohydrate and lipid rich fraction component of NutraCea SRB.  This product contains only a small amount of fiber and is a concentrated form of the vitamins and nutrients found in NutraCea SRB.
 
 
 
NutraCea Fiber Complex (RiFiber)
 
Nutrient-rich insoluble fiber source with associated nutrients.  This product, designed for use by the baking and health food markets, is the remaining ingredient when NutraCea SRB is processed to form NutraCea RiSolubles.
 
 
 
NutraCea Baby Cereal
 
A comprehensive line of signature branded and private label baby cereals, marketed both to domestic and international customers.  We sold our cereal product producing equipment and building in March 2010 and September 2010, respectively.  Therefore, we no longer sell this product.
 
In addition to the above, rice bran can be further processed into edible grade vegetable oils and defatted rice bran.
 
NutraCea Rice Bran Oil
 
Nutrient-rich oil made from NutraCea SRB.  This oil has high smoke and flash points which provides a very long fry life, is not readily absorbed into food, is naturally trans fat free, and provides excellent nutritional qualities.  It is sold into consumer, food services, and industrial segments.
 
 
 
NutraCea Defatted Bran (DRB)
 
Low fat bran that does not contain rice bran oil.  This is a product designed for use by the baking industry for its high fiber nutritional benefits which include a balanced amino acid profile, high fiber content, and high mineral content.  DRB is also sold as a primary ingredient for animal feed formulations.
     
Compounded Animal Feeds
 
DRB is combined with a variety of other ingredients to create high value compounded animal feeds with various formulations aimed at specific animals such as horses, beef cattle, dairy cows, pigs and sheep.
 
 
 
Higher Value Fractions
 
Nutraceutical-like compounds naturally occurring in NutraCea SRB and RBO that provide specific health benefits.  Tocopherols, tocotrienols, gamma oryzanol, lecithin, and phytosterols are some of the antioxidant-rich fractions that are found in rice bran and are enhanced by stabilization.  Gamma oryzanol has a variety of uses as a nutraceutical and is unique to rice bran in terms of the quantity available.  Distilled fatty acids are a co-product of edible oil processing that are sold to the detergent industry.

 
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Industry Background
 
By definition, nutraceuticals are products from natural sources that have biologically therapeutic effects in humans and animals.  These compounds include vitamins, antioxidants, polyphenols, phytosterols, oryzanols, as well as macro and trace minerals.  The NutraCea Process provides SRB and RBO that are good sources for some of these compounds, including tocotrienols, a highly potent antioxidant form of vitamin E, and gamma-oryzanol, which is found in significant amounts in rice bran.  Among other things, these compounds act as potent antioxidants.  SRB and its derivatives also contain high levels of B-complex vitamins and beta-carotene, a vitamin A precursor.  SRB also contains high levels of carotenoids and phytosterols, a balanced amino acid profile and soluble and insoluble fiber which promote colon health.  See section “Benefits of NutraCea Stabilized Bran” for additional information.

As the market becomes more aware of the value of our ingredients and proprietary formulations we believe demand for our products will increase materially.  Since SRB is a safe food product, we believe that its beneficial effects can be obtained with no known deleterious side effects, such as those that may be present in pharmaceuticals.  Many physicians have taken an interest in our nutraceutical products as a means of offering alternative or complementary approaches for treating serious healthcare problems.  If further clinical trials support the beneficial effects of our nutraceutical and medical foods products and if the medical community widely endorses such use of our products, we believe that our products, in certain situations, may be used as a nutritional therapy either prior to or as a complement to traditional pharmaceutical therapies for the treatment of a variety of ailments including diabetes and coronary heart disease.  We continue to further explore the pharmaceutical potential of the thousands of compounds found within rice bran.

Rice bran oil (RBO) is a vegetable oil that falls into two primary areas of use.  In crude form, it has multiple industrial applications.  Refined further to human edible grade level, RBO becomes a high quality cooking oil and food ingredient that has been used for many years.  The RBO extraction process utilized at our Brazilian facility uses a solvent extraction process to separate the oil from the raw bran resulting in crude RBO and DRB.  Additional refinement can involve degumming, neutralization, bleaching, de-waxing and deodorizing.  This bio-refining process results in numerous other marketable products in addition to the actual oil.  DRB is compounded with other ingredients to produce value added packaged animal feeds.

The Importance of Rice

Rice is the staple food for approximately 70% of the world’s population, and is the staple food source for several of the world’s most populous countries.  Asia accounts for roughly 90% of the global rice production, with its primary producer being China.  China is the world’s number one rice producer, outputting some approximately 190 million metric tons of paddy rice annually.  Globally, the United States ranks about 12th in production of rice at about approximately 9 million metric tons annually.  World rice production constitutes more than one quarter of all cereal grains produced worldwide.  The United States accounts for less than 2% of the world’s rice production.  The vast majority of world rice tonnage (approximately 90%) is produced in 13 countries with aggregate populations of 3.2 billion people (according to the USA Rice Federation, Rice Notes).  Approximately 75% of all rice production occurs in China, India, South East Asia, Africa and South America.  Combined, these regions have a population of 2.3 billion people (nearly 50% of the world’s population), and an average per capita gross domestic product of $2,000 (less than one tenth of the U.S. average).

Malnutrition is a common problem in this group of nations, particularly for people located in rural villages where subsistence rice farming is a primary livelihood.  Transportation and storage are poor.  Consequently, locally grown rice is consumed locally and the amount of food available varies widely over time with changes in seasons and weather.  Children are especially susceptible to variations in local agricultural output due to their heightened nutritional needs and dependency on others for food.  Per capita rice consumption in many of the poorer rice belt countries exceeds one pound per day.

Rice Processing and Rice Bran Stabilization

When harvested from the field, individual rice kernels are temporarily stored in common receiving locations such as farm silos for future delivery to grain dryers or area rice mills.  At this stage, large quantities of individual rice kernels are collectively called “paddy rice”, or “rough” rice.  In this form, the rice kernel is fully enveloped by the rice hull, which serves as a protective cover, shielding the inner rice kernel from damage.

 
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After storage and drying if necessary, paddy rice is cleaned of foreign material (scalping, de-stoning and aspiration) just before it enters the first stage of milling, or paddy husking  In the paddy husker, the hull is removed from rough rice by differential speed rubber rollers.  Loosened hulls are carried off by aspiration.  After husking, a paddy separator uses a reciprocating motion to separate normal brown rice kernels (caryopsis) from unhusked kernels which are returned to the paddy husker.

In the second stage of milling, the outer brown layers of bran are removed from the inner white starch endosperm by an abrasive or frictional milling process which produces a milled, white rice kernel.  After milling, white rice is typically sorted by size to remove broken pieces of rice kernels from whole kernels, as well as color sorting to remove discolored kernels.  Additional stages may be required (per customer specifications) to polish the white rice to a smooth surface.

Raw rice bran collected from the milling process is composed of rice germ and several sub-layers (pericarp, testa, nucellus and aeurone) surrounding the white starchy endosperm.  Commercial rice bran makes up approximately 10% by weight of rough rice.  Rice germ, an especially nutrient rich material, makes up approximately 10% by weight of commercial rice bran.

As brown rice is milled into white rice, the oils present in raw rice bran come into intimate contact with native lipase enzymes that are naturally present in the rice kernel.  These lipase enzymes initiate a rapid hydrolysis of the oil, converting oils (triglycerides) into monoglycerides, diglycerides and free fatty acids (FFA).  As the FFA content builds in raw rice bran, the bran becomes unpalatable and off flavors (rancidity) begin to develop.  If left unchecked, enzymatic degradation at normal room temperatures can increase the FFA levels to 5-8% within 24 hours and can continue at a rate of approximately 4-5% per day thereafter.  Enzymatic degradation is the most serious form of degradation of raw rice bran.  Rice bran stabilization (Stabilization) is the process of carefully deactivating native enzymes, which prevents the increase of FFA due to enzymatic activity.  Stabilization is critical in the preservation of an important nutrient source that is largely wasted today.

There have been a number of attempts to develop rice bran stabilization techniques, including the use of chemicals, microwave heating, or variations of existing extrusion technology.  We believe each of these efforts results in an inferior product that either does not remain stable for a commercially reasonable period of time, or the nutrients in the bran are lost to processing, thereby significantly reducing the nutritional value in the bran.

The NutraCea Process

The NutraCea Process uses proprietary innovations to create a combination of temperature, pressure and other conditions necessary to thoroughly deactivate enzymes without significantly damaging the structure or nutrient content of bran.  This means that higher value compounds in bran, such as oils, proteins and phytonutrients are left undamaged and are available for utilization.  The NutraCea Process does not use chemicals to stabilize raw rice bran.

NutraCea stabilizers are designed to be installed on the premises of any conventional rice mill so that pneumatic conveyor systems can immediately carry the freshly milled, raw rice bran to the NutraCea stabilizer.  Process logic controllers maintain exact process conditions within the prescribed pressure/temperature regime.  In case of power failure or interruption of the flow of fresh bran into the system, the electronic control system is designed to purge the equipment of materials in process and resume production only after proper operating conditions are re-established.

Stabilized bran (SRB) leaving our system is then discharged onto cooling units specifically designed to control air pressure and humidity.  Cooled SRB can be loaded into bulk hopper trucks for large volume, local customers, or sent by pneumatic conveyor to a bagging unit for packaging into 50 lb and 2,000 lb sacks.

Each stabilization module can process approximately 2,000 pounds of NutraCea bran per hour and has a capacity of over 5,700 tons per year.  Stabilization production capacity can be doubled or tripled by installing additional NutraCea units sharing a common conveyor and stage system, which we believe can handle the output of the world’s largest rice mills.  We have developed and tested a smaller production unit, which has a maximum production capacity of 840 tons per year, for installation in countries or locations where rice mills are substantially smaller than those in the United States.

Additional patented NutraCea processes involve enzyme treatment of SRB to effect separation of a lipid and carbohydrate rich water soluble fraction and a fiber and protein rich water insoluble fraction.  In this process SRB, in an aqueous slurry, is treated with amylase enzyme, centrifugally separated and the two fractions dried on drum driers.

The Bio-Refining Process

In the bio-refining process raw bran is obtained from a number of rice mills and transported to a facility within which it is first stabilized via extrusion and then solvent extracted to produce crude RBO and DRB.  Crude RBO is subsequently processed in a number of steps designed to sequentially remove non-oil constituents.  The final outcome of these steps is a highly refined, edible RBO that has superior flavor and functional properties.  In addition, the various co-products of crude RBO processing, distilled fatty acids for example, are refined and sold as products in their own right.  DRB is finely ground and packaged for use as a versatile food ingredient in many applications.  DRB may also be compounded with other ingredients such as a vegetable proteins, carbohydrates, vitamin premixes and minerals to produce an array of nutritionally targeted animal feeds for various species.  The bio-refining process is being continuously researched as we examine the technical and commercial feasibility of producing additional products derived from both RBO and DRB.

 
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Benefits of NutraCea SRB, DRB and Rice Bran Oil

Stabilized Rice Bran (SRB) is a rich source of protein, oil, vitamins, antioxidants, dietary fiber and other nutrients.  The approximate composition and caloric content of NutraCea SRB is as follows:

Fat
18-23%
Protein
12-16%
Total Dietary Fiber
20-30%
Soluble Fiber
  2-6%
Moisture
  4-8%
Ash
  6-14%
Calories
3.2 kcal/gram

Rice bran is unique in the plant kingdom.  Its protein is hypoallergenic and contains all of the essential amino acids, the necessary building blocks of protein in the body.  Rice bran contains approximately 20% oil, which has a favorable fatty acid composition and excellent heat stability.  Rice bran oil contains essential fatty acids and a broad range of nutraceutical compounds that have been demonstrated to have therapeutic properties.

Defatted Rice Bran (DRB) contains many of the same nutritional and functional benefits as SRB, except that the oil has been removed.  This is important for several ingredient applications where SRB’s oil content could present food formulation challenges.  By removing oil from SRB, nutritionists have greater options to formulate DRB into breakfast bars, calorie reduced foods, low fat baking applications and batter and breadings for frying applications.  Additionally, DRB is ideally suited for downstream enzymatic processing, transforming DRB into an ideal feedstock for protein concentrates and fiber concentrates.

Rice bran oil (RBO) as extracted from stabilized rice bran can be utilized in a variety of edible and industrial oil applications.  With proper processing, RBO becomes a high quality cooking oil possessing beneficial high temperature frying characteristics.  RBO has a unique fatty acid content that imparts improved oxidative stability as compared to other vegetable oils such as soy or cottonseed giving it advantages when used in food applications.  The RBO extraction process utilized at our Brazilian facility uses a conventional solvent extraction process to separate oil from raw bran, resulting in crude RBO available for sale to industrial markets or other processors.  Additional refining processes done in Brazil can involve degumming, neutralization, bleaching, de-waxing and deodorizing.  A bio-refining process approach results in numerous marketable co-products in addition to the actual end product.

Nutraceuticals are food constituents that have human therapeutic effects.  Some of these compounds include a highly potent anti-oxidant form of Vitamin E called “tocotrienols,” and gamma oryzanol, which is found in rice bran in large quantities.  These compounds are potent antioxidants that have been shown to aid in reducing damage from free radicals in the body.  NutraCea SRB also contains very high levels of B-complex vitamins, betacarotene (a vitamin A precursor), other carotenoids and phytosterols, as well as both soluble and insoluble fiber.

We have been assigned eight U.S. patents relating to the production or use of nutraceutical HVF products (see Patents and Trademarks section below).

Business Strategy

Our goal is to become a significant global producer and marketer of SRB, DRB, RBO and their derivatives.  We produce these products in manufacturing facilities we own or through other arrangements (see Supply and Manufacturing section below).  We intend to vigorously protect our process and products through both trade secret protection and through patent and trademark protection (see Patents and Trademarks section below).

We believe that clinical support for SRB and DRB products will further enhance the value of our products as nutraceuticals and functional food ingredients.  Finally, we intend to aggressively market our products in four distinct market segments.  These areas are functional food ingredients (SRB, DRB and RBO), nutraceuticals (Stage II products), animal nutrition (SRB and DRB) and RBO processing derivatives (distilled fatty acids, waxes and industrial oils).  In pursuit of these goals, we have focused and will continue to focus our marketing and development efforts worldwide.

Sales and Marketing

As of December 31, 2010, we have a senior vice-president of sales and marketing and five domestic sales representatives.  In addition, we have one equine marketing representative in Europe and specialized meat and poultry consultants in the U.S. and Europe.  These specialized consultants assist in meat and poultry application research and development and potential qualified customer introductions.  We will continue to develop breadth and depth of relationships in efforts to increase sales volume.

 
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Because of the potential significance for SRB inclusion in meat and poultry, we have enlisted the services of a strategic protein application specialist from The Netherlands to help research and establish manufacturing processes, identify new SRB meat applications, and market to key international contacts.  We have also secured the services of PHD Technologies LLC to focus on North American meat and poultry application development, marketing support, and customer training programs.

During 2010, approximately 19.8% of revenues from the SRB segment were to regions outside of the United States while approximately 16.4% of our Bio-Refining segment revenues were to regions outside of Brazil.

Functional Food Ingredients

The global functional food market may be as much as $60 billion, depending on how this market is defined, and we believe that it represents a significant opportunity for us.  Premium ingredient manufacturers are in high demand and we are strategically positioned to take advantage of this growing and sustainable market opportunity.  Our proprietary technology and product patents represent extremely valuable assets for achieving strategic leverage in this industry segment.

NutraCea SRB, DRB and derivatives are economical, all natural food products that contain a unique combination of oil, protein, carbohydrates, vitamins, minerals, fibers, and antioxidants that enhance the nutritional value of popular consumer products.  Foods that are ideally suited for the addition of NutraCea SRB and DRB to their products include processed meats, cereals, baked goods, breadings, and batters.  Our DRB inclusion in breadings and batters results in a reduction in oil uptake, higher moisture retention, improved nutritional profiles, and reduced costs.

In 2008, we received USDA/FSIS approval to provide SRB and DRB as enhancers into meat products such as meat and poultry sausages that contain binders, nugget-shaped patties, meatballs, meatloaf, and meat and poultry patties.  Our products replace functional ingredients like soy protein isolate, soy protein concentrate, modified food starch, pea protein and mustard flour at a fraction of the costs.  With strong application benefits such as reduced cost per unit, increased product yield, and reduced purge, our SRB has a strong marketing position in the US meat market and an even stronger position outside the US where non-meat ingredients make up a larger percentage of meat products.

Nutraceuticals

Nutraceuticals are plant-derived substances with pharmaceutical-like properties, including vitamins and dietary supplements.  Our products can be used to provide certain specific nutrients or food components (including antioxidants, oryzanols, Vitamin E, Vitamin B, and fiber) and general nutritional supplementation.  Our ingredient products are primarily sold to consumer nutrition and healthcare companies, national nutritional retailers, and multi-level personal product marketers.

Animal Nutrition

Our SRB and DRB are marketed as feed ingredients in the U.S. and international animal nutrition markets.  Our SRB and DRB are used as equine feed ingredients and have proven to provide a safe, all natural energy source which assists in lowering glycemic response, improving stamina through being a ready available low starch energy component, and improving overall coat bloom through its essential fatty acid and amino acid profiles.  Show and performance horses represent the premium end of the equine market and represent a more than $100 million annual market share opportunity.

We also blend DRB with other ingredients to produce a variety of feed formulations targeted to certain animal species such as horses, beef cattle, dairy cows, pigs and sheep.

Rice Bran Oil Processing Derivatives
 
SRB contains approximately 15-20% oil.  Through a solvent extraction process, the oil is removed from bran resulting in crude RBO and defatted rice bran (DRB).  Crude RBO is further refined to a finished grade edible oil that is primarily sold as a high end vegetable oil for cooking, as well as a human food ingredient for various products.  Virtually every refining step produces valuable co-products that are of great interest to industrial customers.  One of the more important co-products is known as distilled fatty acids which are being sold to several industrial customers.  In addition, we plan to dry wet gums to produce food grade lecithin, which will be unique in that it is genetically modified organism (GMO) free and non soybean based.  We continue to expand our marketing of RBO both domestically in Brazil and globally.  We estimate that the global market for vegetable oils is approximately 160 million tons annually and will continue to grow as the world’s underdeveloped society’s move towards westernized eating habits and populations increase in general.

 
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Private Label

Through March 2010, we manufactured and marketed private label baby cereal to retail in the US and abroad.  We entered into the private label baby cereal market to utilize excess capacity at our Dillon, MT facility.  In March 2010, we sold the cereal business to a major competitor.  In addition, we sold the cereal production equipment located in our idle Phoenix, AZ facility to this same buyer.  These sales were completed during our Chapter 11 Reorganization with proceeds used to reduce bank debt and fund our ongoing business operations.  We continue to manufacture baby cereal in our Dillon, MT facility for the buyer of our cereal business assets under a tolling agreement.  Our decision to exit the baby cereal business was a strategic move away from a non-core business.  As a term of the sale, we are prohibited from re-entering the baby cereal segment or assisting others in doing the same.

Domestic Initiatives

Our main domestic initiative for 2010 was to focus on the sale of non-core assets as part of our Chapter 11 Reorganization.  Those sale efforts included the marketing of: (1) the cereal business and the related equipment located in the Phoenix building, (2) the animal nutrition equine brands and related inventories and (3) the Phoenix building.  These non-core assets were sold in 2010.  In addition, we relocated our corporate headquarters effective January 1, 2010, and initiated a reduction in the corporate office workforce to materially reduce our overhead expenses.

International Initiatives

Due to our focus on domestic issues associated with changes in our senior management group during 2009 and 2010 and the bankruptcy filing, we did not devote substantial resources to international sales and marketing.  However, in spite of domestic distractions, we continued ongoing discussions with possible international customers and have pursued new distributor relationships.

We continue to look at ways to improve profitability at Irgovel and have increased export crude rice bran oil sales to Japan.  We believe that international sales will provide a higher price than the current local markets and will also be a natural hedge against currency fluctuations.

Customers

One customer accounted for 9.7% of our 2010 revenues and 14.7% of our 2009 revenues.  As of December 31, 2010, one customer accounted for 36.1% of our accounts receivable.  At December 31, 2009, another customer accounted for 14.1% of our accounts receivable.

Although the loss of a customer could have a material adverse effect on our revenues and results of operations, we continue to diversify our customer base in an attempt to mitigate the concentration of customers.  Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of trade accounts receivable and notes receivable.  We perform ongoing credit evaluations on our customers’ financial condition and generally do not require collateral.

Supply and Manufacturing

Initial production of SRB

In the U.S. we purchase raw rice bran from four suppliers.  These include Farmers’ Rice Cooperative in Sacramento, California, ADM Rice in Arbuckle, California, Louisiana Rice Mill in Mermentau, Louisiana and Farmers’ Rice Milling in Lake Charles, Louisiana.  Pursuant to our agreements, our stabilization machinery is physically located within or adjacent to the rice processing plants and the rice bran is directly transferred to our machinery for stabilization without the need for shipping.  The relationship with the rice mills are symbiotic, as the rice manufacturer searches for raw rice bran marketing channels while we have ready access to raw bran.  We believe suitable alternative supply arrangements are readily available if needed.

Stage II Production of SRB
 
Based on product demand, we ship SRB from our warehouse in California to our plant in Dillon, Montana for further processing into NutraCea RiSolubles, NutraCea RiBalance and NutraCea RiFiber.  Since the end of 2005, we installed additional equipment at the Dillon, Montana facility which increased our production of NutraCea RiSolubles and NutraCea RiFiber by more than 150%, to a capacity of 5,000 tons per year.

Every food product that we manufacture is produced under published FDA and USDA regulations for “Good Manufacturing Practices.”  We have extensive processes and programs to oversee product quality.  Product samples for each product code are frequently analyzed for adherence to a predetermined set of product microbiological and attribute specifications and each lot is released only when it demonstrates its compliance with specifications.

 
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Production of RBO and DRB

In Brazil, we purchase raw rice bran from a number or rice mills located short distances from our processing facility in Pelotas.  Timing of delivery for raw bran to a bio-refinery is not as stringent as for a SRB process although we make every effort to process bran as soon after milling as possible to maintain the quality of our crude RBO.  We currently process a relatively small percentage of the bran available to us in Brazil and contiguous rice growing regions of Uruguay and Argentina.

Results of Trials and Scientific Research

The beneficial attributes of SRB, including the RiSolubles® and RiFiber® Nutritional Supplements, have been studied and reported by several laboratories, including Medallion Laboratories, Craft’s Technologies, Inc., Southern Testing & Research Laboratories, and Ralston Analytical Laboratories.  We have no affiliation with any of the laboratories that performed these studies but did pay for certain portions of these studies.  These analyses have verified the presence of antioxidants, polyphenols, and phytosterols, as well as beneficial macro and trace minerals, in our SRB products.  Antioxidants are compounds which scavenge or neutralize damaging compounds called free radicals.  Polyphenols are organic compounds which potentially act as direct antioxidants.  Phytosterols are plant-derived sterol molecules that help improve immune response to fight certain diseases.

A 57-subject clinical trial conducted by Advanced Medical Research, with our funding, suggested that consumption of our RiSolubles® and RiceMucil® Nutritional Supplements may lower blood glucose levels of type 1 and type 2 diabetes mellitus patients and may be beneficial in reducing high blood cholesterol and high blood lipid levels.  If warranted, we may develop products which address the use of SRB products as medical foods for, and to potentially make health benefit claims relating to, the effects of dietary rice bran on diabetes and cardiovascular disease.

Through several consulting physicians, we have relationships with several medical institutions and practicing physicians who may continue to conduct clinical trials and beta work for our products.  Some of these previous clinical trials are reviewed in an article published in the March 2002 issue of the Journal of Nutritional Biochemistry.  The trials produced positive results by showing that the levels of blood lipids and glycosylated hemoglobin were reduced.  Subsequently, three domestic and six international patents were issued to us on the strength of these clinical trials.

The W.F. Young Company, distributors of Absorbine® Equine Pain Relief Products, sponsored a 50-horse equine clinical trial, which demonstrated our Absorbine Flex+® Equine Products to be effective products for treating joint degeneration as well as inflammation in horses.

We have an on-going immune system response study for HIV patients at the Haddassah Medical University in Israel.  This study was initiated due to mounting anecdotal evidence obtained from our humanitarian efforts in Africa that RiSolubles seems to boost energy levels in HIV infected individuals, also helping them gain weight and regain relatively normal lifestyles.  We caution that no causal relationship has yet been proven and that RiSolubles does not reverse infection by HIV.  The study, with a medically reviewed, statistically validated protocol, is intended to provide a definitive answer.  Due to the Chapter 11 Reorganization, we have been unable to access the results of this study.  We are uncertain at this time of its completeness or value going forward.

In December 2007, we formed Rice Science, LLC (RS), a Delaware limited liability company, with Herbal Science Singapore PTe. Ltd. (HS) to develop nutraceutical extracts and pharmaceutical chemistries from our SRB.  HS utilizes sophisticated methodologies in the identification and isolation of specific biologically active compounds that have been tested for effectiveness against specific disease conditions.  Thus far, it is apparent that SRB contains a large number of novel, potentially active compounds that will be the target of HS’s methodologies.  Our partnership with HS has ended and effective in March 2011, RS is our wholly owned subsidiary.  We are hopeful that the research already performed will result in biologically active SRB extracts for use in the nutraceutical industry as well as specific identified compounds targeting the pharmaceutical industry.

In 2008, RS conducted a significant amount of research.  The initial thrust of this work was the development of extracts from SRB that would be effective in fighting inflammation which leads to pain.  A number of extracts have been tested with two identified as having significant effect based on in vitro tests.  A combination of these was created to produce a third extract that exhibits a high level of Cox 1, Cox 2 and Lox 5 inhibition.  This extract was used in a pharmacokinetic study to determine the speed of assimilation into the human body.  Results indicated that the active compounds were rapidly assimilated with no evidence of toxic byproducts.  Our next step is to conduct a human clinical trial.  A number of active compounds were identified and modeled.  RS has filed patent applications for the extract along with each of the specific active compounds.

RS has also conducted preliminary work on extracts of SRB for treatment of diabetes and metabolic syndrome.  This is a promising area of research which will be focused on in 2011 and beyond.

 
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Late in 2007, the Cancer Biomarkers Group in the Department of Cancer Studies and Molecular Medicine, University of Leicester in Leicester, UK published a research paper evaluating the effect of our SRB in ApcMin mice (British Journal of Cancer (2007) 96, 248-254).  The mice were genetically modified to serve as models for mammary, prostate and intestinal carcinogenesis.  They reported that consumption of SRB (30% in the diet) reduced the numbers of intestinal adenomas in these mice by 51% compared to the same mice on a control diet.  The results suggest that SRB might be further evaluated as a chemo-preventative intervention in humans.  These results led to us filing a patent application on “Methods for Treatment of Intestinal Carcinogenesis with Rice Bran”.  A new clinical trial utilizing NutraCea Fiber Complex has been initiated at the University of Leicester to further characterize the effectiveness of this rice bran derivative as a chemo-preventative intervention against intestinal cancer in humans.  The study was completed in 2009.

Patents and Trademarks

Through our subsidiary RiceX, we have been assigned eight U.S. patents relating to the production or use of Nutraceutical or HVF products.  The patents include:

1.
Patent Number 5,512,287 “PRODUCTION OF BETA-GLUCAN AND BETA-GLUCAN PRODUCT,” which issued on April 30, 1996 and expires in 2014.

2.
Patent Number 5,985,344 “PROCESS FOR OBTAINING MICRONUTRIENT ENRICHED RICE BRAN OIL,” which issued November 16, 1999 and expires in 2018.

3.
Patent Number 6,126,943 “METHOD FOR TREATING HYPERCHOLESTEROLEMIA, HYPERLIPIDEMIA, AND ATHEROSCLEROSIS,” which issued October 3, 2000 and expires in 2018.

4.
Patent Number 6,303,586 B1 “SUPPORTIVE THERAPY FOR DIABETES, HYPERGLYCEMIA AND HYPOGLYCEMIA,” which issued October 16, 2001 and expires in 2018.
 
5.
Patent Number 6,350,473 B1 “METHOD FOR TREATING HYPERCHOLESTEROLEMIA, HYPERLIPIDEMIA AND ATHEROSCLEROSIS,” which issued February 26, 2002 and expires in 2020.
 
6.
Patent number 6,558,714 B2 “METHOD FOR TREATING HYPERCHOLESTEROLEMIA, HYPERLIPIDEMIA AND ATHEROSCLEROSIS” which issued May 06, 2003 and expires in 2021.
 
7.
Patent number 6,733,799 “METHOD FOR TREATING HYPERCHOLESTEROLEMIA, HYPERLIPIDEMIA AND ATHEROSCLEROSIS” which issued May 11, 2004 and expires in 2023.
 
8.
Patent number 6,902,739 “METHODS FOR TREATING JOINT INFLAMMATION, PAIN AND LOSS OF MOBILITY” which issued June 07, 2005 and expires in 2021.

We currently have several additional patent applications filed and pending formal review, and we intend to apply for additional patents in the future as new products, treatments and uses are developed.

In addition to the previously identified issued patents we have been issued nine additional International patents covering this subject area.

1.
Patent number 71377 “SUPPORTIVE THERAPY FOR DIABETES, HYPERGLYCEMIA AND HYPOGLYCEMIA” which issued by Singapore March 28, 2002.

2.
Patent number 751704 “SUPPORTIVE THERAPY FOR DIABETES, HYPERGLYCEMIA AND HYPOGLYCEMIA” which issued by Australia December 5, 2002.

3.
Patent number 503648 “SUPPORTIVE THERAPY FOR DIABETES, HYPERGLYCEMIA AND HYPOGLYCEMIA” which issued by New Zealand February 3, 2003.

4.
Patent number 98810675.2 “SUPPORTIVE THERAPY FOR DIABETES, HYPERGLYCEMIA AND HYPOGLYCEMIA” which issued by Canada July 16, 2003.

5.
Patent number 15162B1 “PROCESS FOR OBTAINING MICRONUTRIENT ENRICHED RICE BRAN OIL” which issued by Argentina October 22, 2004.

6.
Patent number 232655 “SUPPORTIVE THERAPY FOR DIABETES, HYPERGLYCEMIA AND HYPOGLYCEMIA” which issued by Mexico December 6, 2003.

7.
Patent number 583211 “A METHOD FOR TREATING DIABETES, HYPERGLYCEMIA AND HYPOGLYCEMIA” which issued by Korea May 18, 2006.

 
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8.
Patent number 2002315558 “METHODS FOR TREATING JOINT INFLAMMATION, PAIN AND LOSS OF MOBILITY” which issued by Australia October 18, 2007.

9.
Patent number 221444 “DIABETIC FOOD KIT COMPRISING ENZYME TREATED STABILIZED RICE BRAN DERIVATIVE” which issued by India June 23, 2008.

In 2008, we filed another 11 provisional patent applications of which four have been submitted as formal patent filings.  We intend to apply for additional patents in the future as new products, applications and data become available.

The NutraCea Process is an adaptation and refinement of standard food processing technology applied to the stabilization of rice bran.  We have chosen to treat the NutraCea Process as a trade secret and not to pursue process or process equipment patents on the original processes.  However, process improvements will be reviewed for future patent protection.  We believe that the unique products, and their biological effects, resulting from our SRB are patentable.

We endeavor to protect our intellectual property rights through patents, trademarks, trade secrets and other measures.  However, there can be no assurance that we will be able to protect our technology adequately or that competitors will not develop similar technology.  There can be no assurance that any patent application we may file will be issued or that foreign intellectual property laws will protect our intellectual property rights.  Other companies and inventors may receive patents that contain claims applicable to our systems and processes.  The use of our systems covered by such patents could require licenses that may not be available on acceptable terms, if at all.  In addition, there can be no assurance that patent applications will result in issued patents.

Although there currently are no pending claims or lawsuits against us regarding possible infringement claims, there can be no assurance that infringement claims by third parties, or claims for indemnification resulting from infringement claims, will not be asserted in the future or that such assertions, if proven to be true, will not have a materially adverse affect on our financial condition and results of operations.  In the future, litigation may be necessary to enforce our patents, to protect our trade secrets or know-how or to defend against claimed infringement of the rights of others and to determine the scope and validity of the proprietary rights of others.  Any such litigation could result in substantial cost and diversion of our resources, which could have a material adverse effect on our financial condition and results of operations.  Adverse determinations in such litigation could result in the loss of our proprietary rights, subject us to significant liabilities to third parties, require us to seek licenses from third parties or prevent us from manufacturing or selling our systems or products, any of which could have a material adverse effect on our financial condition and results of operations.  In addition, there can be no assurance that a license under a third party’s intellectual property rights will be available on reasonable terms, if at all.
 
Government Regulation
 
The Federal Food, Drug, and Cosmetic Act (FFDCA), the U.S. Food and Drug Administration, (FDA) and U.S. Department of Agriculture regulations govern the marketing of our products.

Marketers of dietary supplements may make three different types of claims in labeling: nutrient content claims, nutritional support claims, and health claims.

 
·
Nutrient content claims are those claims that state the nutritional content of a dietary supplement and include claims such as “high in calcium” and “a good source of vitamin C.” The FFDCA prescribes the form and content of nutritional labeling of dietary supplements and requires the marketer to list all of the ingredients contained in each product.  A manufacturer is not required to file any information with the FDA regarding nutrient content claims, but must have adequate data to support any such claims.

 
·
Nutritional support claims may be either statements about classical nutritional deficiency diseases, such as “vitamin C prevents scurvy” or statements regarding the effect of a nutrient on the structure or function of the body, such as “calcium builds strong bones.” The FFDCA requires that any claim regarding the effect of a nutrient on a structure or function of the body must be substantiated by the manufacturer as true and not misleading.  In addition, the label for such products must bear the prescribed disclaimer: “This statement has not been evaluated by the Food and Drug Administration.  This product is not intended to diagnose, treat, cure, or prevent any disease.”

 
·
Health claims state a relationship between a nutrient and a disease or a health-related condition.  FDA’s regulations permit certain health claims regarding the consumption of fiber and the reduction of risk for certain diseases, such claims may relate to rice bran ingredients.

 
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The FDA has broad authority to enforce the provisions of federal law applicable to dietary supplements, including the power to seize adulterated or misbranded products or unapproved new drugs, to request product recall, to enjoin further manufacture or sale of a product, to issue warning letters, and to institute criminal proceedings.  In the future, we may be subject to additional laws or regulations administered by the FDA or other regulatory authorities, the repeal of laws or regulations that we might consider favorable or more stringent interpretations of current laws or regulations.  We are not able to predict the nature of such future laws or regulations, nor can we predict the effect of such laws or regulations on our operations.  We may be required to reformulate certain of our products, recall or withdraw those products that cannot be reformulated, keep additional records, or undertake expanded scientific substantiation.  Any or all of such requirements could have a material adverse effect on our business and financial condition.

The Federal Trade Commission, or FTC, regulates the advertising of dietary supplement and other health-related products.  The FTC’s primary concern is that any advertising must be truthful and not misleading, and that a company must have adequate substantiation for all product claims.  The FTC actively enforces requirements that companies possess adequate substantiation for product claims.  FTC enforcement actions may result in consent decrees, cease and desist orders, judicial injunctions, and the payment of fines with respect to advertising claims that are found to be unsubstantiated.

The U.S. Department of Agriculture retains jurisdiction over meat products.  Therefore, use of SRB and DRB as meat enhancers are regulated by this agency.  Both SRB and DRB have USDA approval for use in meat products.

In addition to the foregoing, our operations will be subject to federal, state, and local government laws and regulations, including those relating to zoning, workplace safety, and accommodations for the disabled, and our relationship with our employees are subject to regulations, including minimum wage requirements, anti-discrimination laws, overtime and working conditions, and citizenship requirements.

We believe that we are in substantial compliance with all material governmental laws and regulations.

Competition

Although we believe that we are the only company to produce stabilized all natural rice bran with a shelf life of over one year, we compete with other companies attempting to stabilize rice bran, as well as companies producing other food ingredients and nutritional supplements.  We believe that our only significant competitors currently for rice bran products for feed applications are Producer’s Rice Mill, Stuttgart, Arkansas and Harvest Rice Milling, McGehee, Arakansas.  We are also aware of one small scale producer of food ingredient SRB in Italy, Riso Scotti.  We believe that our major nutritional supplement competitors include producers of isolated soy protein, wheat bran and oat bran, particularly in the functional food ingredients market segment.

We compete with other companies that offer products incorporating SRB as well as companies that offer other food ingredients and nutritional supplements.  We also face competition from companies providing products that use oat bran and wheat bran as nutritional supplements as well as for health and beauty aids.  Many consumers may consider such products to be a replacement for the products we manufacture and distribute.  Many of our competitors have greater marketing, research, and capital resources than we do, and may be able to offer their products at lower costs because of their greater purchasing power or the lower cost of oat and wheat bran ingredients.  There are no assurances that our products will be able to compete successfully.

With the purchase of Irgovel in 2008, we now compete in the world's edible oil market.  Our competition for exports of rice bran oil resides primarily in Southeast Asia.  There are several small scale producers of crude RBO in that region although few produce an edible grade oil.  There are also a number of crude RBO producers in India but most of these produce inferior grade oil destined for soap manufacture.

Research and Development Expenditures

During 2010 and 2009, we spent $0.1 million and $0.9 million on product research and development.  Beginning in 2009, we curtailed research and development activity in an effort to conserve cash during the year.  We expect to continue research and development expenditures to establish the scientific basis for health claims of existing products and to develop new products and applications based on future cash availability.

Seasonality

Our business is not materially affected by seasonal factors.

Environment

We believe that our operations comply in all material respects with applicable laws and regulations concerning the environment.  While it is impossible to predict accurately the future costs associated with environmental compliance and potential remediation activities, compliance with environmental laws is not expected to require significant capital expenditures and has not had, and is not expected to have, a material adverse effect on our results of operations or competitive position.

 
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Employees

As of December 31, 2010, the SRB segment had 57 domestic employees and the Bio-Refining segment had 230 employees based in Brazil.  Our employee count may change periodically.  From year to year we experience normal variable labor fluctuation at our production facilities.  We believe relations with our employees are good.  None of our employees are covered by collective bargaining agreements.

Securities and Exchange Commission Reports

We maintain an Internet website at the following address: www.nutracea.com.  We make available on or through our Internet website certain reports and amendments to those reports that we file with the Securities and Exchange Commission (SEC) in accordance with the Securities Exchange Act of 1934 (Exchange Act).  These include our annual reports on Form 10-K, our quarterly reports on Form 10-Q and our current reports on Form 8-K.  We make this information available on our website free of charge as soon as reasonably practicable after we electronically file the information with, or furnish it to, the SEC.  The contents of our website are not incorporated by reference in this report on Form 10-K and shall not be deemed “filed” under the Securities Exchange Act of 1934.  The public may also read and copy any materials that we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549.  You may obtain information about the Public Reference Room by contacting the SEC at 1-800-SEC-0330.  Reports filed with the SEC are also made available on the SEC website (www.sec.gov).


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.

Our actual financial results may vary significantly from the projections filed with the Bankruptcy Court.

In connection with the Chapter 11 Reorganization, we were required to prepare financial projections to demonstrate the feasibility of the Amended Plan and our ability to continue operations upon emergence from bankruptcy.  The financial projections, which were included in the disclosure statement approved by the Bankruptcy Court, reflected numerous assumptions concerning anticipated future performance and anticipated market and economic conditions that were and continue to be beyond our control and that may not materialize.  Projections are inherently subject to uncertainties and to a wide variety of significant business, economic and competitive risks.  Our actual results will vary from those contemplated by the projections for a variety of reasons.  The projections have not been incorporated by reference into this report and neither those projections nor any version of the disclosure statement should be considered or relied upon in connection with any investment decision concerning our common stock.

Our actual financial results after emergence from bankruptcy under Chapter 11 may not be comparable to our historical financial information.

As a result of the implementation of the Amended Plan and the transactions contemplated thereby, our financial condition and results of operations may not be comparable to the financial condition or results of operations reflected in our historical financial statements.

We cannot be certain that the Chapter 11 Reorganization will not adversely affect our operations going forward.

Although we emerged from bankruptcy under Chapter 11 on November 30, 2010, the effective date of the Amended Plan, we cannot assure you that having been subject to bankruptcy protection will not adversely affect our operations going forward, including our ability to negotiate favorable terms from suppliers, partners and others and to attract and retain customers.  The failure to obtain such favorable terms and attract and retain customers could adversely affect our financial performance.

If we do not meet certain payment benchmarks as described in the Amended Plan, the Plan Agent will be able to direct and control the sale of certain of our assets.

Under the Amended Plan, if we fail to meet certain payment benchmarks to our general unsecured creditors as described in the Amended Plan, the plan agent may direct and control the sale of (i) our Dillon, Montana facility, (ii) all of our loose equipment, and, if the third payment benchmark is not met, (iii) the sale of equipment located in our Lake Charles, Louisiana facility, and (iv) the sale of any other pledged assets.  The general unsecured creditors may retain up to 100% of net proceeds from any such sale in satisfaction of their claims.  Since we will not be able to control the sale of the above assets if we do not meet the payment benchmarks, we cannot guarantee that the assets will be sold at a value satisfactory to us.

 
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Our payment obligations under the Amended Plan may adversely affect our cash flow and we may not be able to obtain additional financing on satisfactory conditions.

Our ability to service our payment obligations under the Amended Plan will depend upon, among other things, our future operating performance and the ability to enter into financing transactions.  These factors depend partly on economic, financial, competitive and other factors beyond our control.  In addition, if we need to obtain additional financing or sell assets or equity, we may not be able to do so on commercially reasonable terms, if at all.  Failure to service our payment obligations may result in the Plan Agent selling one or more of our assets, as described above.

Risks Related to Our Business

Our significant losses and negative cash flow raise questions about our ability to continue as a going concern.

Our net cash used in operating activities was approximately $7.3 million and $8.8 million in 2010 and 2009.  We cannot assure you that we will be able to achieve revenue growth, profitability or positive cash flow, on either a quarterly or annual basis, or that profitability, if achieved, will be sustained.  No adjustments have been made to the financial statements that might result from the outcome of this uncertainty.  If we are unable to achieve or sustain profitability, we may not be financially viable in the future and may have to curtail, suspend, or cease operations, restructure existing operations to attempt to ensure future viability, or pursue other alternatives such as re-filing for bankruptcy, pursuing dissolution and liquidation or seeking to merge with another company or sell all or substantially all of our assets.  Because of our recurring losses and negative cash flows from operations, the audit report of our independent public accountants on our financial statements for the fiscal year ended December 31, 2010 contains an explanatory paragraph stating that the independent auditor has substantial doubt about our ability to continue as a going concern.

We have identified material weaknesses in our internal control over financial reporting. Additionally, we may identify material weaknesses in the future that could adversely affect investor confidence, impair the value of our common stock and increase our cost of raising capital.

We assessed the effectiveness of our disclosure and internal controls and procedures as of December 31, 2010.  We identified material weaknesses in our internal control over financial reporting with respect to timely filling of our 2010 Quarterly Reports on Form 10-Q and to certain control issues with our subsidiary in Brazil.  As a result of these material weaknesses, our chief executive officer and our chief financial officer concluded that our disclosure and internal controls and procedures were not effective at a reasonable assurance level as of December 31, 2010.  We have taken and are continuing to take steps to remediate the material weaknesses in our internal control over financial reporting.  There can be no assurance as to how quickly or effectively our remediation steps will remediate the material weaknesses in our internal control over financial reporting or that additional material weaknesses will not be identified in the future.

Any failure to remedy additional deficiencies in our internal control over financial reporting that may be discovered in the future or to implement new or improved controls, or difficulties encountered in the implementation of such controls, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements.  Any such failure could, in turn, affect the future ability of our management to certify that internal control over our financial reporting is effective.  Inferior internal control over financial reporting could also subject us to the scrutiny of the SEC and other regulatory bodies which could cause investors to lose confidence in our reported financial information and could subject us to civil or criminal penalties or shareholder litigation, which could have an adverse effect on the trading price of our common stock.

In addition, if we or our independent registered public accounting firm identify additional deficiencies in our internal control over financial reporting, the disclosure of that fact, even if quickly remedied, could reduce the market’s confidence in our financial statements and harm our share price.  Furthermore, additional deficiencies could result in future non-compliance with Section 404 of the Sarbanes-Oxley Act of 2002.  Such non-compliance could subject us to a variety of administrative sanctions, including review by the SEC or other regulatory authorities.

We have a limited operating history and have generated losses in every quarter except for the second and third quarters of 2006.

We began operations in February 2000 and incurred losses in each reporting period except for the second and third quarters of 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.

 
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We have not yet achieved positive cash flows.
 
We have not generated a positive cash flow from operations continuously period to period since commencing operations.  We are reassessing the business to identify core and non-core assets.  To raise additional cash funding, non-core assets and/or business units will be offered for sale.  Additionally, increased focus and attention will be undertaken in an effort to reduce operating expenses to increase cash flow and fund current operations in our SRB segment.

Our ability to meet long-term business objectives likely will 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.  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 that will strain our future cash flow.  An inability to obtain sufficient financing might require us to delay, scale back or eliminate some or all of our product development and marketing programs, eliminate or restructure portions of our operations, restructure existing operations to attempt to ensure future viability, or pursue other alternatives including dissolution and liquidation or seeking to merge with another company or sell all or substantially all of our assets.

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 our best estimates, 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 may face difficulties integrating businesses we acquire.

As part of our strategy, we expect to review opportunities to buy other businesses or technologies that would complement our current products, expand the breadth of our 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;
 
·
incur debt; or
 
·
assume liabilities.

These purchases also involve numerous risks, including:

 
·
problems combining the purchased operations, technologies or products;
 
·
unanticipated costs;
 
·
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 acquire in the future.

We intend to pursue significant foreign operations and there are inherent risks in operating overseas.

An important component of our business strategy is to build rice bran stabilization and rice bran oil facilities in foreign countries and to market and sell our products internationally.  For example, we have an operation in Brazil which manufactures rice bran oil.  There are risks in operating facilities in developing countries because, among other reasons, we may be unable to attract sufficient qualified personnel, intellectual property rights may not be enforced as we expect, and legal rights may not be available as contemplated.  Should any of these risks occur, we may be unable to maximize the output from these facilities and our financial results may decrease from our anticipated levels.  The inherent risks of international operations could materially adversely affect our business, financial condition and results of operations.  The types of risks faced in connection with international operations and sales include, among others:

 
·
cultural differences in the conduct of business;
 
·
fluctuations in foreign exchange rates;
 
·
greater difficulty in accounts receivable collection and longer collection periods;

 
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·
impact of recessions in economies outside of the United States;
 
·
reduced protection for intellectual property rights in some countries;
 
·
unexpected changes in regulatory requirements;
 
·
tariffs and other trade barriers;
 
·
political conditions in each country;
 
·
management and operation of an enterprise spread over various countries;
 
·
the burden and administrative costs of complying with a wide variety of foreign laws; and
 
·
currency restrictions.

Fluctuations in foreign currency exchange could adversely affect our financial results.

We earn revenues, pay expenses, own assets and incur liabilities in countries using currencies other than the U.S. dollar, including primarily the Brazilian Real.  Currently, a significant portion of our revenues and expenses occur in our Brazilian subsidiary, Irgovel.  Because our consolidated financial statements are presented in U.S. dollars, we must translate revenues, income and expenses, as well as assets and liabilities, into U.S. dollars at exchange rates in effect historically, during or at the end of each reporting period.  Therefore, increases or decreases in the value of the U.S. dollar against the Brazilian real and any other currency which affects a material amount of our operations, will affect our revenues, cost of sales, gross profit (loss), operating expenses, or other income and expenses and the value of balance sheet items denominated in foreign currencies.  These fluctuations may have a material adverse effect on our financial results.  Disruptions in financial markets may result in significant changes in foreign exchange rates in relatively short periods of time which further increases the risk of an adverse currency effect.  Since we plan to expand our international operations, we will likely increase our exposure to foreign currency risks.  We do not hedge our currency risk, and do not expect to, as currency hedges are expensive and do not necessarily reduce the risk of currency fluctuations over longer periods of time.

We depend on a limited number of customers.

One customer accounted for 9.7% of our 2010 revenues and 14.7% of our 2009 revenues.  At December 31, 2010, one customer accounted for 36.1% of our accounts receivable.  At December 31, 2009, another customer accounted for 14.1% of our accounts receivable.

Although we continue to expand our customer base in an attempt to mitigate the concentration of customers, the loss of any one of these customers could have an adverse effect on our revenues and results of operations.

We may encounter difficulties in maintaining relationships with distributors and customers while enforcing our credit policies.

We define credit risk as the risk of loss from obligors or counterparty default.  Our credit risks arise from both distributors and consumers.  Many of these risks and uncertainties are beyond our control.

Our ability to forecast future trends and spot shifts in consumer patterns or behavior even before they occur are vital for success in today's economy.  In managing risk, our objective is to protect our profitability, but also protect, to the extent we can, our ongoing relationship with our distributors and customers.  With this in mind, we have taken the following actions:
 
 
·
We adopted, and our board of directors approved, a credit risk policy that establishes general principles and the overall framework for managing our consumer credit risk.  This policy is further supported by subordinate policies and practices covering all facets of consumer credit extension, including prospecting, approvals, authorizations, line management, collections, and fraud prevention.  Going forward, these policies should help ensure consistent application of credit management principles and standardized reporting of asset quality and projected loss reserves.
 
·
We incorporated more sophisticated information in our risk evaluations;
 
·
We increased our focus on areas of high risk, including canceling an account or placing a cash only policy on certain questionable accounts;
 
·
We reduced certain credit limits;
 
·
We concentrated our efforts on quickly identifying and assisting distributors who are experiencing temporary financial difficulty.

Implementing and enforcing our credit policy and providing guidance to the officers on the policy is critical for us to achieve US GAAP compliant revenue recognition.  We may encounter difficulties in maintaining relationships with distributors and customers while enforcing our credit policies.

The inability of our significant customers to meet their obligations to us may adversely affect our financial results.

We are subject to credit risk due to concentration of our trade accounts receivables and notes receivables.  As of December 31, 2010, one customer accounted for 36.1% of our $3.5 million in accounts receivable, net and one debtor accounted for 100% of the $1.8 million in note receivable, net reflected on our December 31, 2010, consolidated balance sheet.  The inability of our significant customers and obligors to meet their obligations to us, may adversely affect our financial condition and results of operations.

 
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We rely upon a limited number of product offerings

The majority of the products that we have sold through 2010 have been based on SRB produced at our US facilities and extracted rice bran oil from Irgovel, our Brazil facility.  Although we will market SRB as a dietary supplement, as an active food ingredient in other companies’ products, and in other ways, a decline in the market demand for our SRB products, as well as the products of other companies utilizing our SRB 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.

Many of our current products depend on our proprietary technology using raw rice bran, which is a by-product from milling paddy rice to white rice.  Our ability to manufacture SRB is currently limited to the production capability of our production equipment at Farmers’ Rice Co-operative and Archer Daniels Midland in California and our own plants located next to Louisiana Rice Mill in Mermentau, Louisiana, and Farmer’s Rice Milling in Lake Charles, Louisiana.  Along with our value-added product plants in Dillon, Montana and our facility in Pelotas, Brazil (acquired in February 2008), we currently are capable of producing enough finished products to meet current demand.  If demand for our products were to increase dramatically in the future, we would need additional production capacity.

There can be no assurance that we will continue to secure adequate sources of raw rice bran to meet our future demand.  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 always able to immediately pass cost increases to our customers and any increase in the cost of SRB products could 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.

We must comply with our contractual obligations.

We have numerous ongoing contractual obligations under various purchase, sale, supply, production and other agreements which govern our business operations.  We also have contractual obligations which require ongoing payments such as various lease obligations and the agreement of Irgovel to pay tax obligations to the Brazilian government through 2024.  While we seek to comply at all times with these obligations, there can be no assurance that we will be able to comply with the terms of all contracts during all periods of time, especially if there are significant changes in market conditions or our financial condition.  If we are unable to comply with our material contractual obligations, there likely would be a material adverse effect on our financial condition and results of operations.

We have financial performance obligations related to Irgovel.

Under the limited liability company agreement for Nutra SA LLC, Irgovel must satisfy certain financial performance requirements in order for us to maintain control over Irgovel.  Nutra SA LLC owns Irgovel.  The Parent Company and the investors in Nutra SA, LLC entered into the limited liability company agreement for Nutra SA LLC in connection with the investors purchasing membership interests in Nutra SA pursuant to a membership interest purchase agreement effective January 2011 (see Note 5 to the consolidated financial statements included herein).  These financial performance requirements include Irgovel’s satisfaction of revenue, earnings and net debt targets described in the membership interest purchase agreement.  Beginning in 2011, if Irgovel fails to meet these financial requirements, we could lose management control over Irgovel’s operations, and management control would transfer to the other investors in Nutra SA LLC.
 
The recent natural disaster in Japan could disrupt operations of our customers and adversely affect our results of operations.
 
A number of our customers are located in Japan.  Even if these customers are not located near the epicenter of the March 2011 Sendai earthquake, they may be affected by the consequences of the natural disaster that has affected Japan.  If these conditions persist, we may experience delay or cancellation of orders from such customers which would adversely affect our net sales and results of operations.

 
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We have a high concentration of credit risk

We currently depend on a limited number of customers.  This results in a concentration of credit risk with respect to our outstanding accounts receivable.  We consider the financial strength of the customer, the remoteness of the possible risk that a default event will occur, the potential benefits to our future growth and development, possible actions to reduce the likelihood of a default event and the benefits from the transaction before entering into a large credit limit for a customer.  Although we analyze these factors, there can be no assurance that the ultimate collection of the obligation from the customer will occur.  Although we continue to expand our customer base in an attempt to mitigate the concentration of credit risk, the writing off of an accounts receivable balance could have an adverse effect on our results of operations.  Financial instruments that potentially subject us to concentration of credit risk consist primarily of cash and cash equivalents and trade receivables.  Historically, we have not experienced any loss of our cash and cash equivalents, but we have experienced losses to our trade receivables.

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 Federal 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.

We may be subject to product liability claims and product recalls.

We sell food and nutritional products for animal and human consumption, which involves risk such as product contamination or spoilage, product tampering and other adulteration of food products.  We may be subject to liability if the consumption of any of our products causes injury, illness or death.  In addition, we may voluntarily recall products in the event of contamination or damage.  A significant product liability judgment or a widespread product recall may cause a material adverse effect on our financial condition.  Even if a product liability claim is unsuccessful, there may be negative publicity surrounding any assertion that our products caused illness or injury which could adversely affect our reputation with existing and potential customers.

Many of the risks of our business have only limited insurance coverage and many of our business risks are uninsurable.

Our business operations are subject to potential product liability, environmental, fire, employee, manufacturing, shipping and other risks.  Although we have insurance to cover some of these risks, the amount of this insurance is limited and includes numerous exceptions and limitations to coverage.  Further, no insurance is available to cover certain types of risks, such as acts of God, war, terrorism, major economic and business disruptions, and similar events.  In the event we were to suffer a significant uninsured claim, our financial condition would be materially and adversely affected.
 
Our success depends in part on our ability to obtain patents, licenses and other intellectual property rights for our products and technology.
 
Our success is dependent upon our ability to protect the patents, trade secrets and trademarks that we have and to develop new patents and trademarks for future processes, machinery, compounds and products that we develop.  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 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 effect 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.

 
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We are dependent on key employees and consultants.

Our success depends upon the efforts of our top management team, including the efforts of John Short (Chairman and Chief Executive Officer), Dale Belt (Chief Financial Officer), Leo Gingras (President and Chief Operating Officer), and Colin Garner (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.

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 our common stock has fluctuated significantly in the past and may continue to fluctuate significantly in the future.  Our common stock trades on the over the counter “pink sheets” for which there is an inconsistent market.  Our common stock is thinly traded and subject to volatility in price and demand.  The high and low closing sales prices of our common stock for the following periods were:
 
   
Low
   
High
 
             
Year Ended December 31, 2010
           
Fourth Quarter
  $ 0.10     $ 0.24  
Third Quarter
    0.08       0.13  
Second Quarter
    0.06       0.16  
First Quarter
    0.07       0.14  
                 
Year Ended December 31, 2009
               
Fourth Quarter
  $ 0.04     $ 0.18  
Third Quarter
    0.12       0.27  
Second Quarter
    0.15       0.41  
First Quarter
    0.18       0.56  

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 our competitors;
 
·
developments in our or our competitors’ intellectual property rights;
 
·
adverse effects to our operating results due to impairment of goodwill;
 
·
failure to successfully implement the Amended Plan;
 
·
failure to meet the expectation of securities analysts’ or the public;
 
·
general economic and market conditions;
 
·
our ability to expand our operations, domestically and internationally, and the amount and timing of expenditures related to this expansion;
 
·
litigation involving us, our industry or both;
 
·
actual or anticipated changes in expectations regarding our performance by investors or securities analysts; and
 
·
price and volume fluctuations in the overall stock market from time to time.

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been brought against that company.  Our stock price is volatile and we have been the target of securities litigation which could result in substantial costs and divert our management’s attention and resources from our business.  In addition, volatility, lack of positive performance in our stock price or changes to our overall compensation program, including our equity incentive program, may adversely affect our ability to retain key employees.
 
 
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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 December 31, 2010, we had 195,359,109 shares of common stock outstanding.  Additionally, as of December 31, 2010, options and warrants to purchase approximately 85,914,688 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.

The exercise of outstanding options and warrants may dilute current shareholders.

As of December 31, 2010, there were outstanding options and warrants to purchase approximately 85,914,688 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 likely will need to raise funds through debt or equity financings in the future to achieve our business objectives and to satisfy our cash obligations, which would dilute the ownership of our existing shareholders and possibly subordinate certain of their rights to the rights of new investors.

We likely will need to raise funds through debt or equity financings in order to meet our current cash requirements and to complete our ultimate business objectives.  We also 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.  Our board of directors has the ability, without seeking shareholder approval, to issue additional shares of common stock or preferred stock that is convertible into common stock for such consideration as the Board of Directors may consider sufficient, which may be at a discount to the market price.  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 and issuance of preferred stock may have an adverse effect on the rights of holders of our common 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.  The terms of any series of preferred stock could be issued with terms, rights, preferences and restrictions that 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 have designated and issued five series of preferred stock, no shares of which remain outstanding as of December 31, 2010.  We may issue additional series of preferred stock 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 SEC, 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.


Not applicable.

 
24



We maintain various facilities that are used for manufacturing, warehousing, research and development, distribution, and administrative functions.  These facilities consist of both owned and leased properties.

The following table summarizes the properties used to conduct our operations as of December 31, 2010:

Primary
           
Segment
 
Location
 
Status
 
Primary Use
             
SRB
 
West Sacramento, California
 
Leased
 
Warehousing, and administrative
   
Mermentau, Louisiana
 
Owned
 
Manufacturing
   
Lake Charles, Louisiana
 
Building – owned
 
Manufacturing (idled since May 2009)
       
Land - leased
   
   
Dillon, Montana
 
Owned
 
Manufacturing
Bio-Refining
 
Pelotas, Brazil
 
Owned
 
Manufacturing, R&D, administrative
Corporate
 
Scottsdale, Arizona
 
Leased
 
Administrative – corporate offices

We believe that all facilities are in good operating condition, the machinery and equipment are well-maintained, the facilities are suitable for their intended purposes and they have capacities adequate for current operations.  The properties are covered by insurance but insurance for the properties located in Louisiana is subject to high deductibles and limitations on damages due to tropical storms.


Various lawsuits, claims, proceedings and investigations are pending involving us as described below in this section.  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.  In addition to the matters described herein, we are involved in or subject to, or may become involved in or subject to, routine litigation, claims, disputes, proceedings and investigations in the ordinary course of business, which in our opinion will not have a material adverse effect on our financial condition, cash flows or results of operations.

Irgovel Stockholders Lawsuit

On August 28, 2008, former Irgovel stockholder David Resyng filed an indemnification suit against Irgovel, Osmar Brito and the remaining Irgovel stockholders (Sellers), requesting: (i) the freezing of the escrow account maintained in connection with the transfer of Irgovel’s corporate control to us and the presentation of all documentation related to the transaction, and (ii) damages in the amount of the difference between (a) the sum received by David Resyng in connection with the judicial settlement agreement executed in the action for the partial dissolution of the limited liability company filed by David Resyng against Irgovel and the Sellers and (b) the amount received by the Sellers in connection with the sale of Irgovel’s corporate control to us, in addition to moral damages as determined in the court’s discretion.  The amount of damage claimed by Mr. Resyng is approximately $3 million.

We believe that the filing of the above lawsuit is a fundamental default of the obligations undertaken by the Sellers under the Quotas Purchase Agreement for the transfer of Irgovel’s corporate control, executed by and among the Sellers and us on January 31, 2008 (Purchase Agreement).  Consequently, we believe that the responsibility for any indemnity, costs and expenses incurred or that may come to be incurred by Irgovel and/or us in connection with the above lawsuit is the sole responsibility of the Sellers.

On February 6, 2009, the Sellers filed a collection lawsuit against us seeking payment of the second installment of the purchase price under the Purchase Agreement, which the Sellers allege is approximately $1.0 million.  We have withheld payment of the second installment pending resolution of the Resyng lawsuit noted above.  The Parent Company has not been served with any formal notices in regard to this matter so far.  To date, only Irgovel has received formal legal notice. In addition, the Purchase Agreement requires that all disputes between us and the Sellers be adjudicated through arbitration. As part of the Purchase Agreement, $2.0 million was deposited into an escrow account to cover contingencies with the net remaining funds payable to the Sellers upon resolution of all contingencies.  We believe any payout due to the lawsuit will be made out of the escrow account.  As of December 31, 2010, the balance in the escrow account was $1.9 million and is included in restricted cash in the consolidated balance sheets.  There is an offsetting liability in accrued expenses in our consolidated balance sheets as of December 31, 2010.  We believe that there is no additional material exposure as any amounts determined to be owed as a result of the above noted litigation and contingencies will be covered by the escrow account.

 
25


Shareholder Class Action

On February 27, 2009 and on April 27, 2009, securities class action lawsuits were filed in the District Court for the District of Arizona against us and certain of our current and former officers and directors.  On May 29, 2009, the cases were consolidated into a single action (the Federal Action) and lead plaintiff was appointed.  On July 1, 2009, lead plaintiff filed a consolidated class action complaint on behalf of all persons who purchased our common stock between April 2, 2007 and February 23, 2009.  The complaint alleged that we filed material misstatements in publically disseminated press releases and SEC filings misstating our financial condition and certain transactions during the period in question.  An amended consolidated complaint was filed on September 25, 2009.

The case has been settled in its entirety with the settlement to be funded by our directors and officers insurance carrier.  On October 1, 2010, the District Court of Arizona issued an order approving the settlement, certifying the class and entering judgment dismissing the matter.  On October 27, 2010, the Bankruptcy Court also entered an order approving the settlement.

SEC Enforcement Investigation

We received a letter from the SEC in January 2009 indicating that it had opened an informal inquiry, and we subsequently received an informal request for the production of documents in February 2009 relating to a number of 2007 transactions.  In March 2009, we received a formal order of private investigation from the SEC.  In June 2009, we received a subpoena for the production of documents that largely tracked the SEC’s earlier requests.  We responded to these requests for documents and based on findings related to the internal review and the SEC’s requests, we restated our financial statements for 2006, 2007 and the first three quarters of 2008.

On January 13, 2011, the SEC filed a complaint in the United States District Court for the District of Arizona alleging that we violated Section 17(a) of the Securities Act of 1933 (Securities Act), 15 U.S.C. § 77q(a), Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act of 1934 (the Exchange Act), 15 U.S.C. §§ 78j(b), 78m(a), 78m(b)(2)(A), and 78m(b)(2)(B), and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder, 17 C.F.R. §§ 240.10b-5, 240.12b-20, 240.13a-1, and 240.13a-13 (the SEC Action).  We have settled these allegations with the SEC, without admitting or denying them, and have consented to the entry of a final judgment of permanent injunction (the Consent Judgment), which, among other things, permanently restrains and enjoins us from violations of Section 17(a) of the Securities Act, 15 U.S.C. § 77q(a), Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, 15 U.S.C. §§ 78j(b), 78m(a), 78m(b)(2)(A), and 78m(b)(2)(B), and Rules 10b-5, 12b-20, 13a-1, and 13a-13 thereunder, 17 C.F.R. §§ 240.10b-5, 240.12b-20, 240.13a-1, and 240.13a-13.  The final Consent Judgment was entered in the SEC action on February 14, 2011.  No financial penalty was assessed by the SEC against us.

Farmers’ Rice Milling

Farmers’ Rice Milling (FRM) contended that we defaulted by failing to pay rentals due under two leases between the parties: (i) the March 15, 2007, ground lease, as amended on November 1, 2008, and (ii) the April 15, 2007, warehouse lease.  FRM filed suit against us to terminate the leases and recover damages thereunder.  This suit was filed in the 14th Judicial District Court on June 24, 2009, and was timely removed to the United States District Court, Western District of Louisiana, Lake Charles division.  We filed an answer and counterclaim and deposited into the registry of the court $0.1 million constituting the rentals due under the leases, a late fee due under the warehouse lease plus accrued interest.  As part of the Chapter 11 Reorganization, the leases were assumed under Section 365 of the Bankruptcy Code.  Arrearages due under the leases were paid in January 2011 and the lawsuit was dismissed.  FRM also asserted a claim for monetary damages for breach of a supply agreement, but that claim was dismissed from the lawsuit and allowed as a general unsecured claim in the Chapter 11 Reorganization
 
 
PART II


Price Range of Common Stock

Our common stock is traded on the pink sheets, a centralized electronic quotation service for over-the-counter securities, under the symbol “NTRZ.PK”.  Our CUSIP No. is 45776L100.  Our common stock previously traded on the OTCBB until May 1, 2009. The following table sets forth the range of high and low closing sales prices for our common stock as reported on the OTCBB for the periods indicated below.  The quotations below reflect inter-dealer prices, without retail mark-up, markdown or commission, and may not represent actual transactions.

 
26

 
NutraCea Common Stock
 
Low
   
High
 
             
Year Ended December 31, 2010
           
Fourth Quarter
  $ 0.10     $ 0.24  
Third Quarter
    0.08       0.13  
Second Quarter
    0.06       0.16  
First Quarter
    0.07       0.14  
                 
Year Ended December 31, 2009
               
Fourth Quarter
  $ 0.04     $ 0.18  
Third Quarter
    0.12       0.27  
Second Quarter
    0.15       0.41  
First Quarter
    0.18       0.56  

Holders

As of December 31, 2010, there were approximately 286 holders of record and 13,000 beneficial owners of our common stock.

Dividends

We have never declared or paid any cash dividends on our common stock.  We currently anticipate that we will retain all future earnings for the expansion and operation of our business and do not anticipate paying cash dividends in the foreseeable future.

Recent Sales of Unregistered Securities

During the three months ended December 31, 2010, we issued the following securities without registration under the Securities Act of 1933:

 
·
On November 15, 2010, the Company issued an employee an option to purchase 133,629 shares of our Common Stock at a strike price of $0.21 with a ten year expiration date.

 
·
On December 22, 2010, the Company issued a consultant 331,492 shares of our Common Stock in connection with consulting services previously provided.

The securities described were issued in private placement transactions to a limited number of recipients in reliance on Section 4(2) of the Securities Act of 1933, as amended, and/or Regulation D promulgated under the Securities Act.  Each person or entity to whom securities were issued represented that the securities were being acquired for investment purposes, for the person’s or entity’s own account, not as nominee or agent, and not with a view to the resale or distribution of any part thereof in violation of the Securities Act.

Share Repurchases

We did not repurchase any of our common stock in 2010.


Not applicable.


The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes thereto included in Item 8 of this Annual Report on Form 10-K.
 
This discussion and analysis may contain “forward-looking statements”.  These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Such forward-looking statements may include, without limitation, statements about our market opportunities, strategies, competition, and expected activities and expenditures and at times may be identified by the use of words such as “may,” “could,” “should,” “would,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “continue” and variations of these words or comparable words.  Forward-looking statements inherently involve risks and uncertainties.  Accordingly, actual results may differ materially from those expressed or implied by these forward-looking statements.  Factors that could cause or contribute to such differences include, but are not limited to, the risks described under “Risk Factors” in Item 1A.  We undertake no obligation to update any forward-looking statements for revisions or changes after the filing date of this Annual Report on Form 10-K.

 
27


Executive Summary

The 2010 year was a challenging but pivotal year for us on many fronts.  We achieved significant operating expense reductions through reductions in force that began in 2009 and the relocation of our corporate headquarters in January 2010.  Our restructuring efforts, under bankruptcy court jurisdiction, allowed us to shed non-core assets.  In March 2010, we completed the sale of our cereal product lines and  related equipment.  In April 2010, we sold certain equine brands and trademarks, including related inventory and packaging materials.  In September 2010, we completed the sale of our idle Phoenix, Arizona building which was never brought into full production.  Finally, in December 2010, we entered into an agreement to sell a minority interest in the holding company that holds our Brazilian subsidiary, Irgovel, and closed the transaction in January 2011. The sale of these assets allowed us to pay our secured lender in full by September 2010, to fund our ongoing operations and to take steps toward paying our unsecured creditors.  With regard to the Chapter 11 Reorganization, a plan of reorganization (the Amended Plan) was approved in October 2010 and we emerged from bankruptcy effective November 30, 2010.  Under the Amended Plan, we must pay all of our pre-petition creditor obligations in full no later than January 2012, with periodic payment benchmarks that must be met prior to that date.  As of the date of this filing, we have paid approximately 44% of the creditor obligations that remained as of the November 30, 2010, effective date.

It was no less challenging and active for us on the legal front.  We successfully settled the securities class action lawsuit within the limits of our insurance coverage.  The shareholder derivative action was dismissed following our filing for Chapter 11 Reorganization.  In addition, we reached a settlement agreement with the SEC regarding an enforcement investigation into alleged accounting irregularities that began in early 2009.

We are proud of the above achievements.  With new management in place under long-term employment agreements and a renewed focus on our core business segments, we feel that we are now positively positioned to grow our operations and move towards positive financial results.

Basis of Presentation and Going Concern

Our consolidated financial statements have been prepared assuming we will continue as a going concern based on the realization of assets and the satisfaction of liabilities in the normal course of business.  Although we have made significant improvement, we continue to experience losses and negative cash flows from operations.  In the past, we have turned to the equity markets for additional liquidity.  This was not a source of funds during 2010 and 2009 due to our financial position, the state of the equity markets and the bankruptcy filing.  These factors raise substantial doubt about our ability to continue as a going concern.

See “Liquidity and Capital Resources” section below for a discussion of actions taken and plans to improve liquidity.

Segments

We have three reportable business segments: (1) Corporate, which has no revenue; (2) Stabilized Rice Bran (SRB), which manufactures and distributes SRB in various granulations along with products derived from stabilized rice bran via patented enzyme treatment processes including a fat and protein rich water soluble fraction and a fiber rich insoluble fraction; and (3) Bio-Refining, which separates rice bran into crude rice bran oil and defatted rice bran which are then further processed into a number of valuable food and feed products.  The Corporate segment includes selling, general and administrative expenses, litigation settlements, amortization of intangible assets, and other expenses not directly attributable to other segments.  No corporate allocations are made to the other segments.  Interest is not allocated.

The SRB segment consists of four locations in California and Louisiana that produce SRB.  Not included in these four locations is our Phoenix, Arizona facility, which became operational in February 2009 but was never brought into full production.  The Phoenix, Arizona facility was sold in September 2010.  Our Lake Charles, Louisiana facility has been idle since May 2009.  The SRB segment also includes our Dillon, Montana facility which produces RiSolubles (a highly nutritious, carbohydrate and lipid rich fraction), RiFiber (a fiber rich derivative) and RiBalance (a complete rice bran nutritional package).  The manufacturing facilities included in our SRB segment have specialized processing equipment and techniques for the treatment of rice grain products to cook, convert, isolate, dry and package finished food ingredients used in the formulation of health food and consumer food finished products.  In addition, we have the capability to custom manufacture various grain based products for human food ingredient companies at our Dillon facility.

The Bio-Refining segment currently consists of our operations in Pelotas, Brazil (Irgovel).  Irgovel manufactures rice bran oil (RBO) and defatted rice bran (DRB) products for both the human and animal food markets in Brazil and internationally.  Irgovel owns the largest rice bran processing facility in South America and is the only Brazilian company to produce edible RBO for human consumption.  In refining RBO to an edible grade several co-products are obtained, including distilled fatty acids, a valuable raw material for the detergent industry.  DRB is compounded with a number of other ingredients to produce complex animal feeds which are packaged and sold under Irgovel brands in the Brazilian market.

 
28


Results of Operations
 
The following is a discussion of our consolidated financial condition as of December 31, 2010, and our results of operations for 2010 as compared to 2009.  This discussion should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and notes thereto included elsewhere in this report.

Revenue and Gross Profit

Revenues (in thousands):

   
2010
   
% of Revenues
   
2009
   
% of Revenues
   
Change
   
% Change
 
SRB segment
  $ 11,908       37.6     $ 14,491       43.6     $ (2,583 )     (17.8 )
Bio-Refining segment
    19,723       62.4       18,732       56.4       991       5.3  
Total revenues
  $ 31,631       100.0     $ 33,223       100.0     $ (1,592 )     (4.8 )

For 2010, consolidated revenues were $31.6 million compared to $33.2 million in 2009.  Revenues decreased $1.6 million, or 4.8%.

SRB segment revenues for 2010 were $11.9 million as compared to $14.5 million for 2009, a decrease of $2.6 million, or 17.8%.  The decrease is primarily attributable to three factors.
 
·
SRB segment revenues in 2010 were negatively impacted by the loss of a $1.4 million private label customer related to products we no longer sell.
 
·
Cereal product related revenues for 2010 decreased by $0.8 million due to the March 2010 sale of the cereal product related assets to Kerry Ingredients (Kerry).  The loss of cereal revenues after March 2010 was partially offset by an increase in tolling revenues of $0.5 million.  Under the tolling arrangement, we continue to produce certain cereal products for Kerry on an order by order basis.
 
·
SRB segment revenues from animal nutrition products declined approximately $0.9 million due to the sale of the equine product related assets in April 2010.  As a result of the transaction, we no longer sell higher priced branded equine products and instead supply bulk SRB to the buyer.  In addition, SRB segment revenues from animal nutrition overall in 2010 were depressed due to general economic conditions impacting discretionary spending in the equine market.

Bio-Refining segment revenues were $19.7 million for 2010 compared to $18.7 million for 2009, an increase of $1.0 million or 5.3%.  The increase is primarily attributable to rising crude RBO export sale prices that began in September 2010.  Global vegetable oil prices began to see inflationary pressures in the latter part of the year.  In addition, animal feed prices significantly improved in the last quarter of 2010.  These two gains offset lower volume sales experienced in the first half of the year.

Cost of goods sold (in thousands):

   
2010
   
% of Revenues
   
2009
   
% of Revenues
   
Change
   
% Change
 
SRB segment
  $ 7,510       23.7     $ 11,116       33.5     $ (3,606 )     (32.4 )
Bio-Refining segment
    17,137       54.2       15,938       48.0       1,199       7.5  
Total cost of goods sold
  $ 24,647       77.9     $ 27,054       81.4     $ (2,407 )     (8.9 )

Consolidated cost of goods sold was $24.6 million for 2010 compared to $27.1 million for 2009, a decrease of $2.4 million, or 8.9%.  The SRB segment experienced a cost of goods sold decrease of $3.6 million, or 32.4%, which was driven by the 17.8% decline in SRB segment revenues.  The SRB segment also experienced better utilization of plant capacity in 2010.  The Lake Charles, Louisiana facility has been idled since August 2009 resulting in lower costs of goods sold for all of 2010.  Also, in the second and third quarter of 2009, charges for obsolete inventory were taken for $0.5 million.  No material write-offs occurred in 2010.  The Bio-Refining segment costs of goods sold increased $1.2 million due to higher costs in the first half of 2010 associated with general plant maintenance and improvements.  These higher costs were offset by increased utilization in the fourth quarter.

Gross profit (in thousands):

   
2010
   
% Gross Profit
   
2009
   
% Gross Profit
   
Change
   
Change in % Gross Profit
 
SRB segment
  $ 4,398       36.9     $ 3,375       23.3     $ 1,023       13.6  
Bio-Refining segment
    2,586       13.1       2,794       14.9       (208 )     (1.8 )
Total gross profit
  $ 6,984       22.1     $ 6,169       18.6     $ 815       3.5  

 
29


Consolidated gross profit for 2010 was $7.0 million, 22.1% of revenues, as compared to $6.2 million, 18.6% of revenues, in 2009.  The SRB segment contributed $4.4 million to gross profit and the Bio-Refining segment contributed $2.6 million.  The SRB segment gross profit percentage improved from 23.3% to 36.9% due to the cost factors noted above and a shift away from lower margin products.  The Bio-Refining segment gross profit percentage decreased to 13.1% in 2010 from 14.9% in 2009 as the impacts of improved pricing were offset by higher cost of goods sold.

Operating Expenses

Operating expenses (in thousands):

   
2010
 
   
Corporate
   
SRB
   
Bio-Refining
   
Consolidated
 
Selling, general and administrative
  $ 7,508     $ 4,275     $ 3,960     $ 15,743  
Professional fees
    1,442       103       482       2,027  
Impairment of property, plant and equipment
    -       1,900       -       1,900  
Loss on disposal of trademarks, property, plant and equipment
    -       943       -       943  
Provision for doubtful accounts receivable and notes receivable
    5       33       115       153  
Research and development
    -       123       -       123  
Total operating expenses
  $ 8,955     $ 7,377     $ 4,557     $ 20,889  
                                 
    2009  
   
Corporate
   
SRB
   
Bio-Refining
   
Consolidated
 
Selling, general and administrative
  $ 10,400     $ 6,753     $ 3,850     $ 21,003  
Professional fees
    2,490       -       307       2,797  
Impairment of property, plant and equipment
    -       8,845       -       8,845  
Loss on disposal of trademarks, property, plant and equipment
    -       202       -       202  
Provision for doubtful accounts receivable and notes receivable
    20       -       105       125  
Research and development
    -       897       -       897  
Impairment of trademarks
    -       1,594       -       1,594  
Total operating expenses
  $ 12,910     $ 18,291     $ 4,262     $ 35,463  
                                 
   
Favorable (Unfavorable) Change
 
   
Corporate
   
SRB
   
Bio-Refining
   
Consolidated
 
Selling, general and administrative
  $ 2,892     $ 2,478     $ (110 )   $ 5,260  
Professional fees
    1,048       (103 )     (175 )     770  
Impairment of property, plant and equipment
    -       6,945       -       6,945  
Loss on disposal of trademarks, property, plant and equipment
    -       (741 )     -       (741 )
Provision fordoubtful accounts receivable and notes receivable
    15       (33 )     (10 )     (28 )
Research and development
    -       774       -       774  
Impairment of trademarks
    -       1,594       -       1,594  
Total operating expenses
  $ 3,955     $ 10,914     $ (295 )   $ 14,574  

Consolidated selling, general and administrative (SG&A) expenses were $15.7 million in 2010 compared to $21.0 million in 2009.  SG&A expense decreased by $5.3 million, or 25.0%.  The decline in SG&A is attributable to significant cost cutting efforts in the Corporate and SRB segments that began in February 2009, and continued in May and July of 2009.  In addition, a significant reduction in force was implemented across all corporate departments in January 2010.  As a result, payroll and benefits declined $1.0 million in the Corporate segment and $0.7 million in the SRB segment.  Corporate segment depreciation (related to leasehold improvements and furniture and fixtures) declined by $0.7 million due to the corporate headquarters move in January 2010.  In addition, Corporate SG&A declined by $1.2 million due to rent savings associated with the headquarters relocation.  The remaining decrease in SG&A is attributable to lower consulting fees and a general reduction in corporate spending.  Stock option expense associated primarily with 2010 issuances to employees and directors resulted in an increase in Corporate SG&A of $1.1 million for 2010.

Professional fees were $2.0 million and $2.8 million for 2010 and 2009.  Professional fees are expenses associated with consultants, accounting and auditing services, SOX 404 compliance, and outside legal counsel.  The 27.5% decrease is primarily due to payments made to consultants, legal and financial advisors retained in early 2009 to assist the audit committee with their internal investigation and responses to SEC inquiries.

 
30


The SRB segment results included an impairment of property, plant and equipment of $1.9 million in 2010 and $8.8 million in 2009.  In 2009, charges were recorded for impairment of two idle plant facilities and one intangible asset.  The net carrying value for the idle Phoenix, Arizona building and equipment was written down by $6.5 million and the idle Lake Charles, Louisiana facility by $2.3 million.  In the second quarter of 2010, an additional impairment charge of $1.0 million was recorded relative to the Phoenix, Arizona facility which was sold in the third quarter of 2010.  In the fourth quarter of 2010, we recognized a $0.9 million impairment of the Dillon, Montana facility which was held for sale as of December 31, 2010.  Trademarks associated with certain equine products were also written down by $1.6 million in 2009.

Research and development expenses were $0.1 million in 2010 and $0.9 million in 2009.  The decrease of $0.8 million is attributable to curtailed research and development activity in an effort to conserve cash during the year.  We expect to continue research and development expenditures to establish the scientific basis for health claims of existing products and to develop new products and applications based on future cash availability.

Other Income (Expense)

Other income (expense) (in thousands):

   
2010
 
   
Corporate
   
SRB
   
Bio-Refining
   
Consolidated
 
Interest income
  $ 6     $ -     $ 150     $ 156  
Interest expense
    (617 )     -       (925 )     (1,542 )
Loss on equity method investments
    (42 )     -       -       (42 )
Warrant liability expense
    (349 )     -       -       (349 )
Other income
    87       -       25       112  
Total other income (expense)
  $ (915 )   $ -     $ (750 )   $ (1,665 )
                                 
    2009  
   
Corporate
   
SRB
   
Bio-Refining
   
Consolidated
 
Interest income
  $ 91     $ -     $ 357     $ 448  
Interest expense
    (1,727 )     -       (587 )     (2,314 )
Loss on equity method investments
    (218 )     -       -       (218 )
Foreign exchange loss
    (72 )     -       -       (72 )
Warrant liability income
    2,634       -       -       2,634  
Other expense
    (443 )     -       7       (436 )
Total other income (expense)
  $ 265     $ -     $ (223 )   $ 42  
                                 
   
Favorable (Unfavorable) Change
 
   
Corporate
   
SRB
   
Bio-Refining
   
Consolidated
 
Interest income
  $ (85 )   $ -     $ (207 )   $ (292 )
Interest expense
    1,110       -       (338 )     772  
Loss on equity method investments
    176       -       -       176  
Foreign exchange loss
    72       -       -       72  
Warrant liability income (expense)
    (2,983 )     -       -       (2,983 )
Other income (expense)
    530       -       18       548  
Total other income (expense)
  $ (1,180 )   $ -     $ (527 )   $ (1,707 )

Total other income in 2009 decreased by $1.7 million to other expense of $1.7 million in 2010.

Interest income decreased $0.3 million due to lower cash balances available for investment in 2010.

Interest expense was $1.5 million for 2010 and $2.3 million for 2009, a 33.4% decrease.  In the first eight months of 2009, we recorded $0.9 million of interest expense associated with convertible preferred shares.  These convertible preferred shares were redeemed in August 2009.  The interest expense decrease between years related to the convertible preferred shares was partially offset by higher interest rates on secured bank debt at the Corporate segment and additional borrowings in the Bio-Refining segment.

Warrant liability expense in 2010 was $0.3 million compared to warrant liability income in 2009 of $2.6 million.  Effective January 1, 2009, we adopted ASC 815 and recognized warrants associated with convertible preferred stock as a liability.  As a result of adopting the new accounting guidance, warrants to purchase 42,800,941 shares of our common stock, previously treated as equity, were no longer afforded equity treatment.  Effective January 1, 2009, we reclassified the fair value of these warrants from equity and created an initial liability of $3.9 million.  Warrant liability is carried at fair value which is determined at the end of each reporting period.  The change in fair value is recorded as warrant liability income or expense, resulting in warrant liability expense of $0.3 million in 2010 and warrant liability income of $2.6 million in 2009.
 
 
31

 
Reorganization Items

Reorganization expenses were $1.0 million for 2010 and $3.4 million for 2009.  These expenses are related to the Chapter 11 Reorganization.  In 2009, these expenses included professional expenses, loss on disposal of long lived assets, mainly leasehold improvements and furniture and fixture related to the old headquarters, and additional impairment related to the furniture and fixtures.  These expenses are classified as reorganization expenses as they were incurred as a direct result of the Chapter 11 Reorganization.  In 2010, we incurred professional fees associated with legal and financial advisors related to the bankruptcy court proceeding.

Income Taxes

Income tax benefit for 2010 increased to $0.9 million from $0.5 million for 2009.  Our tax benefit relates entirely to foreign income taxes arising from the operations of Irgovel.  Domestically, we provide a valuation allowance against all tax net operating loss carryforwards generated.

Liquidity and Capital Resources

We have experienced recurring losses and negative cash flows from operations.  Due to defaults under our credit agreement with Wells Fargo our credit lines were reduced to approximately $3.5 million as of July 2009, which was the level of the current outstanding loans and obligations at that time.  We also entered into a forbearance agreement with Wells Fargo pursuant to which Wells Fargo agreed to forebear from exercising its rights and remedies with respect to the existing defaults.  We were behind on our payments to vendors and had defaulted on several agreements due to non-payment resulting in declaring bankruptcy as further described in Item 1 Business.  

We have taken steps to improve profitability and liquidity by reducing our U.S. based employee headcount at both the corporate and plant operations level.  The reductions in force that occurred at various times throughout 2009 resulted in annualized savings of approximately $2.4 million.  In January 2010, an additional corporate reduction in force was enacted resulting in annualized savings of $0.8 million.  Effective January 1, 2010, we moved our corporate headquarters to less expensive office space resulting in yearly rent savings of approximately $1.2 million.  The combined effect of the cost cutting efforts total $4.4 million.

In the ongoing effort to improve profitability, significant emphasis will be placed on growing sales. The growth of revenues is expected to include the following:

 
·
growing sales in existing markets, including bulk SRB and rice bran oil;
 
·
aligning with strategic partners who can provide channels for additional sales of our products including rice bran oil extraction;
 
·
price increases; and
 
·
growing consumer retail product sales.

In the past we have turned to the equity markets for additional liquidity.  This was not a source of funds during 2010 and 2009 due to our financial position, the state of the equity markets and the bankruptcy filing.  However, exiting bankruptcy on November 30, 2010, combined with improving financial performance and equity market conditions, may allow us to raise equity funds in the future.  We intend to provide the necessary cash to continue operations through the monetization of certain assets, growth of sales, and possible equity financing transactions.  Asset monetizations may include some or all of the following:

 
·
sale or a sale-lease back of certain facilities;
 
·
sale of a noncontrolling interest in one or more subsidiaries; or
 
·
sale of surplus equipment.

Some of these sales could result in additional non-cash write downs of asset values.  Although management believes that they will be able to obtain the funds necessary to continue as a going concern there can be no assurances that our efforts will prove successful.  Even if we are able to obtain required funds as described above, the terms of such transactions may not be favorable to us.

Our cash and cash equivalents were $0.5 million and $1.0 million at December 31, 2010, and 2009.

Cash used in operating activities was $7.3 million for 2010, compared to net cash used in operations of $8.8 million in 2009, an improvement of $1.4 million.  The improvement resulted primarily from the following cost reduction efforts:

 
·
the reductions in force that occurred at various times throughout 2009,
 
·
additional corporate reduction in force in January 2010, and
 
·
the move of our corporate headquarters to less expensive office space effective January 2010.

The impacts of these cost reduction efforts were offset by reductions relative to payments on accounts payable and accrued expenses.  Our general trade payables are more current as of December 31, 2010.  We were able to use a portion of the proceeds from the monetization of assets discussed in the next paragraph to meet our working capital needs.

 
32


Cash provided by investing activities was $9.3 million in 2010 and $5.3 million 2009.  Cash provided by investing activities in 2010 consisted of proceeds from the sales of trademarks, property, plant and equipment totaling $8.9 million.  These sales consisted of:

 
·
In March 2010, we sold the cereal equipment in the Phoenix, Arizona facility for $3.7 million.
 
·
In April 2010 we closed on the sale of the equine trademarks for $0.8 million;
 
·
In September 2010 we sold the Phoenix, Arizona facility for $4.5 million;

Cash used in financing activities for 2010 was $2.3 million and for 2009 was $0.5 million.  In 2010, we paid our Wells Fargo debt in full.  Irgovel’s debt increased as it drew on its working capital lines of credit.  Irgovel has working capital lines of credit secured by accounts receivables.  The interest rates range from 6.0% to 26.4% with maturities through June 2012.

Off-Balance Sheet Arrangements

We have not entered into any transactions with unconsolidated entities whereby we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities, or any other obligation under a variable interest in an unconsolidated entity that provides financing and liquidity support or market risk or credit support risk to us.

Critical Accounting Policies

A summary of our significant accounting policies is included in Note 3 of Part II - Item 8, Financial Statements and Supplementary Data.  We believe the application of these accounting policies on a consistent basis will enable us to provide timely and reliable financial information about our earnings results, financial condition and cash flows.

The preparation of financial statements in accordance with generally accepted accounting principles requires us to make judgments, estimates and assumptions regarding uncertainties that affect the reported amounts presented and disclosed in the financial statements.  We review these estimates and assumptions based on historical experience, changes in business conditions and other relevant factors that they believe to be reasonable under the circumstances.  In any given reporting period, actual results could differ from the estimates and assumptions used in preparing our financial statements.

Critical accounting policies are those that may have a material impact on our financial statements and also require us to exercise significant judgment due to a high degree of uncertainty at the time the estimate is made.  We have discussed the development and selection of our accounting policies, related accounting estimates and the disclosures set forth below with the Audit Committee of our Board of Directors.  We believe our critical accounting policies include those addressing revenue recognition, allowance for doubtful accounts, inventories, and long lived assets, intangible assets, and goodwill.

Principles of Consolidation – The consolidated financial statements include the accounts of NutraCea (the Parent Company) and all subsidiaries in which we have a controlling interest.  All significant inter-company accounts and transactions are eliminated in consolidation.  Noncontrolling interests in our subsidiaries are recorded net of tax as net earnings (loss) attributable to noncontrolling interests.

Foreign Currencies - The consolidated financial statements are presented in our reporting currency, U.S. Dollars.  The functional currency for our wholly-owned subsidiary, Industria Riograndens De Oleos Vegetais Ltda. (Irgovel), is the Brazilian Real.  Accordingly, the balance sheet of Irgovel is translated into U.S. Dollars using the exchange rate in effect at the balance sheet date.  Revenues and expenses are translated using the average exchange rates in effect during the period.  Translation differences are recorded in accumulated other comprehensive income (loss) as foreign currency translation.  Gains or losses on transactions denominated in a currency other than the subsidiaries’ functional currency which arise as a result of changes in foreign exchange rates are recorded as foreign exchange gain or loss in the statements of operations.

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 credit-worthiness, 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 our provision for doubtful accounts.  We continue to evaluate our credit policy to ensure that the customers are worthy of terms and support our business plans.

Equity Method Investments - Investments in business entities in which we have the ability to exert significant influence over operating and financial policies (generally 20% to 50% ownership) are unconsolidated entities and are accounted for using the equity method.  Under the equity method, investments are initially recorded at cost and are adjusted for dividends, distributed and undistributed earnings and losses, changes in foreign exchange rates, and additional investments.  Equity method investments are periodically reviewed for other-than-temporary declines in fair value below carrying value.

 
33


Long-Lived Assets, Intangible Assets and Goodwill – Long-lived assets, consisting primarily of property, plant and equipment, intangible assets, and goodwill, comprise a significant portion of our total assets.  Property, plant and equipment are stated at cost less accumulated depreciation.  Intangible assets are stated at cost less accumulated amortization.

The carrying values of property, plant and equipment and intangible assets with finite lives are evaluated periodically in relation to the expected future cash flows of the underlying assets and monitored for other potential triggering events that might indicate impairment.  Adjustments are made in the event that estimated undiscounted net cash flows estimated to be derived from the asset are less than the carrying value of the related asset.  The cash flow projections are based on historical experience, management’s view of growth rates within the industry, and the anticipated future economic environment.

We are required to test goodwill for impairment at least annually (by policy, December 31) and more often if an event occurs or circumstances change that more likely than not reduce the fair value of a reporting unit below its carrying value.  In assessing the recoverability of goodwill, we make estimates and assumptions about sales, operating margin, terminal growth rates and discount rates based on our budgets, business plans, economic projections, anticipated future cash flows and marketplace data.  There are inherent uncertainties related to these factors and management’s judgment in applying these factors.  The fair value of a reporting unit has been determined using an income approach based on the present value of the future cash flows of each reporting unit.  The goodwill impairment test compares the fair value of individual reporting units to the carrying value of these reporting units.  If fair value is less than carrying value then goodwill impairment may be present.  The market value of our common stock is an indicator of fair value and a consideration in determining the fair value of our reporting units.

Revenue Recognition – We recognize revenue for product sales when title and risk of loss pass to our customers, generally upon shipment for domestic customers and upon customer receipt for international customers and when provisions for estimates, including discounts, and price adjustments are reasonably determinable.  Revenues on the statements of operations are net of provisions for routine sales discounts, volume allowances, and adjustments.  Deposits are deferred until either the product has been shipped or conditions relating to the sale have been substantially performed.
 
Revenue from direct customers is recognized when shipment of goods occur.  Each transaction is evaluated to determine if all of the following four criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the selling price is fixed and determinable; and (iv) collectability is reasonably assured.  If any of the above criteria cannot be satisfied then such a transaction is not recorded as revenue, or is recorded as deferred revenue and recognized only when the sales cycle is complete and payment is either received or becomes reasonably assured.  We generally do not allow right of return.  Changes in judgments and estimates regarding the application of the above mentioned four criteria might result in a change in the timing or amount of revenue recognized by such transactions.

We sell certain products such as infant cereal through a network of resellers and distributors.  Revenue is recognized from these customers upon shipment of products.  Each transaction is evaluated to determine if all of the following criteria have been met: (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred; (iii) the selling price is fixed and determinable; and (iv) collectability is reasonably assured.  If collectability is not reasonably assured, then revenue is recognized on a cash basis.  We generally do not allow right of return.

Occasionally, we will grant exclusive use of our labels by customers in specific territories in exchange for a nonrefundable fee.  Each label licensing provision is considered to be a separate unit of accounting.  Revenue from such transactions is recognized over the licensing period.

Warrant Liability – We have certain warrant agreements in effect that contain anti-dilution clauses.  Under these clauses, we may be required to lower the exercise price on these warrants and issue additional warrants based on future issuances of our common stock, awards of options to employees, additional issuance of warrants, or other convertible instruments below a certain exercise price.  We account for the warrants with these anti-dilution clauses as liability instruments.  These warrants are valued using the Lattice model each reporting period and the resultant change in fair value is recorded in the statements of operations as warrant liability income (expense).

Share-Based Compensation – Share-based compensation expense for employees is calculated at the grant date using the Black-Scholes-Merton valuation model based on awards ultimately expected to vest, reduced for estimated forfeitures, and expensed on a straight-line basis over the requisite service period of the grant.  Forfeitures are estimated at the time of grant based on our historical forfeiture experience and will be revised in subsequent periods if actual forfeitures differ from those estimates.  The Black-Scholes-Merton option pricing model requires 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.

 
34


We account for share-based compensation awards granted to non-employees and consultants by determining the fair value of the awards granted at either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measured.  Generally we value options granted to non-employees and consultants using the Black-Scholes-Merton valuation model.  If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of (i) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached or (ii) the date at which the counterparty's performance is complete.  The expense of stock awards issued to consultants or other third parties are recognized over the term of service.  In the event services are terminated early or we require no specific future performance, the entire amount is expensed.  The value is re-measured each reporting period over the requisite service period.  Most non-employee awards have graded vesting schedules resulting in higher compensation expense recorded early in the service period.
 
We early adopted guidance which allows us to treat options granted to employees of foreign subsidiaries as equity options.
 
We will use alternative valuation models if grants have characteristics that cannot be reasonably estimated using the Black-Scholes-Merton model.

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.  Deferred tax expense or benefit is recognized as a result of timing differences between the recognition of assets and liabilities for financial reporting and tax purposes during the year.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  Deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards.  A valuation allowance is established, when necessary, to reduce that deferred tax asset if it is “more likely than not” that the related tax benefits will not be realized.

Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements 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.


Not applicable.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 
35


Report of Independent Registered Public Accounting Firm

Board of Directors and Shareholders
NutraCea
Scottsdale, Arizona

We have audited the accompanying consolidated balance sheets of NutraCea (the Company) as of December 31, 2010 and 2009, and the related consolidated statements of operations, comprehensive loss, changes in equity, and cash flows for the years then ended.  These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2010 and 2009, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

As described in Note 16 to the consolidated financial statements, the Company adopted the provisions of FASB ASC 815, “Derivatives and Hedging” (FASB ASC 815) (previously EITF 07-5, “Determining Whether an Instrument (or an Embedded Feature) is Indexed to an Entity’s Own Stock”) effective as of January 1, 2009.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.  As described in Note 1 to the financial statements, the Company has suffered recurring losses from operations resulting in an accumulated deficit of $184.8 million.  Also, in November 2009, the Company filed a voluntary petition for reorganization under Chapter 11 of the United States Bankruptcy Code.  Although the Company emerged from bankruptcy in November 2010, there continues to be substantial doubt about its ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 1.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/s/ BDO USA, LLP

Phoenix, Arizona
March 31, 2011

 
36


NutraCea
Consolidated Balance Sheets
December 31, 2010 and 2009
(in thousands, except share amounts)

   
2010
   
2009
 
ASSETS
           
Current assets:
           
Cash and cash equivalents
  $ 537     $ 952  
Restricted cash
    1,917       1,915  
Accounts receivable, net of allowance for doubtful notes receivable of $277 and $153
    3,502       3,506  
Inventories
    2,994       3,238  
Notes receivable, current portion, net of allowance for doubtful notes receivable of $636 and $636
    1,200       1,200  
Deferred tax asset
    292       -  
Deposits and other current assets
    2,255       2,637  
Assets held for sale - property, plant and equipment
    3,598       14,551  
Assets held for sale - trademarks
    -       650  
Total current assets
    16,295       28,649  
                 
Notes receivable, net of current portion
    600       1,800  
Property, plant and equipment, net
    24,054       26,243  
Intangible assets, net
    6,296       7,679  
Goodwill
    5,835       5,626  
Equity method investment
    49       91  
Other long-term assets
    95       80  
Total assets
  $ 53,224     $ 70,168  
                 
LIABILITIES AND EQUITY
               
Current liabilities:
               
Accounts payable
  $ 2,573     $ 2,588  
Accrued expenses
    4,266       5,080  
Pre-petition liabilities
    6,406       -  
Long-term debt, current portion
    3,235       6,642  
Warrant liability, current portion
    -       34  
Total current liabilities
    16,480       14,344  
                 
Liabilities subject to compromise
    -       6,988  
                 
Long-term liabilities:
               
Long-term debt, net of current portion
    7,365       5,957  
Deferred tax liability
    4,361       5,110  
Warrant liability, net of current portion
    1,628       1,245  
Other long-term liabilities
    1,000       1,000  
Total liabilities
    30,834       34,644  
                 
Commitments and contingencies
               
                 
Equity:
               
Equity attributable to NutraCea shareholders:
               
Convertible, series E preferred stock, no par value, $1,000 stated value,2,743 shares authorized, no shares outstanding
    -       -  
Convertible, series D preferred stock, no par value, $1,000 stated value,10,000 shares authorized,  no shares outstanding
    -       -  
Common stock, no par value, 350,000,000 shares authorized, 195,359,109 and 192,967,680 shares issued and outstanding
    207,432       205,291  
Accumulated deficit
    (184,812 )     (169,144 )
Accumulated other comprehensive loss
    (74 )     (467 )
Total equity attributable to NutraCea shareholders
    22,546       35,680  
Noncontrolling interest
    (156 )     (156 )
Total equity
    22,390       35,524  
Total liabilities and equity
  $ 53,224     $ 70,168  

See Notes to Consolidated Financial Statements

 
37


NutraCea
Consolidated Statements of Operations
Years Ended December 31, 2010 and 2009
(in thousands, except per share amounts)

   
2010
   
2009
 
             
Revenues
  $ 31,631     $ 33,223  
Cost of goods sold
    24,647       27,054  
Gross profit
    6,984       6,169  
                 
Operating expenses:
               
Selling, general and administrative
    15,743       21,003  
Professional fees
    2,027       2,797  
Impairment of property, plant and equipment
    1,900       8,845  
Impairment of trademarks
    -       1,594  
Loss on disposal of trademarks, property, plant and equipment
    943       202  
Provision for doubtful accounts receivable and notes receivable
    153       125  
Research and development
    123       897  
Total operating expenses
    20,889       35,463  
                 
Loss from operations
    (13,905 )     (29,294 )
                 
Other income (expense):
               
Interest income
    156       448  
Interest expense
    (1,542 )     (2,314 )
Loss on equity method investments
    (42 )     (218 )
Foreign exchange loss
    -       (72 )
Warrant liability income (expense)
    (349 )     2,634  
Other income
    112       -  
Other expense
    -       (436 )
Total other income (expense)
    (1,665 )     42  
                 
Reorganization expenses:
               
Professional fees
    1,033       180  
Loss on disposal of property, plant and equipment
    -       3,016  
Impairment of property, plant and equipment
    -       229  
Total reorganization expenses
    1,033       3,425  
Loss before income taxes
    (16,603 )     (32,677 )
Income tax benefit
    935       474  
Net loss
    (15,668 )     (32,203 )
Net loss attributable to noncontrolling interest
    -       108  
Net loss attributable to NutraCea shareholders
  $ (15,668 )   $ (32,095 )
                 
Loss per share attributable to NutraCea shareholders
               
Basic
  $ (0.08 )   $ (0.17 )
Diluted
  $ (0.08 )   $ (0.17 )
                 
Weighted average number of shares outstanding
               
Basic
    193,196       183,553  
Diluted
    193,196       183,553  

See Notes to Consolidated Financial Statements

 
38


NutraCea
Consolidated Statements of Comprehensive Loss
Years ended December 31, 2010 and 2009
(in thousands)

   
2010
   
2009
 
             
Net loss
  $ (15,668 )   $ (32,203 )
                 
Other comprehensive income (loss) - foreign currency translation, net of tax
    393       (2,324 )
                 
Comprehensive loss, net of tax
    (15,275 )     (34,527 )
                 
Comprehensive loss attributable to noncontrolling interest
    -       108  
                 
Total comprehensive loss attributable to NutraCea shareholders
  $ (15,275 )   $ (34,419 )

See Notes to Consolidated Financial Statements

 
39


NutraCea
Consolidated Statements of Changes in Equity
Years Ended December 31, 2010 and 2009
(in thousands, except share amounts)
 
   
NutraCea Shareholders
             
    Common Stock     Accumulated     Accumulated Other Comprehensive     Non-controlling     Total  
   
Shares
   
Amount
   
Deficit
   
Income (Loss)
   
Interest
    Equity  
Balance, January 1, 2009
    168,124,554     $ 199,485     $ (133,136 )   $ 1,857     $ (80 )   $ 68,126  
                                                 
Adoption of ASC 815-40-15
    -       -       (3,913 )     -       -       (3,913 )
Conversion of convertible Series D and Series E preferred stock to common, net of issuance cost
    24,560,626       5,162       -       -       -       5,162  
Share-based employee and director compensation - options
    -       410       -       -       -       410  
Share-based consultant compensation - options
    -       164       -       -       -       164  
Share-based compensation for vendor services
    282,500       70       -       -       -       70  
Foreign currency translation
    -       -       -       (2,324 )     -       (2,324 )
Contributions
    -       -       -       -       32       32  
Net loss
    -       -       (32,095 )     -       (108 )     (32,203 )
Balance, December 31, 2009
    192,967,680       205,291       (169,144 )     (467 )     (156 )     35,524  
                                                 
Share-based employee and director compensation - options
    -       1,632       -       -       -       1,632  
Share-based consultant compensation options
    -       37       -       -       -       37  
Share-based compensation for vendor services
    2,391,429       472       -       -       -       472  
Foreign currency translation
    -       -       -       393       -       393  
Net loss
    -       -       (15,668 )     -       -       (15,668 )
Balance, December 31, 2010
    195,359,109     $ 207,432     $ (184,812 )   $ (74 )   $ (156 )   $ 22,390  

See Notes to Consolidated Financial Statements

 
40


NutraCea
Consolidated Statements of Cash Flows
Years Ended December 31, 2010 and 2009
(in thousands)

   
2010
   
2009
 
Cash flow from operating activities:
           
Net loss
  $ (15,668 )   $ (32,203 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    4,774       6,955  
Provision for doubtful accounts receivable and notes receivable
    153       125  
Impairment of property, plant and equipment
    1,900       8,845  
Loss on disposal of trademarks, property, plant and equipment
    943       202  
Share-based compensation
    2,141       644  
Warrant liability expense (income)
    349       (2,634 )
Deferred tax benefit
    (935 )     (474 )
Impairment of trademarks
    -       1,594  
Reorganization expenses
    1,033       3,425  
Foreign exchange loss
    -       57  
Loss on equity method investments
    42       218  
Share-based interest expense
    -       861  
Changes in operating assets and liabilities:
               
Accounts receivable
    (63 )     (65 )
Inventories
    334       1,024  
Other current assets
    173       998  
Accounts payable and accrued expenses
    (1,682 )     1,728  
Net cash used in operating activities, before reorganization items
    (6,506 )     (8,700 )
                 
Reorganization items:                
Reorganization expenses
    (1,033 )     (3,425 )
Loss on disposal of property, plant and equipment     -       3,016  
Impairment of property plant and equipment     -       229  
Change in accounts payable for reorganization items     198       101  
Net cash used for reorganization items
    (835 )     (79 )
Net cash used in operating activities
    (7,341 )     (8,779 )
                 
Cash flows from investing activities:
               
Proceeds from payments on notes receivable
    1,200       823  
Purchases of property and equipment
    (772 )     (1,768 )
Proceeds from sale of trademarks, property, plant and equipment
    8,872       308  
Distributions received  from equity method investment
    -       950  
Proceeds from sale of equity method investment
    -       1,675  
Restricted cash
    -       3,281  
Other
    (26 )     -  
Net cash provided by investing activities
    9,274       5,269  
                 
Cash flows from financing activities:
               
Payments on redemption of convertible, preferred stock
    -       (556 )
Proceeds from noncontrolling interest
    -       32  
Payments of debt
    (5,716 )     -  
Principal proceeds from debt
    3,399       37  
Net cash used in financing activities
    (2,317 )     (487 )
                 
Effect of exchange rate changes on cash and cash equivalents
    (31 )     82  
Net decrease in cash and cash equivalents
    (415 )     (3,915 )
Cash and cash equivalents, beginning of year
    952       4,867  
Cash and cash equivalents, end of year
  $ 537     $ 952  
                 
Supplemental disclosures:
               
Cash paid for interest
  $ 990     $ 845  
Cash paid for income taxes
    6       -  

See Notes to Consolidated Financial Statements

 
41


NutraCea
Notes to Consolidate Financial Statements
 
NOTE 1. CHAPTER 11 REORGANIZATION, LIQUIDITY AND MANAGEMENT’S PLANS

Chapter 11 Reorganization

On November 10, 2009, NutraCea (the Parent Company) filed a voluntary petition for relief under Chapter 11 of the United States Bankruptcy Code (Bankruptcy Code) in the United States Bankruptcy Court for the District of Arizona (the Bankruptcy Court), in the proceeding entitled In re:  NutraCea, Case No. 2:09-bk-28817-CGC (the Chapter 11 Reorganization).  None of the Parent Company’s subsidiaries, including its Brazilian rice bran oil operation, were included in the bankruptcy filing.  The Parent Company continued to manage its assets and operate its business as “debtor-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code.  Under the Bankruptcy Code, certain claims against the Parent Company in existence prior to the filing of the bankruptcy petition were stayed during the pendency of the Chapter 11 Reorganization.  Additional claims arose subsequent to the filing date from the Parent Company’s business operations, its secured borrowing from Wells Fargo Bank, N.A. (Wells Fargo), its employment of professionals, its disposition of certain non-core assets (as described below) and its treatment of certain executory contracts.  The claim of Wells Fargo, the primary secured creditor of the Parent Company, was secured by perfected liens against the Parent Company’s real and personal property, including, without limitation, its plant and equipment, trade receivables and inventory.

On August 10, 2010, the Parent Company and the Official Unsecured Creditors Committee filed with the Bankruptcy Court an amended plan of reorganization (Amended Plan) in accordance with the Bankruptcy Code.  The Amended Plan called for the payment in full of all allowed claims.  Creditors voted overwhelmingly in favor of the Amended Plan and, on October 27, 2010, the Bankruptcy Court entered its order confirming the Amended Plan.  The confirmation order became final on November 10, 2010, and the Amended Plan became effective on November 30, 2010.

In connection with the Chapter 11 Reorganization, we entered into a Senior Secured Super-Priority Debtor-In-Possession Credit and Security Agreement (DIP Credit Agreement), successor loan to the Wells Fargo secured borrowing, which was paid in full as of December 31, 2010 (see Note 13).

The liabilities subject to compromise existing at December 31, 2009, became the Parent Company’s payment obligations under the Amended Plan of approximately $7.0 million when the Amended Plan became effective.  As of December 31, 2010, the portion of these obligations remaining unpaid is reflected as pre-petition liabilities in our consolidated balance sheets.  During 2010, $0.6 million of these obligations were paid with proceeds from the sale of the Phoenix, Arizona building (see Note 9).  Interest accrued on the allowed liabilities subject to compromise from November 2009 through November 2010, at an annual rate of 0.38%.  Interest accrues on the unpaid prepetition liabilities at an annual rate of 8.25% beginning in December 2010.

The Parent Company intends to discharge the obligation to pay these pre-petition liabilities by selling non-core assets, possible equity financing transactions, collecting outstanding receivables, and borrowing on a secured basis.  To secure a portion of these payment obligations, unsecured creditors were granted a lien in all of the Parent Company’s assets.  The lien is administered and may be enforced by a plan agent, who was jointly selected by the Parent Company and the Official Unsecured Creditors Committee.  The plan agent may, among other things, sell specified assets if the payment benchmarks set forth in the Amended Plan are not met.

Under the Amended Plan, if we fail to meet certain benchmarks for payment to our general unsecured creditors as described in the Amended Plan, the plan agent may direct and control the sale of pledged assets as follows: