HONG YUAN HOLDING GROUP - Annual Report: 2009 (Form 10-K)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2009
Or
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 333-126378
Cereplast, Inc.
(Exact name of registrant as specified in its charter)
| Nevada | 91-2154289 | |
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| 300 Continental Blvd., Suite 100 | ||
| El Segundo, California | 90245 | |
| (Address of principal executive office) | (Zip Code) |
(310) 676-5000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: [NONE]
Securities registered pursuant to Section 12(g) of the Act: [NONE]
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that
the registrant was required to submit and post such files. Yes o No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K Section 229.405 is not contained herein, and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definition of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Securities Exchange Act.
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The aggregate market value of the voting common stock held by non-affiliates of the
registrant, based upon the closing sale price of the Common Stock on June 30, 2009 was
approximately $25,987,596.
As of March 18, 2010, the Company had outstanding 9,877,976 shares of Common Stock, $0.001 par
value.
Table of Contents
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| Exhibit 31.1 | ||||||||
| Exhibit 32.1 | ||||||||
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STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
In this annual report, references to “Cereplast, “CERP”, “the Company,” “we,” “us,” and “our” refer
to Cereplast, Inc. Except for the historical information contained herein, some of the statements
in this Report contain forward-looking statements that involve risks and uncertainties. These
statements are found in the sections entitled “Business,” “Management’s Discussion and Analysis and
Analysis of Financial Condition and Results of Operations” and “Risk Factors.” They include
statements concerning: our business strategy; expectations of market and customer response;
liquidity and capital expenditures; future sources of revenues; expansion of our proposed product
line; and trends in industry activity generally. In some cases, you can identify forward-looking
statements by words such as “may,” “will,” “should,” “expect,” “plan,” “could,” “anticipate,”
“intend,” “believe,” “estimate,” “predict,” “potential,” “goal,” or “continue” or similar
terminology. These statements are only predictions and involve known and unknown risks,
uncertainties and other factors, including, but not limited to, the risks outlined under “Risk
Factors,” that may cause our or our industry’s actual results, levels of activity, performance or
achievements to be materially different from any future results, levels of activity, performance or
achievements expressed or implied by such forward-looking statements. For example, assumptions that
could cause actual results to vary materially from future results include, but are not limited to,
our ability to successfully develop and market our products to customers; our ability to generate
customer demand for our products in our target markets; the development of our target markets and
market opportunities; our ability to manufacture suitable products at competitive cost; market
pricing for our products and for competing products; the extent of increasing competition;
technological developments in our target markets and the development of alternate, competing
technologies in them; and sales of shares by existing shareholders. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future
results, levels of activity, performance or achievements. Unless we are required to do so under US
federal securities laws or other applicable laws, we do not intend to update or revise any
forward-looking statements.
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PART I
| Item 1. | Business |
GENERAL
History
On January 6, 2010, we filed an
amendment to our certificate of incorporation to effect a 1-fo-40 reverse stock split of
our outstanding common stock.
Overview
We have developed and are commercializing proprietary bio-based resins through two complementary
product families: Cereplast Compostables® Resins which are renewable, ecologically sound substitute
for petroleum-based plastics and Cereplast Hybrid® Resins, which replace up to 50% of the
petroleum-based content of traditional plastics with materials from renewable resources. Our
resins aim to be competitively priced compared to petroleum-based plastic resins and can be
converted into finished products using conventional manufacturing equipment without significant
additional capital investment by downstream converters.
The demand for non-petroleum based, clean and renewable sources for materials, such as bioplastics,
and the demand for compostable/biodegradable products are being driven globally by a variety of
factors, including fossil fuel price volatility, energy security and environmental concerns. These
factors have led to increased spending on clean and renewable products by corporations and
individuals as well as legislative initiatives at the local and state level.
We are a full-service resin solution provider uniquely positioned to capitalize on the rapidly
increasing demand for sustainable and environmentally friendly alternatives to traditional plastic
products.
We primarily conduct our operations through three product families:
| • | Cereplast Compostables Resins® are renewable, ecologically-sound substitutes for petroleum-based plastics targeting primarily single-use disposables and packaging applications. We offer 17 commercial grades of Compostables Resins in this product line. These resins are compatible with existing manufacturing processes and equipment making them a ready substitute for traditional petroleum-based resins. We commercially introduced our Compostables line in November 2006. |
| • | Cereplast Hybrid Resins® replace up to 50% of the petroleum content in conventional plastics with bio-based materials such as industrial starches sourced from plants. The Hybrid Resin line is designed to offer similar properties to traditional polyolefins such as impact strength and heat deflection temperature, and is compatible with existing converter processes and equipment. Hybrid Resins provide a viable alternative for brand owners and converters looking to partially replace petroleum-based resins in durable goods applications. Hybrid Resins address this need in a wide range of markets, including automotive, consumer goods, consumer electronics, medical, packaging, and construction. We commercially introduced our first grade of Hybrid Resin, Hybrid 150, at the end of 2007. We currently offer two commercial grades in this product line. |
| • | Cereplast Algae Plastics™. In October 2009, we announced that we have been developing a new technology to transform algae into bioplastics and intend to launch a new family of algae-based resins that will complement the company’s existing line of Compostables & Hybrid resins. Although we do not expect this new technology to become commercial before the end of 2010 or early 2011, it remains an important development as we believe that the potential open by algae is quite substantial. Cereplast algae-based resins could replace in a first step 50% or more of the petroleum content used in traditional plastic resins. Currently, Cereplast is using renewable material such as starches from corn, tapioca, wheat and potatoes and Ingeo® PLA. Recently the algae production business has attracted a lot of attention when Exxon announced a $600 million investment in Synthetic Genomics and BP’s $10 million investment in Martek Biosciences. The Company retains that algae is a very attractive feedstock as it does offer a low carbon footprint alternative and at the same time could be accessible in very large quantity. We also have a future plan to create algae plastic made of 100% algae component abandoning any reliance on fossils fuels. |
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Business Strengths
Our competitive strengths position us well in the markets we choose to serve and reinforce our
ability to execute our substantial growth plans.
Technology Leadership and Processing Expertise. We are a technology leader in the development of
bio-based resins. As of December 31, 2009, our intellectual property includes 30 formulation
patents and pending patent applications on a worldwide basis. Our unique formulation technology
and proprietary manufacturing expertise, in-depth customer and product knowledge and patent
portfolio provide us with a strong competitive position. We leverage our expertise toward the
design and adoption of new resins that can be rapidly commercialized by our customers.
Competitive Pricing with Traditional Plastic. Our bio-resins aim to be priced as competitively as
possible to petroleum-based plastic alternatives. We have the capability to work with multiple
polymer families and sustainable additive families when manufacturing our resins. This gives us
the ability to effectively source abundant and low-cost, renewable natural resources from various
sources including industrial starches, PLA, PHA, recycled bioplastic polymers and other bio-based
virgin polymers. The flexibility to continuously choose between various raw materials as market
prices change allows us to consistently be more price competitive with traditional petroleum-based
alternatives than many other bio-based competitors. We feel this unique breadth of feedstock
options and pricing leadership commitment will further market adoption of our products as demand
for renewable and clean alternatives to petroleum-based plastics increases in the future and as
bio-based alternatives improve in performance and cost.
Scalable and Low-Cost Manufacturing Platform. Our proprietary process to manufacture our resins is
modular and scalable in nature, which we believe will allow us to readily expand manufacturing
capacity at relatively low incremental cost. Our capital requirement is approximately $6 million
for every additional 50 million pounds of capacity. Our manufacturing equipment can be used for
both the Cereplast Compostables® and Cereplast Hybrid Resins® lines interchangeably. All of the
manufacturing equipment we are installing today is readily available from multiple manufacturers.
Our new facility in Seymour, Indiana, which is currently mechanically completed and started
production on March 1, 2010, will operate at manufacturing costs and a logistics scale comparable
to traditional plastics compounding leaders. The Seymour location competiveness is supported
further by its attractive location close to feedstock sources and major plastics converters. Part
of the Company strategy is to enter into a partnership agreement with large third party compounders
around the world to expand manufacturing capability and make it more flexible and cost efficient.
Close Consultative Relationship with Customers. We are a solution provider to both brand owners
and converters. We have built a team of skilled technologists with experience in the design and
performance characteristics of our resins. Our formulation, processing and dispersion technologies
allow us to create proprietary bio-resin blends to meet the specific needs of our converter clients
for various end products. We work closely with our customers to understand their needs and develop
solutions to address their customer base. Our market reach continues to expand and develop beyond
the United States to include Europe, Latin America and Asia.
Highly Experienced Management and Technical Team. Senior management has extensive experience
developing, manufacturing, marketing and selling plastics and specialty chemicals. This team is
composed of veterans from the bioplastics, specialty chemicals, traditional plastics and process
engineering industries. In bioplastics alone, our team has over 75 years of cumulative experience
despite the young state of market development. Our CEO is the founder of the Biodegradable Products
Institute (BPI) and the 2010 Chair of the Society of Plastic Industry Bioplastic Council.
Business Strategy
Target High-Growth Segments with Commercial Products. We believe that bioplastics will continue to
take market share from petroleum-based plastics as technologically advanced and commercially
feasible alternatives are offered to consumers. In 2007, the compostable biodegradable bioplastic
market was estimated to be greater than 540 million pounds. BCC Research estimates this market will
grow to 1.2 billion pounds by 2012, a compounded annual growth rate of 17%. We believe that the
bioplastics market share will continue to grow rapidly as these resins become increasingly viable
due to improving supply and performance characteristics, growing environmental concerns regarding
petroleum-based plastics and future concerns regarding oil prices and supply uncertainty.
Closely support converter partners and brand owners in the adoption of bio-based plastics to expand
our customer base. We develop close working relationships with our customers that enable us to
provide solutions and identify opportunities to employ our products. Our strategy is to work
closely with both converters and brand owners through a product push and demand pull process. For
converters, the sales process is more technical in nature as they focus on the ability to utilize
our resins in their traditional manufacturing processes. Brand owners are following the “green”
trend and looking for ways to make packaging and other products more environmentally friendly and
develop a “green” identity with consumers while satisfying performance and cost requirements.
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More than 235 companies have requested and been provided with samples of the Company’s bioplastic
resin. Ninety-five customers have purchased resin for trials and testing. Of these, 65 customers
have advanced to prototype testing and qualification of more than
110 different product applications. Twenty customers – including Alcoa, Genpak, Innoware, Penley,
Solo, Cadaco, Jatco, WNA, Dentek, CSI- Cosmolab, and Pace Industries – have commercialized and
introduced 90 different bioplastic products using the Company’s resin.
Expand manufacturing capabilities. The Company has mechanically completed a new 80 million pound
bioplastic production facility in Seymour, Indiana. The location of the Seymour plant puts it in
close proximity to various raw material sources, and provides an ideal platform for further
expansion. The relocation of all core manufacturing activities from Hawthorne, California to the
Indiana facility was completed by March 1, 2010. The combination of greater scale, enhanced
manufacturing assets, improved logistics and lowered input costs (such as labor and electricity)
will dramatically improve operating costs and quality to competitive benchmark levels. Subsequent
expansion plans will depend on growth in market demand, but the Seymour site offers ample
infrastructure for development of capacity to a level of 500 million pounds per annum. However the
Company strategy is to enter into partnership agreements with large third party compounders around
the world to expand manufacturing capability and make it more flexible and cost efficient.
Strengthen our product leadership by developing new formulations and product lines in conjunction
with customer demands. We continuously work to strengthen our position in new and more cost
competitive resin formulations. We interact with our customers and suppliers not only to improve
the performance and broaden the applications for our resins, but also to reduce the material and
manufacturing costs of our products. In addition, we maintain a rigorous research and development
effort that continues to yield opportunities to broaden and extend our product lines. We continue
to develop and refine properties in our resins that have high value for our customers including
sustainability, compostability, better thermal properties and printability.
Pursue Strategic Alliances. We continue to pursue strategic business relationships that complement
our product portfolio, strengthen our competitiveness or create a new channel to market and
increase our rate of growth. We have built strategic partnerships with suppliers, distributors,
converters and brand owners to develop and commercialize our products and to bring them to market
more quickly than we otherwise could on our own. As a result of these efforts, Cereplast has
strong or rapidly maturing positions in several key fabrication technologies/industries including
thermoforming, injection molding, extrusion coating and resin foaming.
Industry Overview and Outlook
The traditional plastics market is large, operates on a global scale and is comprised of a number
of different polymers and resins. It includes a wide range of commodity polymers and resins as well
as numerous lower volume, higher performance polymers and resins targeted at specific finished
product applications. Plastics are sold in a variety of industries including consumer products,
packaging, automotive, construction, and electronics. The ubiquitous nature of plastic can be
attributed to its durability, cost, adaptability and functionality, which have allowed it to meet a
variety of end user requirements including increased health and safety requirements as well as
consumer demand for enhanced appearance and packaging.
The global plastics market targeted by Cereplast resins represents over 100 billion pounds per year
with worldwide plastic demand recently estimated to be growing at 5% annually. Bioplastics
currently represent a tiny percentage of the overall plastic market. The worldwide market for
biodegradable bioplastics was estimated to be greater than 500 million pounds in 2007, or less than
1% of our targeted traditional plastics markets. Based on recent consulting reports, the demand
for bioplastics is estimated to be growing at 17% per annum reaching 1.2 billion pounds by 2012.
Beyond the growth potential for fully biodegradable/compostable bioplastics, “hybrid” materials
that are sophisticated blends of traditional plastics with sustainable polymers and additives (such
as Cereplast Hybrid Resins® that incorporate natural starches) open up additional markets. By
offering enhanced performance characteristics (such as durability) when compared with fully
compostable resins, yet delivering a step change in improved feedstock sustainability, these resins
open up very large add-on market opportunities.
Market Opportunity
Greater Environmental Concerns. Bioplastics are positioned to benefit from powerful secular trends
in favor of reducing the environmental impact of everyday materials. It is estimated that the U.S.
generates 210 million tons of trash per year, with approximately 20% of solid municipal waste
coming from plastics. According to the U.S. Environmental Protection Agency, less than 6% of waste
plastic is recycled. There is concern among the scientific community that global climate change
poses an environmental risk that is attributed to an increase in carbon dioxide emissions.
According to an EF Consumer Survey, 88% of consumers in the United States believe that
environmental issues are important or very important. Furthermore, local governments and large
corporations are encouraging the replacement of conventional plastics with alternatives, including
bioplastics. Because of fossil fuel’s detrimental impact on the environment, individuals and
governments increasingly demand that material suppliers reduce their reliance on oil, curb
greenhouse gas emissions, and minimize the deposit of solid waste and plastics in the environment.
Bioplastics are now a preferred purchasing item under Federal government policy, and numerous local
governments have enacted or are considering outright bans on certain plastics or plastic articles.
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National Security Concerns. The United States consumes approximately 25% of worldwide oil
production while only accounting for 5% of the world’s population and 2% of the world’s oil
reserves. The majority of U.S. oil needs are met through imports, with a large portion coming from
potentially unstable areas of the world including the Middle East, Nigeria and Venezuela. It has
been suggested that the United States dependence on oil imports is an issue of national security.
The use of bioplastics has the ability to reduce U.S. petroleum consumption; approximately 7% of
the oil consumed in the United States is used for the production of plastic. Health and Safety
Concerns. Consumers have become increasingly concerned about the safety and health of plastics
materials that are used in their daily lives, particularly items that are in contact with children
(such as toys) or used in food packaging (such as water bottles). Several widely used petroleum
based resins including polycarbonates have been the subject of intense scientific and consumer
concerns and study regarding their consumer safety. These concerns, along with other examples of
tainted plastics and food products manufactured outside the United States, have lead to higher
interest in locally manufactured environmentally friendly alternatives such as bioplastics.
Our Resin Products
We have developed and are commercializing proprietary bio-based resins through two complementary
product families: Cereplast Compostables®, renewable, ecologically sound substitutes
for single-use petroleum-based plastics and Cereplast Hybrid Resins®, which replace up
to 50% of the petroleum-based content of durable petroleum-based plastics with materials from
renewable resources. Our Compostable and Hybrid Resins can be used in the following conventional
converting processes:
| • | Injection molding |
| • | Thermoforming |
| • | Blown film |
| • | Blow molding |
| • | Extrusion for profiles |
| • | Extrusion coating |
All of our resins are genetically modified organism (“GMO”)-free and FDA-compliant.
Cereplast Compostables® Resins
Traditional foodservice disposables, wraps, and paperboard are currently manufactured from a
variety of materials, including paper and plastic. We believe that each of these materials fail to
address fully all three of the principal challenges facing the foodservice industry; performance,
price, and environmental impact.
Our Compostable Resins are renewable substitutes for petroleum-based plastics targeting primarily
single-use disposables. We introduced our Compostable Resin line in November 2006 and currently
offer 11 commercial grades of Compostable Resins in our product line. We designed our Compostable
Resins to meet the same product specifications of traditional plastic resins and to be processed
with the existing equipment used by converters today. All Cereplast Compostables resins are
certified as biodegradable/compostable in the United States and Europe, meeting both US ASTM
standards and European EN requirements. As required to meet these standards, Cereplast
Compostables resins will compost in municipal or commercial composting facilities in less than 180
days and will not leave any harmful chemical residues.
Our Compostable Resins have been used to produce foodservice ware, including the first line of
fully biodegradable and compostable foodservice ware (plates, bowls, etc.), launched in late 2006.
In 2008, we continued to develop markets outside of foodservice ware where our resins have been
used to produce commercial quantities of products targeted at the health and beauty sector,
advertising materials, rigid food packaging, and consumer products. All of these products were
manufactured using our resins, which minimize the harmful impact on the environment without
sacrificing competitive price or performance.
Our Compostable Resins are primarily made from abundantly available, stable-cost natural raw
materials such as plant starch from annually renewable crops such as corn.
Cereplast Hybrid Resins®
Our Hybrid Resins replace up to 50% of the petroleum content in conventional plastics with
renewable materials such as starches from corn and tapioca. Hybrid Resins products can be easily
used by converter clients with no additional capital investment since our bio-resins can run on
existing equipment and can be processed at a lower manufacturing temperature than petroleum-based
plastics. Our Hybrid Resins target a balance between properties similar to traditional polyolefins
in areas such as heat deflection temperature, modulus and impact strength with a step change in
sustainability. Our Hybrid Resins are an effective, affordable alternative for brand
owners and converters interested in alternatives to petroleum-based resins and can be used in a
variety of applications and markets, including automotive, house wares, medical, cosmetic
packaging, and toys.
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Hybrid Resins were introduced in October 2007 and since then over 60 companies have requested
samples for testing and commercial development. We are one of only a few companies offering
bioplastics as substitutes for durable petroleum-based plastics for a wide range of market
applications.
At the end of 2009, eight customers had launched or were about to launch new products based upon
Hybrid Resins. Cereplast is the recipient of the 2009 Environment Award for Emerging Technology in
Materials from the Society of Plastics Engineers (“SPE”) for its work on Hybrid Resins.
Sales and Marketing
Our sales strategy is to work closely with converters and brand owners to educate on the benefits
of bioplastics through both a performance “push” and demand creation “pull” approach.
To achieve our objective of establishing our Resins as the preferred bio-based material for plastic
converters, we engage in the following marketing strategies:
| • | Targeted marketing aimed at the highest potential opportunities together with industry leaders in each market segment |
| • | Extensive commercial and technical support to customers to enhance their processing and product economics and speed to market |
| • | Assistance to our converter customers with end-user customer demand creation as well as product performance improvement and end user positioning |
| • | Selective extension of our global sales reach through our own resources and exclusive distributors |
| • | Pursuit of certain key market commercialization opportunities through exclusive, co-development agreements |
Manufacturing
Our manufacturing process for creating both Compostable and Hybrid Resins consists of blending the
component ingredients of a proprietary composite material in various industrial mixers, then
processing such ingredients through heat and extrusion with custom designed extruders. The resins
are then subjected to crystallization and drying and are packaged at our facility. We use readily
available natural raw materials, such as plant starches, as well as natural polymers such as Poly
Lactic Acid (PLA) for the Compostable Resins and traditional synthetic polymers such as
polypropylene for the Hybrid Resins. All the ingredients are blended in specific percentages
according to patented/proprietary formulations and are processed on traditional equipment using our
own technology.
Since our resins are engineered from readily available, stable-cost natural raw materials such as
plant starches, we believe our products can be manufactured cost-effectively at commercial
production levels without being substantively impacted by the fluctuating price of fossil fuels.
During 2009, we manufactured our bio-based resins at a 55,000 square foot leased facility in
Hawthorne, California. The Hawthorne facility was comprised of three manufacturing lines, a
research and development line, a lab area for resin testing, and a logistic area with storage for
raw materials and bio-based resins, as well as our corporate headquarters. All the production
lines and manufacturing equipment was transported to our Seymour facility in January-February 2010.
Our Seymour, Indiana site is a 105,000 square foot leased facility located on 12.4 acres. This
facility offers 14 truck loading docks and is in the process of being connected to rail service.
With the 2010 start-up of continuous production at our Seymour site, and subsequent consolidation
of all core manufacturing to this location, our manufacturing efficiency, quality and productivity
will be enhanced dramatically to competitive benchmark levels.
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Our production lines are versatile and could produce both Compostable and Hybrid Resins if
necessary. Our estimated name-plate production capacity in pounds by normally produced resin by
line is estimated as follows:
| Annual Compostable Resin | Annual Hybrid Resin | |||||||
| Production Capacity | Production Capacity | |||||||
Production Line 1 |
9,600,000 | — | ||||||
Production Line 2 |
11,200,000 | — | ||||||
Production Line 3 |
17,600,000 | — | ||||||
Production Line 4 (Seymour) |
— | 50,000,000 | ||||||
Total |
38,400,000 | 50,000,000 | ||||||
As of March 2010, only three lines have been installed in Seymour (IN) with an aggregate name plate
facility of about sixty eight million pounds (68,000,000 Lbs.). It is the plan of the Company not
to install the other lines until production requires additional capacity in Seymour.
Competition
The worldwide plastics market is large and comprised of many established players that have evolved
from chemical processing of oil and natural gas to produce non-biodegradable petroleum-based
resins. There are a number of large and established companies in this segment, including BASF, Dow
Chemical, Lyondell Basell, DuPont, and SABIC among many others. The price of conventional
petroleum-based plastic is volatile and dependent on petroleum and natural gas for feedstock.
These materials do not biodegrade, are not sustainable in terms of a natural carbon recycle loop,
and are major contributors to landfill usage.
While a number of companies have introduced or are in the process of introducing both bio-based
resins, polymers and/or compostable synthetic-based resins, including BASF, DuPont, Novamont,
NatureWorks and Telles, we view the threat from this competition as low. Just as a wide variety of
different petroleum-based polymers and resins currently serve the needs of the plastic markets, we
believe that the various bio-based resins and polymers offer different properties and are targeted
at different applications, making them more complementary and in turn broadening the overall
applications for bio-based and compostable plastics.
Our flexible manufacturing process allows us to use different bio-based polymers, as they become
commercially available, to manufacture our Compostable Resins and to use different synthetic
polymers to manufacture our Hybrid Resins. We believe that our two families of Compostable and
Hybrid resins possess a broad range of physical and thermal properties, can be processed on
traditional converting equipment, and can target both single use disposable and durable goods
applications in a sustainable and environmentally conscious manner as an alternative to
conventional petroleum-based plastics.
Government Regulation
The manufacture, sale and use of our resins are subject to regulation in the USA by the Food and
Drug Administration (the “FDA”). The FDA’s regulations are concerned with substances used in food
packaging materials. Thus, food and beverage containers are in compliance with FDA regulations if
the components used in the food and beverage containers are approved by the FDA as indirect food
additives for their intended uses and comply with the applicable FDA indirect food additive
regulations, or are generally recognized as safe for their intended uses and are of suitable purity
for those intended uses. We believe that our resins are in compliance with all FDA requirements
and do not require further FDA approval prior to the sale of our products. To assist us in this
field, we retain the services of legal counsel that specializes in FDA issues. We cannot be certain
however, that the FDA will always agree with their conclusions.
Research and Development
We have a well-developed research and development program that has enabled us to commercialize
multiple grades and families of bio-based resins. Expenditures related to our research and
development efforts were approximately $1,071,814 in 2008 and $313,078 in 2009. The reduction in
R&D expenditures was primarily due to the new cash control policy instituted during the fiscal year
2009.
Our approach to research and development follows our corporate strategy of being a “solution
provider”. As such, we are always working to find innovative alternatives to meet well understood
market demands. The primary goal of our research and development efforts is to:
| • | Improve the properties and processing window of our portfolio of resins |
| • | Broaden the suitable conversion technologies and market applications of our resins |
| • | Reduce the cost of our resins to improve their competitiveness with fossil fuel alternatives |
| • | Continue to introduce and patent new resins to satisfy the demand of our converter customers and protect our intellectual property |
| • | Explore new alternatives and source new natural raw materials as platforms for new types of bio-based resins |
| • | Explore the possibility to increase the renewable content in Hybrid resins |
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Patents, Licenses and Trade Secrets
We regard our copyrights, service marks, trademarks, trade dress, trade secrets and similar
intellectual property as critical to our success. In addition, we have filed for patent and
trademark protection for our proprietary technology. In 2008, we were granted registration of
several new trademarks in different international classes covering packaging and plastic resin; the
most significant marks are Cereplast Compostables® and Cereplast Hybrid
Resins® which have been registered in the United States and in several countries abroad.
Currently we have about 24 mark registrations on file in the United States of America and abroad.
We have filed for patent protection of our proprietary resin formulation technology in the United
States and abroad and currently have been granted or have filed a total of 48 patents worldwide.
As we continue to refine and develop additional bio-based resin formulation, we will actively seek
patent protection. We can give no assurance that any such patent will be granted for our resin
technology. We rely on trademark and copyright law, trade secret protection and confidentiality or
license agreements with our employees, customers, partners and others to protect our proprietary
rights.
History
We were incorporated on September 29, 2001 in the State of Nevada under the name of
Biocorp North America Inc. On March 18, 2005, we filed an amendment to our certificate of
incorporation to change our name to Cereplast, Inc.
Employees
Cereplast is a California Equal Employment Opportunity Employer. We have a total of 26 full-time
employees, broken down in the following functions: 6 in sales and marketing, 2 in research and
development, 9 in production/ logistics and quality control, 2 in finance and accounting, and 7
in general and administrative functions. Among our staff, many employees hold Ph.D. or Masters
Degrees in their respective fields. None of our employees are represented by a labor organization,
nor have we experienced any work stoppage. We consider our relations with our employees to be good.
Item 1A. Risk Factors
Risks Relating to Our Business
We have incurred net losses in the past.
We have a history of operating losses and have incurred significant net losses in each fiscal
quarter since our inception. For the years ended December 31, 2009 and 2008, we had gross revenues
of $2,751,445 and $4,599,303, respectively and incurred net losses of $6,072,948 and $12,748,701,
respectively. We expect to see positive cash flows by the end of the third quarter of 2010
due to our restructuring efforts in 2009 and the start up of continuous
production at our new bioplastic facility in Seymour, Indiana and subsequent consolidation of all
core manufacturing to this location as of March 1, 2010.
We will need to generate significant additional revenue to achieve profitability. While
management believes that we may achieve profitability in the second part of 2010, there can be no
assurance that we will. Our ability to generate and sustain significant additional revenues or
achieve profitability will depend upon numerous factors outside of our control, including the
market acceptance of our bio-based resins, future cost trends for our key raw materials and
competitive products, and general economic conditions.
We have a limited operating history, which makes it difficult to evaluate our financial
performance and prospects.
We only commenced the marketing and commercial sale of our products within the past three
years, and continue to develop and launch new bio-based resins. We are, therefore, subject to all
of the risks inherent in a new business enterprise, as well as those inherent in a rapidly
developing industry. Our limited operating history makes it difficult to evaluate our financial
performance and prospects. There can be no assurance that in the future we will generate revenues,
operate profitably or that we will have adequate working capital to meet our obligations as they
become due. Because of our limited financial history, we believe that period-to-period comparisons
of our results of operations will not be meaningful in the short term and should not be relied upon
as indicators of future performance.
In the current economic environment we will be required to raise additional capital to fund
our research and development efforts, marketing programs, as well as our continuing operations and
have been successful at doing so.
Our capital requirements depend on several factors, including:
| • | the speed at which our products are accepted into the market; |
| • | the level of spending to increase and enhance manufacturing capacity; |
| • | costs of recruiting and retaining qualified personnel; and |
| • | the level of research and development and market commercialization spending. |
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Additional capital will be required to continue to fund our research and development efforts
as well as our continuing operations. There can be no assurance that additional sources of
financing will be available on terms favorable to us, or at all. If adequate funds are not
available or are not available on acceptable terms, our ability to fund our research and
development efforts, take advantage of opportunities, develop products or technologies or otherwise
respond to competitive pressures will be impaired.
The commercial success of our business depends on the widespread market acceptance of products
manufactured with our bio-based resins.
Although there is a developed market for petroleum-based plastics, the market for plastics
produced with our environmentally friendly bio-based resins is still developing. Our success
depends on consumer acceptance of these plastic products as well as the success of the
commercialization of plastics produced with our bio-based resins by third parties. At present, it
is difficult to assess or predict with any assurance the potential size, timing and viability of
market opportunities for our product in the plastics market. The traditional plastics market
sector is well-established with entrenched competitors with whom we must compete. Pricing for
traditional plastics has been highly volatile in recent years, and moved rapidly from conditions
which are more supportive of bioplastics to environments which are less favorable (like the
present). While we expect to be able to command a premium price for our environmentally
sustainable products, a widening gap in the pricing for bioplastics versus petroleum-based plastics
may reduce the size of our addressable market.
We have only recently commenced industrial scale production of our bio-based resins and it is
possible that some of our bio-based resins or plastic products made with our bio-based resins may
not perform as well as other resins or traditional plastics.
Individual products produced with our bio-based resins may not perform as well as traditional
plastics. We are still developing and improving many of our bio-based resins and are continuing to
evaluate the performance in specific applications. If we fail to develop bio-based resins that
allow products made with our bio-based resins to perform comparably to traditional plastics, this
could cause consumers to prefer alternative products.
We may not be successful in protecting our intellectual property and proprietary rights and
may be required to expend significant amounts of money and time in attempting to protect these
rights. If we are unable to protect our intellectual property and proprietary rights, our
competitive position in the market could suffer.
Our intellectual property consists of patents, copyrights, trade secrets, trade dress and
trademarks. Our success depends in part on our ability to obtain patents and maintain adequate
protection of our other intellectual property for our technologies and products in the U.S. and in
other countries. The laws of some foreign countries do not protect proprietary rights to the same
extent as do the laws of the U.S., and many companies have encountered significant problems in
protecting their proprietary rights in these foreign countries. These problems may be caused by,
among other factors, a lack of rules and methods for defending intellectual property rights.
Our future commercial success requires us not to infringe on patents and proprietary rights of
third parties, or breach any licenses or other agreements that we have entered into with respect to
our technologies, products and businesses. The enforceability of patent positions cannot be
predicted with certainty. We will apply for patents covering both our technologies and our
products, if any, as we deem appropriate. Patents, if issued, may be challenged, invalidated or
circumvented. There can be no assurance that no other relevant patents have been issued that could
block our ability to obtain patents or to operate as we would like. Others may develop similar
technologies or may duplicate technologies developed by us.
We are not currently a party to any litigation with respect to any of our patent positions.
However, if we become involved in litigation or interference proceedings declared by the United
States Patent and Trademark Office, or other intellectual property proceedings outside of the U.S.,
we might have to spend significant amounts of money to defend our intellectual property rights. If
any of our competitors file patent applications or obtain patents that claim inventions or other
rights also claimed by us, we may have to participate in interference proceedings declared by the
relevant patent regulatory agency to determine priority of invention and our right to a patent of
these inventions in the U.S. Even if the outcome is favorable, such proceedings might result in
substantial costs to us, including, significant legal fees and other expenses, diversion of
management time and disruption of our business. Even if successful on priority grounds, an
interference proceeding may result in loss of claims based on patentability grounds raised in the
interference proceeding. Uncertainties resulting from initiation and continuation of any
patent or related litigation also might harm our ability to continue our research or to bring
products to market.
An adverse ruling arising out of any intellectual property dispute, including an adverse
decision as to the priority of our inventions would undercut or invalidate our intellectual
property position. An adverse ruling also could subject us to significant liability for damages,
prevent us from using certain processes or products, or require us to enter into royalty or
licensing agreements with third parties. Furthermore, necessary licenses may not be available to
us on satisfactory terms, or at all.
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Confidentiality agreements with employees and others may not adequately prevent disclosure of
trade secrets and other proprietary information.
To protect our proprietary technologies and processes, we rely on trade secret protection as
well as on formal legal devices such as patents. Although we have taken security measures to
protect our trade secrets and other proprietary information, these measures may not provide
adequate protection for such information. Our policy is to execute confidentiality and proprietary
information agreements with each of our employees and consultants upon the commencement of an
employment or consulting arrangement with us. These agreements generally require that all
confidential information developed by the individual or made known to the individual by us during
the course of the individual’s relationship with us be kept confidential and not be disclosed to
third parties. These agreements also generally provide that technology conceived by the individual
in the course of rendering services to us shall be our exclusive property. Even though these
agreements are in place there can be no assurances that that trade secrets and proprietary
information will not be disclosed, that others will not independently develop substantially
equivalent proprietary information and techniques or otherwise gain access to our trade secrets, or
that we can fully protect our trade secrets and proprietary information. Violations by others of
our confidentiality agreements and the loss of employees who have specialized knowledge and
expertise could harm our competitive position and cause our sales and operating results to decline
as a result of increased competition. Costly and time-consuming litigation might be necessary to
enforce and determine the scope of our proprietary rights, and failure to obtain or maintain trade
secret protection might adversely affect our ability to continue our research or bring products to
market.
Management and affiliates own enough shares to have a substantial impact on shareholder vote
which could cause us to take action that may not be in the best interest of all shareholders.
As of December 31, 2009, our executive officers and directors, and entities controlled by or
affiliated with them or the Company, own in aggregate approximately 28.5% of the outstanding common
stock. As a result, this group of stockholders have a substantial impact on the vote on matters
that require stockholder approval, such as election of directors, approval of a corporate merger,
increasing or decreasing the number of authorized shares, adopting corporate benefit plans,
effecting a stock split, amending our Certificate of Incorporation or other material corporate
actions, and these shareholders could cause the us to take action that may not be in the best
interest of all shareholders.
Given our limited resources, we may not effectively manage our growth.
Our growth and expansion plan, which includes targeting high-growth segments with commercial
products, supporting converter partners and working with brand owners in the adoption of bio-based
plastics to enlarge our customer base, expanding our manufacturing capabilities, strengthening our
product leadership by developing new formulations in conjunction with customer demands and pursuing
strategic alliances, requires significant management time and operational and financial resources.
There is no assurance that we have the necessary operational and financial resources to manage our
growth. This is especially true as we expand facilities and manufacture our products on a larger
commercial scale. In addition, rapid growth in our headcount and operations may place a
significant strain on our management, administrative, operational and financial infrastructure.
Failure to adequately manage our growth could have a material adverse effect on our business,
results of operations, financial condition and the quoted price of our common stock.
Established product manufacturers could improve the ability to recycle their existing products
or develop new environmentally preferable products which could render our technology less
competitive.
Several paper and plastic disposable packaging manufacturers and converters and others have
made efforts to increase the recycling of their products. Increased recycling of paper and plastic
products could lessen their harmful environmental impact, one major basis upon which we compete.
Many potential competitors who have greater resources and experience than we do may develop
products and technologies that compete with ours.
A number of these companies, including BASF, DuPont, Novamont, NatureWorks and Telles, have
introduced or are in the process of introducing both bio-based resins and/or compostable
synthetic-based resins. We view the threat from this competition as
low. Just as a wide variety of different petroleum-based polymers and resins currently serve
the needs of the plastic market, we believe that the various resins and polymers offer different
properties and are targeted at different applications, making them more complementary and thus
broadening the universe of applications for bio-based and compostable plastics.
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We rely on prime grade polylactic acid (“PLA”) supplied from NatureWorks, LLC in manufacturing
some of our Compostables resins. If we lose NatureWorks, LLC as a supplier, the price of these
resins may increase or the introduction and market acceptance of these resins may be delayed and
our results of operations could be materially adversely affected.
We have entered into a supply agreement with NatureWorks to supply prime grade PLA for some of
our raw material needs. NatureWorks, LLC, currently produces the majority of the prime grade PLA
in the United States, and we currently rely on NatureWorks, LLC for a substantial portion of our
PLA requirements. For the year ended December 31, 2009 PLA accounted for 28.9 % of our total raw
material cost of goods sold. If we lose NatureWorks, LLC as a supplier or if NatureWorks, LLC
fails to perform its obligations under our supply agreement, it could delay the commercial
introduction, hinder market acceptance of these resins and increase the cost of these resins and
our results of operations could be materially adversely affected. We continue to develop
alternative feedstock to PLA and evaluate additional PLA sources to support some of our
Compostables® Resins, which incorporate prime grade PLA. Cereplast Hybrid
Resins® do not depend on PLA.
Fluctuations in the costs of our raw materials and competitive products could have an adverse
effect on our results of operations and financial condition.
Our results of operations are directly affected by the cost of our raw materials. Our Compostables
Resins are based in large part on polylactic acid, a renewable polymer manufactured from an
agricultural feedstock (corn sugar). Our ability to offset the effect of raw material prices by
increasing sales prices is uncertain. A further increase in the price differential between
agricultural –based raw materials relative to petroleum-based plastics could have a negative impact
on our results of operations and financial position. Historically, a primary driver for the growth
of the bioplastics market has been the rising and increasingly volatile cost of oil, which has
narrowed the cost gap between traditional and bio-based plastics, and expectations of sustained
large hydrocarbon price increases over the long term which would further enhance the
competitiveness of our products. Prices and demand for traditional plastics have collapsed in
recent months due to global economic conditions; this in turn has affected the interest in
bioplastics by certain market sectors and reduced our relative competitiveness.
During the year ended December 31, 2009, we had three significant customers that accounted
for 54.4% of total sales. The loss of these customers could adversely affect our short-term sales
and profitability.
During the year ended December 31, 2009, three customers accounted for 54.4% of our total
sales. If these customer elect not to continue purchasing products from us, we may not be able to
find other customers whose requirements for our products are as significant. Accordingly, the loss
of these significant customers may adversely affect our near-term business, prospects, financial
condition and results of operations.
Our operations are subject to regulation by the U.S. Food and Drug Administration.
The manufacture, sale and use of resins are subject to regulation by the U.S. Food and Drug
Administration (the “FDA”). The FDA’s regulations are concerned with substances used in food
packaging materials, not with specific finished food packaging products. Thus, food and beverage
containers are in compliance with FDA regulations if the components used in the food and beverage
containers: (i) are approved by the FDA as indirect food additives for their intended uses and
comply with the applicable FDA indirect food additive regulations; or (ii) are generally recognized
as safe for their intended uses and are of suitable purity for those intended uses.
We believe that our resins are in compliance with all FDA requirements. Failure to comply
with FDA regulations could subject us to administrative, civil or criminal penalties.
Regulatory changes applicable to us, or the products in our end-use markets, could adversely
affect our financial condition and results of operations.
We and many of the applications for the products in the end-use markets in which we sell our
products are regulated by various national and local regulations. Changes in those regulations
could result in additional compliance costs, seizures, confiscations, recall or monetary fines, any
of which could prevent or inhibit the development, distribution and sale of our products.
We may be liable for damages based on product liability claims brought against our customers
in our end-use markets.
Many of our products may provide critical performance attributes to our customers’ products
that will be sold to end users who could potentially bring product liability suits in which we
could be named as a defendant. The sale of these products involves the risk of product liability
claims. If a person were to bring a product liability suit against one of our customers, this
customer may attempt to seek contribution from us. A person may also bring a product liability
claim directly against us. A successful product liability claim or series of claims against us in
excess of our insurance coverage for payments, for which we are not otherwise indemnified, could
have a material adverse effect on our financial condition or results of operations. We have
acquired product liability coverage of up to $7.0 million.
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Loss of key personnel or our inability to attract and retain new qualified personnel could
hurt our business and inhibit our ability to operate and grow successfully.
Our success in the competitive markets in which we operate will continue to depend to a
significant extent on our leadership and other key management and technical personnel. We may not
be able to retain our current management personnel or to recruit qualified individuals to join our
management team. The loss of any key individual could have a material adverse effect on our
business.
Disruptions of continuous operation of our new Seymour bioplastic production facility could
materially and adversely affect our results of operations.
In 2009, we manufactured our bio-based resins at a 55,000 square foot facility in Hawthorne,
California. The Hawthorne facility was comprised of three manufacturing lines, a research and
development line, a lab area for resin testing and a logistics area for raw materials and bio-based
resins, as well as our corporate headquarters. In March 2010, we commenced operations at a
manufacturing facility in Seymour, Indiana.
We lease a facility and site in Seymour, Indiana, where we have constructed a new bioplastic
production facility. Phase I of the development of the Seymour facility included approximately
50 million pounds of annual capacity of bio-resin and was fully implemented in 2009. This Phase is
mechanically completed and includes major supply contracts in order to be operating on a continuous
basis. Completed in March, 2010, Phase II encompassed the consolidation of all core
manufacturing activities from California to the Seymour site resulting in significant cost,
productivity and quality enhancements. Further expansions will depend on growth in market demand.
Downturns in general economic conditions could adversely affect our profitability.
Downturns in general economic conditions can cause fluctuations in demand for our products,
product prices, volumes and margins. Future economic conditions may not be favorable to our
industry. A decline in the demand for our products or a shift to lower-margin products due to
deteriorating economic conditions could adversely affect sales of our products and our
profitability and could also result in impairments of certain of our assets.
Risks related to our stock
Our common stock is subject to the “Penny Stock” rules of the SEC and the trading market in
our securities is limited, which makes transactions in our stock cumbersome and may reduce the
value of an investment in our stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition
of a “penny stock,” for the purposes relevant to us, as any equity security that has a market price
of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to
certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
| • | that a broker or dealer approve a person’s account for transactions in penny stocks; and |
| • | that the broker or dealer receives from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. |
In order to approve a person’s account for transactions in penny stocks, the broker or dealer
must:
| • | obtain financial information concerning the person’s financial situation, and investment experience and investment objectives of the person; and |
| • | make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. |
The broker or dealer must also deliver, prior to any transaction in a penny stock, a
disclosure schedule prescribed by the Commission relating to the penny stock market, which, in
highlight form:
| • | sets forth the basis on which the broker or dealer made the suitability determination; and |
| • | that the broker or dealer received a signed, written agreement from the investor prior to the transaction. |
Generally, brokers may be less willing to execute transactions in securities subject to the
“penny stock” rules. This may make it more difficult for investors to dispose of our common stock
and cause a decline in the market value of our stock.
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Disclosure also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both the broker-dealer and
the registered representative, current quotations for the securities and the rights and remedies
available to an investor in cases of fraud in penny stock transactions. Finally, monthly
statements have to be sent disclosing recent price information for the penny stock held in the
account and information on the limited market in penny stocks.
In January 2010, a majority of shareholders agreed to follow management of the company to implement
a reverse split of 40 to 1 shares. On March 15, 2010, The Financial Industry Regulatory Authority
authorized the reverse split and issued a new ticker symbol for a period of 20 days: CERPD. The
stock started to trade at a price above $5.00 but there is no guarantee that the stock will
continue to trade above $5.00.
| Item 1B. | Unresolved Staff Comments |
As of the date of this Annual Report on Form 10-K, there are no unresolved staff comments regarding
our previously filed periodic or current reports under the Securities Exchange Act of 1934, as
amended.
| Item 2. | Properties |
In 2009, we operated out of two main locations in Hawthorne, California and Seymour, Indiana. The
various leases underlying these two facilities are summarized below:
California Facilities — The Hawthorne facility consisted of one building covering an aggregate of
25,000 square feet that served as our main corporate office, research and development lab,
production facility and logistic center. The Hawthorne facility is subject to two operating
leases:
| • | a lease for office, industrial and warehouse space with monthly rents of $15,405 which expired in January 2010; |
| • | a lease for office and warehouse space with monthly rents of $20,644 expiring in April 2012 has been vacated and terminated prior to expiration; and |
An additional lease for a 30,000 square foot facility for office and warehouse space was terminated
during the month ended June 30, 2009 as part of our facilities consolidation and cost
reduction efforts under out Strategic Restructuring Program.
All leases were terminated prior to expiration via amicable negotiation with our landlords. In
December 2009, the Company entered into a new Lease for a 3,000 square foot facility located in El Segundo,
which will serve as our corporate headquarters.
Indiana Facility — The 105,000 square foot Seymour facility is currently used as a distribution
facility for our products; construction and installation of our first production line is
mechanically completed. The Seymour facility is subject to a lease with monthly rents of $25,000
expiring in January 2018, however the rent agreement has been amended with a substantial rent
reduction to $10,000 per month for a period of several months ending at the end of 2010.
| Item 3. | Legal Proceedings |
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in
the ordinary course of business. However, litigation is subject to inherent uncertainties, and an
adverse result in these or other matters may arise from time to time that may harm our business. We
are currently not aware of any such legal proceedings or claims that we believe will have,
individually or in the aggregate, a material adverse affect on our business, financial condition or
operating results.
| Item 4. | Reserved |
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PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
Our common stock has been quoted on the OTC Bulletin Board under the symbol “CERP.OB.” The
following table shows the reported high and low closing bid quotations per share for our common
stock based on information provided by the OTC Bulletin Board.
Effective March 15, 2010, the Company implemented a reverse stock split in a ratio of 1 for 40
shares. The following table reflects the impact of the stock split.
| 2009 | 2008 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
First Quarter ended March 31 |
$ | 6.80 | $ | 2.80 | $ | 28,00 | $ | 20.80 | ||||||||
Second Quarter ended June 30 |
$ | 6.40 | $ | 2.80 | $ | 21.20 | $ | 12.80 | ||||||||
Third Quarter ended September 30 |
$ | 6.00 | $ | 3.60 | $ | 14.00 | $ | 7.60 | ||||||||
Fourth Quarter ended December 31 |
$ | 6.00 | $ | 3.20 | $ | 9.20 | $ | 3.20 | ||||||||
Holders
As of
March 18, 2010, there were approximately 293 record holders of the Company’s common stock,
not counting shares held in “street name” in brokerage accounts which is unknown. As of March 18,
2010, there were 9,877,976 shares of common stock outstanding on record with the Company’s stock
transfer agent, Computershare.
Dividend Policy
Historically, we have not paid any dividends to the holders of our common stock and we do not
expect to pay any such dividends in the foreseeable future as we expect to retain our future
earnings for use in the operation and expansion of our business.
Recent Sale of Unregistered Securities
We issued the following unregistered securities during the three months ended December 31, 2009:
| • | On December 11, 2009,we issued 1,090,000 shares of the Company’s common stock at a price of $2.00 per share on a post-split basis, for aggregate net proceeds of $2,230,000. |
We claim an exemption from the registration requirements of the Securities Act of 1933, as amended
(the “Act”) for the private placement of these securities pursuant to Regulation D promulgated
under the Act since, among other things, the transaction did not involve a public offering, the
investors were accredited investors and/or qualified institutional buyers, the investors had access
to information about us and their investment, the investors took the securities for investment and
not resale, and we took appropriate measures to restrict the transfer of the securities.
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Equity Compensation Plan Information
As of December 31, 2009:
| Number of shares remaining available | ||||||||||||
| Number of shares to be issued | Weighted-average exercise | for future issuance under equity | ||||||||||
| upon exercise of outstanding | price of outstanding options | compensation plans (excluding | ||||||||||
| Plan Category | options and warrants | and warrants | securities reflected in column (a)) | |||||||||
Equity Compensation
Plans approved by
security holders |
— | — | — | |||||||||
Equity Compensation
Plan not approved
by security holders |
71,250 | $ | 18.40 | 334,375 | ||||||||
Total |
71,250 | 334,375 | ||||||||||
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STOCK OPTION PLAN
GENERAL
The Stock Option Plan was adopted by the Board of Directors. The Board of Directors has initially
reserved 625,000 shares of Common Stock for issuance under the Stock Plan. Under the Plan, options
may be granted which are intended to qualify as Incentive Stock Options (“ISOs”) under Section 422
of the Internal Revenue Code of 1986 (the “Code”) or which are not (“Non-ISOs”) intended to qualify
as Incentive Stock Options there under.
The Stock Option Plan and the right of participants to make purchases there under are intended to
qualify as an “employee stock purchase plan” under Section 423 of the Internal Revenue Code of
1986, as amended (the “Code”). The Stock Option Plan is not a qualified deferred compensation plan
under Section 401(a) of the Internal Revenue Code and is not subject to the provisions of the
Employee Retirement Income Security Act of 1974 (“ERISA”).
PURPOSE
The primary purpose of the Stock Option Plan is to attract and retain the best available personnel
for the Company in order to promote the success of the Company’s business and to facilitate the
ownership of the Company’s stock by employees.
ADMINISTRATION
The Stock Option Plan is administered by the Company’s Board of Directors, as the Board of
Directors may be composed from time to time. All questions of interpretation of the Stock Option
Plan are determined by the Board, and its decisions are final and binding upon all participants.
Any determination by a majority of the members of the Board of Directors at any meeting, or by
written consent in lieu of a meeting, shall be deemed to have been made by the whole Board of
Directors.
Notwithstanding the foregoing, the Board of Directors may at any time, or from time to time,
appoint a committee (the “Committee”) of at least two members of the Board of Directors, and
delegate to the Committee the authority of the Board of Directors to administer the Plan. Upon such
appointment and delegation, the Committee shall have all the powers, privileges and duties of the
Board of Directors, and shall be substituted for the Board of Directors, in the administration of
the Plan, subject to certain limitations.
Members of the Board of Directors who are eligible employees are permitted to participate in the
Stock Option Plan, provided that any such eligible member may not vote on any matter affecting the
administration of the Stock Option Plan or the grant of any option pursuant to it, or serve on a
committee appointed to administer the Stock Option Plan. In the event that any member of the Board
of Directors is at any time not a “disinterested person”, as defined in Rule 16b-3(c)(3)(i)
promulgated pursuant to the Securities Exchange Act of 1934, the Plan shall not be administered by
the Board of Directors, and may only by administered by a Committee, all the members of which are
disinterested persons, as so defined.
ELIGIBILITY
Under the Stock Option Plan, options may be granted to key employees, officers, directors or
consultants of the Company, as provided in the Stock Option Plan.
TERMS OF OPTIONS
The term of each Option granted under the Plan shall be contained in a stock option agreement
between the Optionee and the Company and such terms shall be determined by the Board of Directors
consistent with the provisions of the Plan, including the following:
(a) PURCHASE PRICE. The purchase price of the Common Shares subject to each ISO shall not be less
than the fair market value (as set forth in the Stock Option Plan), or in the case of the grant of
an ISO to a Principal Stockholder, not less that 110% of fair market value of such Common Shares at
the time such Option is granted. The purchase price of the Common Shares subject to each Non-ISO
shall be determined at the time such Option is granted, but in no case less than 85% of the fair
market value of such Common Shares at the time such Option is granted.
(b) VESTING. The dates on which each Option (or portion thereof) shall be exercisable and the
conditions precedent to such exercise, if any, shall be fixed by the Board of Directors, in its
discretion, at the time such Option is granted.
(c) EXPIRATION. The expiration of each Option shall be fixed by the Board of Directors, in its
discretion, at the time such Option is granted; however, unless otherwise determined by the Board
of Directors at the time such Option is granted, an Option shall be exercisable for ten (10) years
after the date on which it was granted (the “Grant Date”). Each Option shall be subject to earlier
termination as expressly provided in the Stock Option Plan or as determined by the Board of
Directors, in its discretion, at the time such Option is granted.
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(d) TRANSFERABILITY. No Option shall be transferable, except by will or the laws of descent and
distribution, and any Option may be exercised during the lifetime of the Optionee only by him. No
Option granted under the Plan shall be subject to execution, attachment or other process.
(e) OPTION ADJUSTMENTS. The aggregate number and class of shares as to which Options may be granted
under the Plan, the number and class shares covered by each outstanding Option and the exercise
price per share thereof (but not the total price), and all such Options, shall each be
proportionately adjusted for any increase decrease in the number of issued Common Shares resulting
from split-up spin-off or consolidation of shares or any like Capital adjustment or the payment of
any stock dividend.
Except as otherwise provided in the Stock Option Plan, any Option granted hereunder shall terminate
in the event of a merger, consolidation, acquisition of property or stock, separation,
reorganization or liquidation of the Company. However, the Optionee shall have the right
immediately prior to any such transaction to exercise his Option in whole or in part
notwithstanding any otherwise applicable vesting requirements.
(f) TERMINATION, MODIFICATION AND AMENDMENT. The Stock Option Plan (but not Options previously
granted under the Plan) shall terminate ten (10) years from the earlier of the date of its adoption
by the Board of Directors or the date on which the Plan is approved by the affirmative vote of the
holders of a majority of the outstanding shares of capital stock of the Company entitled to vote
thereon, and no Option shall be granted after termination of the Plan. Subject to certain
restrictions, the Plan may at any time be terminated and from time to time be modified or amended
by the affirmative vote of the holders of a majority of the outstanding shares of the capital stock
of the Company present, or represented, and entitled to vote at a meeting duly held in accordance
with the applicable laws of the State of Nevada.
| Item 6. | Selected Financial Data |
Not
applicable.
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
CAUTIONARY STATEMENTS
This Form 10-K may contain “forward-looking statements,” as that term is used in federal securities
laws, about our financial condition, results of operations and business. These statements include,
among others, statements concerning the potential benefits that we may experience from our business
activities and certain transactions we contemplate or have completed; and statements of our
expectations, beliefs, future plans and strategies, anticipated developments and other matters that
are not historical facts. These statements may be made expressly in this Form 10-K. You can find
many of these statements by looking for words such as “believes”, “expects”, “anticipates”,
“opines”, or similar expressions used in this Form 10-K. These forward looking statements are
subject to numerous assumptions, risks, and uncertainties that may cause our actual results to be
materially different from any future results expressed or implied by us in those statements.
Important facts that could prevent our company from achieving its stated goals include, but are not
limited to, the following:
| • | Inability to raise sufficient additional capital to finance operations |
| • | potential fluctuation in quarterly results |
| • | our failure to earn profits |
| • | inadequate capital to expand its business, inability to raise additional capital or financing to implement its business plans; |
| • | decline in demand for our products and services; |
| • | rapid and significant changes in markets and other factors which encourage use of bioplastics; |
| • | successful commencement of operations at our new Seymour facility and relocation of manufacturing activities from California to Indiana; |
| • | failure to commercialize sufficient new grades of resin being pursued in our technical / market development “pipeline” |
| • | competitor actions which curtail our market share, negatively affect pricing or limit sales growth; |
| • | litigation with or legal claims and allegations by outside parties; |
| • | insufficient revenues to cover operating costs. |
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There is no assurance that we will be profitable. We may not be able to successfully, manage or
market our products and services, attract or retain qualified executives and technology personnel
or obtain additional customers for our products or services. Our products and services may become
obsolete, government regulation may hinder our business, additional dilution in outstanding stock
ownership may be incurred due to the issuance of more shares, warrants and stock options, or the
exercise of outstanding warrants and stock options, and other risks inherent in our businesses.
Because the statements are subject to risks and uncertainties, actual results may differ materially
from those expressed or implied by the forward-looking statements. We caution you not to place
undue reliance on the statements, which speak only as of the date of this Form 10-K. The cautionary
statements contained or referred to in this section should be considered in connection with any
subsequent written or oral forward-looking statements that our company or persons acting on our
behalf may issue. We do not undertake any obligation to review or confirm analysts’ expectations or
estimates or to release publicly any revisions to any forward-looking statements to reflect events
or circumstances after the date of this Form 10-K, or to reflect the occurrence of unanticipated
events.
OVERVIEW
General.
We primarily conduct our operations through three product families:
| • | Cereplast Compostables Resins® are renewable, ecologically-sound substitutes for petroleum-based plastics targeting primarily single-use disposables and packaging applications. We offer 17 commercial grades of Compostables Resins in this product line. These resins are compatible with existing manufacturing processes and equipment making them a ready substitute for traditional petroleum-based resins. We commercially introduced our Compostables line in November 2006. |
| • | Cereplast Hybrid Resins® replace up to 50% of the petroleum content in conventional plastics with bio-based materials such as industrial starches sourced from plants. The Hybrid Resin line is designed to offer similar properties to traditional polyolefins such as impact strength and heat deflection temperature, and is compatible with existing converter processes and equipment. Hybrid Resins provide a viable alternative for brand owners and converters looking to partially replace petroleum-based resins in durable goods applications. Hybrid Resins address this need in a wide range of markets, including automotive, consumer goods, consumer electronics, medical, packaging, and construction. We commercially introduced our first grade of Hybrid Resin, Hybrid 150, at the end of 2007. We currently offer two commercial grades in this product line. |
| • | Cereplast Algae Plastics™. In October 2009 we announced that we have been developing a new technology to transform algae into bioplastics and intend to launch a new family of algae-based resins that will complement the company’s existing line of Compostables & Hybrid resins. Although we do not expect this new technology to become commercial before the end of 2010 or early 2011, it remains an important development as we believe that the potential open by algae is quite substantial. Cereplast algae-based resins could replace in a first step 50% or more of the petroleum content used in traditional plastic resins. Currently, Cereplast is using renewable material such as starches from corn, tapioca, wheat and potatoes and Ingeo® PLA. Recently the algae production business has attracted a lot of attention when Exxon announced a $600 million investment in Synthetic Genomics and BP’s $10 million investment in Martek Biosciences. The Company retains that algae is a very attractive feedstock as it does offer a low carbon footprint alternative and at the same time could be accessible in very large quantity. We also have a future plan to create algae plastic made of 100% algae component abandoning any reliance on fossils fuels. |
As of December 31, 2009, over 230 companies have requested and been provided with samples of our
bioplastic resin and 150 customers have purchased resin for trials and testing. Of these, 80
customers have advanced to prototype testing and qualification of more than 135 different
product applications. Thirty customers, including Dorel Industries, WNA, Alcoa, Genpak,
Innoware, Penley, Solo, Cadaco, Jatco, Dentek, CSI-Cosmolab, Warner Tools, Handgards and Pace
Industries, have commercialized and introduced 95 different bioplastic products using our resin.
As a result of successful testing and commercial product launches, some of our customers have
signed multi-year supply contracts with increasing volume.
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Trends and Uncertainties that May Impact Future Results of Operations
Global Market and Economic Conditions. Recent global market and economic conditions have been
unprecedented and challenging with tighter credit conditions and slower growth through the fourth
quarter of 2008. For the year ended December 31, 2009, continued concerns about the systemic
impact of inflation, energy costs, geopolitical issues, the availability and cost of credit, the
U.S. mortgage market and a declining real estate market in the U.S. have contributed to increased
market volatility and diminished expectations for the U.S. economy. In the third and fourth
quarters, added concerns fueled by the federal government conservatorship of the Federal Home Loan
Mortgage Corporation and the Federal National Mortgage Association, the declared bankruptcy of
Lehman Brothers Holdings Inc., the U.S. government provided loan to American International Group
Inc. and other federal government interventions in the US credit markets lead to increased market
uncertainty and instability in both US and international capital and credit markets. These
conditions, combined with volatile oil prices, declining business and consumer confidence and
increased unemployment have in recent weeks subsequent to the end of the quarter contributed to
volatility of unprecedented levels.
As a result of these market conditions, the cost and availability of credit has been and may
continue to be adversely affected by illiquid credit markets and wider credit spreads. Concern
about the stability of the markets generally and the strength of counterparties specifically has
led many lenders and institutional investors to reduce, and in some cases, cease to provide funding
to borrowers and to developing companies, such as ours. Continued turbulence in the U.S. and
international markets and economies may adversely affect our liquidity and financial condition, and
the liquidity and financial condition of our customers. If these market conditions continue, they
may limit our ability, and the ability of our customers, to timely replace maturing liabilities,
and access the capital markets to meet liquidity needs, resulting in an adverse effect on our
financial condition and results of operations.
Sales. We record sales at the time that we ship our products, provided that evidence of an
arrangement exists, title and risk of loss have passed to the customer, fees are fixed or
determinable, and collection of the related receivable is reasonably assured. We record sales net
of sales discounts and allowances. For the year ended December 31, 2009 and 2008, we provided
price incentives to several customers that entered into multi-year supply contracts for their
initial purchase commitments to assist in testing, sample production and commercial launch
activities. In the future, we may offer these incentives on a selected basis as we continue to
grow our customer base. The amount of these incentives in the future periods will be a function of
the growth of our customer base and the particular commercialization.
Operating Expenses. Operating expenses consist principally of salaries (both cash and
non-cash equity-based compensation), professional fees (including legal, accounting,
patent-related, government compliance), marketing, rent and research and development. Salaries
include all cash and non-cash compensation and related costs for all principal functions including
executive, finance, accounting, production, and human resources. During recent periods we have
made grants of equity awards, including shares of restricted stock and stock options, to attract
directors and members of senior management, which have resulted in non-cash compensation expense
for the periods reported. We expect that non-cash compensation expense attributed to equity-based
awards may increase in future periods as the result of future equity-based incentive compensation
awards granted to attract and retain talented employees as we continue to grow our business. In
addition, we expect to experience increases in our research and development expenses as we continue
to develop new products and formulations, as well as increases in marketing and promotional
expenses as we seek to increase our customer base.
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CRITICAL ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States. (“GAAP”) The consolidated financial statements include the financial condition and results of operations of our wholly-owned subsidiary, Cereplast International, S.A., a Luxembourg company organized during the year ended December 31, 2009, for the purpose of conducting sales operations in Europe. Intercompany balances and transactions have been 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 amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements include the estimate of useful lives of property and equipment, the deferred tax valuation allowance and the fair value of stock options. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At various times throughout the year, the Company may have exceeded federally insured limits.
Concentration of Credit Risk
We had unrestricted cash, cash equivalents, and short-term investment, totaling $1,291,353 and $501,699 at December 31, 2009 and 2008, respectively. The unrestricted cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Some of the securities in which we invest, however, may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, debt securities and certificates of deposit. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. As of December 31, 2009, all of our investments were held in money market accounts and short-term instruments. We actively monitor changes in interest rates.
Other Concentration
During the year ended months ended December 31, 2009, we had two significant suppliers that accounted for 27.9% and 18.7%, respectively, of total cost of goods sold and had one customer, Dorel Juvenile Group, which accounted for 32.7% of total sales. No other supplier or customer accounted for more than 10% of cost of sales or sales during this period
Restricted Cash
We had restricted cash in the amount of $0 and $48,628 at December 31, 2009 and 2008, respectively. The restricted cash amount consists of a “Certificate of Deposit” which supports a “Letter of Credit” for a leased facility.
Accounts Receivable
We maintain an allowance for doubtful accounts for estimated losses that may arise if any of our customers are unable to make required payments. Management performs a review of the receivables past due from customers on a monthly basis and reserves against uncollectible items for each customer after all reasonable means of collection have been exhausted, and the potential for recovery is considered remote. The allowance for doubtful accounts was $39,743 and $29,350 as of December 31, 2009 and 2008, respectively.
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Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or market, and consist primarily of raw materials used in the manufacturing of bioplastic resins, finished bioplastic resins and finished goods. Inventories are reviewed for excess and obsolescence and a reserve is established accordingly.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed on the straight-line method over the estimated useful lives of the assets. The estimated useful lives of the assets are between five and seven years. Repairs and maintenance expenditures are charged to expense as incurred.
Intangibles
Intangibles are stated at cost and consist primarily of patents and trademarks. Amortization is computed on the straight-line method over the estimated life of these assets, estimated to be between five and fifteen years.
Deferred Income Taxes
Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statement of income.
Revenue Recognition
We recognize revenue at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.
Marketing and Advertising
We expense marketing and advertising costs as incurred.
Research and Development Costs
Research and development costs are charged to expense as incurred. These costs consist primarily of research with respect to new grades of bioplastic resins, testing of both the bioplastic resins as well as testing of finished products made from the bio-based resins.
Stock-Based Compensation
Compensation cost for all stock-based awards is measured at fair value on the date of grant and recognized over the service period for awards expected to vest. The fair value of stock options is determined using the Black-Scholes valuation model. Such value is recognized as expense over the service period, net of estimated forfeitures, using the straight-line method. Adjustments to this expense are made periodically to recognize actual rates of forfeiture which vary significantly from estimates.
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Loss per Share Calculations
Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Our diluted loss per share is the same as the basic loss per share for the years ended December 31, 2009 and 2008 as inclusion of any potential shares would have had and anti-dilutive effect due to us generating a loss.
Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2009 COMPARED TO THE YEAR ENDED DECEMBER 31,
2008.
Sales
Gross sales decreased by $1,847,858, or 40.2%, to $2,751,445 for the year ended December 31, 2009
compared to the year ended December 31, 2008. Net sales decreased by $1,773,148 or 39.3% to
$2,739,008 for the year ended December 31, 2009 compared to the year ended December 31, 2008. The
sales decrease can be primarily attributed to the 2009 economic recession and volume decline in the
Company’s bioplastic resins from both existing customers and new customers launching commercial
applications with our resins. The difference in gross and net sales is primarily due to initial
price discounts given to customers to assist in testing and sample production, provide support for
marketing promotion and application development and reward achievement of commercialization
milestones. In 2009, three customers, Dorel Juvenile Group, Innoware Plastics, Inc., and Solo Cup
Company accounted for more than 10% of total gross sales. In 2008, two customers, Pace Industries
Inc. and Genpak® accounted for more than 10% of total gross sales.
Gross Profit
Gross profit increased by $257,404 or 321.0%, to $337,584 for the year ended December 31, 2009
compared to the year ended December 31, 2008. As a percentage of net sales, gross profit margin
increased by 10.5% to 12.3% for the year ended December 31, 2009 compared to 1.8% for the year
ended December 31, 2008. The increase in gross profit is due to significant cost cutting actions
in all aspect of operations (including reduction in leases, reduction in labor force, cut in
salaries, mandatory furlough, etc.), higher efficiency in equipment utilization, recently
implemented cost and organization efficiency improvements, sales volumes with a higher percentage
of commercially mature customers and applications as well as the launch of resins for several new
customer applications.
Operating Expenses
Overall, total Operating Expenses decreased by $7,565,112, or 57.0%, to $5,714,257 for the year
ended December 31, 2009 compared to the year ended December 31, 2008. The decrease for the period
is largely attributable to the impact of restructuring of our operations to focus on product
development and marketing and contract for production. The related focus on reducing in-house
manufacturing capacity and the related workforce reductions resulted in a significant decrease in
salaries and wages, including a significant reduction in stock based compensation during the year
ended December 31, 2009, as compared to the year ended December 30, 2008, In addition, reduced
spending on marketing, research and development and professional fees was enabled by focusing our
“pipeline process” for technical development and expansion of our resin families.
| • | Salaries and wages, including non-cash stock based compensation of $273,919, decreased by $4,140,742 for the year ended December 31, 2009, compared to the year ended December 31, 2008. The decrease is attributable to head count reductions in accordance with our restructuring program. Non-cash compensation for the year was comprised of the issuance of 137,400 restricted common shares, valued at $563,309 to employees for services rendered together with $259,056 of expenses relating to unvested employee stock options granted in the prior year. |
| • | Marketing expense decreased by $1,176,310 for the year ended December 31, 2009, compared to the year ended December 31, 2008. The decrease for the period is directly attributable to focusing our “pipeline process” and implementing more rigorous market and customer selection processes. |
| • | Research and Development costs decreased by $758,736, or 70.8%, to $313,078, for the year ended December 31, 2009, compared to the year ended December 31, 2008. This is also as a result of an improved focus of our “pipeline process” for technical development and expansion of our resin families. |
| • | Rent expense decreased by $514,810 or 48.3%, to $549,995 for the year ended December 31, 2009, compared to the year ended December 31, 2008. The decrease for the period was the result of rental income from the sublease of one of our office and warehouse premises in Hawthorne offsetting rent expense and the subsequent termination of this lease. No rental income was earned on any of our leased premises for the year ended December 31, 2008. |
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Net Loss
Net loss decreased by $6,675,753 or 52.4%, to $6,072,948 for the year ended December 31,
2009, compared to the year ended December 31, 2008. This decrease in net loss was a result of
reduced operating expenses associated with the downsizing of our manufacturing operations,
leveraging of our staff resources and, improved processes and cost control and rigorous market
and customer selection as well as enhanced gross profit margins. Currently, operating costs
exceed revenue as we have only recently introduced Cereplast Hybrid Resins®.
LIQUIDITY AND CAPITAL RESOURCES
We require working capital to fund our operations, including payments to finance our research and
development and expand sales and marketing, to purchase equipment, service indebtedness, satisfy
lease obligations and execute on our business plan and growth strategy. Based on our current cash
position and to complete the start-up of continuous production at our Seymour facility, we will be
required to raise additional working capital, either through commercial debt financing or through
the issuance of debt or equity securities. There is no assurance that we will be able to obtain
additional sources of working capital on commercially reasonable terms when needed, or at all.
We had net unrestricted cash of $1,305,771 at December 31, 2009 as compared to $501,699 at December
31, 2008. The net increase in unrestricted cash is attributable principally to funds received
through successful private placements.
We had positive working capital (the difference between current assets and current liabilities) of
$1,019,741 at December 31, 2009, as compared to positive working capital of $539,332 at December
31, 2008. The increase in working capital is due to proceeds from issuance of common stock and a
decrease in trade payables, accrued expenses and indebtedness.
During the year ended December 31, 2009, we used $2,813,930 of cash for operating activities, as
compared to $8,308,426 during the year ended December 31, 2008. The decrease in the use of cash for
operating activities was a result of a decrease in operating expenses, particularly as a result of
restructuring activities, as well as a focus on working capital management, which resulted in a
reduction in inventory and accounts payable.
Cash from investing activities during the year ended December 31, 2009, was $3,617 compared to
cash used in investing activities of $2,542,202 during the year ended December 31, 2008. No
spending related to construction of equipment for the Indiana facility was required during the year
ended December 31, 2009 which resulted in this decrease.
Cash
provided by financing activities relating primarily to the issuance of shares of common stock during the
year ended December 31, 2009 was $3,606,052 as compared to $2,729,893 during the year ended
December 31, 2008.
We have incurred a net loss of $6,072,948 for the year ended December 31, 2009, and $12,748,701 for
the year ended December 31, 2008, and have an accumulated deficit of $35,444,968 as of December 31,
2009. Based on our operating plan, our existing working capital will not be sufficient to meet the
cash requirements to fund our planned operating expenses, capital expenditures and working capital
requirements through December 31, 2010 without additional sources of cash.
Our plan to address the shortfall of working capital is to generate additional financing through a
combination of financing of assets, incremental product sales and the sale of equity securities.
There are no assurances that we will be able to obtain any sources of financing on acceptable
terms, or at all.
If we cannot obtain sufficient additional financing in the short-term, we may be forced to file for
bankruptcy or cease operations. The consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset amounts or amounts
and classification of liabilities that might be necessary should we be forced to take such actions.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any relationships with unconsolidated entities or financial partnerships such as
entities often referred to as structured finance or special purpose entities that would have been
established for the purpose of facilitating off-balance-sheet arrangements or for other
contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity,
market or credit risk that could arise if we had engaged in such relationships.
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| Item 8. | Financial Statements and Supplementary Data |
Financial statements required by this item are included after the signature page of this filing.
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| Item 9 (T). | Changes in and Disagreements With Accountants on Accounting and Financial Disclosure |
None.
| Item 9A. | Controls and Procedures |
As of the end of the period covered by this report, we conducted an evaluation, under the
supervision and with the participation of our chief executive officer and our principal financial
officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e)
of the Exchange Act). Based upon this evaluation, our chief executive officer and our principal
financial officer concluded that our disclosure controls and procedures are effective to ensure
that information required to be disclosed by us in the reports that we file or submit under the
Exchange Act is recorded, processed, summarized and reported, within the time periods specified in
the Commission’s rules and forms. There was no change in our internal controls or in other factors
that could affect these controls during our last fiscal year that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
Evaluation of Disclosure Controls and Procedures. Our management, with the participation of our
CEO and our principal financial officer, evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based on that evaluation, our CEO
and our principal financial officer concluded that our disclosure controls and procedures as of the
end of the period covered by this report were effective such that material information required to
be disclosed is made known to management and others, as appropriate, to allow timely decision
regarding required disclosure and that the information required to be disclosed by us in reports
filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and forms and (ii) accumulated and
communicated to our management, including our CEO, as appropriate to allow timely decisions
regarding disclosure. A controls system cannot provide absolute assurance, however, that the
objectives of the controls system are met, and no evaluation of controls can provide absolute
assurance that all control issues and instances of fraud, if any, within a company have been
detected.
Management’s Annual Report on Internal Control over Financial Reporting. Our management is
responsible for establishing and maintaining adequate internal control over financial reporting (as
defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is
a process designed to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes of accounting principles
generally accepted in the United States.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Therefore, even those systems determined to be effective can provide only
reasonable assurance of achieving their control objectives.
Our management, with the participation of the CEO, evaluated the effectiveness of the Company’s
internal control over financial reporting as of December 31, 2009. In making this assessment, our
management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO) in Internal Control — Integrated Framework. Based on this evaluation, our
management, with the participation of the CEO, concluded that, as of December 31, 2009, our
internal control over financial reporting was effective.
This annual report does not include an attestation report of the Company’s registered public
accounting firm regarding internal control over financial reporting. Management’s report was not
subject to attestation by the Company’s registered public accounting firm pursuant to temporary
rules of the Securities and Exchange Commission that permits us to provide only management’s report
in this annual report.
Changes in Internal Controls. There were no changes to the internal controls that have materially
affected or that are reasonably likely to affect the internal controls.
| Item 9B. | Other Information |
None.
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PART III
| Item 10. | Directors, Executive Officers, and Corporate Governance |
Our directors and executive officers are as follows:
| Name | Age | Position | ||||
Frederic Scheer
|
54 | CEO, Founder and Chairman of the Board of Directors | ||||
William Kelly
|
63 | Senior Vice President Technology | ||||
Mark Barton
|
50 | Senior Vice President, Operations | ||||
Margaret McMurray
|
61 | Chief Administrative Officer | ||||
Peter Kitsos
|
43 | Director | ||||
Jacques Vincent
|
63 | Director | ||||
Steve Hanni
|
42 | Director | ||||
FREDERIC SCHEER, our CEO, Founder and Chairman of the Board of Directors, since Cereplast’s
inception, became involved in the biodegradable plastics industry in 1994 through Montedison SpA, a
large chemical conglomerate operating Novamont SpA, an Italian resin manufacturer and research
company. Foreseeing that the demand for biodegradable products in North America would expand
rapidly by the end of the decade, Scheer created the Biodegradable Products Institute (BPI), and
this non-profit organization has quickly become the largest biodegradable association in the world,
with more than 40 members, including BASF, DuPont, Georgia Pacific, NatureWorks, Dow and Eastman.
Prior to his involvement in the biodegradable industry, Scheer was a merchant banker in Europe. He
holds a Doctor of Laws from the University of Paris, a Master Degree in Finance and a Masters
Degree in Political Science from Institut d’Etudes Politiques, Paris, France. Scheer, a US
citizen, is fluent in French, Spanish, Italian and English.
Due to his knowledge of the bioplastic and the fact that Mr. Scheer is the founder of the Company,
the Board of Director concluded that Mr. Scheer had all qualifications to be a member of the Board.
WILLIAM KELLY, Senior Vice President of Technology since July, 2007. Mr. Kelly is a specialist in
polymer product development, with 26 years of related industrial experience innovating new
thermoplastic materials, which have been useful for serving demanding applications. Kelly led
technical efforts to develop fiber forming polylactide material with a unique property set for
Chronopol. Kelly also established process parameters for numerous grades of polylactic acid
polymers. Kelly planned and directed activities leading to product commercialization for over 50
new polymer systems and products to meet customer needs. Kelly also developed many diverse forms
of polylactic acid polymers and co-polymers — both low and high molecular weight. Kelly innovated
and enhanced processing parameters for polylactic acid resin with revised material reformulations,
which improved processing via fiber forming, injection molding, blow molding, film extrusion, and
foam processing. Kelly invented and qualified the RADEL R7000, polyethersulfone product line at
Boeing and other airframe companies, which exceeding all FAA and industry requirements for
performance. He transformed AMODEL PPA resin into palatable material using existing ABS plating
technology maintaining high heat capability. Kelly qualified and produced both amorphous and
semi-crystalline polymers for many diverse customer applications. He has originated 20 patent
applications with six issued, participated in numerous technical trials and presented papers
worldwide.
MARK BARTON joined Cereplast as Senior Vice President Manufacturing in July 2008. Mr.
Barton leads overall manufacturing operations. With over 25 years of successful plastic compounding
industry experience, most recently as Vice President of Toray Resin Company, Barton has held a
succession of resin manufacturing leadership positions. Under Barton’s leadership, Toray Resin’s
engineering resin compounding operations became an industry leader, achieving registrations of ISO
9001/TS16949 for quality systems, ISO 14001 for environmental systems and receiving the Toray
Industries, Presidents Award in 2006 for overall performance and achievement. Barton’s experience
includes championing successful lean manufacturing and continuous improvement systems in resin
compounding operations. Barton holds a B.S in Management Science/Business Administration from
Franklin University in Columbus, Ohio.
MARGARET McMURRAY, Chief Administrative Officer. Ms. McMurray joined Cereplast in June of 2006 and
has over 30 years of experience in operations primarily in administrative management services to a
variety of corporations and government agencies. McMurray was appointed to her current position of
Chief Administrative Officer in January, 2007 and oversees Cereplast’s administrative functions by
providing administrative direction, supervision and support to the staff pertaining to Human
Resources, Property Management and Purchasing, as well as coordinating the duties of the office
staff and general operation of the administrative offices. Prior to joining Cereplast, McMurray
spent ten years performing administrative duties for Conwell Shonkwiler’s &
Associates. McMurray background also includes advising the Directors
of the U. S Information
Services offices in Bogota, Colombia and Jakarta, Indonesia on government procedures pertaining to
administrative and management matters.
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Table of Contents
INDEPENDENT DIRECTORS
PETROS KITSOS, Director. Mr. Kitsos is the managing principal of TBL Strategy/TBL, LLC in Los
Angeles, a strategic firm providing a unique suite of professional services to diversified
industrial companies designed to facilitate strategy formulation and execution, and to illuminate
and solve challenges facing industry, investors and government. Prior to his establishing TBL
Strategy, Kitsos had a distinguished 16 year career in investment banking with Citigroup and the
predecessor companies where among other duties he was Citigroup’s Head of Western Region Mergers &
Acquisitions, Head of Global Aerospace Group, Co-Head of Los Angeles Corporate Finance. As
Citigroup’s Managing Director of Investment Banking, Kitsos oversaw mergers, acquisitions and
divestitures in the Western Region. Kitsos is a Phi Beta Kappa graduate of Hamilton College where
he currently serves on the Board of Trustees and holds an MBA with honors from Harvard Business
School.
Due to his knowledge of the financial industry and his merger & acquisition experience, the Board
concluded that Mr. Kitsos is qualified to serve as a Director.
JACQUES VINCENT, Director. Mr. Vincent was recently named vice chairman and advisor to the
chairman and previously served as the vice chairman and chief operating officer at Groupe Danone.
Vincent began his career with Danone in 1970 and has since held various financial and overall
management positions within the company. Vincent is a graduate engineer of the Ecole Centrale,
Paris, holds a bachelor’s degree in economics from Paris University and a Master’s of Science from
Stanford University. In addition to Vincent’s position at Groupe Danone, he is also the Chairman
of Daniel Carasso Research Center and Ecole Normale Superieure de Lyon, and board member of
Syngenta in Switzerland and Yakult Honsha in Japan.
Due to his knowledge of the Trade and marketing of food service items and dairy products around the
world, the Board concluded that Mr. Vincent is qualified to serve as a Director.
STEVE HANNI, Director and Chairman of the Audit Committee. Mr. Hanni is a Certified Public
Accountant, licensed in Utah and Nevada. He graduated from Weber State University with both a
Bachelor and Masters Degree in accounting in 1994. He is a member of the Utah Association of
Certified Public Accountants and the American Institute of Certified Public Accountants. He also
has served on the Practice Advisory Council and other committees for the Utah Association of
Certified Public Accountants. Mr. Hanni has taught auditing at Westminster College in Salt Lake
City, Utah and accounting at Weber State University in Ogden, Utah. Since 2001, Mr. Hanni has been
engaged in public practice with the firm of Stayner, Bates & Jensen, PC, Certified Public
Accountants, in Salt Lake City, Utah. Mr. Hanni was previously a partner with the firm of HJ &
Associates, LLC, a public accounting firm also in Salt Lake City, Utah. Mr. Hanni also serves on
the audit committee of Amerityre Corporation (“AMTY.OB”) and serves as a part-time Chief
Financial Officer for Medizone International, Inc. (“MZEI.OB”).
Due to his experience in public accounting, the Board concluded that Mr. Hanni
is qualified to serve. As a Director, Mr. Hanni is also Chairman of the Audit Committee.
BOARD COMMITTEES
BOARD LEADERSHIP STRUCTURE AND ROLE IN RISK OVERSIGHT
Although we have not adopted a formal
policy on whether the Chairman and Chief Executive Officer positions should be separate or combined,
we have traditionally determined that it is in the best interests of the Company and its
shareholders to combine these roles. Mr. Scheer has served as our CEO and Chairman since
inception. Due to the small size and early stage of the Company, we believe it is currently most
effective to have the Chairman and Chief Executive Officer positions combined.
Our Audit Committee is primarily
responsible for overseeing our risk management processes on behalf of our board of directors.
The Audit Committee receives and reviews periodic reports from management, auditors, legal counsel,
and others, as considered appropriate regarding our company’s assessment of risks. In addition,
the Audit Committee reports regularly to the full Board of Directors, which also considers our
risk profile. The Audit Committee and the full Board of Directors focus on the most significant
risks facing our company and our company’s general risk management strategy, and also ensure that
risks undertaken by our Company are consistent with the Board’s appetite for risk. While the Board
oversees our company’s risk management, management is responsible for day-to-day risk management
processes. We believe this division of responsibilities is the most effective approach for
addressing the risks facing our company and that our Board leadership structure supports this approach.
AUDIT COMMITTEE
The audit committee of the board of directors reviews the internal accounting procedures of our
company and consults with and reviews the services provided by our independent accountants. Petros
Kitsos, Jacques Vincent and Steve Hanni serve on our audit committee. The Board of directors has
determined that Mr. Hanni is the audit committee financial expert and he serves as the chairman
of the audit committee.
COMPENSATION COMMITTEE
The compensation committee of the board of directors:
| • | Reviews and recommends to the board the compensation and benefits of our executive officers; |
| • | Administers our stock option plans and employee stock purchase plan; and |
| • | Establishes and reviews general policies relating to compensation and employee benefits. |
Petros
Kitsos, Jacques Vincent and Steve Hanni serve on our compensation committee.
No interlocking relationships exist between the board of directors or compensation committee and
the board of directors or compensation committee of any other company. During the past fiscal year,
the compensation committee had no meetings.
NOMINATING COMMITTEE
The functions of the Nominating Committee are: (i) leading the search for, screening, evaluating and recommending to the Board qualified candidates or nominees for election or appointment as directors; (ii) recommending the number of members that shall serve on the Board; and (iii) reviewing the processes and performance of the Board in order to identify areas of concern or potential issues relating to Board and committee processes, performance and effectiveness and to assess and evaluate the overall effectiveness of individual directors. Petros Kitsos, Jacques Vincent and Steve Hanni were on our Nominating Committee.
30
Table of Contents
CODE OF ETHICS
We have adopted a Code of Ethics and Business Conduct for Officers, Directors and Employees that
applies to all of our officers, directors and employees. A copy of the Code of Ethics, may be
obtained, free of charge, by submitting written request to the Company.
INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
To our knowledge, during the past ten years, none of our directors, executive officers, promoters,
control persons, or nominees has been:
| • | convicted in a criminal proceeding or is subject to a pending criminal proceeding (excluding traffic violations and other minor offenses); |
| • | subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction or any Federal or State authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; |
| • | found by a court of competent jurisdiction (in a civil action), the Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law. |
| • | the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of (a) any Federal or State securities or commodities law or regulation; (b) any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or (c) any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or |
| • | the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
31
Table of Contents
| Item 11. | Executive Compensation |
The following table sets forth the cash compensation (including cash bonuses) paid and
equity awards granted by us for years ended December 31, 2009 and 2008 to our Chief Executive
Officer and our most highly compensated officers other than the Chief Executive Officer at December
31, 2009 whose total compensation exceeded $100,000.
| Change in | ||||||||||||||||||||||||||||||||||||
| Pension Value | ||||||||||||||||||||||||||||||||||||
| Non- | and Non- | |||||||||||||||||||||||||||||||||||
| Equity | Qualified | |||||||||||||||||||||||||||||||||||
| Incentive | Deferred | All | ||||||||||||||||||||||||||||||||||
| Stock | Option | Plan | Compensation | Other | ||||||||||||||||||||||||||||||||
| Name & Principal Position | Year | Salary ($) | Bonus ($) | Awards ($) | Awards ($) | Compensation ($) | Earnings ($) | Compensation ($) | Total ($) | |||||||||||||||||||||||||||
Frederic Scheer, CEO |
2009 | $ | 112,201 | $ | — | $ | 83,836 | $ | — | $ | — | $ | — | $ | 74,400 | $ | 270,437 | |||||||||||||||||||
| 2008 | $ | 202,909 | $ | — | $ | 164,367 | $ | — | $ | — | $ | — | $ | 98,422 | $ | 465,698 | ||||||||||||||||||||
Kelly,
William, Senior VP Technology |
2009 | $ | 135,247 | $ | — | $ | 106,250 | $ | — | $ | — | $ | — | $ | — | $ | 241,497 | |||||||||||||||||||
| 2008 | $ | 135,347 | $ | — | $ | 76,755 | $ | — | $ | — | $ | — | $ | — | $ | 212,102 | ||||||||||||||||||||
Larrivee,
Gary, Senior VP Technology Services |
2009 | $ | 109,314 | $ | — | $ | 25,686 | $ | — | $ | — | $ | — | $ | — | $ | 135,000 | |||||||||||||||||||
| 2008 | $ | 106,795 | $ | — | $ | 53,543 | $ | — | $ | — | $ | — | $ | — | $ | 160,338 | ||||||||||||||||||||
32
Table of Contents
DIRECTOR COMPENSATION
The following table sets forth with respect to the named director, compensation information
inclusive of equity awards and payments made in the year end December 31, 2009.
| Change in Pension | ||||||||||||||||||||||||||||
| Fees Earned | Non-Equity | Value and Nonqualified | ||||||||||||||||||||||||||
| or Paid in | Option | Incentive Plan | Deferred Compensation | All Other | ||||||||||||||||||||||||
| Name | Cash ($) | Stock Awards ($) | Awards ($) | Compensation ($) | Earnings ($) | Compensation ($) | Total ($) | |||||||||||||||||||||
Petros Kitsos |
$ | — | $ | 54,572 | $ | — | $ | — | $ | — | $ | — | $ | 54,572 | ||||||||||||||
Jacques Vincent |
$ | — | $ | 54,572 | $ | — | $ | — | $ | — | $ | — | $ | 54,572 | ||||||||||||||
Steve Hanni |
$ | — | $ | 49,000 | $ | — | $ | — | $ | — | $ | — | $ | 49,000 | ||||||||||||||
Commencing in 2008, The Board of Directors granted to Mr. Kitsos and Mr. Vincent are to receive 25,000 shares of Cereplast
restricted stock as compensation over a 3 year period and with vests at 1/3 per year over the three year period subject to a vesting agreement. Mr. Hanni
has received a total of 12,500 shares of the stock in December 2009.
EMPLOYMENT AND OTHER AGREEMENTS
We have entered into the following agreements filed in our corporate office with our executive
officers:
| • | In November 2006, we entered into an Employment Agreement effective January 1, 2007 with our Chief Executive Officer pursuant to which he agreed to serve as CEO for a period of five (5) years. He is entitled to a yearly cash compensation of $400,000 but has agreed to substitute part of his cash compensation for restricted stock until the cash flow of the company will permit. |
During the year ended December 31 ,2009, our Chief Executive Officer agreed to defer up to 40% of his annual cash base
salary until the cash flow of the company permits payment of these earned amounts.
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholders Matters |
The following table sets forth information regarding the beneficial ownership of our common stock
as of March 1, 2010. The information in this table provides the ownership information for:
| • | each person known by us to be the beneficial owner of more than 5% of our Common Stock; |
| • | each of our directors; |
| • | each of our executive officers; and |
| • | our executive officers and directors as a group. |
Beneficial ownership has been determined in accordance with the rules and regulations of the SEC
and includes voting or investment power with respect to the shares. Unless otherwise indicated, the
persons named in the table below have sole voting and investment power with respect to the number
of shares indicated as beneficially owned by them. Common stock beneficially owned and percentage
ownership is based on 9,877,976 shares outstanding on March 18, 2010, and assuming the exercise of
any options or warrants or conversion of any convertible securities held by such person, who are
presently exercisable or will become exercisable within 60 days after March 18, 2010.
| Name and Address of Beneficial Owner | Number of Shares Beneficially Owned | Percent of Class | ||||||
Frederic Scheer (1)(2) |
2,732,621 | 27.66 | % | |||||
William Kelly |
66,009 | * | ||||||
Gary Larrivee |
18,545 | * | ||||||
Mark Barton |
13,459 | * | ||||||
Margaret McMurray |
8,421 | * | ||||||
Petros Kitsos |
31,250 | * | ||||||
Jacques Vincent |
31,250 | * | ||||||
Steve Hanni |
12,500 | * | ||||||
All officers and directors as a group |
2,914,055 | 29.50 | % | |||||
| * | Less than one percent | |
| (1) | Mr. Scheer beneficially owns such shares jointly with his wife, Jocelyne Scheer and through their private foundation The Frederic & Jocelyne Scheer Foundation. | |
| (2) | Mr. Scheer gifted 42,125 shares to certain members of the management of Cereplast on March 10, 2009. |
33
Table of Contents
| Item 13. | Certain Relationships, Related Transactions, and Director Independence |
During the year ended December 31, 2008, the Company entered in to a loan agreement with one of our
shareholders, Mrs. Nathalie Leblanc, a sibling of our CEO, pursuant to which Mrs. Leblanc extended
a loan to the Company in the amount of $212,482. The loan was secured by the Company’s assets up
to the value of the loan, bears no interest, and was repayable on or before January 15, 2009 at the
Company’s discretion in cash or 36,250 shares of Cereplast common stock. In February, 2009 this
loan was repaid in full through the issue of 61,250 shares of Cereplast common stock, including the
36,250 shares related to the original principal conversion and 25,000 additional shares related to
the agreement to waive default penalties.
| Item 14. | Principal Accountant Fees and Services |
The following table sets forth all fees we incurred in connection with professional services
rendered by HJ Associates & Consultants, LLP during the years ended December 31, 2009, and 2008:
| Fee Type | 2009 | 2008 | ||||||
Audit Fees |
$ | 68,000 | $ | 67,485 | ||||
Tax Fees |
1,871 | 2,281 | ||||||
| $ | 69,871 | $ | 69,766 | |||||
The Audit Committee has adopted procedures for the pre-approval of audit and non-audit
services rendered by our independent registered public accountants, HJ Associates & Consultants,
LLP. up to specified amounts. Pre-approval may also be given as part of the audit committee’s
approval of the scope of the engagement of the independent registered public accountants or on an
individual explicit case-by-case basis before the independent registered public accountants are
engaged to provide each service.
The Audit Committee has determined that the provision of non-audit services is compatible with
maintaining the principal accountant’s independence.
34
Table of Contents
| Exhibit | ||||
| Number | Description | |||
| 3.1 | Articles of Incorporation. (Incorporated by reference to the
Form SB-2 Registration Statement filed with the Securities and Exchange
Commission dated July 5, 2005.) |
|||
| 3.2 | Certificate of Amendment to the Articles of Incorporation
dated February 26, 2003 (Incorporated by reference to the Form SB-2
Registration Statement filed with the Securities and Exchange Commission dated
July 5, 2005.) |
|||
| 3.3 | Certificate of Amendment to the Articles of Incorporation dated
July 19, 2004 (Incorporated by reference to the Form SB-2 Registration
Statement filed with the Securities and Exchange Commission dated July 5,
2005.) |
|||
| 3.4 | Certificate of Amendment to the Articles of Incorporation
dated March 18, 2005 (Incorporated by reference to the Form SB-2
Registration Statement filed with the Securities and Exchange Commission dated
July 5, 2005.) |
|||
| 3.5 | Certificate of Amendment to the Articles of Incorporation filed
January 6, 2010 (Incorporated by reference to the Registrant’s current report
on Form 8-K filed with the SEC on January 8, 2010) |
|||
| 3.6 | Bylaws (Incorporated by reference to the Form SB-2 Registration
Statement filed with the Securities and Exchange Commission dated July 5,
2005.) |
|||
| 3.7 | Amendment to Bylaws (Incorporated by reference to the Registrant’s
current report on Form 8-K filed with the SEC on
December 28, 2009) |
|||
| 3.8 | Employment Agreement effective January 1, 2007, with our Chief Executive Officer. |
|||
| 4.1 | Form of Subscription Agreement used in connection with
private offering dated April 2005 (Incorporated by reference to the Form
SB-2 Registration Statement filed with the Securities and Exchange Commission
dated August 26, 2005) |
|||
| 4.2 | Stock Option Plan(Incorporated by reference to the Form SB-2
Registration Statement filed with the Securities and Exchange Commission dated
August 26, 2005) |
|||
| 4.3 | Form of Subscription Agreement used in connection with
private offering of 21,800 shares of common stock (Incorporated by
reference to the Form SB-2 Registration Statement filed with the Securities and
Exchange Commission dated August 26, 2005) |
|||
| 4.4 | Periodic Equity Investment Agreement dated February 13, 2006
between the Company and Cumorah Capital, Inc. (Incorporated by reference to
the Form SB-2 Registration Statement filed with the Securities and Exchange
Commission dated February 14, 2006) |
|||
| 4.5 | Registration Rights Agreement dated February 13, 2006 between the
Company and Cumorah Capital, Inc. (Incorporated by reference to the Form
SB-2 Registration Statement filed with the Securities and Exchange Commission
dated February 14, 2006) |
|||
| 4.6 | Letter Agreement dated March 31, 2006 by and between the Company
and Cumorah Capital, Inc. (Incorporated by reference to the Form 8-K
Current Report filed with the Securities and Exchange Commission dated December
21, 2006) |
|||
| 4.7 | Periodic Equity Investment Agreement dated December 8, 2008 between
the Company and Cumorah Capital, Inc. (Incorporated by reference to the
Form 8-K Current Report filed with the Securities and Exchange Commission dated
December 8, 2008) |
|||
| 10.1 | Sale and Purchase Agreement entered between the Company and
Cargill Dow LLC (Incorporated by reference to the Form SB-2 Registration
Statement filed with the Securities and Exchange Commission dated August 26,
2005) |
|||
35
Table of Contents
| Exhibit | ||||
| Number | Description | |||
| 10.6 | Promissory Note in the amount of $100,000 in the name of Wings
Fund Inc. (Incorporated by reference to the Form SB-2 Registration
Statement filed with the Securities and Exchange Commission dated September 21,
2005.) |
|||
| 10.7 | Promissory Note in the amount of $50,000 in the name of
Yanosan Group (Incorporated by reference to the Form SB-2 Registration
Statement filed with the Securities and Exchange Commission dated September 21,
2005.) |
|||
| 10.8 | Form of Subscription Agreement used in connection with
private offering of 958,526 shares of common stock (Incorporated by
reference to the Form SB-2 Registration Statement filed with the Securities and
Exchange Commission dated July 6, 2007) |
|||
| 10.9 | Letter re Termination of Periodic Equity Investment Agreement dated
December 8, 2008 (Incorporated by reference to the Registrant’s current report
on Form 8-K filed with the SEC on February 19, 2010) |
|||
| 10.10 | Lease between Continental Grand I, L.P. and Cereplast, Inc. dated
December 31, 2009 (Incorporated by reference to the Registrant’s current report
on Form 8-K filed with the SEC on January 6, 2010) |
|||
| 14.1 | Code of Ethics (Incorporated by reference to the Form SB-2
Registration Statement filed with the Securities and Exchange
Commission dated July 5, 2005.) |
|||
| 31.1 | Certification of the Chief Executive Officer and the
Principal Accounting and Financial Officer pursuant to Section 302 of the Sarbanes
Oxley Act of 2002 |
|||
| 32.1 |
Certification of the Chief Executive Officer and the Principal Accounting and Financial Officer
pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. |
|||
36
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned on March 30, 2009,
thereunto duly authorized.
| CEREPLAST, INC. |
||||
| Dated: March 31, 2010 | By: | /s/ Frederic Scheer | ||
| Frederic Scheer, Chairman, | ||||
| Chief Executive Officer, Director and Principal Accounting and Financial Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
| Dated: March 31, 2010 | By: | /s/ Frederic Scheer | ||
| Frederic Scheer, | ||||
| Chairman, Chief Executive Officer, Director and Principal Accounting and Financial Officer | ||||
| Dated: March 31, 2010 | By: | /s/ Jacques Vincent | ||
| Jacques Vincent, Director | ||||
| Dated: March 31, 2010 | By: | /s/ Petros Kitsos | ||
| Petros Kitsos, Director | ||||
| Dated: March 31, 2010 | By: | /s/ Steve Hanni | ||
| Steve Hanni, Director | ||||
37
Table of Contents
| Item 15. | Exhibits and Financial Statement Schedules |
(a)(1) Index to Consolidated Financial Statements
| 36 | ||||
| 37 | ||||
| 38 | ||||
| 39 | ||||
| 40 | ||||
| 41 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Cereplast, Inc.
Cereplast, Inc.
El Segundo, California
We have audited the accompanying consolidated balance sheets of Cereplast, Inc. and subsidiaries as
of December 31, 2009 and 2008, and the related consolidated statements of operations and other
comprehensive income, shareholders’ equity, and cash flows for each of the two years in the period ended December 31, 2009.
These financial statements are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Cereplast, Inc. and subsidiaries as of December 31,
2009 and 2008, and the results of their operations and their cash flows for each of the two years
in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting
principles.
We were not engaged to examine management’s assessment of the effectiveness of Cereplast, Inc.’s
internal control over financial reporting as of December 31, 2009, included in the accompanying
Form 10-K and, accordingly, we do not express an opinion thereon.
By:
|
/s/ HJ Associates & Consultants, LLP | |||
| HJ Associates & Consultants, LLP | ||||
| Salt Lake City, Utah | ||||
| March 31, 2010 |
F-1
Table of Contents
CEREPLAST, INC.
CONSOLIDATED BALANCE SHEETS
| 12/31/2009 | 12/31/2008 | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash |
$ | 1,305,771 | $ | 501,699 | ||||
Accounts Receivable, Net |
325,270 | 280,102 | ||||||
Inventory, Net |
847,527 | 1,838,775 | ||||||
Prepaid Expenses |
215,356 | 160,863 | ||||||
Total Current Assets |
2,693,924 | 2,781,439 | ||||||
Property and Equipment |
||||||||
Property and Equipment |
5,416,436 | 5,729,051 | ||||||
Accumulated Depreciation |
(1,519,714 | ) | (1,132,337 | ) | ||||
Net Property and Equipment |
3,896,722 | 4,596,714 | ||||||
Other Assets |
||||||||
Restricted Cash |
— | 48,628 | ||||||
Intangibles, Net |
184,039 | 173,285 | ||||||
Deposits |
89,286 | 44,943 | ||||||
Total Other Assets |
273,325 | 266,856 | ||||||
Total Assets |
$ | 6,863,971 | $ | 7,645,009 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current Liabilities |
||||||||
Accounts Payable |
$ | 989,927 | $ | 962,096 | ||||
Other Payables |
1,413 | 33,634 | ||||||
Accrued Expenses |
604,015 | 829,933 | ||||||
Capital Leases, Current Portion |
25,341 | 47,440 | ||||||
Convertible Shareholder Loan |
— | 212,482 | ||||||
Loan Payable, Current Portion |
53,487 | 156,522 | ||||||
Total Current Liabilities |
1,674,183 | 2,242,107 | ||||||
Long-Term Liabilities |
||||||||
Capital Leases |
8,897 | 40,045 | ||||||
Total Long-Term Liabilities |
8,897 | 40,045 | ||||||
Total Liabilities |
1,683,080 | 2,282,152 | ||||||
Shareholders’ Equity |
||||||||
Preferred Stock, $0.001 Par Value;
5,000,0000 Authorized Preferred Shares , Zero Outstanding |
— | — | ||||||
Common Stock, $0.001 Par Value;
495,000,000 Authorized Shares; 9,825,476 Shares &
7,028,359 Shares Issued and Outstanding, Respectively |
9,825 | 7,028 | ||||||
Common Stock
Subscribed, Not Issued |
— | 250,000 | ||||||
Additional Paid in Capital |
40,578,981 | 34,449,129 | ||||||
Retained Earnings/(Deficit) |
(35,444,968 | ) | (29,372,020 | ) | ||||
Other Comprehensive Income |
37,053 | 28,720 | ||||||
Total Shareholders’ Equity |
5,180,891 | 5,362,857 | ||||||
Total Liabilities and Shareholders’ Equity |
$ | 6,863,971 | $ | 7,645,009 | ||||
See accompanying notes to consolidated financial statements.
F-2
Table of Contents
CEREPLAST, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
| Year Ended | Year Ended | |||||||
| 12/31/2009 | 12/31/2008 | |||||||
GROSS SALES |
$ | 2,751,445 | $ | 4,599,303 | ||||
Sales Discounts, Returns & Allowances |
(12,437 | ) | (87,147 | ) | ||||
NET SALES |
2,739,008 | 4,512,156 | ||||||
COST OF SALES |
2,401,424 | 4,431,976 | ||||||
GROSS PROFIT |
337,584 | 80,180 | ||||||
OPERATING EXPENSES |
||||||||
Depreciation and Amortization |
538,098 | 545,832 | ||||||
Financing Costs |
— | 100,027 | ||||||
Marketing Expense |
371,237 | 1,547,547 | ||||||
Professional Fees |
728,454 | 996,322 | ||||||
Rent Expense |
549,955 | 1,064,765 | ||||||
Research and Development |
313,078 | 1,071,814 | ||||||
Salaries & Wages |
1,708,537 | 3,263,518 | ||||||
Salaries & Wages — Stock Based Compensation |
273,919 | 2,859,680 | ||||||
Other Operating Expenses |
1,230,979 | 1,829,864 | ||||||
TOTAL OPERATING EXPENSES |
5,714,257 | 13,279,369 | ||||||
LOSS FROM OPERATIONS BEFORE OTHER
INCOME(EXPENSES) |
(5,376,673 | ) | (13,199,189 | ) | ||||
OTHER INCOME (EXPENSES) |
||||||||
Gain on Marketable Securities |
— | 346,280 | ||||||
Restructuring Costs |
(448,846 | ) | — | |||||
Loss on Settlement of Litigation |
(67,200 | ) | — | |||||
Loss on Sale of Equipment |
(172,366 | ) | (4,588 | ) | ||||
Interest Income |
20,935 | 117,628 | ||||||
Interest Expense |
(28,798 | ) | (8,832 | ) | ||||
TOTAL OTHER INCOME (EXPENSES) |
(696,275 | ) | 450,488 | |||||
LOSS BEFORE PROVISIONS FOR TAXES |
(6,072,948 | ) | (12,748,701 | ) | ||||
Provision for Taxes |
— | — | ||||||
NET LOSS |
(6,072,948 | ) | (12,748,701 | ) | ||||
OTHER COMPREHENSIVE INCOME |
||||||||
Gain on Foreign Currency Translation |
8,333 | 28,720 | ||||||
TOTAL COMPREHENSIVE LOSS |
$ | (6,064,615 | ) | $ | (12,719,981 | ) | ||
BASIC AND DILUTED LOSS PER SHARE |
$ | (0.75 | ) | $ | (1.92 | ) | ||
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED |
8,044,487 | 6,644,184 | ||||||
See accompanying notes to consolidated financial statements.
F-3
Table of Contents
CEREPLAST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE LOSS
| Other | ||||||||||||||||||||||||||||||||||||
| Common Stock | Preferred Stock | Additional | Accumulated | Comprehensive | Subscribed | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Paid-In Capital | Deficit | Income | Stock | Total | ||||||||||||||||||||||||||||
Balance, December 31, 2007 |
6,482,560 | $ | 6,482 | — | $ | — | $ | 28,983,367 | $ | (16,623,319 | ) | $ | — | $ | — | $ | 12,366,530 | |||||||||||||||||||
Issuance of common stock as compensation. Stock price ranging from $4.40 per share to $25.60
per share |
169,431 | 169 | — | — | 1,688,644 | — | — | — | 1,688,813 | |||||||||||||||||||||||||||
Issuance of common stock to 3rd parties and directors for services. Stock price ranging from
$4.40 per share to $25.60 per share |
51,652 | 52 | — | — | 749,061 | — | — | — | 749,113 | |||||||||||||||||||||||||||
Expense relating to stock options under employee stock option plan |
— | — | — | — | 578,066 | — | — | — | 578,066 | |||||||||||||||||||||||||||
Issuance of common stock for cash. Stock price ranging from $8.80 per share to $15.20 per share |
299,716 | 300 | — | — | 2,637,200 | — | — | — | 2,637,500 | |||||||||||||||||||||||||||
Issuance of common stock to Cumorah for commitment fee on equity line of financing |
25,000 | 25 | — | — | 99,975 | — | — | — | 100,000 | |||||||||||||||||||||||||||
Stock subscription for stock not issued |
— | — | — | — | — | — | — | 250,000 | 250,000 | |||||||||||||||||||||||||||
Stock Offering Costs |
— | — | — | — | (287,184 | ) | — | — | — | (287,184 | ) | |||||||||||||||||||||||||
Net loss for the year ended December 31, 2008 |
— | — | — | — | — | (12,748,701 | ) | — | — | (12,748,701 | ) | |||||||||||||||||||||||||
Gain on foreign currency translation |
— | — | — | — | — | — | 28,720 | — | 28,720 | |||||||||||||||||||||||||||
Balance, December 31, 2008 |
7,028,359 | 7,028 | — | — | 34,449,129 | (29,372,020 | ) | 28,720 | 250,000 | 5,362,857 | ||||||||||||||||||||||||||
Stock issued in fulfillment of subscriptions at $2.00 per share |
125,000 | 125 | — | — | 249,875 | — | — | (250,000 | ) | — | ||||||||||||||||||||||||||
Issuance of
common stock in repayment of a convertible shareholder loan at $3.47 per share. |
61,250 | 61 | — | — | 212,421 | — | — | — | 212,482 | |||||||||||||||||||||||||||
Issuance of common stock for the services of directors and employees. Stock at prices ranging
from $3.60 per share to $6.00 per share |
212,400 | 212 | — | — | 860,597 | — | — | — | 860,809 | |||||||||||||||||||||||||||
Issuance of common stock to 3rd parties for prepaid services and debt repayment. Stock price
ranging from $3.60 per share to $5.20 per share |
318,590 | 319 | — | — | 1,300,961 | — | — | — | 1,301,280 | |||||||||||||||||||||||||||
Expense relating to cancellation of stock options under employee stock option plan |
— | — | — | — | (259,056 | ) | — | — | — | (259,056 | ) | |||||||||||||||||||||||||
Issuance of common stock for cash. Stock price ranging from $1.60 per share to $2.00 per share |
1,948,170 | 1,948 | — | — | 3,894,393 | — | — | — | 3,896,341 | |||||||||||||||||||||||||||
Issuance of common stock to Cumorah for commitment fee on equity line of financing |
114,207 | 114 | — | — | 299,886 | — | — | — | 300,000 | |||||||||||||||||||||||||||
Issuance of common stock for litigation settlement. |
17,500 | 18 | — | — | 67,182 | — | — | — | 67,200 | |||||||||||||||||||||||||||
Stock Offering Costs |
— | — | — | — | (496,407 | ) | — | — | — | (496,407 | ) | |||||||||||||||||||||||||
Net loss for the year ended December 31, 2009 |
— | — | — | — | — | (6,072,948 | ) | — | — | (6,072,948 | ) | |||||||||||||||||||||||||
Gain on foreign currency translation |
— | — | — | — | — | — | 8,333 | — | 8,333 | |||||||||||||||||||||||||||
Balance, December 31, 2009 |
9,825,476 | $ | 9,825 | — | $ | — | $ | 40,578,981 | $ | (35,444,968 | ) | $ | 37,053 | $ | — | $ | 5,180,891 | |||||||||||||||||||
See accompanying notes to consolidated financial statements.
F-4
Table of Contents
CEREPLAST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended | Year Ended | |||||||
| 12/31/2009 | 12/31/2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net Loss |
$ | (6,072,948 | ) | $ | (12,748,701 | ) | ||
Adjustment to Reconcile Net Loss to Net Cash
Used in Operating Activities |
||||||||
Depreciation
and Amortization |
538,098 | 545,832 | ||||||
Reserve for Inventory Obsolescence |
(132,000 | ) | 132,000 | |||||
Allowance for Doubtful Accounts |
4,987 | 18,051 | ||||||
Loss on Sale of Equipment |
172,366 | 4,588 | ||||||
Gain on Sale
of Securities |
— | (346,280 | ) | |||||
Common Stock and Common Stock Equivalents Issued for Services,
Salaries & Wages |
712,153 | 3,115,992 | ||||||
Loss on Settlement of Litigation |
67,200 | — | ||||||
(Increase) Decrease in: |
||||||||
Accounts Receivable |
(50,155 | ) | 132,867 | |||||
Inventory |
1,123,248 | (143,108 | ) | |||||
Deposits |
(44,343 | ) | (14,465 | ) | ||||
Prepaid Expenses |
1,026,173 | (93,273 | ) | |||||
Restricted Cash |
48,628 | 24,264 | ||||||
Intangibles |
(19,377 | ) | (161,122 | ) | ||||
Increase (Decrease) in: |
||||||||
Accounts Payable |
88,497 | 514,455 | ||||||
Accrued Expenses |
(255,918 | ) | 676,986 | |||||
Other Payables |
(32,220 | ) | 33,488 | |||||
NET CASH USED IN OPERATING ACTIVITIES |
(2,795,611 | ) | (8,308,426 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchase of Property and Equipment |
(18,319 | ) | (2,891,918 | ) | ||||
Proceeds from Sale of Equipment |
3,617 | 2,936 | ||||||
Proceeds from Sale of Securities |
— | 346,780 | ||||||
NET CASH USED IN INVESTING ACTIVITIES |
(14,702 | ) | (2,542,202 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Advances/(Payments) on Shareholder Loans |
— | 212,482 | ||||||
Payments on Capital Leases |
(53,247 | ) | (71,767 | ) | ||||
Payments on Term Loan Payable |
(3,874 | ) | (11,138 | ) | ||||
Payments on Notes Payable |
(36,761 | ) | — | |||||
Proceeds from Issuance of Common Stock and Subscription Receivable |
4,196,341 | 2,877,500 | ||||||
Stock Offering Costs |
(496,407) | (287,184) | ||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES |
3,606,052 | 2,729,893 | ||||||
FOREIGN CURRENCY TRANSLATION |
8,333 | 28,720 | ||||||
NET DECREASE IN CASH |
804,072 | (8,092,015 | ) | |||||
CASH, BEGINNING OF PERIOD |
501,699 | 8,593,714 | ||||||
CASH, END OF PERIOD |
$ | 1,305,771 | $ | 501,699 | ||||
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
During the year ended December 31, 2009, the Company issued 1,948,170 shares in exchange for proceeds of
$3,896,341 under private placements, 114,207 shares in exchange for net proceeds of $300,000 pursuant to a Periodic Equity
Investment Agreement, and 125,000 shares in fulfillment of subscriptions payable of $250,000. During the year ended
December, 31, 2008, the Company issued 299,715 shares in exchange for gross proceeds of $2,637,500 under a
private placement. During the year ended December 31, 2009, and the year ended December 31, 2008, the Company paid $28,798
and $8,832, respectively, in cash for interest and $0 for taxes.
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS
During the year ended December 31, 2009, the Company issued 212,400 shares valued at $860,809 for services to
directors and employees and 318,590 shares valued at $1,301,280 for prepaid services and debt repayment to third parties.
61,250 shares of restricted common stock valued at $212, 482 were issued to one of our shareholders in repayment of a
convertible shareholder loan and 17,500 shares of restricted common stock valued at $67,200 were issued under the term of a litigation settlement. The
Company also recognized $(259,056) of net expense for vesting of employee stock options for the same period.
During the year ended December 31, 2008, the Company issued 206,930 shares, valued at $2,321,313 for services to employees
and directors and 39,152 shares valued at $216,613 for services to third parties. The Company also recognized $578,067 of
expense related to the vesting of employee stock options for the year ended December 31, 2008.
See accompanying notes to consolidated financial statements.
F-5
Table of Contents
CEREPLAST, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
1. ORGANIZATION AND LINE OF BUSINESS
Organization
We were incorporated on September 29, 2001 in the State of Nevada under the name of Biocorp North
America Inc. On March 18, 2005, we filed an amendment to our certificate of incorporation to
change our name to Cereplast, Inc.
Line of Business
We have developed and are commercializing proprietary bio-based resins through two complementary
product families: Cereplast Compostables® Resins which are renewable, ecologically sound substitute
for petroleum-based plastics and Cereplast Hybrid® Resins, which replace up to 50% of the
petroleum-based content of traditional plastics with materials from renewable resources. Our
resins aim to be competitively priced compared to petroleum-based plastic resins and can be
converted into finished products using conventional manufacturing equipment without significant
additional capital investment by downstream converters.
The demand for non-petroleum based, clean and renewable sources for materials, such as bioplastics,
and the demand for compostable/biodegradable products are being driven globally by a variety of
factors, including fossil fuel price volatility, energy security and environmental concerns. These
factors have led to increased spending on clean and renewable products by corporations and
individuals as well as legislative initiatives at the local and state level.
We are a full-service resin solution provider uniquely positioned to capitalize on the rapidly
increasing demand for sustainable and environmentally friendly alternatives to traditional plastic
products.
We primarily conduct our operations through three product families:
| • | Cereplast Compostables Resins® are renewable, ecologically-sound substitutes for petroleum-based plastics targeting primarily single-use disposables and packaging applications. We offer 17 commercial grades of Compostables Resins in this product line. These resins are compatible with existing manufacturing processes and equipment making them a ready substitute for traditional petroleum-based resins. We commercially introduced our Compostables line in November 2006. | ||
| • | Cereplast Hybrid Resins® replace up to 50% of the petroleum content in conventional plastics with bio-based materials such as industrial starches sourced from plants. The Hybrid Resin line is designed to offer similar properties to traditional polyolefins such as impact strength and heat deflection temperature, and is compatible with existing converter processes and equipment. Hybrid Resins provide a viable alternative for brand owners and converters looking to partially replace petroleum-based resins in durable goods applications. Hybrid Resins address this need in a wide range of markets, including automotive, consumer goods, consumer electronics, medical, packaging, and construction. We commercially introduced our first grade of Hybrid Resin, Hybrid 150, at the end of 2007. We currently offer two commercial grades in this product line. | ||
| • | Cereplast Algae Plastics™. In October 2009 we announced that we have been developing a new technology to transform algae into bioplastics and intend to launch a new family of algae-based resins that will complement the company’s existing line of Compostables & Hybrid resins. Although we do not expect this new technology to become commercial before the end of 2010 or early 2011, it remains an important development as we believe that the potential open by algae is quite substantial. Cereplast algae-based resins could replace in a first step 50% or more of the petroleum content used in traditional plastic resins. Currently, Cereplast is using renewable material such as starches from corn, tapioca, wheat and potatoes and Ingeo® PLA. Recently the algae production business has attracted a lot of attention when Exxon announced a $600 million investment in Synthetic Genomics and BP’s $10 million investment in Martek Biosciences. The Company retains that algae is a very attractive feedstock as it does offer a low carbon footprint alternative and at the same time could be accessible in very large quantity. We also have a future plan to create algae plastic made of 100% algae component abandoning any reliance on fossils fuels. |
As of December 31, 2009, over 230 companies have requested and been provided with samples of our
bioplastic resin and 150 customers have purchased resin for trials and testing. Of these, 80
customers have advanced to prototype testing and qualification of more than 135 different product
applications. Thirty customers, including Dorel Industries, WNA, Alcoa, Genpak, Innoware, Penley,
Solo, Cadaco, Jatco, Dentek, CSI-Cosmolab, Warner Tools, Handgards and Pace Industries, have
commercialized and introduced 95
different bioplastic products using our resin. As a result of successful testing and commercial
product launches, some of our customers have signed multi-year supply contracts with increasing
volume.
F-6
Table of Contents
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with
generally accepted accounting principles in the United States. (“GAAP”) The consolidated financial
statements include the financial condition and results of operations of our wholly-owned
subsidiary, Cereplast International, S.A., a Luxembourg company organized during the year ended
December 31, 2008, for the purpose of conducting sales operations in Europe. Intercompany balances
and transactions have been 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 amounts reported in the accompanying financial
statements. Significant estimates made in preparing these financial statements include the
estimate of useful lives of property and equipment, the deferred tax valuation allowance and the
fair value of stock options. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the 2008 financial statements in order for them to conform to the classifications used for the 2009 year.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or
less to be cash equivalents. At various times throughout the year, the Company may have exceeded
federally insured limits.
Concentration of Credit Risk
We had
unrestricted cash, cash equivalents, and short-term investment,
totaling $1,305,771 and
$501,699 at December 31, 2009 and 2008, respectively. The unrestricted cash and cash equivalents
are held for working capital purposes. We do not enter into investments for trading or
speculative purposes. Some of the securities in which we invest, however, may be subject to market
risk. This means that a change in prevailing interest rates may cause the principal amount of the
investment to fluctuate. To minimize this risk, we intend to maintain our portfolio of cash
equivalents and short-term investments in a variety of securities, including commercial paper,
money market funds, debt securities and certificates of deposit. Due to the short-term nature of
these investments, we believe that we do not have any material exposure to changes in the fair
value of our investment portfolio as a result of changes in interest rates. As of December 31,
2009, all of our investments were held in money market accounts and short-term instruments. We
actively monitor changes in interest rates.
Accounts Receivable
The Company extends unsecured credit to its customers in the normal course of business. Periodically, the Company performs credit and valuations of its customers’ financial condition for determination of allowance for doubtful accounts.
Liquidity and Capital Resources
We have incurred a net loss of $6,072,948 for the year ended December 31, 2009, and $12,748,701 for the year ended December 31, 2008, and have an accumulated deficit of $35,444,968 as of December 31, 2009. Based on our operating plan, our existing working capital will not be sufficient to meet the cash requirements to fund our planned operating expenses, capital expenditures and working capital requirements through December 31, 2010 without additional sources of cash.
Our plan to address the shortfall of working capital is to generate additional financing through a combination of financing of assets, incremental product sales and the sale of equity securities. There are no assurances that we will be able to obtain any sources of financing on acceptable terms, or at all.
If we cannot obtain sufficient additional financing in the short-term, we may be forced to file for bankruptcy or cease operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be forced to take such actions.
Other Concentration
During the year ended December 31, 2009, we had two significant suppliers that accounted for 27.9% and 18.7%, respectively, of total cost of goods sold and had three customers, Dorel Juvenile Group, which accounted for 32.7% of total sales. Innoware Plastics Inc. which accounted for 10.3% of total sales, and Solo Cup Company which accounted for 11.3% of total sales. No other supplier or customer accounted for more than 10% of cost of sales or sales during this period.
Restricted Cash
We had restricted cash in the amount of $0 and $48,628 at December 31, 2009 and 2008, respectively. The restricted cash amount consists of a “Certificate of Deposit” which supports a “Letter of Credit” for a leased facility.
Fair Value of Financial Instruments
The carrying amounts of our financial instruments as of December 31, 2009 and 2008, which include cash equivalents, accounts receivable, unbilled receivable, accounts payable, accrued expenses, and advances on financing from investors, approximate their fair values due to the short-term nature of these instruments.
Accounts Receivable
We maintain an allowance for doubtful accounts for estimated losses that may arise if any of our
customers are unable to make required payments. Management performs a review of the receivables
past due from customers on a monthly basis and reserves
against uncollectible items for each customer after all reasonable means of collection have been
exhausted, and the potential for recovery is considered remote. The allowance for doubtful accounts
was $34,337 and $29,350 as of December 31, 2009 and 2008, respectively.
F-7
Table of Contents
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or market, and consist
primarily of raw materials used in the manufacturing of bioplastic resins, finished bioplastic
resins and finished goods. Inventories are reviewed for excess and obsolescence and a reserve is
established accordingly. During the year ended December 31, 2009 and 2008, an obsolescence reserve of
$0 and $132,000 was recorded and charged as cost of sales. As of December 31, 2009 and 2008, the
inventories are as follows:
| 2009 | 2008 | |||||||
Raw Materials |
$ | 344,489 | $ | 608,984 | ||||
Bioplastic Resins |
355,082 | 1,040,255 | ||||||
Finished Goods |
76,458 | 291,890 | ||||||
Packaging Materials |
14,978 | 29,646 | ||||||
WIP |
56,520 | — | ||||||
Reserve for Obsolescence |
— | (132,000 | ) | |||||
Inventories, Net |
$ | 847,527 | $ | 1,838,775 | ||||
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed on the straight-line method
over the estimated useful lives of the assets. The estimated useful lives of the assets are between
five and seven years. Repairs and maintenance expenditures are charged to expense as incurred.
Property and Equipment consist of:
| 2009 | 2008 | |||||||
Equipment |
$ | 2,518,132 | $ | 2,582,204 | ||||
Construction in Progress |
2,588,904 | 2,593,937 | ||||||
Furniture & Fixtures |
275,055 | 325,738 | ||||||
Leasehold Improvements |
34,345 | 227,172 | ||||||
| 5,416,436 | 5,729,051 | |||||||
Less Accumulated Depreciation |
(1,519,714 | ) | (1,132,337 | ) | ||||
Net Property and Equipment |
$ | 3,896,722 | $ | 4,596,714 | ||||
Intangibles
Intangibles are stated at cost and consist primarily of patents and trademarks. Amortization is
computed on the straight-line method over the estimated life of these assets, estimated to be
between five and fifteen years.
| 2009 | 2008 | |||||||
Intangibles |
$ | 208,304 | $ | 188,927 | ||||
Less Accumulated Amortization |
(24,265 | ) | (15,642 | ) | ||||
Net Intangibles |
$ | 184,039 | $ | 173,285 | ||||
Deferred Income Taxes
Deferred income taxes are provided using the liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating loss and tax credit carry forwards
and deferred tax liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and liabilities and their
tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred tax assets will not
be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in
tax laws and rates of the date of enactment.
F-8
Table of Contents
The benefit of a tax position is recognized in the financial statements in the period during which,
based on all available evidence, management believes it is more likely than not that the position
will be sustained upon examination, including the resolution of appeals or litigation processes, if
any. Tax positions taken are not offset or aggregated with other positions. Tax positions that
meet the more-likely-than-not recognition threshold are measured as the largest amount of tax
benefit that is more than 50 percent likely of being realized upon settlement with the applicable
taxing authority. The portion of the benefits associated with tax positions taken that exceeds the
amount measured as described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and penalties that would be payable
to the taxing authorities upon examination.
Interest and penalties associated with unrecognized tax benefits are classified as additional
income taxes in the statement of income.
Revenue Recognition
We recognize revenue at the time of shipment of products, provided that evidence of an arrangement
exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and
collection of the related receivable is reasonably assured.
Marketing and Advertising
We expense marketing and advertising costs as incurred. Marketing and advertising costs for the
year ended December 31, 2009 and 2008 were $371,237 and $1,547,547, respectively.
Research and Development Costs
Research and development costs are charged to expense as incurred. These costs consist primarily of
research with respect to new grades of bioplastic resins, testing of both the bioplastic resins as
well as testing of finished products made from the bio-based resins. The costs for the years ended
December 31, 2009 and 2008 were $313,078 and $1,071,814 respectively.
Stock-Based Compensation
Compensation cost for all stock-based awards is measured at fair value on the date of grant and
recognized over the service period for awards expected to vest. The fair value of stock options is
determined using the Black-Scholes valuation model. Such value is recognized as expense over the
service period, net of estimated forfeitures, using the straight-line method. Adjustments to this
expense are made periodically to recognize actual rates of forfeiture which vary significantly from
estimates. During the years ended December 31, 2009 and 2008, such adjustments resulted in stock
based compensation of $(259,056) and $0, respectively.
Loss per Share Calculations
Basic earnings per share is computed by dividing income available to common shareholders by
the weighted-average number of common shares available. Diluted earnings per share is computed
similar to basic earnings per share except that the denominator is increased to include the number
of additional common shares that would have been outstanding if the potential common shares had
been issued and if the additional common shares were dilutive. Our diluted loss per share is the
same as the basic loss per share for the years ended December 31, 2009 and 2008, as inclusion of any
potential shares would have had and anti-dilutive effect due to us generating a loss.
Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in
the ordinary course of business. However, litigation is subject to inherent uncertainties, and an
adverse result in these or other matters may arise from time to time that may harm our business. We
are currently not aware of any such legal proceedings or claims that we believe will have,
individually or in the aggregate, a material adverse affect on our business, financial condition or
operating results.
3. CAPITAL STOCK
Reverse Stock Split
On March 15,2010, we implemented a reverse spit of our common stock in ratio of one-for-forty. The
reverse split was effective at 6:00 a.m. on March 15, 2010. All historical and per share amounts
have been adjusted to reflect the reverse stock split.
F-9
Table of Contents
During the year ended December 31, 2009, we issued shares of common stock as follows:
| • | In private placement transactions, which were made in reliance upon an exemption from registration under rule 506 of Regulation D promulgated under Section 4(2) of the Securities Act of 1933, as amended the “Securities Act”), we issued 1,948,170 restricted shares of common stock for gross cash proceeds of $3,896,341, and 125,000 restricted shares of common stock in fulfillment of subscriptions received prior to December 31, 2008 of $250,000. | ||
| • | Also on February 18, 2009 we also issued 61,250 shares of restricted common stock valued at $212,482 to one of our shareholders, a party related to our Chief Executive Officer, in repayment of a convertible shareholder loan. The stock issuance includes 36,250 shares related to the original principal amount of $212,482 and 25,000 additional shares related to an agreement to waive default penalties. | ||
| • | We issued 318,590 shares of restricted common stock valued at $1,301,280 for debt repayment and services from third parties rendered during the year. | ||
| • | We issued 212,400 shares of restricted common stock valued at $860,809 to directors and various employees during the period. | ||
| • | We issued 114,207 shares of restricted common stock for net cash proceeds of $300,000 pursuant to the Periodic Equity Investment Agreement with Cumorah Capital, Inc. dated December 8, 2008. | ||
| • | We issued 17,500 shares of restricted common stock valued at $67,200 under the terms of a litigation settlement. |
During the year ended December 31, 2008, we issued shares of common stock as follows:
| • | In a private placement transaction completed on September 8, 2008, which was made in reliance upon an exemption from registration under rule 506 of Regulation D promulgated under Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), we issued 299,716 restricted shares of common stock for gross cash proceeds of $2,637,500, less related fees and expenses in the amount of $287,184. | ||
| • | We issued 25,000 shares of restricted common stock valued at $100,000 as a commitment fee related to a Periodic Equity Investment Agreement with Cumorah Capital, Inc entered into on December 8, 2008. | ||
| • | We issued 221,083 shares of common stock valued at $2,437,926 to various employees, directors, and third parties for services rendered. |
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Valuation Assumptions for Stock Options
During the year ended December 31, 2007, total stock options granted to employees were 290,625 with
estimated total grant-date fair values of $4,481,665. We estimate that stock-based compensation
for awards not expected to be exercised is $864,688. We did not issue any stock options to
employees during 2009. During the year ended December 31, 2009 and 2008, we recorded stock-based
compensation related to stock options of $273,919 and $2,859,680, respectively relating to the
vesting of the 2007 grants. The fair value for each stock option granted during the year
ended December 31, 2007 was estimated at the date of grant using the Black-Scholes option-pricing
model, assuming no dividends and the following assumptions.
| Year ended | ||||
| December 31, | ||||
| 2009 | ||||
Average risk-free interest rate |
3.84 | % | ||
Average expected life (in years) |
5.1 | |||
Volatility |
102.2 | % | ||
| • | Expected Volatility: The fair values of stock based payments were valued using a volatility factor based on our historical stock prices. | ||
| • | Expected Term: We elected to use the “simplified method” as discussed in SAB No. 107 to develop the estimate of the expected term. | ||
| • | Expected Dividend: We have not paid any dividends and do not anticipate paying dividends in the foreseeable future. | ||
| • | Risk-Free Interest Rate: We base the risk-free interest rate used on the implied yield currently available on U.S. Treasury zero-coupon issues with remaining term equivalent to the expected term of the options. |
Stock Option Activity
Our board of directors adopted the 2004 Employee Stock Option Plan. Under this Plan, the Board of
Directors may issue incentive and non-qualified stock options to our employees. Options granted
under this Plan generally expire at the end of five or ten years and vest in accordance with a
vesting schedule determined by our Board of Directors, usually over three years from the grant
date. As of December 31, 2009, 2004 Employee Stock Option Plan, 334,375 shares are available for
future grants under the 2004 Employee Stock Option Plan. We settle stock option exercises with
newly issued common shares. The following is a summary of stock option activity (in thousands,
except per share data):
| 2009 | 2008 | |||||||||||||||
| Weighted Average | Weighted Average | |||||||||||||||
| Shares | Exercise Price | Shares | Exercise Price | |||||||||||||
Outstanding—beginning of year |
249 | $ | 22.40 | 290 | $ | 22.40 | ||||||||||
Granted at fair value |
— | — | — | — | ||||||||||||
Exercised |
— | — | — | — | ||||||||||||
Canceled/forfeited |
(178 | ) | 22.40 | (41 | ) | 22.40 | ||||||||||
Outstanding—end of year |
71 | 18.40 | 249 | 22.40 | ||||||||||||
Options exercisable at
year-end |
71 | $ | 18.40 | 171 | $ | 22.40 | ||||||||||
The following table summarizes information about stock options as of December 31, 2009 (in
thousands, except per share data):
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||||||
| Weighted | Weighted | |||||||||||||||||||||||||||||||
| Weighted | Average | Weighted | Average | |||||||||||||||||||||||||||||
| Average | Remaining | Aggregate | Average | Remaining | Aggregate | |||||||||||||||||||||||||||
| Exercise | Contract | Intrinsic | Exercise | Contract | Intrinsic | |||||||||||||||||||||||||||
| Range of Exercise Prices | Shares | Price | Life | Value | Shares | Price | Life | Value | ||||||||||||||||||||||||
$0.0-$22.40 |
71 | $ | 18.40 | 4.3 | — | 71 | $ | 18.40 | 4.3 | — | ||||||||||||||||||||||
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Table of Contents
All awards are vested as of December 31, 2009.
The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based
on our average stock price of $4.40 and $14.80 during the year ended December 31, 2009, and 2008,
which would have been received by the option holders had all option
holders exercised their options as of that date. Based on the average stock price during the years
ended December 31, 2009, and 2008, there were no in-the-money options exercisable as of December
31, 2009 and 2008.
No
options were granted and 42,351 shares vested during the year ended December 31, 2009.
Additionally, no options were exercised during the year ended December 31, 2009, and as such no
cash was received from employees as a result of any such exercise of stock options.
4. REVOLVING LINE OF CREDIT
The Company has one revolving line of credit with total availability of $25,000. As of December
31, 2009 and December 31, 2008, the Company did not have any borrowings under the line of credit.
5. LEASES
We currently operate out of two main locations in Hawthorne, California and Seymour, Indiana. The
various leases underlying these two facilities are summarized below:
California Facilities — The Hawthorne facility consisted of one building covering an aggregate of
25,000 square feet that serve as our main corporate office, research and development lab,
production facility and logistic center. The Hawthorne facility is subject to two operating
leases:
| • | a lease for office, industrial and warehouse space with monthly rents of $15,405 expiring in January 2010; | ||
| • | a lease for office and warehouse space with monthly rents of $20,644 expiring in April 2012 has been vacated and terminated prior to expiration; and |
An additional lease for a 30,000 square foot facility for office and warehouse space was terminated
during the second quarter of 2009 as part of our facilities consolidation and cost reduction
efforts under out Strategic Restructuring Program.
All Leases were terminated in 2009 prior to their contractual expiration date through amicable
negotiation. On December 2009, the Company entered into a new office lease for a 3,000 square foot facility
located in El Segundo, CA.
Indiana Facility — The 105,000 square foot Seymour facility is currently used as a distribution
facility for our products; construction and installation of our first production line is
mechanically completed. The Seymour facility is subject to a lease with monthly rents of $25,000
expiring in January 2018, however the rent agreement has been amended with a substantial rent
reduction for a period of several months ending at the end of 2010.
The future minimum lease payments are as follows:
2010 |
$ | 120,000 | ||
2011 |
300,000 | |||
2012 |
300,000 | |||
2013 |
300,000 | |||
2014 |
300,000 | |||
Thereafter |
1,200,000 | |||
| 2,520,000 | ||||
6. LOANS PAYABLE
Term Loan
During the year ended December 31, 2004, the Company obtained a term loan payable in the amount of
$50,000, bearing interest at 6.75% per annum. The loan matured and the outstanding
balance of $3,874 was repaid during the second quarter of 2009.
Notes Payable
During the year ended December 31, 2008, the Company issued a promissory note to a vendor for
services provided in the amount of $152,648 which bears interest at the rate of 1.5% per month due
in full on February 6, 2009. A payment of $65,000 and stock valued at $62,400 was issued to the
vendor in December 2009. The remaining balance at December 31, 2009 of $53,487 was paid in January 2010,
Shareholder Loan
During the year ended December 31, 2008, we received a loan of $212,482 from one of our
shareholders, a party related to our Chief Executive Officer. The loan bore no interest and was
repayable on or before January 15, 2009, in cash or in shares of Cereplast common stock. On
February 18, 2009, the loan was repaid with the issuance of 61,250 shares of Cereplast common
stock valued at $212,482 (see Note 3).
7. INCOME TAX
We are subject to U.S. and California income tax. Subject to limited statutory exceptions, we are
no longer subject to federal, state and local or non-U.S. income tax examinations by tax
authorities for years before 2006. We are not presently liable for any income taxes nor are we
undergoing any tax examinations by the Internal Revenue Service. No Deferred Tax Assets and
Deferred Tax Liabilities are included in the balance sheets at December 31, 2009, or December 31,
2008.
Our policy is to recognize interest accrued related to unrecognized tax benefits in interest
expense and penalties in operating expenses.
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Table of Contents
8. DEFERRED TAX BENEFIT
At December 31, 2009, we have available federal and state cumulative net operating loss carry
forwards of ($23,450,000), which expires at various dates from 2010 to 2029.
The differences between our effective income tax rate and the statutory federal rate for the years
ended December 31, 2009 and 2008 relate primarily to losses incurred for which no tax benefit was
recognized, due to the uncertainty of realization. The valuation allowance was $9,154,752 and
$7,488,150 at December 31, 2009 and 2008 respectively. Due to the change in ownership provisions of
the Tax Reform Act of 1986, net operating loss carryforwards for Federal income tax reporting
purposes are subject to significant annual limitations. Should a change in ownership occur, net
operating loss carryforwards may be limited as to use in future years.
A reconciliation of income tax expense that would result from applying the U.S. Federal and State
rate of 39% to pre-tax income from continuing operations for the years ended December 31, 2009 and
2008, with federal income tax expense presented in the financial statements is as follows:
| 2009 | 2008 | |||||||
Income tax benefit computed at U.S. Federal
statutory rate (34%) |
$ | (1,442,434 | ) | $ | (4,231,111 | ) | ||
State income taxes, net of benefit federal taxes |
(211,810 | ) | (622,222 | ) | ||||
Meals & Entertainment |
490 | 3,225 | ||||||
Stock for services |
723,536 | 1,201,189 | ||||||
Depreciation |
37,611 | (80,980 | ) | |||||
Accruals |
25,143 | 153,850 | ||||||
Disposal of Assets |
(23,040 | ) | 1,593 | |||||
Bad Debt Expense |
1,945 | — | ||||||
Inventory Reserve |
(51,480 | ) | — | |||||
Less Valuation Allowance |
940,039 | 3,574,456 | ||||||
Income tax expense |
$ | — | $ | — | ||||
The deferred income tax benefit at December 31, 2009 and 2008 reflects the impact of temporary
differences between the amounts of assets and liabilities recorded for financial reporting purposes
and such amounts as measured in accordance with tax laws. The items, which comprise a significant
portion of deferred tax assets and liabilities, are approximately as follows:
| 2009 | 2008 | |||||||
Deferred Tax Assets: |
||||||||
NOL Carryover |
$ | 9,146,078 | $ | 7,572,160 | ||||
R&D Carryover |
83,948 | 48,630 | ||||||
Contribution
Carryover |
1,349 | — | ||||||
Allowance for Doubtful Accounts |
13,391 | 11,125 | ||||||
Inventory Reserve |
— | 51,480 | ||||||
RP Accruals |
120,799 | 95,655 | ||||||
Deferred tax Liabilities: |
||||||||
Depreciation |
(210,813 | ) | (290,900 | ) | ||||
Less Valuation Allowance |
(9,154,752 | ) | (7,488,150 | ) | ||||
Income Tax Expense |
$ | — | $ | — | ||||
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Table of Contents
9. CAPITAL LEASE OBLIGATIONS
At December 31, 2009, and 2008, capital lease obligations are as follows:
| 2009 | 2008 | |||||||
Capital lease at 15% interest, with monthly principal and interest payments
of $513 due January 2010,
secured by mold equipment. The purchase option at the end of the lease is $1.00. |
$ | 506 | $ | 6,125 | ||||
Capital lease at 9.99% interest, with monthly
principal and interest payments of $2,054 due May 2010,
secured by MAS Computer Software. The purchase option at the end of the
lease is $1.00. |
7,843 | 30,249 | ||||||
Capital lease at 13% interest, with monthly principal and interest payments
of $1,128 due April 2009,
secured by equipment. The purchase option at the end of the lease was $1.00. |
— | 4,389 | ||||||
Capital lease at 29% interest, with monthly principal and interest payments
of $1,369 due June 2010,
secured by equipment. The purchase option at the end of the lease is $1.00. |
7,558 | 19,757 | ||||||
Capital lease at 8% interest, with monthly principal and interest payments
of $505 due November 2011,
secured by equipment. The purchase option at the end of the lease is $1.00. |
10,467 | 15,662 | ||||||
Capital lease at 13% interest, with monthly principal and interest payments
of $385 due November 2011,
secured by equipment. The purchase option at the end of the lease is $1.00. |
7,864 | 11,303 | ||||||
| 34,238 | 87,485 | |||||||
Less Current Portion |
(25,341 | ) | (47,440 | ) | ||||
| $ | 8,897 | $ | 40,045 | |||||
Future payments on capital lease obligations are as follows:
Years ending December 31, |
||||
2010 |
$ | 27,390 | ||
2011 |
9,280 | |||
Total Payments |
36,670 | |||
Less Interest Portion |
(2,432 | ) | ||
Present Value of Future Payments |
$ | 34,238 | ||
Leased assets under capital obligations, comprised of warehouse equipment, and computer
equipment is as follows at December 31, 2009 and 2008. The assets have been recorded under property
and equipment, and are being depreciated over the estimated lives of the assets leased. Depreciation
of assets leased is included in depreciation and amortization expense.
| 2009 | 2008 | |||||||
Assets Under Capital Leases |
$ | 318,122 | $ | 318,122 | ||||
Less Accumulated Depreciation |
(217,190 | ) | (172,236 | ) | ||||
| $ | 100,932 | $ | 145,886 | |||||
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10. RELATED PARTY TRANSACTIONS
During the years ended December 31, 2009 and 2008, we had the following related party transactions:
| • | We received funds of $212,482 pursuant to a loan agreement with one of our shareholders, Mrs. Nathalie Leblanc, a sibling of our CEO, in the amount of $212,482. The loan was secured by the Company’s assets up to the value of the loan, bears no interest, and was repayable on or before January 15, 2009 at the Company’s discretion in cash or 36,250 shares of Cereplast common stock. In February, 2009 this loan was repaid in full through the issue of 61,250 shares of Cereplast common stock, including the 36,250 shares related to the original principal conversion and 25,000 additional shares related to the agreement to waive default penalties. |
11. SUBSEQUENT EVENTS
Lease
As of March 1, 2010, we entered into a five year lease agreement for 3,654 square feet to be used
for the corporate office. Rent will be $9,118 per month.
Reverse Stock Split
On March 15,2010, we implemented a reverse split of our common stock in ratio of one-for-forty. The
reverse split was effective at 6:00 a.m. on March 15, 2010. All historical and per share amounts
have been adjusted to reflect the reverse stock split.
Issuance of Capital Stock
On March 19, 2010, we issued 411,000 restricted shares of common stock to accredited investors, for
gross cash proceeds of $822,000 less related fees and expenses in the
amount of $75,790.
Stock Subscriptions
On March 26, 2010, we received
subscription for the sale of 705,000 shares of common stock at the price of $2.00 per share,
for aggregate gross proceed of $1,410,000.
F-15