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RICEBRAN TECHNOLOGIES - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

August 12, 2014

The following discussion and analysis addresses material changes in the results of operations and financial condition of RiceBran Technologies and subsidiaries for the periods presented. This discussion and analysis should be read in conjunction with the consolidated financial statements, the related notes thereto, and management's discussion and analysis of results of operations and financial condition included in our Annual Report on Form 10-K, for the year ended December 31, 2013. In 2013 and the first half of 2014, we experienced losses and negative cash flows from operations on a consolidated basis which raises substantial doubt about our ability to continue as a going concern. We believe that we now have adequate financial resources to operate our business for the next year and we will be able to obtain additional funds to operate our business, should it be necessary. However, there can be no assurances that our efforts will prove successful. The accompanying consolidated financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern. We closed an underwritten public offering in December 2013 and completed a private placement offering in March 2014 which together provided us with net proceeds in excess of $12.0 million, allowing us to make additional investments in our Brazilian operations and provide cash for corporate purposes. In January 2014, we completed the acquisition of H&N Distribution Inc., now operating as Healthy Natural, Inc. (H&N), the operations of which we expect to be accretive to cash flows. Our Brazilian subsidiary, Irgovel, shut down operations in the first quarter of 2014 to complete the final stages of a major capital expansion. The shutdown and capital expenditures have been a drain on cash. Operations at Irgovel started to normalize during the second quarter of 2014, such that Irgovel will then begin trending upward towards its newly increased capacity and begin generating cash from operations. We are a human food ingredient, nutritional supplement and animal nutrition company focused on value-added processing and marketing of healthy, natural and nutrient dense products derived from raw rice bran (RRB), an underutilized by-product of the rice milling industry. Using our bio-refining business model, we apply our proprietary and patented technologies and intellectual properties to convert RRB into numerous high value products including stabilized rice bran (SRB), rice bran oil (RBO), defatted rice bran (DRB), RiBalance (a complete rice bran nutritional package derived from further processing of SRB), RiSolubles (a highly nutritious, carbohydrate and lipid rich fraction of SRB), RiFiber (a fiber rich derivative of SRB), ProRyza rice bran protein-based products and a variety of other valuable derivatives extracted from these core products. Our target markets are natural food, functional food, nutraceutical supplement and animal nutrition manufacturers, wholesalers and retailers, both domestically and internationally. We have two reportable operating segments: (i) USA segment, which manufactures and distributes SRB in various granulations along with Stage II products (described below) and derivatives and formulates and co-packages products, and (ii) Brazil segment, which extracts crude RBO and DRB from rice bran, which are then further processed into fully refined rice bran oil for sale internationally and in Brazil, compounded animal nutrition products for horses, cows, swine, sheep and poultry and a number of valuable human food and animal nutrition products derivatives and co-products. In addition we incur corporate and other expenses not directly attributable to operating segments, which include costs related to our corporate staff, general and administrative expenses including public company expenses, intellectual property, professional fees, and other expenses. No corporate allocations, including interest, are made to the operating segments. The combined operations of our USA and Brazil segments encompass our bio-refining approach to processing RRB into various high quality, value-added constituents and finished products. Over the past decade, we have developed and optimized our proprietary bio-refining processes to support the production of healthy, natural, hypoallergenic, gluten free, and non-genetically modified ingredients and supplements for use in human meats, baked goods, cereals, coatings, health foods, nutritional supplements, nutraceuticals and high-end animal nutrition and health products. The USA segment produces SRB inside two supplier rice mills in California and one owned facility in Louisiana. A facility located in Lake Charles, Louisiana has been idle since May 2009. The USA segment also includes our Dillon, Montana Stage II facility which produces our Stage II products RiSolubles (a highly nutritious, carbohydrate and lipid rich fraction of SRB), RiFiber (a fiber rich derivative of SRB), RiBalance (a complete rice bran nutritional package derived from further processing SRB), and ProRyza, a family of protein products. Stage II refers to the proprietary processes run at our Dillon, Montana facility and includes products produced at that facility using our patented processes. In January 2014, we completed the acquisition of H&N which has been integrated into our USA segment. H&N is a formulator and co-packer of products targeted at customers in the direct marketing, internet sales and retail distribution markets, which operates a facility in Irving, Texas. H&N serves the natural products, nutritional supplement and nutraceutical and functional food (NFF) sectors. We acquired H&N as part of our strategy to vertically integrate our business in order to leverage our proprietary and patented technologies. Certain manufacturing facilities included in our USA segment have proprietary processing equipment and patented technology for the stabilization and further processing of rice bran into finished products. In the three and six months ended June 30, 2014, approximately 85% of USA segment revenue was from sales of human food products and approximately 15% was from sales of animal nutrition products. 24 -------------------------------------------------------------------------------- The Brazil segment consists of the consolidated operations of Nutra SA, whose only operating subsidiary is Irgovel, located in Pelotas, Brazil. Irgovel manufactures RBO and DRB products for both the human ingredient and animal nutrition markets in Brazil and internationally. In refining RBO to an edible grade, several co-products are obtained. One such product is distilled fatty acids, a valuable raw material for the detergent industry. Irgovel recently started production of rice lecithin, which has application in human nutrition, animal nutrition and industrial applications. DRB is compounded with a number of other ingredients to produce complex animal nutrition products which are packaged and sold under Irgovel brands in the Brazilian market, sold as a raw material for further processing into human food ingredients or sold in bulk into the animal nutrition markets in Brazil and neighboring countries. In 2013, approximately 45% of Brazil segment product revenue was from sales of RBO products and 55% was from sales of DRB products. In the three and six months ended June 30, 2014, approximately 38% of Brazil segment product revenue was from sales of RBO products and 62% was from sales of DRB products, however Irgovel was shut down for a large portion of these periods to complete the final stages of a capital expansion project, and we expect product mix to return to historical levels in future periods.



Results of Operations

THREE MONTHS ENDED JUNE 30, 2014 and 2013

Consolidated net loss attributable to RiceBran Technologies shareholders for the three months ended June 30, 2014, was $15.1 million, or $3.52 per share, compared to a loss of $2.0 million, or $1.83 per share, for the three months ended June 30, 2013. Revenue and Gross Profit Revenues (in thousands): Three Months Ended June 30, % of % of Total Total 2014 Revenues 2013 Revenues Change % Change USA segment $ 6,748 59.5 $ 3,125 33.3



$ 3,623 115.9

Brazil segment 4,595 40.5 6,263 66.7



(1,668 ) (26.6 )

Total revenues $ 11,343 100.0 $ 9,388 100.0 $ 1,955 20.8



Consolidated revenues for the three months ended June 30, 2014, were $11.3 million compared to $9.4 million in the prior year period, an increase of $2.0 million, or 20.8%.

USA segment revenues increased $3.6 million, or 115.9% in 2014 compared to 2013. Animal feed product revenues decreased $0.5 million on lower volume while human nutrition product revenues increased $3.6 million, in large part due to increased sales in the human functional food market as a result of the acquisition of H&N. The decline in animal feed revenue was primarily attributable to reduced sales to two large, but low margin customers. We continue to focus on increasing the higher margin human nutrition product revenue in our mix of revenue. Brazil segment revenues decreased $1.7 million, or 26.6% in 2014 compared to 2013. Revenues decreased $0.8 million as a result of the 12.4% decline in the average exchange rate between these periods. On a local currency basis, prior to translation into US dollars, Brazil segment revenues decreased 22.9% year over year. Revenues were negatively affected by the Irgovel plant shut down that began in January 2014. The plant was shut down until April 2014 for expansion of the rice bran oil extractor, the key functional part of the plant, as well as installation of a new desolventizing/toasting system. Production began again in April 2014 on a limited basis. During the first half of the shutdown period, inventory available for sale was limited to certain animal feed products that utilized DRB that had been stockpiled prior to the shutdown. During the 2014 second quarter operations began to normalize, however production yields were limited by the quality of rice bran stored during shut down. Bran stored for long periods develops higher fatty acid levels requiring additional refinement. Bran normally is processed within days of receipt. 25



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Gross profit (in thousands): Three Months Ended June 30, Change Gross Gross in Gross 2014 Profit % 2013 Profit % Change Profit % USA segment $ 1,632 24.2 $ 767 24.5 $ 865 (0.4 ) Brazil segment (436 ) (9.5 ) 511 8.2



(947 ) (17.6 )

Total gross profit $ 1,196 10.5 $ 1,278 13.6



$ (82 ) (3.1 )

Consolidated gross profit in the second quarter of 2014 decreased $0.1 million, or 3.1 percentage points, to $1.2 million for the three months ended June 30, 2014, compared to $1.3 million in the prior year period. The USA segment gross profit increased $0.9 million, to $1.6 million in 2014, from $0.8 million in 2013. The improvement was attributable to increased human nutrition product revenues derived from the acquisition of H&N and the resulting shift in sales mix from animal to human. Raw bran prices were relatively flat quarter over quarter. Brazil segment gross profit declined $0.9 million, or 17.6 percentage points. As noted above, the Irgovel plant was shut down in January 2014. Production began again at the beginning of the second quarter on a limited basis and raw bran processing levels steadily increased throughout the second quarter of 2014. Processing levels are expected to reach approximately 150% of pre-expansion raw bran processing levels consistently in the third quarter of 2014. The amount of raw bran processed in the second quarter of 2014 was significantly lower than in the second quarter of 2013.



Operating Expenses (in thousands):

Three Months Ended June



30, 2014

Corporate USA Brazil



Consolidated

Selling, general and administrative $ 1,338$ 1,054$ 1,023

$ 3,415 Depreciation and amortization 14 559 186 759 Total operating expenses $ 1,352$ 1,613$ 1,209$ 4,174 Three Months Ended June 30, 2013 Corporate USA Brazil Consolidated



Selling, general and administrative $ 919$ 444$ 897

$ 2,260 Depreciation and amortization 5 118 195 318 Intersegment fees (56 ) - 56 - Total operating expenses $ 868$ 562$ 1,148$ 2,578 Favorable (Unfavorable) Change Corporate USA Brazil Consolidated Selling, general and administrative $ (419 )$ (610 )$ (126 )$ (1,155 ) Depreciation and amortization (9 ) (441 ) 9 (441 ) Intersegment fees (56 ) - 56 - Total operating expenses $ (484 )$ (1,051 )$ (61 )$ (1,596 )



Consolidated operating expenses were $4.2 million for the second quarter of 2014, compared to $2.6 million for the second quarter of 2013, an increase of $1.6 million.

Corporate segment selling, general and administrative expenses (SG&A) increased $0.4 million. Bonus expense increased $0.1 million and the remainder related to additional legal, financial advisor and investor relations costs. 26 -------------------------------------------------------------------------------- USA segment SG&A expenses increased $0.6 million. Additional expenses from the operations of H&N, acquired in January 2014 were $0.1 million. The remainder of the increase related to increased bonus accruals and travel expense.



Brazil segment SG&A increased $0.1 million related to bonuses for obtaining capital expansion targets.

USA segment depreciation and amortization expense increased $0.4 million due to amortization of a customer relationship intangible asset of $3.3 million established in January 2014 upon the acquisition of H&N. Amortization of the intangible is being taken over a three year period.



Other Income (Expense) (in thousands):


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Source: Edgar Glimpses


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