ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of RiceBran Technologies
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of RiceBran Technologies and its subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, changes in shareholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, 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.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting 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.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Long-Lived Asset and Goodwill Impairment
As described in Notes 6 and 7 to the financial statements, the Company’s net consolidated property and equipment and intangible assets balances were $15,444,000 and $527,000, respectively, at December 31, 2021. As further described in Note 2 to the financial statements, the Company reviews long-lived assets, including property and equipment and intangible assets for impairment whenever events or changes in circumstances indicate that the caring amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to the estimated undiscounted future cash flows expected to be generated by the assets. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount exceeds the fair value of the asset. Based on events occurring during the year ended December 31, 2021, management performed an impairment assessment to test long-lived assets for impairment. The results of this assessment indicated that estimated undiscounted future cash flows exceed the carrying amount of the assets. The Company’s impairment assessment required management to make significant estimates and assumptions related to a number of factors, including forecasts of revenue growth rates and cash flows.
As described in Notes 2 and 7 to the financial statements, the Company recognized a full impairment of goodwill of $3,915,000 for the year ending December 31, 2021. As further described in Note 2 to the financial statements, the Company tests goodwill for impairment at the reporting unit level on an annual basis in the fourth quarter. The Company quantifies the reporting unit’s fair value using the income approach, based on a discounted cash flow valuation model. If the carrying amount of the reporting unit exceeds its fair value, the Company records an impairment loss, limited to the amount of goodwill allocated to that reporting unit, based on the difference. As described in Note 2 to the financial statements, the Company has identified one reporting unit and one operating segment, specialty ingredients.
We identified the long-lived asset and goodwill impairment assessments as a critical audit matter because changes in certain significant assumptions management used in the impairment analysis, including revenue growth rates, operating margins and, for the goodwill impairment assessment, discount rates, could have a significant impact on the analysis. Auditing these assumptions involved a high degree of auditor judgment and subjectivity and increased audit effort.
Our audit procedures related to the Company’s long-lived asset and goodwill impairment assessments included the following, among others:
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We obtained an understanding of the relevant controls related to the development of forecasted revenue growth rates, operating margins and, for the goodwill impairment assessment, discount rates |
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We tested the reasonableness of management’s process for determining the forecasts of revenue growth rates and operating margins |
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We tested the reasonableness of management’s process for determining the discount rates utilized in the goodwill impairment assessment |
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We tested the reasonableness of management's assumptions of revenue growth rates and operating margins by comparing management's prior forecast to historical results for the Company comparing the projections for consistency to the Company's strategic plans and initiatives and comparing the projections to industry forecasts |
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We tested the reasonableness of management's discount rates utilized in the goodwill impairment assessment by comparing to known costs of capital and evaluating the sensitivty of the impairment assessment to the discount rates |
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We evaluated whether the estimates of revenue growth rates and cash flows were consistent with evidence obtained in other areas of the audit |
/s/ RSM US LLP
We have served as the Company's auditor since 2018.
Houston, Texas
March 17, 2022
RiceBran Technologies
Consolidated Balance Sheets
December 31, 2021 and 2020
(in thousands, except share amounts)
| | 2021 | | | 2020 | |
ASSETS | | | | | | | | |
Current assets: | | | | | | | | |
Cash and cash equivalents | | $ | 5,825 | | | $ | 5,263 | |
Accounts receivable, net of allowance for doubtful accounts of $18 and $9 | | | 4,136 | | | | 2,819 | |
Inventories | | | 2,444 | | | | 1,878 | |
Other current assets | | | 810 | | | | 1,380 | |
Total current assets | | | 13,215 | | | | 11,340 | |
Property and equipment, net | | | 15,444 | | | | 16,367 | |
Operating lease right-of-use assets | | | 2,127 | | | | 2,452 | |
Intangible assets | | | 527 | | | | 722 | |
Goodwill | | | - | | | | 3,915 | |
Total assets | | $ | 31,313 | | | $ | 34,796 | |
| | | | | | | | |
LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | | | | |
Current liabilities: | | | | | | | | |
Accounts payable | | $ | 826 | | | $ | 955 | |
Commodities payable | | | 1,702 | | | | 825 | |
Accrued salary, wages and benefits | | | 787 | | | | 601 | |
Accrued expenses | | | 683 | | | | 536 | |
Operating lease liabilities, current portion | | | 382 | | | | 344 | |
Due under insurance premium finance agreements | | | 128 | | | | 126 | |
Due under factoring agreement | | | 3,379 | | | | 1,785 | |
Finance lease liabilities, current portion | | | 86 | | | | 82 | |
Long-term debt, current portion | | | 1,183 | | | | 572 | |
Total current liabilities | | | 9,156 | | | | 5,826 | |
Operating lease liabilities, less current portion | | | 1,948 | | | | 2,330 | |
Finance lease liabilities, less current portion | | | 100 | | | | 113 | |
Long-term debt, less current portion | | | 1,356 | | | | 3,107 | |
Derivative warrant liabilty | | | 258 | | | | - | |
Total liabilities | | | 12,818 | | | | 11,376 | |
Commitments and contingencies | | | | | | | | |
Shareholders' equity: | | | | | | | | |
Preferred stock, 20,000,000 shares authorized: Series G, convertible, 3,000 shares authorized, stated value $150 and $225, 150 and 225 shares, issued and outstanding | | | 75 | | | | 112 | |
Common stock, no par value, 150,000,000 shares authorized, 51,589,674 shares and 45,238,087 shares, issued and outstanding | | | 326,279 | | | | 322,218 | |
Accumulated deficit | | | (307,859 | ) | | | (298,910 | ) |
Total shareholders' equity | | | 18,495 | | | | 23,420 | |
Total liabilities and shareholders' equity | | $ | 31,313 | | | $ | 34,796 | |
See Notes to Consolidated Financial Statements
RiceBran Technologies
Consolidated Statements of Operations
Years Ended December 31, 2021 and 2020
(in thousands, except share and per share amounts)
| | 2021 | | | 2020 | |
| | | | | | | | |
Revenues | | $ | 31,131 | | | $ | 26,199 | |
Cost of goods sold | | | 30,689 | | | | 28,670 | |
Gross profit (loss) | | | 442 | | | | (2,471 | ) |
Selling, general and administrative expenses | | | 7,087 | | | | 7,971 | |
Impairment of goodwill | | | 3,915 | | | | - | |
Loss on disposition and involuntary conversion of property and equipment | | | 6 | | | | 847 | |
Operating loss | | | (10,566 | ) | | | (11,289 | ) |
Other income (expense): | | | | | | | | |
Interest expense | | | (463 | ) | | | (318 | ) |
Interest income | | | 1 | | | | 20 | |
Gain on extinguishmenbt of PPP Loan | | | 1,792 | | | | - | |
Change in fair value of derivative warrant liability | | | 389 | | | | - | |
Other income | | | 4 | | | | 4 | |
Other expense | | | (85 | ) | | | (128 | ) |
Total other income (expense) | | | 1,638 | | | | (422 | ) |
Loss before income taxes | | | (8,928 | ) | | | (11,711 | ) |
Income tax expense | | | (21 | ) | | | (19 | ) |
Net loss | | $ | (8,949 | ) | | $ | (11,730 | ) |
| | | | | | | | |
Loss per common share: | | | | | | | | |
Basic | | $ | (0.19 | ) | | $ | (0.29 | ) |
Diluted | | | (0.19 | ) | | | (0.29 | ) |
| | | | | | | | |
Weighted average number of shares outstanding: | | | | | | | | |
Basic | | | 47,738,948 | | | | 41,131,782 | |
Diluted | | | 47,738,948 | | | | 41,131,782 | |
See Notes to Consolidated Financial Statements
RiceBran Technologies
Consolidated Statements of Changes in Shareholders’ Equity
Years Ended December 31, 2021 and 2020
(in thousands, except share amounts)
| | Shares | | | | | | | | | | | | | | | | | |
| | | | | | | | | | Preferred | | | Common | | | Accumulated | | | | | |
| | Series G | | | Common | | | Stock | | | Stock | | | Deficit | | | Equity | |
Balance, January 1, 2020 | | | 225 | | | | 40,074,483 | | | $ | 112 | | | $ | 318,811 | | | $ | (287,180 | ) | | $ | 31,743 | |
Sales of common stock, net of costs | | | | | | | 4,850,489 | | | | - | | | | 2,318 | | | | - | | | | 2,318 | |
Common stock awards under equity incentive plans | | | - | | | | 214,234 | | | | - | | | | 1,041 | | | | - | | | | 1,041 | |
Exercise of common stock warrants | | | - | | | | 67,577 | | | | - | | | | 12 | | | | - | | | | 12 | |
Common stock issued to vendors | | | - | | | | 31,304 | | | | - | | | | 36 | | | | - | | | | 36 | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (11,730 | ) | | | (11,730 | ) |
Balance, December 31, 2020 | | | 225 | | | | 45,238,087 | | | | 112 | | | | 322,218 | | | | (298,910 | ) | | | 23,420 | |
Sales of common stock and common stock warrants, net of costs | | | - | | | | 3,062,395 | | | | - | | | | 2,721 | | | | - | | | | 2,721 | |
Common stock awards under equity incentive plans | | | - | | | | 708,584 | | | | - | | | | 1,114 | | | | - | | | | 1,114 | |
Exercise of common stock warrants | | | - | | | | 2,485,434 | | | | - | | | | 171 | | | | - | | | | 171 | |
Common stock issued to vendors | | | - | | | | 24,000 | | | | - | | | | 18 | | | | - | | | | 18 | |
Conversion of preferred stock into common stock | | | (75 | ) | | | 71,174 | | | | (37 | ) | | | 37 | | | | - | | | | - | |
Net loss | | | - | | | | - | | | | - | | | | - | | | | (8,949 | ) | | | (8,949 | ) |
Balance, December 31, 2021 | | | 150 | | | | 51,589,674 | | | $ | 75 | | | $ | 326,279 | | | $ | (307,859 | ) | | $ | 18,495 | |
See Notes to Consolidated Financial Statements
RiceBran Technologies
Consolidated Statements of Cash Flows
Years Ended December 31, 2021 and 2020
(in thousands)
| | 2021 | | | 2020 | |
Cash flow from operating activities: | | | | | | | | |
Net loss | | $ | (8,949 | ) | | $ | (11,730 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
Depreciation | | | 2,397 | | | | 2,393 | |
Amortization | | | 195 | | | | 228 | |
Stock and share-based compensation | | | 1,135 | | | | 1,077 | |
Impairment of goodwill | | | 3,915 | | | | - | |
Loss on disposition and involuntary conversion of property and equipment | | | 6 | | | | 847 | |
Gain on extinguishment of PPP loan | | | (1,792 | ) | | | - | |
Change in fair value of derivative warrant liability | | | (389 | ) | | | - | |
Accretion of interest | | | 98 | | | | 95 | |
Other | | | (3 | ) | | | (84 | ) |
Changes in operating assets and liabilities: | | | | | | | | |
Accounts receivable | | | (1,332 | ) | | | 997 | |
Inventories | | | (566 | ) | | | (980 | ) |
Accounts payable and accrued expenses | | | 280 | | | | (709 | ) |
Commodities payable | | | 876 | | | | (4 | ) |
Other | | | (69 | ) | | | (76 | ) |
Net cash used in operating activities | | | (4,198 | ) | | | (7,946 | ) |
Cash flows from investing activities: | | | | | | | | |
Purchases of property and equipment | | | (1,440 | ) | | | (1,184 | ) |
Proceeds from insurance on involuntary conversion | | | 639 | | | | 250 | |
Proceeds from sale of property and equipment | | | 3 | | | | 15 | |
Net cash used in investing activities - continuing operations | | | (798 | ) | | | (919 | ) |
Cash flows from financing activities: | | | | | | | | |
Advances on factoring agreement | | | 31,038 | | | | 27,450 | |
Payments on factoring agreement | | | (29,519 | ) | | | (27,583 | ) |
Advances on insurance premium finance agreements | | | 962 | | | | 743 | |
Payments on insurance premium finance agreements | | | (960 | ) | | | (733 | ) |
Advances on long-term debt, net of issuance costs | | | 1,167 | | | | 3,762 | |
Payments of long-term debt and finance lease liabilities | | | (665 | ) | | | (285 | ) |
Proceeds from issuances of common stock and warrants, net of issuance costs | | | 3,364 | | | | 2,318 | |
Proceeds from common stock warrant exercises | | | 171 | | | | 12 | |
Net cash provided by financing activities | | | 5,558 | | | | 5,684 | |
Net change in cash and cash equivalents | | $ | 562 | | | $ | (3,181 | ) |
| | | | | | | | |
Cash and cash equivalents, beginning of period | | | 5,263 | | | | 8,444 | |
Cash and cash equivalents, end of period | | | 5,825 | | | | 5,263 | |
Net change in cash and cash equivalents and restricted cash | | $ | 562 | | | $ | (3,181 | ) |
| | | | | | | | |
Supplemental disclosures: | | | | | | | | |
Cash paid for interest | | $ | 354 | | | $ | 223 | |
Cash paid for income taxes | | $ | 18 | | | $ | 7 | |
See Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
NOTE 1. LIQUIDITY AND MANAGEMENT’S PLAN
Our multi-year history of operating losses and negative operating cash flows from continuing operations raised substantial doubt about our ability to continue as a going concern before consideration of management’s plans, however after consideration of management’s plans and the factors below, we believe substantial doubt about our ability to continue as a going concern within one year after the date that the financial statements are issued has been alleviated. The factors that alleviated the substantial doubt are summarized below:
1) | Significant Cash Reserves – As of December 31, 2021, we had $5.8 million in cash and cash equivalents. |
2) | Declining Operating Losses – During 2021, we experienced declines in both operating losses and negative operating cash flows, driven by: |
| ● | The transition to positive gross profits in 2021 from negative gross losses, driven principally by growth in operating profits from our SRB derivative business and a reduction in operating losses from our Golden Ridge rice mill, compared to a year ago. |
| ● | An 11% reduction in selling, general, and administrative expenses in 2021, compared to 2020, due to headcount reductions and lower expenditures from outside services and consultants. |
3) | Access to Equity Funding – During the second half of 2021, we raised $3.6 million in equity funding, $2.8 million through the issuance of shares in a direct placement, $0.6 million from the sale of common shares through our ATM facility, and $0.2 million in proceeds from warrant exercises. |
4) | Ability to Leverage and/or Sell Real-estate Assets – We operate three wholly-owned facilities (Mermentau LA, Dillon MT, and North Grand Forks MN) with no existing liens. Such facilities could potentially be sold or mortgaged to provide additional liquidity. |
NOTE 2. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
We are a specialty ingredient company focused on the development, production, and marketing of products derived from traditional and ancient small grains. We create and produce products utilizing proprietary processes to deliver improved nutrition, ease of use, and extended shelf-life, while addressing consumer demand for all natural, non-GMO and organic products. We believe our products can become valuable alternatives to traditional food ingredients.
Notably, we apply our proprietary technologies to convert raw rice bran into stabilized rice bran (SRB), and high value-added derivative products including: RiBalance, a rice bran nutritional package derived from SRB; RiSolubles, a nutritious, carbohydrate and lipid rich fraction of RiBalance; RiFiber, a fiber rich insoluble derivative of RiBalance and ProRyza, a rice bran protein-based product; and a variety of other valuable derivatives extracted from these core products.
In granular form, SRB is a food additive used in products for human and animal consumption. We believe SRB has certain qualities that make it more attractive than additives based on the by-products of other agricultural commodities, such as corn, soybeans, wheat, and yeast. Our SRB products and SRB derivatives support the production of healthy, natural, hypoallergenic, gluten free, and non-genetically modified ingredients and supplements for use in meats, baked goods, cereals, coatings, health foods, and high-end animal nutrition. Our target customers are food and animal nutrition manufacturers, wholesalers and retailers, both domestically and internationally.
We manufacture and distribute SRB from four locations: two facilities located within supplier-owned rice mills in Arbuckle and West Sacramento, California; one company-owned facility in Mermentau, Louisiana; and our own rice mill in Wynne, Arkansas. At our Dillon, Montana facility, we produce SRB-based products and derivatives through proprietary processes. Our rice mill in Wynne, Arkansas also supplies grades U.S. No. 1 and No. 2 premium long and medium white rice, and our grain processing facility in East Grand Forks, Minnesota, mills a variety of traditional, and ancient, small grains. Given the integrated nature of these facilities, we have one reporting unit and one operating segment, specialty ingredients.
Notes to Consolidated Financial Statements
Segment Reporting
An operating segment is defined as a component of a business for which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and evaluate performance. The “Segment Reporting” topic of the Financial Accounting Standard Board (FASB) accounting standards codification requires that public companies report certain information about operating segments. It also requires that public companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. Given the integrated nature of these facilities, we have one reporting unit and one operating segment.
Recent Accounting Guidance
Recent accounting standards not yet adopted
The following discusses the accounting standard(s) not yet adopted that will, or are expected to, result in a significant change in practice and/or have a significant financial impact on our financial position, results of operations or cash flows.
In June 2016, the FASB issued guidance ASU No. 2016-13 Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which changes the accounting for credit losses for certain instruments, including trade receivables, from an incurred loss method to a current expected loss method. The measurement of expected credit losses is based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts. The guidance, and subsequent guidance related to the topic, is effective for our annual and interim periods beginning in 2023 and must be adopted on a modified retrospective approach through cumulative-effect adjustment to retained earnings as of January 1, 2023. Based on the nature of our current receivables and our credit loss history, we do not expect the adoption of the guidance to have a significant impact on our results of operations, financial position, or cash flows.
Recently adopted accounting standards
In August 2020, the FASB issued ASU 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40). Among other things, the new guidance eliminates some of the conditions that must be met for equity classification of freestanding warrants under ASC 815-40-25. We adopted ASU 2020-06 effective January 1, 2021, using the modified retrospective method. Adoption of the standard had no impact on our results of operations, financial position, or cash flows.
In May 2021, the FASB issued ASU 2021-04, Accounting for Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options. Among other things, the amendments affect (i) the accounting for freestanding equity-classified written call option modifications or exchanges which remain equity classified after the modification or exchange and (ii) the recognition and measurement of earnings per share (EPS) for certain modifications or exchanges. We early adopted ASU 2021-04 effective January 1, 2021, and we will apply it prospectively to applicable transactions. Adoption of the standard had no impact on our results of operations, financial position, or cash flows.
In October 2021, the FASB issued ASU 2021-08, Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. Among other things, the new guidance requires that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination as if it had originated the contracts. We early adopted ASU 2021-08 effective October 1, 2021 and will apply it prospectively to business combinations. Adoption of the standard had no impact on our results of operations, financial position, or cash flows.
Summary of Significant Accounting Policies
Basis of Presentation and Principles of Consolidation – The accompanying consolidated financial statements have been prepared in U.S. dollars and in accordance with accounting principles generally accepted in the United States (GAAP). The accompanying consolidated financial statements include the accounts of RiceBran Technologies and all subsidiaries in which we have a controlling interest. All significant inter-company balances are eliminated in consolidation.
Use of Estimates – The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, disclosure of contingent assets and liabilities and the reported amounts of revenue and expenses during the reporting period. Because of the uncertainty inherent in such estimates, actual results could differ from those estimates.
Notes to Consolidated Financial Statements
Reclassifications – Certain reclassifications have been made to amounts reported for the prior year to achieve consistent presentation with the current year. Such reclassifications had no impact on previously reported net loss or shareholders’ equity.
Cash and Cash Equivalents – We consider all highly liquid investments purchased with an original maturity of three months or less at the time of purchase to be cash equivalents. In all periods presented, we maintained our cash and cash equivalents with major banks. We maintain cash in bank accounts in amounts which at times may exceed federally insured limits. At times we invest in money market funds which are also not federally insured. We have not experienced any losses on such accounts.
Accounts Receivable and Allowance for Doubtful Accounts – Accounts receivable represent amounts receivable on trade accounts. The allowance for doubtful accounts is based on our assessment of the collectability of customer accounts and the aging of accounts receivable. We analyze the aging of customer accounts, customer concentrations, customer creditworthiness, current economic trends and changes in our customer payment patterns when evaluating the adequacy of the allowance for doubtful accounts. From period to period, differences in judgments or estimates utilized may result in material differences in the amount and timing of the provision for doubtful accounts. We periodically evaluate our credit policy to ensure that customers are worthy of terms and support our business plans. We generally do not require collateral.
Inventories – Inventories are stated at the lower of cost or net realizable value. We employ a full absorption procedure using standard cost techniques for the majority of our operations. The standards are customarily reviewed and adjusted so that they are materially consistent with actual purchase and production costs. Provisions for potentially obsolete or slow-moving inventory are made based upon our analysis of inventory levels, historical obsolescence and future sales forecasts, while inventory determined to be obsolete is written off immediately.
Property and Equipment – Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed on the straight-line basis over the estimated useful lives of the assets. Expenditures for maintenance and repairs are expensed as incurred while renewals and betterments are capitalized. Gains or losses on the sale of property and equipment are reflected in net income (loss).
We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when the undiscounted future cash flows estimated to be generated by the asset to be held and used are not sufficient to recover the unamortized balance of the asset. An impairment loss is recognized based on the difference between the carrying value and estimated fair value. The estimated fair value is determined based on either the discounted future cash flows or other appropriate fair value methods with the amount of any indicated deficiency charged to operations in the current year. Estimates of future cash flows are based on many factors, including current operating results, expected market trends and competitive influences. Assets to be disposed of by sale are reported at the lower of the carrying amount or fair value, less estimated costs to sell.
Goodwill – Goodwill is recorded when the purchase price paid for an acquisition exceeds the estimated fair value of net identified tangible and intangible assets acquired. Goodwill is tested for impairment at the reporting unit level on an annual basis in the fourth quarter and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. We may first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If we conclude that is the case, or chose to not perform the qualitative assessment, we quantify the reporting unit’s fair value. If the carrying amount of the reporting unit exceeds its fair value, we record an impairment loss based on the difference. The impairment loss will be limited to the amount of goodwill allocated to that reporting unit. Multiple valuation techniques may be used to assess the fair value of the reporting unit. All of these techniques include the use of estimates and assumptions that are inherently uncertain. Changes in these estimates and assumptions could materially affect the determination of fair value or goodwill impairment, or both. After a 2021 impairment charge, discussed further in Note 7, goodwill is zero as of December 31, 2021.
Notes to Consolidated Financial Statements
Intangible Assets, Exclusive of Goodwill – Recognized intangible assets, exclusive of goodwill, are amortized over the useful lives of the assets unless that life is determined to be indefinite. All of our intangible assets, exclusive of goodwill, are finite lived. We evaluate the remaining useful life of an intangible asset each reporting period to determine whether events or circumstances may indicate that a revision to the useful life is warranted to reflect the remaining expected use of the asset. If an intangible asset’s useful life is determined to be finite, but the precise length of that life is not known, the intangible asset is amortized over our best estimate of the asset’s useful life in a manner that reflects the pattern in which the asset’s economic benefits are consumed or expected to be realized. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when the undiscounted future cash flows estimated to be generated by the asset to be held and used are not sufficient to recover the unamortized balance of the asset. Our primary intangible asset, exclusive of goodwill, is a customer relationship intangible which derives its value from future cash flows expected from the acquired customers. Changes in the actual or estimated future cash flows of these customers could result in a material adjustment to amortization expense, an impairment loss, or both. Estimates of future cash flows are based on many factors, including current cash flows, expected market trends and competitive influences.
Leases – We lease certain buildings, land and corporate office space under operating leases with monthly or annual rent payments. We lease certain machinery and equipment under finance leases with monthly rent payments. We determine if an arrangement is a lease at inception. Operating lease assets are presented as operating lease right-of-use assets and the related liabilities are presented as operating lease liabilities in our consolidated balance sheets. Finance lease right-of-use assets are included in property and equipment, net, and the related liabilities are included as finance lease liabilities in our consolidated balance sheets.
We recognize right-of-use assets and lease liabilities based on the present value of the future minimum lease payments over the lease term, beginning at the commencement date, for leases exceeding a year. Minimum lease payments include the fixed lease components of the lease and any variable rate payments that depend on an index, initially measured using the index at the lease commencement date. Lease terms may include options to renew when it is reasonably certain that we will exercise that option. We combine lease and nonlease components and account for them as a single lease component. Certain leases contain rent escalation clauses, rent holidays, capital improvement funding or other lease concessions.
In determining our right-of-use assets and lease liabilities, we apply a discount rate to the minimum lease payments within each lease. When we cannot readily determine the discount rate implicit in a lease, we utilize our incremental borrowing rate, the rate of interest that we would incur to borrow, on a collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. To estimate the incremental borrowing rate, we reference a market yield curve consistent with our assessment of our credit quality.
We recognize operating lease expense related to the minimum lease payments on a straight-line basis over the lease term. For finance leases, we recognize amortization expense related to the minimum lease payments on a straight-line basis over the lease term while interest expense is recognized using the effective interest method. Expense related to variable lease payments that do not depend on a rate or index and short-term rentals, on leases with terms less than a year, are expensed as incurred.
Revenue Recognition – We account for a contract with a customer when the written contract is committed, the rights of the parties, including payment terms, are identified, the contract has commercial substance and consideration is probable of collection. Substantially all of our revenue is derived by fulfilling customer orders for the purchase of our products under contracts which contain a single performance obligation, to supply continually defined quantities of product at fixed prices. We account for shipping and handling activities that occur after the customer has obtained control of a good as a fulfillment cost rather than as an additional promised service. We recognize revenue at the point in time that control of the ordered product(s) is transferred to the customer, which is upon delivery to the customer, or its designee at our location, a customer location or other customer-designated delivery point. For substantially all of our contracts, control of the ordered product(s) transfers at our location. Amounts invoiced to customers for shipping and handling are reported as revenues and the related costs incurred to deliver product to the customer are reported as cost of goods sold.
Revenue is measured as the amount of consideration we expect to receive in exchange for fulfilling product orders. Incidental items that are immaterial in the context of the contract are recognized as expense. Our contracts do not include a significant financing component. Our contracts may include terms that could cause variability in the transaction price, including, for example, rebates and volume discounts, or other forms of contingent revenue. The amount of consideration we expect to receive and revenue we recognize includes estimates of variable consideration, including costs for rebates and discounts. If the consideration promised in a contract includes a variable amount, we estimate the amount to which we expect to be entitled using either the expected value or most likely amount method. Changes in judgments and estimates regarding probability of collection and variable consideration might result in a change in the timing or amount of revenue recognized.
Notes to Consolidated Financial Statements
Incremental costs of obtaining a revenue contract are capitalized and amortized on a straight-line basis over the expected customer relationship period if we expect to recover those costs. As a practical expedient, we expense costs to obtain a contract as incurred if the amortization period would have been a year or less. Typically, costs to incur revenue contracts are not significant.
Selling, General and Administrative Expenses – Selling, general and administrative expenses include salaries and wages, bonuses and incentives, share-based compensation expense, employee-related expenses, facility-related expenses, marketing and advertising expense, depreciation of non-operating property and equipment, professional fees, amortization of intangible assets, provisions for losses on accounts receivable and other operating expenses.
Research and Development – Research and development expenses include internal and external costs. Internal costs include salaries and employment related expenses. External expenses consist of costs associated with product development. All such costs are charged to expense in the period they are incurred.
Share-Based Compensation –Share-based compensation expense for stock options granted to employees is calculated at the grant date using the Black-Scholes-Merton valuation model based on awards ultimately expected to vest and expensed on a straight-line basis over the service period of the grant. We recognize forfeitures as they occur. 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. We will use alternative valuation models if grants have characteristics that cannot be reasonably estimated using the Black-Scholes-Merton model.
For awards of nonvested stock to employees, share-based compensation is measured based on the fair value of the stock on the date of grant and the corresponding expense is recognized over the period during which an employee is required to provide service in exchange for the reward. Compensation expense related to service-based awards are recognized on a straight-line basis over the requisite service period for the entire award.
For restricted stock units issued to employees with market conditions, share-based compensation is measured based on the fair value of the award on the date of grant using a binomial simulation model and expense is recognized over the derived service period determined by the simulation. The binomial simulation model requires us to estimate key assumptions such as stock volatility, risk-free interest rates and dividend yields based on both historical information and management’s judgment regarding market factors and trends.
Share-based compensation for awards to nonemployees is calculated as of the grant date, taking into consideration the probability of satisfaction of performance conditions, in a manner consistent with awards to employees. The expense associated with share-based awards for service is recognized over the term of service. In the event services are terminated early or we require no specific future performance, the entire amount is expensed. The expense associated with share-based awards made in exchange for goods is generally attributed to expense in the same manner as if the vendor had been paid in cash.
Income Taxes – We account for income taxes by recording a deferred tax asset or liability for the recognition of future deductible or taxable amounts and operating loss and tax credit carryforwards. 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. The realization of deferred tax assets can be affected by, among other things, the nature, frequency and severity of current and cumulative losses, forecasts of future profitability, the length of statutory carryforward periods, our experience with utilizing operating losses and tax credit carryforwards by jurisdiction, and tax planning alternatives that may be available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that may be different from current estimates of the tax liabilities. If our estimate of tax liabilities proves to be less than the ultimate assessment, an additional charge to expense would result. If payment of these amounts ultimately proves to be less than the recorded amounts, the reversal of the liabilities may result in income tax benefits being recognized in the period when it is determined that the liabilities are no longer necessary.
We recognize interest and penalties related to uncertain tax positions, if any, in selling, general and administrative expenses.
Derivative Warrant Liability – We have an outstanding warrant agreement that provides for cash settlement of the warrant in certain circumstances. We account for this warrant as a liability instrument. This warrant is carried at fair value as a derivative warrant liability in our consolidated balance sheets at the end of each reporting period, and any resultant changes in fair value are recorded in the consolidated statements of operations in other income (expense) as change in fair value of derivative warrant liability.
Notes to Consolidated Financial Statements
Fair Value – Fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Certain assets and liabilities may be presented in the financial statements at fair value. Assets and liabilities measured at fair value on a non-recurring basis may include property and equipment.
We assess the inputs used to measure fair value using a three-tier hierarchy based on the extent to which inputs used in measuring fair value are observable in the market:
| ● | Level 1 – inputs include quoted prices for identical instruments and are the most observable. |
| ● | Level 2 – inputs include quoted prices for similar assets and observable inputs such as interest rates, currency exchange rates and yield curves. |
| ● | Level 3 – inputs are not observable in the market and include management’s judgments about the assumptions market participants would use in pricing the asset or liability. |
NOTE 3. CASH AND CASH EQUIVALENTS
As of December 31, 2021, we had $4.3 million of cash and cash equivalents invested in a money market fund with net assets invested in U.S. Dollar denominated money market securities of domestic and foreign issuers, U.S. Government securities and repurchase agreements. We consider all liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.
We have cash on deposit in excess of federally insured limits at a bank. We do not believe that maintaining substantially all such assets with the bank or investing in a liquid mutual fund represent material risks.
NOTE 4. ACCOUNTS RECEIVABLE AND REVENUES
Amounts billed and due from our customers are classified as accounts receivables on our consolidated balance sheets and require payment on a short-term basis. Invoices are generally issued at the point control transfers and substantially all of our invoices are due within 30 days or less, however certain customers have terms of up to 120 days. For substantially all of our contracts, control of the ordered product(s) transfers at our location. Periodically, we require payment prior to the point in time we recognize revenue. Amounts received from customers prior to revenue recognition on a contract are contract liabilities, are classified as customer prepayments liability on our consolidated balance sheets and are typically applied to an invoice within 30 days of the prepayment. Revenues in 2021 and 2020 include $0.1 million, or less, in unearned revenue as of the end of the prior year.
Our accounts receivable potentially subject us to significant concentrations of credit risk. Revenues and accounts receivable from significant customers (customers with revenue or accounts receivable in excess of 10% of consolidated totals) are stated below as a percent of consolidated totals.
| | Customer | |
| | A | | | B | | | C | |
% of revenue, 2021 | | | 5 | % | | | 11 | % | | | 12 | % |
% of revenue, 2020 | | | 10 | % | | | 11 | % | | | 2 | % |
| | | | | | | | | | | | |
% of accounts receivable, as of December 31, 2021 | | | 7 | % | | | 8 | % | | | 15 | % |
% of accounts receivable, as of December 31, 2020 | | | 17 | % | | | 1 | % | | | 10 | % |
The following table presents revenues by geographic area shipped to (in thousands).
| | 2021 | | | 2020 | |
United States | | $ | 29,637 | | | $ | 24,790 | |
Other countries | | | 1,494 | | | | 1,409 | |
Revenues | | $ | 31,131 | | | $ | 26,199 | |
Notes to Consolidated Financial Statements
NOTE 5. INVENTORIES
The following table details the components of inventories (in thousands).
| | December 31 | |
| | 2021 | | | 2020 | |
Finished goods | | $ | 1,679 | | | $ | 1,512 | |
Raw materials | | | 599 | | | | 236 | |
Packaging | | | 166 | | | | 130 | |
Inventories | | $ | 2,444 | | | $ | 1,878 | |
NOTE 6. PROPERTY AND EQUIPMENT
The following table details the components of property and equipment (amounts in thousands).
| | December 31 | | | | | |
| | 2021 | | | 2020 | | | Estimated Useful Lives (Years) |
Land | | $ | 730 | | | $ | 730 | | | | | |
Furniture and fixtures | | | 265 | | | | 276 | | | 5 | - | 10 |
Plant | | | 10,457 | | | | 9,377 | | | 20 | - | 40 or life of lease |
Computer and software | | | 452 | | | | 1,060 | | | 3 | - | 5 |
Leasehold improvements | | | 1,828 | | | | 1,880 | | | 4 | - | 15 or life of lease |
Machinery and equipment | | | 15,115 | | | | 16,402 | | | 5 | - | 15 |
Property and equipment, cost | | | 28,847 | | | | 29,725 | | | | | |
Less accumulated depreciation | | | 13,403 | | | | 13,358 | | | | | |
Property and equipment, net | | $ | 15,444 | | | $ | 16,367 | | | | | |
Amounts payable for property and equipment included in accounts payable totaled $0.2 million at December 31, 2021, and $0.3 million at December 31, 2020. Assets which had not yet been placed in service, included in property and equipment, totaled $0.9 million at December 31, 2021, and $0.6 million at December 31, 2020.
Involuntary Conversion
In 2020, we wrote down assets, consisting primarily of a building, machinery and equipment, in the amount of $0.9 million and incurred other costs of $0.1 million as a result of hurricane damage that occurred in August 2020 to our Lake Charles, Louisiana property. Operations at this facility have been shut down since September 2020, while this facility is being repaired. We expected insurance recoveries to cover our asset loss to the extent it exceeded our $0.1 million deductible under our insurance policy. The resulting $0.1 million loss on involuntary conversion of assets was included in selling, general and administrative expenses in our consolidated financial statements in 2020. As of December 31, 2021, we have received $0.9 million of proceeds from the insurer. The insurance proceeds receivable included in other current assets on our consolidated balance sheet was zero at December 31, 2021, and $0.7 million as of December 31, 2020. We accrue estimated insurance proceeds receivable when the proceeds are estimable and probable of collection. We do not expect any recovery of lost profits under business interruption insurance. We finalized our insurance claim in the first quarter of 2022. We received $0.1 million in proceeds from the insurer in the first quarter of 2022 and expect any adjustment to our loss on involuntary conversion in 2022 to be less than $0.1 million.
Notes to Consolidated Financial Statements
NOTE 7. INTANGIBLE ASSETS AND GOODWILL
Intangible assets, excluding goodwill, consist of the following (in thousands).
| | December 31, 2021 | | | December 31, 2020 | |
| | Estimated Useful Life | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Carrying Value | | | Gross Carrying Value | | | Accumulated Amortization | | | Net Carrying Value | |
Customer relationships | | | 15 | | | $ | 930 | | | $ | 423 | | | $ | 507 | | | $ | 930 | | | $ | 236 | | | $ | 694 | |
Trademarks | | | 10 | | | | 13 | | | | 3 | | | | 10 | | | | 13 | | | | 2 | | | | 11 | |
Non-compete agreement | | | 5 | | | | 22 | | | | 12 | | | | 10 | | | | 22 | | | | 8 | | | | 14 | |
Other | | | 17 | | | | - | | | | - | | | | - | | | | 32 | | | | 29 | | | | 3 | |
Total intangible assets | | | | | | $ | 965 | | | $ | 438 | | | $ | 527 | | | $ | 997 | | | $ | 275 | | | $ | 722 | |
The customer relationship intangible is amortizing over the 15-year period of expected future economic benefit, in proportion to the discounted expected future cash flows used to estimate the value of the intangible at acquisition in 2019. It is amortizing at a more rapid rate in the earlier periods than in later periods. Other finite-lived intangible assets are amortizing on a straight-line basis.
As of December 31, 2021, the weighted-average remaining amortization period for intangibles other than goodwill is 11.7 years and future intangible amortization is expected to total the following (in thousands):
2022 | | $ | 147 | |
2023 | | | 111 | |
2024 | | | 80 | |
2025 | | | 58 | |
2026 | | | 42 | |
Thereafter | | | 89 | |
Total amortization | | $ | 527 | |
A summary of goodwill activity follows (in thousands).
| | 2021 | | | 2020 | |
Goodwill, January 1 | | $ | 3,915 | | | $ | 3,915 | |
Impairment of goodwill | | | (3,915 | ) | | | - | |
Goodwill, December 31 | | $ | - | | | $ | 3,915 | |
We performed our annual impairment testing of goodwill as of
December 31, 2021. We estimated the fair value of our company by a discounted cash flow method, reconciled to our market capitalization. We determined the fair value of our equity, based on our market capitalization, was substantially below our carrying value. As a result, in the
fourth quarter of
2021, we recorded a non-cash, non-tax deductible impairment charge equal to the entire amount of our goodwill,
$3.9 million.
NOTE 8. LEASES
The components of lease expense and cash flows from leases (in thousands) follow.
| | 2021 | | | 2020 | |
Finance lease cost: | | | | | | | | |
Amortization of right-of use assets, included in cost of goods sold | | $ | 89 | | | $ | 62 | |
Interest on lease liabilities | | | 11 | | | | 14 | |
Operating lease cost, included in selling, general and administrative expenses: | | | | | | | | |
Fixed leases cost | | | 515 | | | | 517 | |
Variable lease cost | | | 149 | | | | 127 | |
Short-term lease cost | | | 61 | | | | 9 | |
Total lease cost | | $ | 825 | | | $ | 729 | |
| | | | | | | | |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | | | | |
Operating cash flows from finance leases | | $ | 11 | | | $ | 14 | |
Operating cash flows from operating leases | | $ | 515 | | | $ | 517 | |
Financing cash flows from finance leases | | $ | 96 | | | $ | 101 | |
As of December 31, 2021, variable lease payments do not depend on a rate or index. As of December 31, 2021, property and equipment, net, includes $0.2 million of finance lease right-of-use-assets, with an original cost of $0.5 million. During 2021, we financed the purchase of $0.1 million of property and equipment in noncash finance lease transactions. During 2020, we financed the purchase of less than $0.1 million of property and equipment in noncash finance lease transactions.
Notes to Consolidated Financial Statements
As of December 31, 2021, we do not believe it is certain that we will exercise any lease renewal options. The remaining terms of our leases and the discount rates used in the calculation of the fair value of our leases as of December 31, 2021, follows.
| | Operating Leases | | | Finance Leases | |
Remaining leases terms (in years) | | | 1.8 | - | 11.2 | | | | 0.4 | - | 4.8 | |
Weighted average remaining lease terms (in years) | | | | | 6.2 | | | | | | 2.6 | |
Discount rates | | | 6.3% | - | 9.0% | | | | 2.8% | - | 7.3% | |
Weighted average discount rate | | | | | 7.7% | | | | | | 4.9% | |
As of December 31, 2021, operating leases have maturities extending through 2032. Maturities of lease liabilities as of December 31, 2021, follows (in thousands).
| | Operating | | | Finance | |
| | Leases | | | Leases | |
2022 | | $ | 548 | | | $ | 93 | |
2023 | | | 528 | | | | 63 | |
2024 | | | 429 | | | | 23 | |
2025 | | | 439 | | | | 9 | |
2026 | | | 451 | | | | 7 | |
Thereafter | | | 578 | | | | - | |
Total lease payments | | | 2,973 | | | | 195 | |
Amounts representing interest | | | (643 | ) | | | (9 | ) |
Present value of lease obligations | | $ | 2,330 | | | $ | 186 | |
NOTE 9. DEBT
We finance certain amounts owed for annual insurance premiums under financing agreements. As of December 31, 2021, amounts due under insurance premium financing agreements are due in monthly installments of principal and interest through February 2022, at an interest rate of 3.7% per year.
In October 2019, we entered into a factoring agreement which provides for a $7.0 million credit facility with a lender. We may only borrow to the extent we have qualifying accounts receivable as defined in the agreement. The facility had an initial two-year term and automatically renews for successive annual periods, unless proper termination notice is given. The facility term was automatically extended to October 2022. We paid a $0.2 million facility fee upon inception of the agreement which amortized to interest expense on a straight-line basis over the two years ending in October 2021. We incur recurring fees under the agreement, including a funding fee of 0.5% above the prime rate, in no event to be less than 5.5%, on any advances and a service fee on average net funds borrowed. The lender has the right to demand repayment of the advances at any time. The lender has a security interest in personal property assets.
Due under factoring agreement consists of the following (in thousands).
| | December 31, | |
| | 2021 | | | 2020 | |
Borrowings outstanding | | $ | 3,379 | | | $ | 1,860 | |
Debt issuance costs, net | | | - | | | | (75 | ) |
Due under factoring agreement | | $ | 3,379 | | | $ | 1,785 | |
Additional information related to our factoring obligation follows.
| | 2021 | | | 2020 | |
Average borrowings outstanding (in thousands) | | $ | 1,622 | | | $ | 1,713 | |
Amortization of debt issuance costs (in thousands) | | $ | 75 | | | $ | 91 | |
Fees paid, as a percentage of average oustanding borrowings | | | 6.2 | % | | | 7.3 | % |
Interest paid, as a percentage of average outstanding borrowings | | | 6.4 | % | | | 6.4 | % |
Notes to Consolidated Financial Statements
Long-term debt consists of the following (in thousands).
| | December 31, | |
| | 2021 | | | 2020 | |
Mortgage promissory note - Originally dated in July 2020 and modified in December 2021. As modified, interest accrues at an annual rate which is the greater of 7.0% above the lender's prime rate and 10.3% (10.3% at December 31, 2021) payable in monthly installments through December 2023. Net of $32 debt issuance costs at December 31, 2021. Face amount $2.5 million. Interest accrued at the effective discount rate 11.5%. | | $ | 2,469 | | | $ | 1,817 | |
Payroll Protection Program note - Dated April 2020. Interest accrued at an annual rate of 1.0%. Forgiven in January 2021. | | | - | | | | 1,792 | |
Equipment note - Dated May 2021. Original principal $46. Due in monthly installments through June 2025. Interest accrues at the effective discount rate of 3.6% per year. | | | 33 | | | | - | |
Equipment note - Dated December 2019. Original principal $40. Due in monthly installments through December 2024. Interest accrues at the effective discount rate of 9.3% per year. | | | 26 | | | | 33 | |
Equipment notes - Initially recorded in November 2018, in an acquisition, at the present value of future payments using a discount rate of 4.8% per year. Due in monthly installments through August 2022. | | | 11 | | | | 37 | |
Total long term debt, net | | $ | 2,539 | | | $ | 3,679 | |
In December 2021, we entered into agreements with our lender to effect a modification of the terms of our mortgage promissory note. We entered into a new mortgage promissory note in the principal amount of $2.5 million, with terms as indicated in the table above. We received $1.2 million in cash from the lender and the lender applied the remainder of the principal to the $1.3 million principal and interest then outstanding under our old promissory note. We recognized no gain or loss with the modification. At modification, the carrying amount of the new note equaled the total of (i) the $1.3 million carrying amount of the old note prior to modification (ii) the $1.2 million advanced by the lender at modification and (iii) the debt issuance costs associated with the modification. Under the terms of the original note, (i) interest accrued at an annual rate which was the greater of 11.0% above the 1ender’s prime rate and 14.3% and (ii) principal and interest were payable in monthly installments through May 2022 and a final payment of $1.0 million was due in June 2022. The note is secured by certain real property and personal property assets located in Wynne, Arkansas.
In April 2020, we received $1.8 million on a Small Business Administration (SBA) Payroll Protection Program (PPP) loan as provided for in the Coronavirus Aid, Relief and Economic Security Act, enacted into U.S. law in March 2020. Under certain conditions, the loan and accrued interest were forgivable, if the loan proceeds were used for maintaining workforce levels. As of December 31 2020, payments on the PPP loan were deferred under the terms of the program. Interest accrued at an annual rate of 1.0%. The loan proceeds were used for maintaining workforce levels and the entire loan and related accrued interest was forgiven, in its entirety in January 2021. As discussed further in Note 14, our compliance with the loan program is subject to potential audit by the SBA.
Future principal maturities of long-term debt outstanding at December 31, 2021, follow (in thousands).
2022 | | $ | 1,215 | |
2023 | | | 1,332 | |
2024 | | | 19 | |
2025 | | | 5 | |
Principal maturities | | | 2,571 | |
Debt issuance costs | | | (32 | ) |
Total long term debt, net | | $ | 2,539 | |
NOTE 10. EQUITY, SHARE-BASED COMPENSATION, WARRANTS AND SECURITIES OFFERINGS
In June 2020, our shareholders approved, and we filed an amendment to our articles of incorporation, increasing our authorized shares of common stock from 50,000,000 to 150,000,000.
Preferred Stock
Our board of directors, without further action or vote by holders of our common stock, has the right to establish the terms, preference, rights and restrictions and issue shares of preferred stock. We previously designated and issued six series of preferred stock of which no shares remain outstanding. In addition, we designated and issued a seventh series of preferred stock, Series G, of which 150 shares remain outstanding as of December 31, 2021.
Notes to Consolidated Financial Statements
The Series G preferred stock is non-voting and may be converted into shares of our common stock at the holders’ election at any time, subject to certain beneficial ownership limitations, at a ratio of 1 preferred share for 948.9915 shares of common stock. The Series G preferred stock is entitled to receive dividends if we pay dividends on our common stock, in which case the holders of the preferred stock are entitled to receive the amount and form of dividends that they would have received if they held the common stock that is issuable upon conversion of the Series G preferred stock. If we are liquidated or dissolved, the holders of Series G preferred stock are entitled to receive, before any amounts are paid in respect of our common stock, an amount per share of preferred stock equal to $1,000, plus any accrued but unpaid dividends thereon.
Securities Offerings
In September 2021, we issued and sold 2,307,500 shares of common stock, a warrant for the purchase of up to 2,307,693 shares (Warrant A), and a prefunded warrant (the Prefunded Warrant) for the purchase of up to 2,307,855 shares of common stock pursuant to our effective “shelf” registration statement on Form S-3. The initial $1.00 per share exercise price of Warrant A is subject to adjustment in September 2022, and again in September 2023, if 110% of the 5-day volume weighted average price of our common stock is less than the then-current exercise price. The Prefunded Warrant, which was exercised in full in 2021, had an exercise price of $0.0001 (net of the $0.6499 per share prefunded). We determined that the Prefunded Warrant qualified for equity accounting, however, Warrant A did not qualify for equity accounting because the holder may elect cash settlement of this warrant in the event of a change of control. As a result, we carry Warrant A as a liability at fair value in our consolidated balance sheets and the change in fair value of this warrant is recorded in our consolidated statements of operations. The net proceeds from the offering of $2.8 million, after deducting commissions and other cash offering expenses of $0.2 million were allocated to derivative warrant liability, in an amount equal to the $0.6 million estimated fair value of Warrant A as of September 13, 2021, with the remainder of the proceeds recorded in equity. We determined the exercise price of the Prefunded Warrant was nominal and, as such, considered the 2,307,855 shares initially underlying the Prefunded Warrant to be outstanding effective September 13, 2021, for the purposes of calculating basic earnings per share (EPS). We intend to use the net proceeds from the September 2021 offering for general corporate purposes, which may include funding capital expenditures and working capital and repaying indebtedness.
On March 30, 2020, we entered into an at market issuance (ATM) sales agreement with respect to an at-the-market offering program through B. Riley FBR, Inc, as sales agent. The issuances and sales of our common stock under the ATM sales agreement are made pursuant to our effective “shelf” registration statement on Form S-3. During 2021, we issued and sold 754,895 shares of common stock under an at market issuance sales agreement, at an average price of $0.80 per share. Proceeds from those 2021 sales of $0.5 million are recorded in equity, net of $0.1 million of stock issuance costs. During 2020, we issued and sold 4,850,489 shares of common stock under the agreement, at an average price of $0.53 per share. Proceeds from those 2020 sales are recorded in equity, net of $0.2 million of stock issuance costs. Under the terms of the securities purchase agreement related to the September 2021 offering, we are prohibited from entering into an agreement to effect any at-the-market issuance until September 13, 2023.
Equity Incentive Plan
Our board of directors adopted our 2014 Equity Incentive Plan (2014 Plan) in August 2014, after the plan was approved by shareholders. The total shares of common stock authorized for issuance under the 2014 Plan is 6,300,000 shares. Under the terms of the plan, we may grant stock options, shares of common stock and share-based awards to officers, directors, employees or consultants providing services on such terms as are determined by the board of directors. Our board of directors administers the plan, determines vesting schedules on plan awards and may accelerate the vesting schedules for award recipients. The stock options granted under the plan have terms of up to 10 years. As of December 31, 2021, awards for the purchase of 5,813,021 shares of common stock have been granted and remain outstanding (common stock options, common stock and restricted stock units) and 486,979 shares of common stock are reserved for future grants under the 2014 Plan. As of December 31, 2021, we have outstanding restricted stock unit awards for 1,000,000 shares of common stock, the vesting of which, as amended, is subject to our shareholders approving an increase in the total shares of common stock authorized for issuance under the plan on or before December 15, 2022.
Notes to Consolidated Financial Statements
Share-based compensation expenses related to employees and directors are included in selling, general and administrative expenses. Share-based compensation by type of award follows (in thousands).
| | 2021 | | | 2020 | |
Common stock | | $ | 108 | | | $ | 308 | |
Stock options | | | 140 | | | | 148 | |
Restricted stock units | | | 866 | | | | 585 | |
Compensation expense related to common stock awards issued under equity incentive plan | | $ | 1,114 | | | $ | 1,041 | |
Information regarding common stock issued under the equity incentive plan follows, including shares issued upon vesting of restricted stock units. All shares of common stock issued in 2021 or 2020 were vested as of the date issued.
| | 2021 | | | 2020 | |
| | Shares Issued | | | Weighted Average Grant Date Fair Value Per Share | | | Shares Issued | | | Weighted Average Grant Date Fair Value Per Share | |
Directors | | | 136,084 | | | $ | 0.80 | | | | 83,306 | | | $ | 0.53 | |
Employees | | | 572,500 | | | | 0.55 | | | | 71,011 | | | | 0.85 | |
Consultants | | | - | | | | | | | | 59,917 | | | | 0.71 | |
| | | 708,584 | | | | | | | | 214,234 | | | | | |
The shares of common stock issued to employees in 2021 were issued upon vesting of restricted stock units with a grant date fair value of $0.55 per share.
Options
Stock option activity follows.
| | 2021 | | | 2020 | |
| | Shares Under Options | | | Weighted Average Exercise Price | | | Weighted Average Grant Date Fair Value | | | Weighted Average Remaining Contractual Life (Years) | | | Shares Under Options | | | Weighted Average Exercise Price | | | Weighted Average Grant Date Fair Value | | | Weighted Average Remaining Contractual Life (Years) | |
Outstanding at January 1 | | | 675,026 | | | $ | 2.24 | | | | | | | | 7.9 | | | | 996,009 | | | $ | 3.23 | | | | | | | | 8.1 | |
Granted | | | - | | | | - | | | | NA | | | | - | | | | 653,004 | | | | 1.22 | | | $ | 0.73 | | | | 10.0 | |
Forfeited | | | (31,067 | ) | | | 8.40 | | | | | | | | 7.4 | | | | (973,987 | ) | | | 2.56 | | | | | | | | 8.1 | |
Outstanding at December 31 | | | 643,959 | | | $ | 1.95 | | | | | | | | 6.9 | | | | 675,026 | | | $ | 2.24 | | | | | | | | 7.9 | |
The options granted in 2020 vest and become exercisable in annual or monthly installments ending three or four years from the date of grant.
Notes to Consolidated Financial Statements
Information related to outstanding and exercisable stock options as of December 31, 2021, follows.
| | Outstanding | | | Exercisable | |
Range of Exercise Prices | | Shares Underlying Options | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life (Years) | | | Shares Underlying Options | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life (Years) | |
less than $1.00 | | | 78,000 | | | $ | 0.85 | | | | 5.3 | | | | 78,000 | | | $ | 0.85 | | | | 5.3 | |
$1.00 to $1.99 | | | 333,811 | | | | 1.26 | | | | 7.7 | | | | 115,983 | | | | 1.32 | | | | 7.2 | |
$2.00 to $2.99 | | | 116,750 | | | | 2.79 | | | | 7.3 | | | | 72,687 | | | | 2.82 | | | | 7.1 | |
$3.00 to $3.99 | | | 89,875 | | | | 3.34 | | | | 6.3 | | | | 60,256 | | | | 3.36 | | | | 5.9 | |
$4.00 to $4.99 | | | 23,104 | | | | 4.43 | | | | 2.6 | | | | 23,094 | | | | 4.43 | | | | 2.6 | |
$5.00 to $16.00 | | | 2,419 | | | | 16.00 | | | | 0.8 | | | | 2,419 | | | | 16.00 | | | | 0.8 | |
| | | 643,959 | | | $ | 1.95 | | | | 6.9 | | | | 352,439 | | | $ | 2.18 | | | | 6.2 | |
As of December 31, 2021, outstanding stock options had an intrinsic value of zero, the weighted average remaining vesting period of options outstanding was 1.7 years and unrecognized option compensation cost was $0.2 million. As of December 31, 2020, exercisable options had an intrinsic value of zero. The following are the assumptions used in valuing stock option grants:
| | 2020 | |
Assumed volatility | | | 60% | - | 69% | |
| | (62% weighted average) | |
Assumed risk free interest rate | | | 1.3% | - | 1.7% | |
| | (1.6% weighted average) | |
Average expected life of options (in years) | | | 5.9 | - | 7.0 | |
| | (6.3 weighted average) | |
Expected dividends | | | | - | | |
Restricted Stock Units
Restricted stock unit (RSU) activity follows.
| | 2021 | | | 2020 | |
| | RSU Shares Issued | | | Unrecognized Stock Compensation (in thousands) | | | Weighted Average Expense Period (Years) | | | RSU Shares Issued | | | Unrecognized Stock Compensation (in thousands) | | | Weighted Average Expense Period (Years) | |
Nonvested at January 1 | | | 1,495,400 | | | $ | 730 | | | | 1.4 | | | | 1,148,062 | | | $ | 377 | | | | 1. 4 | |
Granted (1) | | | 824,689 | | | | 796 | | | | 1.0 | | | | 1,261,803 | | | | 828 | | | | 0.9 | |
Modified | | | - | | | | - | | | | | | | | - | | | | - | | | | | |
Before modification (2) | | | - | | | | - | | | | | | | | (227,062 | ) | | | (22 | ) | | | | |
After modification (3) | | | - | | | | - | | | | | | | | 620,000 | | | | 353 | | | | 2.0 | |
Vested (4) | | | (1,051,149 | ) | | | - | | | | | | | | (386,403 | ) | | | - | | | | | |
Cancelled | | | - | | | | - | | | | | | | | (625,000 | ) | | | - | | | | | |
Forfeited (5) | | | (2,907 | ) | | | (3 | ) | | | | | | | (296,000 | ) | | | (221 | ) | | | | |
Expensed | | | - | | | | (865 | ) | | | | | | | - | | | | (585 | ) | | | | |
Nonvested at December 31 | | | 1,266,033 | | | $ | 658 | | | | 0.9 | | | | 1,495,400 | | | $ | 730 | | | | 1.4 | |
| (1) | The shares of common stock subject to the RSUs granted in 2021 and 2020, were vested when granted or vest within two years of grant. These RSU grants were not subject to any market conditions and were valued using the market price of our common stock on the date of grant. Prior to being modified in 2020, the shares of common stock subject to the RSUs granted in 2019 vested based upon a vesting price equal to the volume weighted average trading price of our common stock over sixty-five consecutive trading days, subject to a minimum service period in certain grants, and expired on the fifth anniversary of each grant. |
| (2) | In December 2020, we modified RSUs for a total of 227,062 shares of common stock. Prior to modification, the shares subject to the RSUs vested based upon a vesting price equal to the volume weighted average trading price of our common stock over sixty-five consecutive trading days. Subject to a minimum service period, as described in the next sentence, the RSU shares vested as to (i) 22,706 shares on the date the vesting price equals or exceeds $5.00 per share, (ii) 68,119 shares on the date the vesting price equals or exceeds $10.00 per share and (iii) 136,237 shares on the date the vesting price equals or exceeds $15.00 per share. Vesting on the RSU shares would have occurred the later of the one-year anniversary of the grant and the date the shares reach the vesting price indicated in the preceding sentence. The RSUs expire on the fifth anniversary of each grant at dates ranging from October 2023 to August 2024. |
| (3) | In December 2020, after modification, shares subject to the modified RSUs referred to above totaled 620,000 and vest as to 50% of the shares in December 2021 and as to the remainder of the shares in December 2022. We are recognizing the total of (i) the remaining unrecognized compensation on the awards as of the modification date and (ii) the increase in fair value of the RSUs as a result of the modification, over the remaining two-year vesting period of the RSUs. |
Notes to Consolidated Financial Statements
| (4) | Represents the following. |
| | 2021 | | | 2020 | |
Vested when granted | | | 386,403 | | | | 386,403 | |
Vested upon completion of service conditions, common stock issued at vesting | | | 572,500 | | | | - | |
Vested upon completion of service, common stock issuance deferred | | | 450,400 | | | | - | |
Outstanding at December 31 | | | 1,409,303 | | | | 386,403 | |
| (5) | In 2021 and 2020, we reversed expense recognized in prior periods on forfeited RSU shares in the amounts indicated in the unrecognized stock compensation column. |
As of December 31, 2021, issuance of 1,209,092 shares of common stock subject to certain RSUs, 865,052 of which are vested, is deferred to the date the holder is no longer providing service to RiceBran Technologies.
In addition, as of December 31, 2021, we have outstanding RSUs for 1,000,000 shares of common stock, the vesting of which is subject to our shareholders approving an increase in the total shares of common stock authorized for issuance under the 2014 Plan. The impacts of these RSUs are excluded from the table above as the RSUs are considered contingently issued.
Warrants
Prefunded Warrant was cashless exercised in its entirety in 2021 and we issued 2,307,498 shares of common stock upon the cashless exercise. Warrant activity, excluding activity related to the Prefunded Warrant, follows.
| | 2021 | | | 2020 | |
| | Shares Under Warrants | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life (Years) | | | Shares Under Warrants | | | Weighted Average Exercis e Price | | | Weighted Average Remaining Contractual Life (Years) | |
Outstanding at January 1 | | | 6,645,916 | | | $ | 0.98 | | | | 1.1 | | | | 7,532,280 | | | $ | 1.32 | | | | 1.9 | |
Granted (1) | | | 2,307,693 | | | | 1.00 | | | | 5.0 | | | | - | | | | NA | | | | NA | |
Cash exercised | | | (177,936 | ) | | | 0.96 | | | | 0.8 | | | | (12,948 | ) | | | 0.96 | | | | - | |
Cashless exercised (2) | | | - | | | | NA | | | | NA | | | | (215,740 | ) | | | 0.96 | | | | - | |
Expired | | | (25,000 | ) | | | 5.25 | | | | - | | | | (657,676 | ) | | | 5.25 | | | | - | |
Outstanding at December 31 (2) | | | 8,750,673 | | | $ | 0.98 | | | | 1.4 | | | | 6,645,916 | | | $ | 0.98 | | | | 1.1 | |
| (1) | Represents Warrant A and is classified as a liability in our consolidated balance sheets. The $1.00 per share exercise price as of December 31, 2021, is subject to adjustment in September 2022, and again in September 2023, if 110% of the 5-day volume weighted average price of our common stock is less than the then-current exercise price. |
| (2) | We issued 54,629 shares of common stock upon the cashless exercise of the warrants in 2020. |
| (3) | Under the terms of certain outstanding warrants, the holders may elect to exercise the warrants under a cashless exercise feature. As of December 31, 2021, warrant holders may elect to exercise cashless warrants for 3,484,675 shares of common stock at an exercise price of $0.96 per share and 2,307,696 shares of common stock at an exercise price of $1.00 per share. If we register for resale the shares subject to warrants, the holders of some of the warrants may no longer have the right to elect a cashless exercise. If we fail to maintain a registration statement for the resale of shares under certain other warrants, the shares under those warrants may again become exercisable using a cashless exercise feature. |
Notes to Consolidated Financial Statements
As of December 31, 2021, all outstanding warrants were exercisable. The following table summarizes information related to exercisable and outstanding warrants as of December 31, 2021.
Range of Exercise Prices | | | Shares Under Warrants | | | Weighted Average Exercise Price | | | Weighted Average Remaining Contractual Life (Years) | |
$ | 0.96 | | | | 6,392,980 | | | $ | 0.96 | | | | 0.1 | |
$ | 1.00 | (1) | | | 2,307,693 | | | | 1.00 | | | | 4.7 | |
$ | 2.00 | | | | 50,000 | | | | 2.00 | | | | 1.1 | |
| | | | | 8,750,673 | | | $ | 0.98 | | | | 1.4 | |
| (1) | Represents Warrant A and is classified as a liability in our consolidated balance sheets because the holder may elect cash settlement of this warrant in the event of a change of control. The $1.00 per share exercise price as of December 31, 2021, is subject to adjustment September 2022, and again in September 2023, if 110% of the 5-day volume weighted average price of our common stock is less than the then-current exercise price. |
In February 2022, warrants for the purchase of up to 6,142,980 shares of common stock with an exercise price of $0.96 per share, expired.
In the period from January 1, 2022 to March 17, 2022, we:
| ● | issued RSUs under the 2014 Plan to employees covering a total of 370,000 shares of our common stock. The shares subject to the RSUs vest over two years beginning March 2023, |
| ● | awarded 1,898,781 RSUs to employees that are subject to our shareholders approving an increase in the total shares of common stock authorized for issuance under the 2014 Plan, |
| ● | issued 224,751 shares of common stock upon the vesting of RSUs with an average grant date fair value of $0.91 per share. |
NOTE 11. INCOME TAXES
Deferred tax asset (liability) is comprised of the following (in thousands):
| | December 31 | |
| | 2021 | | | 2020 | |
Net operating loss carryforwards | | $ | 13,385 | | | $ | 11,473 | |
Stock options and warrants | | | 832 | | | | 576 | |
Property and equipment | | | 16 | | | | 50 | |
Intangible assets | | | 950 | | | | (9 | ) |
Capitalized expenses | | | 105 | | | | 85 | |
Other | | | 64 | | | | 135 | |
Operating right-of-use lease assets | | | (566 | ) | | | (652 | ) |
Operating right-of-use lease liabilities | | | 670 | | | | 763 | |
Net deferred tax assets | | | 15,456 | | | | 12,421 | |
Less: Valuation allowance | | | (15,456 | ) | | | (12,421 | ) |
Deferred tax asset (liability) | | $ | - | | | $ | - | |
We have determined it is more likely than not that our deferred tax assets will not be realized. Accordingly, we have provided a valuation allowance for deferred tax assets.
The following table summarizes the change in the valuation allowance (in thousands):
| | 2021 | | | 2020 | |
Vaulation allowances, beginning of year | | $ | 12,421 | | | $ | 8,687 | |
Net operating loss and other temporary differences | | | 2,926 | | | | 3,039 | |
Expiration of net operating losses and limitations | | | - | | | | (20 | ) |
Adjustment to deferred taxes | | | 67 | | | | (51 | ) |
Impact of state tax rate change | | | 42 | | | | 746 | |
Other adjusments | | | - | | | | 20 | |
Valuation allowance, end of year | | $ | 15,456 | | | $ | 12,421 | |
Notes to Consolidated Financial Statements
As of December 31, 2021, net operating loss (NOL) carryforwards for U.S. federal tax purposes totaled $50.1 million. NOLs generated after December 31, 2017, do not expire. Federal NOLs of $9.9 million expire at various dates from 2022 through 2037 and the remainder do not expire. NOL carryforwards for state tax purposes totaled $59.5 million at December 31, 2021, and expire at various dates from 2022 through 2041.
Our ability to utilize previously accumulated NOL carryforwards is subject to substantial annual limitations due to the changes in ownership provisions of the Internal Revenue Code (IRC) of 1986, as amended, and similar state regulations. Prior to 2020, we experienced several ownership changes as defined in IRC Section 382(g). In general, the annual limitation is equal to the value of our stock immediately before the ownership change, multiplied by the long-term tax-exempt rate for the month in which the ownership change occurred. Any unused annual limitation may generally be carried over to later years until the NOL carryforwards expire. Accordingly, we have reduced our NOL in the table above to reflect these limitations.
We are subject to taxation in the U.S. federal jurisdiction and various state and local jurisdictions. We record liabilities for income tax contingencies based on our best estimate of the underlying exposures. We are open for audit by the IRS for years after 2017 and, generally, by U.S. state tax jurisdictions after 2016.
Reconciliations between the amounts computed by applying the U.S. federal statutory tax rate to loss before income taxes, and income tax expense (benefit) follows (in thousands):
| | 2021 | | | 2020 | |
Income tax benefit at federal statutory rate | | $ | (1,875 | ) | | $ | (2,459 | ) |
Increase (decrease) resulting from: | | | | | | | | |
State tax benefit, net of federal tax effect | | | (605 | ) | | | (623 | ) |
Effect of change in state tax rate | | | (42 | ) | | | (746 | ) |
Change in valuation allowance | | | 3,035 | | | | 3,734 | |
Expirations of net operating losses and application of IRC 382 limitation | | | - | | | | 20 | |
PPP loan forgiveness, nontaxable | | | (376 | ) | | | - | |
Change in fair value of derivative warrant liability, nontaxable | | | (81 | ) | | | - | |
Other nondeductible expenses | | | 32 | | | | - | |
Adjustments to deferreds | | | (67 | ) | | | 51 | |
Other | | | - | | | | 42 | |
Income tax expense | | $ | 21 | | | $ | 19 | |
Based on an analysis of tax positions taken on income tax returns filed, we determined no material liabilities related to uncertain income tax positions existed as of December 31, 2021 or 2020. Although we believe the amounts reflected in our tax returns substantially comply with applicable U.S. federal, state and local tax regulations, the respective taxing authorities may take contrary positions based on their interpretation of the law. A tax position successfully challenged by a taxing authority could result in an adjustment to our provision or benefit for income taxes in the period in which a final determination is made.
NOTE 12. INCOME (LOSS) PER SHARE (EPS)
Basic EPS is calculated under the two-class method under which all earnings (distributed and undistributed) are allocated to each class of common stock and participating securities based on their respective rights to receive dividends. Our outstanding convertible preferred stock are considered participating securities as the holders may participate in undistributed earnings with holders of common shares and are not obligated to share in our net losses.
Diluted EPS is computed by dividing the net income attributable to RiceBran Technologies common shareholders by the weighted average number of common shares outstanding during the period increased by the number of additional common shares that would have been outstanding if the impact of assumed exercises and conversions is dilutive. The dilutive effects of outstanding options, warrants, nonvested shares of common stock and nonvested restricted stock units that vest solely on the basis of a service condition are calculated using the treasury stock method. The dilutive effects of the outstanding preferred stock are calculated using the if-converted method.
Notes to Consolidated Financial Statements
Below are reconciliations of the numerators and denominators in the EPS computations.
| | 2021 | | | 2020 | |
NUMERATOR (in thousands): | | | | | | | | |
Basic and diluted - net loss | | $ | (8,949 | ) | | $ | (11,730 | ) |
| | | | | | | | |
DENOMINATOR: | | | | | | | | |
Weighted average number of shares of shares of common stock outstanding | | | 47,105,673 | | | | 41,019,802 | |
Weighted average number of shares of common stock underlying vested restricted stock units | | | 633,275 | | | | 111,980 | |
Basic EPS - weighted average number of shares outstanding | | | 47,738,948 | | | | 41,131,782 | |
Effect of dilutive securities outstanding | | | - | | | | - | |
Diluted EPS - weighted average number of shares outstanding | | | 47,738,948 | | | | 41,131,782 | |
No effects of potentially dilutive securities outstanding were included in the calculation of diluted EPS for 2021 and 2020, because to do so would be anti-dilutive as a result of our net loss. Potentially dilutive securities outstanding during 2021 and 2020 included our outstanding convertible preferred stock, options, warrants, nonvested restricted stock units. Those potentially dilutive securities, further described in Note 10, could potentially dilute EPS in the future.
NOTE 13. FAIR VALUE MEASUREMENT
The fair value of cash and cash equivalents, restricted cash, accounts and other receivables, accounts payable, commodities payable and short-term debt approximated their carrying value due to shorter maturities. As of December 31, 2021, the fair value of our operating lease liabilities was approximately $0.2 million lower than their carrying values, based on current market rates for similar debt and leases with similar maturities (Level 3 measurements). As of December 31, 2021, the fair values of our long-term debt and finance lease liabilities approximated their carrying values, based on current market rates for similar debt and leases with similar maturities (Level 3 measurements).
The following tables summarize the fair values by input hierarchy of items measured at fair value on a recurring basis on our consolidated balance sheets (in thousands):
| | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
Derivative warrant liability | | $ | - | | | $ | - | | | $ | 258 | | | $ | 258 | |
Total liabilities at fair value | | $ | - | | | $ | - | | | $ | 258 | | | $ | 258 | |
The following tables summarize the changes in level 3 items measured at fair value on a recurring basis for 2021 (in thousands):
| | Fair Value as of Beginning of Period | | | Total Realized and Unrealized Gains (Losses) | | | Issuance of New Instruments | | | Net Transfers (Into) Out of Level 3 | | | Fair Value, at End of Period | | | Change in Unrealized Gains (Losses) on Instruments Still Held | |
Derivative warrant liability | | $ | - | | | $ | - | | | $ | 647 | | | $ | - | | | $ | 258 | | | $ | (389 | ) |
Total Level 3 fair value | | $ | - | | | $ | - | | | $ | 647 | | | $ | - | | | $ | 258 | | | $ | (389 | ) |
Notes to Consolidated Financial Statements
The derivative warrant liability relates to Warrant A, discussed further in Note 10. Warrant A is carried in our consolidated balance sheet as derivative warrant liability because the holder may elect cash settlement of this warrant in the event of a change of control. We estimated the fair value of Warrant A as of December 31, 2021, and at issuance, using the Black-Scholes value of a warrant with an exercise price of $1.00 per share. The changes in the estimated fair value of Warrant A are included in other income (loss) in our consolidated statements of operations. The following are the assumptions used in valuing Warrant A.
| | December 31, 2021 | | | September 30, 2021 | |
Assumed volatility | | | 69.5 | % | | | 71.0 | % |
Assumed risk free interest rate | | | 0.8 | % | | | 0.4 | % |
Expected life of options (in years) | | | 4.8 | | | | 5.0 | |
Expected dividends | | | - | | | | - | |
The fair value of Warrant A approximates the cash settlement the holder could elect to be paid in the event of a change in control. At December 31, 2021, a $0.10 increase in our stock price would have resulted in an approximate $130 thousand increase in the Black Scholes fair value of Warrant A.
NOTE 14. COMMITMENTS AND CONTINGENCIES
PPP Audit Contingency
As discussed in Note 9, the outstanding principal and related accrued interest on our PPP loan were completely forgiven in January 2021. The SBA may audit any PPP loan at its discretion through January 2027, six years after the date the SBA forgave the loan. The SBA may review any or all of the following when auditing a PPP loan: whether the borrower qualified for the PPP loan, whether the PPP loan amount was appropriately calculated and the proceeds used for allowable purposes, and whether the loan forgiveness amount was appropriately determined. We could be deemed ineligible for the PPP loan received in 2020 upon audit by the SBA. We believe the SBA’s stated intention is to focus its reviews on borrowers with loans greater than $2 million, thereby mitigating our future risk of an audit. The SBA continues to develop and issue new and updated guidance regarding required borrower certifications and requirements for forgiveness of loans made under the program.
Employment Contracts and Severance Payments
In the normal course of business, we periodically enter into employment agreements which incorporate indemnification provisions. While the maximum amount to which we may be exposed under such agreements cannot be reasonably estimated, we maintain insurance coverage, which we believe will effectively mitigate our obligations under these indemnification provisions. No amounts have been recorded in our financial statements with respect to any obligations under such agreements.
We have employment contracts with certain officers and key management that include provisions for potential severance payments in the event of without-cause terminations or terminations under certain circumstances after a change in control. In addition, vesting of outstanding nonvested equity grants would accelerate following a change in control.
Legal Matters
From time to time, we are involved in litigation incidental to the conduct of our business. These matters may relate to employment and labor claims, patent and intellectual property claims, claims of alleged non-compliance with contract provisions and claims related to alleged violations of laws and regulations. When applicable, we record accruals for contingencies when it is probable that a liability will be incurred, and the amount of loss can be reasonably estimated. Defense costs are expensed as incurred and are included in professional fees. While the outcome of lawsuits and other proceedings against us cannot be predicted with certainty, in the opinion of management, individually or in the aggregate, no such lawsuits and other proceedings had or are expected to have a material effect on our financial position or results of operations in 2021 and 2020, except for a contract dispute settled in 2020. During 2020, we recognized $0.8 million in cost of goods sold related to the resolution of that contract dispute.
Notes to Consolidated Financial Statements
NOTE 15. RELATED PARTY TRANSACTIONS
Our director, Ari Gendason, is an employee and senior vice president and chief investment officer of Continental Grain Company (CGC). As of the date of this filing, CGC owns approximately 20.6% of our outstanding common stock. We have agreed that in connection with each annual or special meeting of our shareholders at which members of our board of directors are to be elected, or any written consent of our shareholders pursuant to which members of the board of directors are to be elected, CGC shall have the right to designate one nominee to our board of directors.
NOTE 16. FAILURE TO COMPLY WITH NASDAQ LISTING REQUIREMENTS
On September 15, 2021, we received a notification letter from The Nasdaq Stock Market LLC (Nasdaq) indicating that we have failed to comply with the minimum bid price requirement of Nasdaq Listing Rule 5550(a)(2). Nasdaq Listing Rule 5550(a)(2) requires that companies listed on the Nasdaq Capital Market maintain a minimum bid price of $1.00. To regain compliance with this listing rule, the closing bid price of our common stock had to be at least $1.00 for a period of Nasdaq discretion, of at least 10, but not to exceed 20, consecutive business days. As of the date of this filing, we had not regained compliance with the minimum bid price requirement, however, we were eligible for and obtained from Nasdaq an additional 180-day compliance period, which extends through September 12, 2022. We are committed to taking actions that would enable us to regain compliance, including, if necessary, completing a reverse split of our common stock to increase its share price above the $1.00 minimum bid price.
PART II
(continued)