During
December 2008, the Audit Committee (the "Audit Committee"), which is composed of
independent outside directors, of the Board of Directors of NutraCea (the
"Company") commenced an internal review of certain matters with respect to the
Company's accounting and reporting practices, including the appropriateness
and/or timing of recognition of revenues from certain transactions in 2007, and
the adequacy of internal control over financial reporting and disclosure
controls and procedures. The Audit Committee retained independent
outside counsel and forensic accounting consultants to assist in the
investigation.
As a
result of the preliminary findings of the investigation, the Board of Directors
of the Company has determined, based on the recommendation of the Audit
Committee, that the Company should restate its financial statements for the year
ended December 31, 2007, including the associated second, third and fourth
fiscal quarters in 2007 and all of the quarters in 2008. Accordingly,
on February 17, 2009, the Board of Directors determined, based on the
recommendation of the Audit Committee, that the Company's previously issued
financial statements included in filings with the Securities and Exchange
Commission for these periods should no longer be relied
upon. Similarly, related press releases, reports and
shareholder communications describing the Company's financial statements for
these periods should no longer be relied upon.
Based on
its review to date, the Audit Committee has determined that the Company
improperly recognized revenue on two transactions in 2007 with entities that are
not currently customers of the Company.
The
Company recognized revenue in the second quarter of 2007 on a $2.6 million sale
of its Dr. Vetz PetFlex brand product with respect to which the applicable
criteria for revenue recognition were not met. Based upon facts
discovered during the Audit Committee investigation, the Company has now
concluded that a $1.0 million down payment received by the Company in that
transaction was provided to the purchaser through a loan from a person who at
the time was a consultant to and a former officer of NutraCea, and that the
evidence originally relied upon to determine and support the purchaser’s ability
to pay the remaining $1.6 million receivable balance was subsequently determined
to be inaccurate.
The
Company also determined that a $2.0 million sale of its RiceNShine product in
December 2007 did not meet accounting requirements for recognition of revenue in
bill and hold transactions and that the transaction should not have been
recognized as revenue in the Company’s 2007 results. However, the
Company expects that the transaction and revenues from the transaction will be
recognized in the Company’s results for 2008 and possibly 2009.
Based on
the findings of the Audit Committee's investigation to date, the Company
currently estimates that $4.6 million of the approximately $22.2 million of
previously reported revenue for 2007 is expected to be affected by the
restatement. With respect to the transaction in the second quarter of
2007, approximately $2.6 million of the adjustment is not expected to be
recorded as revenue. However, with respect to the Company’s reported
results for the 2007 year, when the purchaser did not pay the $1.6 million
receivable balance, the Company established an $800,000 reserve against the
receivable balance in the third quarter of 2007 and an additional reserve of
$800,000 in the fourth quarter of 2007. That reserve is expected to
be reversed, which would reduce the Company’s reported expense for 2007 by $1.6
million.
With
respect to the December 2007 transaction, the Company expects that approximately
$2.0 million of the adjustment for 2007 will be reversed and will be recorded as
revenue during 2008 and potentially in 2009, when the criteria for the
recognition of revenue was ultimately met, resulting in an increase in reported
revenue for those quarters compared to previously reported
results. The Company is still evaluating the amounts that will be
recorded in those quarters.
The
Company preliminarily estimates that the adjustments will also (i) increase
the net loss in 2007 by approximately $1.1 million, (ii) decrease the net
loss in the reported periods of 2008 and 2009 by an amount that the Company has
not yet determined, and (iii) reflect a deferred liability of $1.0 million
pending resolution of certain issues relating to the $1.0 million down payment
provided in connection with the Dr. Vetz PetFlex transaction in the second
quarter of 2007 for which the Company has determined no revenue should have been
recognized. However, as the Audit Committee's review is ongoing, this
information is subject to change based upon the final findings of the
investigation and completion of the audit and review of the Company's restated
financial statements by its independent registered public accounting firm, and
the cumulative effect of the adjustments could change in such restated financial
statements.
The
Company has discussed these preliminary findings and the matters disclosed in
this Item 4.02(a) with Perry-Smith LLP, the Company's independent registered
accounting firm.
The
Company and the Audit Committee are continuing to review and assess the
preliminary findings of the investigation and are also assessing the effect of
the restatement on the Company's internal control over financial reporting and
its disclosure controls and procedures. Further investigation and
assessment may result in additional matters that require restatement for the
periods referenced above or for additional fiscal periods. The
Company will not reach a final conclusion on the restatement's effect on
internal controls and disclosure controls and procedures until completion of the
review and restatement process. The Company expects to implement
remediation steps in connection with the ultimate conclusion of the
investigation.
The
Company is working diligently to complete the restatement of its prior period
financial statements. The Company can give no assurance as to the
ultimate findings of its ongoing review or the impact of these matters on the
Company's results of operations or financial condition as reported for prior
periods or as expected to be reported for its recently completed fiscal
year.
NutraCea
received a letter from the Securities and Exchange Commission (the “Commission”) in mid-January
2009 indicating that it has opened an informal inquiry, and also received a
subsequent request for documents in February 2009 requesting that NutraCea
voluntarily produce documents relating to a number of transactions, including
the transactions mentioned above. NutraCea is in the process of
responding to the request for documents. NutraCea voluntarily
reported to the Securities and Exchange Commission that the Audit Committee was
conducting an internal review of certain matters.
This
Report includes “forward looking statements” that involve uncertainties and
risks. There can be no assurance that actual results will not differ
from the Company’s expectations or any results expressed or implied by such
forward looking statements. Factors which could cause materially
different results include, among others, the risk that the final conclusion of
the Audit Comitteee’s investigation could result in a determination that the
effect of the issues under review are materially greater or lesser than the
Company currently believes to be the case; the risk that the investigation could
take longer than expected because of unanticipated issues; the risk that these
matters could adversely affect the Company’s ability to remain current in its
filings with the Commission; additional issues that may arise in connection with
the Audit Committee’s ongoing investigation or the audit by the Company’s
independent public accounting firm; risks of damage to the Company's business
and reputation arising from these matters; risks arising from the Commission's
informal inquiry or other possible litigation or regulatory
action; and other risks and uncertainties discussed more fully in the
Company’s SEC filings, including those discussed under Item 1A, “Risk Factors,”
in the Company’s annual report on Form 10-K for the year ended December 31,
2007, and in subsequent quarterly reports on Form 10-Q. The Company
disclaims any obligation to update or correct any forward-looking statements
made herein due to the occurrence of events after the issuance of this report,
except as required under federal securities laws.