HONG YUAN HOLDING GROUP - Annual Report: 2010 (Form 10-K)
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, 2010
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: 001-34689
Cereplast, Inc.
(Exact name of registrant as specified in its charter)
| Nevada (State or other jurisdiction of incorporation or organization) |
91-2154289 (I.R.S. Employer Identification No.) |
|
| 300 Continental Blvd., Suite 100 El Segundo, California |
90245 |
|
| (Address of principal executive office) | (Zip Code) |
(310) 615-1900
(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
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, 2010 was
approximately $31,814,544.
As of March 29, 2011, the Company had outstanding 15,688,634 Shares of Common Stock, $0.001
par value.
Table of Contents
2
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.
3
PART I
| Item 1. | Business |
Overview
We have developed and are commercializing proprietary bio-based resins through two complementary
product families: (1) Cereplast Compostables® resins, which are renewable, ecologically
sound substitutes for petroleum-based plastics, and (2) Cereplast Sustainables™ 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 two product families:
| • | Cereplast Compostables® resins are renewable, ecologically-sound
substitutes for petroleum-based plastics targeting primarily single-use disposables and
packaging applications. We offer 12 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 Sustainables™ resins are renewable, ecologically-sound substitutes
for petroleum-based plastics targeting primarily single-use disposables and packaging
applications. We offer eight commercial grades of Sustainables 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 Sustainables line in late 2007 under the name “Cereplast Hybrid Resins®”. |
| • | 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 resins 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. Cereplast 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 three 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 and Sustainable resins. Although we do not expect this new
technology to become commercial before mid 2011, it remains an important development
as we believe that the potential for algae-based resins 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, potatoes and
Ingeo® PLA, which are considered food related crops. Cereplast believes
that it is important to enhance research on non-food crops as the Company is
expecting a surge in demand in bioplastics in the years to come thus potentially
creating pressure on food crops. Algae is the first non-food crop project the
company will introduce and our R&D department is contemplating the development of
additional non-food crop polymers in future years. Recently the algae production
business has attracted considerable attention when Exxon announced a $600 million
investment in Synthetic Genomics and BP invested $10 million in Martek Biosciences.
We maintain that algae is a very attractive feedstock as it offers a low carbon
footprint alternative and at the same time could be accessible in very large
quantities. We also have a long-term future plan to create algae plastic made of
100% algae component, abandoning any reliance on fossil fuels. However the
availability of algae production in large quantities is several years away. |
4
Business Strengths
We believe that our competitive strengths position us well in the markets we choose to serve and
reinforce our ability to execute our growth plans.
Technology Leadership and Processing Expertise. We are a technology leader in the development of
bioplastics. As of December 31, 2010, our intellectual property includes eight patent families
with four active US patents, one patent application allowed and four pending US patent applications
on a worldwide basis. Our entire 33 patents portfolio is formulation patents. We believe that 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 bioplastics 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 $7 million
for every additional 50 million pounds of capacity. Our manufacturing equipment can be used for the
Cereplast Compostables® resin, Cereplast Sustainables™ resin 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
started production on March 1, 2010 operates at manufacturing costs and a logistics scale
comparable to traditional plastics compounding leaders. We believe that our Seymour location
competitiveness is supported further by its attractive location close to feedstock sources and
major plastics converters. Part of our 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.
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. Our 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 the bioplastics sector, 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 is 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 (SPI Bioplastic Guide). 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.
More than 550 companies have requested and been provided with samples of our bioplastic resin. 185
customers have purchased resin for trials and testing. Of these, 130 customers have advanced to
prototype testing and qualification of more than 180 different product applications. Fifty
customers, including RI.ME. Masterbatch Srl, Sezerzan Ambalaj, Colortec Srl, EuroInk Romania Srl,
Zust &
Bachmeier SA, AVH, Innoware, Solo Cup Company, Cadaco, Jatco, WNA, Dentek, CSI- Cosmolab, and Pace
Industries, have commercialized and introduced in excess of 100 different bioplastic products
using our resin.
5
Expand manufacturing capabilities. We are manufacturing in 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 our
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. We are also
exploring the potential for locating a second manufacturing plant overseas closer to our important
overseas clients.
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, we have 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 according to Plastic
News. 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. In recent months a growing number of countries especially in Europe have
passed regulations to favor the use of compostable products thus creating demand for our
bio-resins, including Italy, Austria, Ireland, Spain, Turkey, etc. 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. We believe that 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. We believe such markets are very sensitive to oil prices
and the recent pressure on oil prices is clearly enhancing the attractiveness of our “Sustainables”
resins.
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 (Waste News magazine). 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.
6
New Regulatory environment in Europe. In the past few months, we commenced active marketing and
sales of our resin in Europe. The reception of our resins in Europe has been favorable and is
enhanced by favorable local regulatory environment. The change in the regulatory environment began
several years ago in various European countries but is taking effect in some of these countries
more recently. The most spectacular change has been in Italy where at the end of December 2010
legislations were passed banning the use of traditional polyethylene and highly suggesting
substitution by bioplastic. The company is one of the handful numbers of companies able to provide
resins that can be used in blown film process. We continue to be actively involved in trade
association attempting to “lobby” in order to obtain similar regulations favoring the use of
bioplastic in other countries, starting in the United States and the State of California.
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 (according to the Department of the Energy). 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 (Society of Plastics Industry).
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 bioplastic resins through two complementary
product families: (1) Cereplast Compostables®, renewable, ecologically sound substitutes
for single-use petroleum-based plastics and (2) Cereplast Sustainables™ resins which
replace up to 50% of the petroleum-based content of durable petroleum-based plastics with materials
from renewable resources. Our Compostables resins, Sustainables resins, and its subcategory the
Hybrid resins can be used in the following conventional converting processes with no changes to the
equipment in use by the converters:
| • | Injection molding |
| • | Sheet extrusion |
| • | Thermoforming |
| • | Blown film |
| • | Blow molding |
| • | Profile extrusion |
| • | Extrusion coating |
| • | Extruded foam |
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 Compostables and Sustainables resins are renewable substitutes for petroleum-based plastics
targeting primarily single-use disposables. We introduced our Compostables resin line in November
2006 and currently offer 20 commercial grades of Compostables and Sustainables resins in our
product line. We designed our Compostables and Sustainables 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/or Europe, meeting both US ASTM (American Society for Testing and
Materials) standards and/or European EN requirements. As required to meet these standards,
Cereplast Compostables resins will compost in municipal or commercial composting facilities in 84
days or less and will not leave any harmful chemical residues.
Our Compostables and Sustainables 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.
7
Our Compostables resins are primarily made from abundantly available, stable-cost natural raw
materials such as plant starch from annually renewable crops such as corn.
Cereplast Sustainables™ Resins
Cereplast Hybrid Resins®, a sub category of our Sustainables family of 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 bioplastic resins can run on existing equipment and may
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.
Cereplast Hybrid Resins® were introduced in October 2007 and since then over 100
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 2010, 15 customers had launched or were about to launch new products based upon
Hybrid resins. We are the recipient of the 2009 Environment Award for Emerging Technology in
Materials from the Society of Plastics Engineers (“SPE”) for our 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 reaches through our own resources and exclusive
distributors. In 2010 the Company entered into several distributorship agreements in the
United States and overseas. Among the most noticeable names are Ashland Inc. distributing
Cereplast resins in the United States and A. Schulman GmbH distributing Cereplast resins in
Europe. |
| • | Pursuit of certain key market commercialization opportunities through exclusive,
co-development agreements |
Manufacturing
Our manufacturing process for creating Compostables resins and Sustainables 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 polylactic acid (PLA) for the Compostables and Sustainables 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.
8
Starting in March 2010, we manufactured our bio-based resins at a 105,000 square foot leased
facility located on 12.4 acres in Seymour, Indiana. This facility offers 14 truck loading docks and
was connected to rail service in late July 2010. The Seymour facility is comprised of four
manufacturing lines, a research and development line, a full scale lab area for resin testing and
research, and a logistic area with storage for raw materials and bio-based resins, as well as
administrative officers. 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 was enhanced dramatically to enable achievement of competitive benchmark
levels.
Our production lines are versatile and could produce either Compostables resin or Sustainables
resins as 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 |
— | 50,000,000 | ||||||
Total |
38,400,000 | 50,000,000 | ||||||
As of December 2010, only two lines have been installed with an aggregate name plate capacity of
approximately sixty eight million pounds (68,000,000 Lbs.). We plan to start one additional line by
mid 2011 and a fourth one when production demand will require 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, LyondellBasell, 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 petroleum-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
Sustainable 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 $0.5 million in 2010, including the costs of construction of
a new laboratory within the Seymour manufacturing facility, and $0.3 million in 2009. In 2010 we
also hired a new Senior Vice President Research & Development to enhance our research and continue
the development of our patent strategy.
9
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 |
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 43 trademark 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 33 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. Our principal executive offices are located at 300 Continental Blvd.,
Suite 100, El Segundo, California. Our telephone number is (310) 615-1900.
Employees
Cereplast is a California Equal Employment Opportunity Employer. We have a total of 53 full-time
employees, broken down in the following functions: 13 in sales and marketing, two in research
and development, 28 in production/ logistics and quality control, four in finance and accounting,
and six 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 stoppages. We consider our relations with our
employees to be good.
| 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, 2010 and 2009, we had gross revenues
of $6.4 million and $2.8 million, respectively, and incurred net losses of $7.5 million and $6.1
million respectively. We will need to generate significant additional revenue to achieve
profitability. While management believes that we may achieve profitability in the second part of
2011, 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 four
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.
10
In the current economic environment we will be required to raise additional capital to fund
our growth, research and development efforts, marketing programs, enhancement of our production
capacity, 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; |
| • | the level of research and development and market commercialization spending; and |
| • | the necessity to acquire additional manufacturing capacity |
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 in addition the growth of the market will create some
pressure on price for applications today considered as commodities.
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.
11
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.
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 March 29, 2011, our executive officers and directors, and entities controlled by or
affiliated with them or the Company, own in aggregate approximately 20.9% 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.
12
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.
As the bioplastic industry grows, the demand for biopolymers grows as well, creating more
uncertainty with respect to access to critical components of our process.
One of our suppliers, 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, 2010, PLA accounted for 23.2% of our total raw
material cost of goods sold. If we lose NatureWorks, LLC as a supplier 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.
We also rely on several grades of copolyester supplied by companies such as BASF Corporation,
Perstop, and Wacker in manufacturing some of our Compostables resins. If we lose any of these
suppliers, or if there are disruptions in the supply chain, the price of these resins may increase
or the sales of these resins may be delayed and our results of operations could be materially
adversely affected.
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, 2010, we had two significant customers that accounted for
62.9% of total sales. The loss of these customers could adversely affect our short-term sales and
profitability.
During the year ended December 31, 2010 two customers accounted for 62.9% of our total sales.
If these customers 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.
We are subject to risks generally associated with companies that operate in a global
environment, which could affect our growth and financial performance.
Approximately 77% of our 2010 gross sales and 11% of our 2009 gross sales were generated from
export sales to customers outside of North America and thus we are subject to risks inherent in
multinational business environments. Those risks include:
| • | compliance with U.S. laws affecting operations outside of the U.S., such as the Foreign
Corrupt Practices Act, |
| • | compliance with a variety of local regulations and laws, |
| • | changes in tax laws and the interpretation of those laws, |
| • | disruptions in ocean container shipping routes, |
| • | fluctuations in currency values, |
| • | sudden changes in foreign currency exchange controls, |
| • | discriminatory or conflicting fiscal policies, |
| • | difficulties enforcing intellectual property and contractual rights in certain
jurisdictions, |
| • | greater risk of uncollectible accounts and longer collection cycles, |
| • | imposition of more or new tariff, quotas, trade barriers, and similar restrictions on
our sales outside the U.S. |
Moreover, political and economic changes or volatility, geopolitical regional conflicts,
terrorist activity, political unrest, civil strife, acts of war, public corruption and other
economic or political uncertainties could interrupt and negatively affect our business operations.
All of these factors could result in increased costs or decreased revenues, and could materially
and adversely affect our product sales 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.
13
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. We have acquired product liability coverage of up to $7.0 million.
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.
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.
We lease a facility and site in Seymour, Indiana, where we have constructed a new bioplastic
production facility. Completed in March 2010, we have consolidated all core manufacturing
activities from California to the Seymour site resulting in significant cost, productivity and
quality enhancements. We believe we will need to add additional production capacity in the near
future as the current development of the market seems to call for full capacity of our Seymour
facility to be reached within 24 months, and would need approximately an additional nine to 16
months to set up additional capacity, depending on the location. If we are unable to set up and
finance such additional facility, we may experience some disruption in our growth.
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 common stock
We may fail to qualify for continued listing on the NASDAQ Capital Market which could make it
more difficult for investors to sell their shares.
In April 2010, our common stock was approved for listing on the NASDAQ Capital Market and
continues to be listed on the NASDAQ Capital Market. There can be no assurance that trading of our
common stock on such market will be sustained or that we can meet NASDAQ’s continued listing
standards. In the event that our common stock fails to qualify for continued inclusion, our common
stock could thereafter be quoted on the OTC Bulletin Board or the Pink Sheets. Under such circumstances, shareholders may find it more difficult to sell, or to
obtain accurate quotations, for our common stock, and our common stock would become substantially
less attractive to certain purchasers such as financial institutions, hedge funds and other similar
investors.
Our common stock may be affected by limited trading volume and price fluctuations which could
adversely impact the value of our common stock.
Trading in our common stock can fluctuate significantly and there can be no assurance that an
active trading market will either develop or be maintained. Our common stock is expected to
continue to experience significant price and volume fluctuations. This trading activity could
adversely affect the market price of our common stock without regard to our operating performance.
In addition, we believe that factors such as quarterly fluctuations in our financial results and
changes in the overall economy or the condition of the financial markets could cause the price of
our common stock to fluctuate substantially. These fluctuations may also cause short sellers to
periodically enter the market in the belief that our stock price will decline in the future. We
cannot predict the actions of market participants or the stock market as a whole. We can offer no
assurances that the market for our common stock will be stable or that our stock price will
fluctuate in a manner that is consistent with our operating results.
14
We have not and do not anticipate paying any dividends on our common stock.
We have paid no dividends on our common stock to date and it is not anticipated that any
dividends will be paid to holders of our common stock in the foreseeable future. While our future
dividend policy will be based on the operating results and capital needs of the business, it is
currently anticipated that any earnings will be retained to finance our future expansion and for
the implementation of our business plan. As an investor, you should take note of the fact that a
lack of a dividend can further affect the market value of our stock, and could significantly affect
the value of any investment in our Company.
Our Board of Directors has the authority, without stockholder approval, to issue preferred
stock with terms that may not be beneficial to common stock holders.
Our articles of incorporation authorize the issuance of preferred shares which may be issued
with dividend, liquidation, voting and redemption rights senior to our common stock without prior
approval by the stockholders. The preferred stock may be issued for such consideration as may be
fixed from time to time by the Board of Directors. The Board of Directors may issue such shares of
preferred stock in one or more series, with such designations, preferences and rights or
qualifications, limitations or restrictions thereof as shall be stated in the resolution of
resolutions.
The issuance of preferred stock could adversely affect the voting power and other rights of
the holders of common stock. Preferred stock may be issued quickly with terms calculated to
discourage, make more difficult, delay or prevent a change in control of our Company or make
removal of management more difficult. As a result, the Board of Directors’ ability to issue
preferred stock may discourage the potential hostile acquirer, possibly resulting in beneficial
negotiations. Negotiating with an unfriendly acquirer may result in, among other things, terms more
favorable to us and our stockholders. Conversely, the issuance of preferred stock may adversely
affect any market price of, and the voting and other rights of the holders of the common stock. We
presently have no plans to issue any preferred stock.
| Item 1B. | Unresolved Staff Comments |
Not applicable.
| Item 2. | Properties |
We currently operate out of two locations in El Segundo, California and Seymour, Indiana. The
leases underlying these two facilities are summarized below:
California Facilities: The El Segundo facility consists of 3,634 square feet of corporate office
space. The lease commenced on March 1, 2010, for a period of five years at $9,118 per month.
Indiana Facility: The 105,000 square foot Seymour facility is currently used as a manufacturing
and distribution facility for our products. The Seymour facility is subject to a lease with monthly
rents of $25,000 expiring in January 2018.
| 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. | Removed and Reserved |
15
PART II
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities |
Market Information
Our common stock was quoted on the OTC Bulletin Board from November 4, 2005 through April 12, 2010
under the symbol “CERP.OB”. Since April 13, 2010, our common stock has been listed on the NASDAQ
Capital Market under the trading symbol “CERP.” The following table shows the reported high and low
closing bid quotations per share for our common stock based on information provided by the NASDAQ
Capital Market.
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.
| 2010 | 2009 | |||||||||||||||
| High | Low | High | Low | |||||||||||||
First Quarter ended March 31 |
$ | 6.73 | $ | 3.90 | $ | 6.80 | $ | 2.80 | ||||||||
Second Quarter ended June 30 |
$ | 5.36 | $ | 3.02 | $ | 6.40 | $ | 2.80 | ||||||||
Third Quarter ended September 30 |
$ | 3.99 | $ | 3.14 | $ | 6.00 | $ | 3.60 | ||||||||
Fourth Quarter ended December 31 |
$ | 4.15 | $ | 2.82 | $ | 6.00 | $ | 3.20 | ||||||||
Holders
As of March 29, 2011 there were approximately 167 record holders of the Company’s common stock, not
counting shares held in “street name” in brokerage accounts which is unknown. As of March 29, 2011
there were 15,688,634 shares of common stock outstanding on record with the Company’s stock
transfer agent, Computershare Trust Company, N.A.
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, 2010:
| • | On November 4 2010, we issued 26,180 shares of common stock valued at $73,828 for
employee services. |
We claim an exemption from the registration requirements of the Securities Act of 1933, as amended
(the “Act”) pursuant to Section 4(2) of the Act.
Equity Compensation Plan Information
As of December 31, 2010:
| 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 | $ | 22.40 | 334,375 | ||||||||
Total |
71,250 | $ | 22.40 | 334,375 | ||||||||
16
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.
17
(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 |
| • | failure to earn profits |
| • | inadequate capital to expand our business, inability to raise additional capital or
financing to implement our business plans; |
| • | decline in demand for our products and services; |
| • | rapid and significant changes in markets and other factors which encourage use of
bioplastics; |
| • | 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. |
18
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 have developed and are commercializing proprietary bio-based resins through two complementary
product families: (1) Cereplast Compostables® resins, which are renewable, ecologically
sound substitutes for petroleum-based plastics, and (2) Cereplast Sustainables™ 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 two product families:
| • | Cereplast Compostables® resins are renewable, ecologically-sound
substitutes for petroleum-based plastics targeting primarily single-use disposables and
packaging applications. We offer 12 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 Sustainables™ resins are renewable, ecologically-sound substitutes
for petroleum-based plastics targeting primarily single-use disposables and packaging
applications. We offer eight commercial grades of Sustainables 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 Sustainables line in late 2007 under the name “Cereplast Hybrid Resins®”. |
| • | 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 resins 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. Cereplast 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 three 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 and Sustainable resins. Although we do not expect this new
technology to become commercial before mid 2011, it remains an important development
as we believe that the potential for algae-based resins 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, potatoes and
Ingeo® PLA, which are considered food related crops. Cereplast believes
that it is important to enhance research on non-food crops as the Company is
expecting a surge in demand in bioplastics in the years to come thus potentially
creating pressure on food crops. Algae is the first non-food crop project the company will introduce and our R&D department is contemplating the
development of additional non-food crop polymers in future years. Recently the algae
production business has attracted considerable attention when Exxon announced a $600
million investment in Synthetic Genomics and BP invested $10 million in Martek
Biosciences. We maintain that algae is a very attractive feedstock as it offers a low
carbon footprint alternative and at the same time could be accessible in very large
quantities. We also have a long-term future plan to create algae plastic made of 100%
algae component, abandoning any reliance on fossil fuels. However the availability of
Algae production in large quantities is several years away. |
19
As of December 31, 2010, more than 550 companies have requested and been provided with samples of
the Company’s bioplastic resin. 185 customers have purchased resin for trials and testing. Of
these, 130 customers have advanced to prototype testing and qualification of more than 180
different product applications. Fifty customers, including RI.ME. Masterbatch Srl, Sezerzan
Ambalaj, Colortec Srl, EuroInk Romania Srl, Zust & Bachmeier SA, AVH, Innoware, Solo Cup Company,
Cadaco, Jatco, WNA, Dentek, CSI- Cosmolab, and Pace Industries, have commercialized and introduced
in excess of 100 different bioplastic products using the Company’s resin.
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. These conditions,
combined with volatile oil prices, declining business and consumer confidence and increased
unemployment have 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.
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.
20
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our
financial statements, which have been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities. We monitor our estimates
on an on-going basis for changes in facts and circumstances, and material changes in these
estimates could occur in the future. Changes in estimates are recorded in the period in which they
become known. We base our estimates on historical experience and other assumptions that we believe
to be reasonable under the circumstances. Actual results may differ from our estimates if past
experience or other assumptions do not turn out to be substantially accurate.
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.
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.
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.
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.
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.
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.
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.
21
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.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2010 COMPARED TO THE YEAR ENDED DECEMBER 31,
2009
Sales
Net sales increased by $3.6 million or 132%, to $6.3 million for the year ended December 31, 2010
compared to the year ended December 31, 2009. The sales increase for the period is attributable to
volume increases associated with both existing customer contracts and new contracts entered into
during the third and fourth quarters of 2010 with European customers. In 2010 we had two customers,
RI.ME. Masterbatch S.r.l and Dorel Juvenile Group, that each accounted for more than 10% of total
gross sales. In 2009, three customers, Dorel Juvenile Goup, Innoware Plastics, Inc. and Solo Cup
Company each accounted for more than 10% of total gross sales.
Gross Profit
Gross profit increased by $0.8 million or 225% to $1.1 million for the year ended December 31, 2010
compared to the year ended December 31, 2009. As a percentage of net sales, gross profit margin
increased by 41% to 17.3% for the year ended December 31, 2010 compared to 12.3% for the year ended
December 31, 2009. The increase in gross profit is primarily due to lower production and raw
material costs achieved as a result of our relocation of our manufacturing operations to Indiana
from California as well as increased production efficiencies experienced with higher production
volumes.
Operating Expenses
Overall, total Operating Expenses increased by $2.3 million or 40%, to $8.0 million for the year
ended December 31, 2010 compared to the year ended December 31, 2009. The increase is largely
attributable to increases in sales and marketing expenses as a result of increased sales
commissions, staff and activities designed to increase product and market exposure in the US and
European markets, increases in salaries and wages as a result of increased staffing levels to
support business growth and an increase in depreciation expense associated with the new Seymour
facility.
| • | Marketing and sales expenses increased by $1.4 million or 382% for the year ended
December 31, 2010, compared to the year ended December 31, 2009. The increase in expense is
due primarily to increased sales commissions and sales and marketing staff and activities
designed to increase product and market exposure in the US and international markets. During
the year we more than doubled our sales and marketing force worldwide to both drive and
capture market demand. |
| • | Research and Development costs increased by $0.1 million or 43%, to $0.4 million for the
year ended December 31, 2010, compared to the year ended December 31, 2009. The increase is
primarily a result of an increase in research and development activities and the cost
associated with inventory used for testing purposes at the facilities of potential
customers. |
| • | Professional fees increased by $0.1 million, or 19%, to $0.9 million for the year ended
December 31, 2010 compared to the year ended December 31, 2009. The increase is primarily
driven by fees paid to search firms for recruitment services as well as increased legal fees
relating to increase in general business activities. |
| • | Salaries and wages, including non-cash stock based compensation of $0.5 million,
increased by $0.2 million for the year ended December 31, 2010 compared to the year ended
December 31, 2009. The increase is attributable to head count increases due necessitated by
the growth in sales demand. Non-cash compensation for the year included the issuance of
81,345 restricted common shares, valued at $0.3 million to employees for services rendered. |
| • | Rent expense decreased by $0.1 million or 23%, to $0.4 million for the year ended
December 31, 2010, compared to the year ended December 31, 2009. The decrease in rent is
due primarily to lower lease costs associated with the move of the corporate offices from
Hawthorne, California to El Segundo, California and of the manufacturing facilities from
Hawthorne to Seymour, Indiana. |
| • | Depreciation and Amortization expense increased by $0.3 million, or 49% to $0.8 million
for the year ended December 31, 2010 compared to the year ended December 31, 2009. The
increase is due to additional depreciation related to the Seymour manufacturing facility
which was placed in service on March 1, 2010. |
22
Net Loss
Net loss increased by $1.4 million or 23%, to $7.5 million for the year ended December 31, 2010,
compared to the year ended December 31, 2009. This increase is due primarily to the increase in
operating expense as discussed above, $0.6 million spent relating to restructuring costs
associated with the Strategic Restructuring Program begun in 2009 and the move of the
manufacturing facility to Indiana, offset by an increase in the gross profit margin.
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.
We had net unrestricted cash of $2.4 million at December 31, 2010 as compared to $1.3 million at
December 31, 2009. The net increase in unrestricted cash is attributable principally to funds
received through successful private placements, sale of shares made pursuant to an effective
Registration Statement on Form S-3 and venture loan proceeds.
We had positive working capital (the difference between current assets and current liabilities) of
$5.1 million at December 31, 2010, as compared to positive working capital of $1.0 at December 31,
2009. The increase in working capital is due primarily to proceeds received from issuance of common
stock and venture loans, and increases in accounts receivable.
During the year ended December 31, 2010, we used $8.6 million of cash for operating activities, as
compared to $2.8 million during the year ended December 31, 2009. The increase in the use of cash
for operating activities was primarily a result of an increase in accounts receivable and inventory
amounts reflecting the significant increase in sales growth in the 2010 compared to 2009.
Cash used in investing activities during the year ended December 31, 2010 was $0.3 million
compared to cash used in investing activities of $0.01 million during the year ended December 31,
2009. The increase is due to costs associated with the start-up of our Indiana facility in 2010.
Cash provided by financing activities during the year in December 31, 2010 was $9.9 million
compared to $3.6 million provided by financing activities during the year ended December 31, 2009.
The increase is attributable to an increase in funds received through successful private
placements, sales of shares made pursuant to an effective Registration Statement on Form S-3 and
venture loan proceeds.
We have incurred a net loss of $7.5 million for the year ended December 31, 2010, and $6.1 million
for the year ended December 31, 2009, and have an accumulated deficit of $42.9 million as of
December 31, 2010.
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.
| Item 7A. | Quantitative and Qualitative Disclosures about Market Risk |
Not Applicable
| Item 8. | Financial Statements and Supplementary Data |
Financial statements required by this item are included after the signature page of this filing.
23
| Item 9. | 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 CFO, 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 CFO 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
and CFO, as appropriate to allow timely decisions regarding required 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, 2010. 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, 2010, 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 rules of the
Securities and Exchange Commission that permits us to provide only management’s report in this
annual report.
Changes in Internal Control over Financial Reporting. There were no changes in our internal control
over financial reporting that occurred during the fourth quarter of the year ended December 31,
2010 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
| Item 9B. | Other Information |
None.
24
PART III
| Item 10. | Directors, Executive Officers, and Corporate Governance |
Our directors and executive officers are as follows:
| Name | Age | Position | ||||
Frederic Scheer
|
56 | CEO, Founder and Chairman of the Board of Directors | ||||
Heather Sheehan
|
48 | Senior Vice President and Chief Financial Officer | ||||
William Kelly
|
65 | Senior Vice President, Technology | ||||
Mark Barton
|
52 | Senior Vice President, Operations | ||||
Kelvin Okamoto
|
51 | Senior Vice President, Research & Development | ||||
Jacques Vincent
|
64 | Director | ||||
Petros Kitsos
|
45 | Director | ||||
Craig Peus
|
38 | Director | ||||
Franklin Hunt
|
61 | 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 100 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 Masters 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.
HEATHER SHEEHAN originally joined Cereplast as Vice President, Chief Accounting Officer in June
2008. After a brief hiatus, Ms. Sheehan rejoined the Company effective August 2010 with
her appointment as Senior Vice President and Chief Financial Officer. Ms. Sheehan has
over 20 years experience in leading finance teams in international markets over a broad range of
industries. Before joining Cereplast, Sheehan served as Chief Financial Officer at Exemplis
Corporation and held various senior international treasury, financial planning and accounting roles
at ConAgra Inc. (NYSE), International Rectifier Corp. (NYSE), and Trans Mountain Pipe Line Co.,
Ltd. Prior to that, Ms. Sheehan served in the audit practice of PricewaterhouseCoopers in Canada
and the United Kingdom. Ms. Sheehan is a Certified Public Accountant (USA), a Chartered Accountant
(Canada), and holds a Bachelor of Business Administration degree from Simon Fraser University
(Vancouver, Canada).
WILLIAM KELLY, has been our 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.
25
KELVIN OKAMOTO, joined Cereplast as Senior Vice President Research & Development in December, 2010.
Dr. Okamoto brings 20 plus years of research and development experience in the plastics and
packaging industries to his role as Chief Technology Officer Prior to joining Cereplast, he served
as Manager of Materials Engineering and Manager of Materials Engineering for Solo Cup Operating
Corp. His career has included positions as an Intellectual Property Consultant, Chief Engineer at
Taylor-Made-Adidas, Director of Intellectual Property at Trexel, Inc., Materials Development
Manager at Pactiv, Group Leader-Structural Plastics Product Development and Research Chemist at
Himont USA (presently Lyondell Basell) and Staff Chemist at GE Corporate Research and Development.
Dr. Okamoto has been affiliated with the American Chemical Society, ASTM, National Association of
Patent Practitioners and the Society of Plastic Engineers, where he has held a number of elected
positions. Dr. Okamoto holds a Ph.D. in Chemistry from Cornell University and a Bachelor of
Science in Chemistry from Stanford University.
INDEPENDENT DIRECTORS
PETROS KITSOS, Director. Mr. Kitsos has served as a Director of the Company since August 8, 2007.
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 has served as a Director of the Company since January 2008.
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.
CRAIG PEUS, Director and Chair of the Audit Committee. Mr. Peus was appointed as one of our
directors effective September 29, 2010. Mr. Peus currently serves as the Chairman and Founder of
One Simple Move Inc., a web-based relocation software company, a position he has held since June
2006. Mr. Peus also currently serves as an advisor to three operating companies providing general
business advice. Mr. Peus has served as a Managing Director of Waveland Capital Group, Inc. a
multi-service investment bank. From June 2003 through December 2009, Mr. Peus was the Managing
Partner and Co-Founder of Blossom Street Capital Advisors, LLC, an investment banking firm and
licensed broker/dealer. Mr. Peus has held executive level positions at Astera Care, LLC, MTS Health
Partners, LP, KRS Kapital, LLC and was a financial analyst at Salomon Brothers, Inc. Mr. Peus
received a Bachelor of Sciences Degree in Biological Sciences from Stanford University.
Due to his knowledge of the financial industry, the Board concluded that Mr. Peus is qualified to
serve as a Director. Mr. Peus is also Chairman of the Audit Committee.
FRANKLIN HUNT, Director. Mr. Hunt was appointed as one of our directors effective September 29,
2010. Mr. Hunt is the owner of Hunt Business Consulting, a company that provides consultation to
companies regarding current requirements under GAAP and IFRS. Mr. Hunt served as a member of HJ
&Associates, LLC from 1995 through May 2010. Mr. Hunt received a Bachelor of Science degree from
Brigham Young University. He is a member of AICPA and UACPA and is a CPA licensed in Utah.
Due to his experience in public accounting, the Board concluded that Mr. Hunt is qualified to serve
as a Director.
Family Relationships
There are no family relationships among our directors or executive officers.
26
BOARD COMMITTEES
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 Craig Peus serve on our audit committee. The Board of directors has
determined that Craig Peus is the audit committee financial expert.
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 |
| • | Establishes and reviews general policies relating to compensation and employee benefits. |
Mr. Petros Kitsos and Mr. Jacques Vincent 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 AND CORPORATE GOVERNANCE COMMITTEE
The Nominating Committee identifies individuals qualified to become members of the Board. The
Committee’s duties also includes the development and recommendation to the Board of Directors of
corporate governance principles that are applicable to the
Company, and is responsible for leading an annual review of the Board’s performance. Mr. Petros
Kitsos and Mr. Jacques Vincent serve on our nominating and corporate governance committee.
DIRECTOR COMPENSATION
During the year ended December 31, 2010, the former Chairman of the Audit Committee received
12,500 shares of restricted common stock valued at $50,000 and $12,500 cash compensation for his
service as a member of the Board of Directors and Chairman of the Audit Committee.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires that our officers and
directors, and persons who own more than ten percent of a registered class of our equity
securities, file reports of ownership and changes in ownership with the Securities and Exchange
Commission and with any exchange on which the Company’s securities are traded. Officers, directors
and persons owning more than ten percent of such securities are required by Commission regulation
to file with the Commission and furnish the Company with copies of all reports required under
Section 16(a) of the Exchange Act. To our knowledge, based solely upon our review of the copies of
such reports furnished to us, during the fiscal year ended December 31, 2010, all Section 16(a)
filing requirements applicable to our officers, directors and greater than 10% beneficial owners
were complied with, except that: Frederic Scheer, William Kelly and Heather Sheehan did not timely
file Form 4s. The transactions have since been reported on Form 5s filed by each of the foregoing.
Changes in Nominating Procedures
None.
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.
27
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. |
| 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, 2010 and 2009 to our Chief Executive Officer and
our most highly compensated officers other than the Chief Executive Officer at December 31, 2010
whose total compensation exceeded $100,000.
| Change | ||||||||||||||||||||||||||||||||||||
| in | ||||||||||||||||||||||||||||||||||||
| Pension | ||||||||||||||||||||||||||||||||||||
| Value | ||||||||||||||||||||||||||||||||||||
| Non- | and Non- | |||||||||||||||||||||||||||||||||||
| Equity | Qualified | |||||||||||||||||||||||||||||||||||
| Incenti | Deferred | |||||||||||||||||||||||||||||||||||
| ve Plan | Compens | All Other | ||||||||||||||||||||||||||||||||||
| Stock | Option | Compe | ation | Compens | ||||||||||||||||||||||||||||||||
| Name & Principal | Bonus | Awards | Awards | nsation | Earnings | ation ($) | ||||||||||||||||||||||||||||||
| Position | Year | Salary ($) | ($) | ($) | ($) | ($) | ($) | (1) | Total ($) | |||||||||||||||||||||||||||
Frederic Scheer |
2010 | $ | 269,778 | — | $ | 106,250 | — | — | — | $ | 133,687 | $ | 404,124 | |||||||||||||||||||||||
Chief Executive Officer |
2009 | $ | 112,201 | — | $ | 83,836 | — | — | — | $ | 74,400 | $ | 270,437 | |||||||||||||||||||||||
Heather Sheehan (2) |
2010 | $ | 73,571 | — | $ | 75,002 | — | — | — | $ | 77,225 | $ | 225,796 | |||||||||||||||||||||||
Chief Financial Officer |
2009 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
William Kelly |
2010 | $ | 141,315 | — | $ | 61,250 | — | — | — | — | $ | 202,565 | ||||||||||||||||||||||||
SVP, Technology |
2009 | $ | 135,247 | — | $ | 106,250 | — | — | — | — | $ | 241,492 | ||||||||||||||||||||||||
| (1) | Other compensation comprises payments made of salary amounts voluntarily deferred
from a prior year. |
|
| (2) | Ms. Sheehan joined the Company on August 16th, 2010. |
28
DIRECTOR COMPENSATION (in thousands)
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, 2010.
| Non-Equity | Change in Pension | |||||||||||||||||||||||||||
| Fees Earned | Option | Incentive Plan | Value and Nonqualified | All Other | ||||||||||||||||||||||||
| or Paid in | Stock Awards | Awards | Compensation | Deferred Compensation | Compensation | |||||||||||||||||||||||
| Name | Cash ($) | ($) | ($) | ($) | Earnings ($) | ($) | Total ($) | |||||||||||||||||||||
Petros Kitsos |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Jacques Vincent |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Steve Hanni |
$ | 12,500 | $ | 50,000 | $ | — | $ | — | $ | — | $ | — | $ | 62,500 | ||||||||||||||
Craig Peus |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
Franklin Hunt |
$ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||
EMPLOYMENT AND OTHER AGREEMENTS
We have entered into the following agreements filed in our corporate office with our executive
officers (in thousands):
| • | In November 2006, we entered into an Employment Agreement effective January
1st, 2007 with our Chief Executive Officer by which he has agreed to serve as
CEO for a period of five (5) years. He is entitled to a yearly cash compensation of
$400,000 with annual increases of 7% 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, Mr. Scheer agreed to defer a portion of his annual cash base salary and to
substitute a portion of the cash based salary for stock until the cash flow of the company
permitted payment of earned amounts. |
| • | Effective August 16, 2010, we entered into an Employment Agreement with
Heather Sheehan pursuant to which Ms. Sheehan will serve as our Senior Vice President
and Chief Financial Officer. The agreement is for a term of 2 years, unless earlier
terminated, as provided in the Agreement. The agreement provides for an initial base salary
of $180,000, which shall increase to $215,000 upon the Company reaching operating cash flow
breakeven and further increased to $250,000 when the Company declares a profit of more than
$100,000 for a single quarter. Ms. Sheehan will also be eligible for an annual bonus upon
the achievement of certain goals and performance as established by the Company’s CEO.
However, a bonus shall be payable only when the Company reaches cash flow breakeven.
Pursuant to the terms of the agreement, Ms. Sheehan shall be paid 12 months base salary and
the cash portion of the bonus if her employment is terminated without “good cause” (as
defined in the Agreement) or if Ms. Sheehan is forced to resign for “good reason”, (as
defined in the Agreement). The agreement provides for the grant of $75,000 in restricted
stock, which shall become vested simultaneously with the commencement of Ms. Sheehan’s
employment with the Company and an additional grant of $20,000 in Stock, 50% of which shall
become vested immediately and 50% shall become vested on the sixth month anniversary of Ms.
Sheehan’s employment with the Company. |
| 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 29, 2011. 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. |
29
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 15,688,634 shares outstanding on March 29, 2011 and assuming the exercise of
any options or warrants or conversion of any convertible securities held by such person, which are
presently exercisable or will become exercisable within 60 days after March 29, 2011.
| Name and Address of Beneficial Owner | Number of Shares Beneficially Owned | Percent of Class | ||||||
Frederic Scheer (1) |
2,895,605 | 18.3 | % | |||||
William Kelly |
136,241 | * | ||||||
Heather Sheehan |
66,073 | * | ||||||
Mark Barton |
45,960 | * | ||||||
Petros Kitsos |
113,637 | * | ||||||
Jacques Vincent |
38,500 | * | ||||||
Craig Peus |
12,500 | * | ||||||
Franklin Hunt |
12,500 | * | ||||||
All officers and directors as a group |
3,424,759 | 20.9 | % | |||||
| * | 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. |
| Item 13. | Certain Relationships, Related Transactions, and Director Independence |
At no time during the last two fiscal years has any executive officer, director or any member of
these individuals’ immediate families, any corporation or organization with whom any of these
individuals is an affiliate or any trust or estate in which any of these individuals serves as a
trustee or in a similar capacity or has a substantial beneficial interest been indebted to the
Company or was involved in any transaction in which the amount exceeded $120,000 and such person
had a direct or indirect material interest.
Director Independence
Each of Petros Kitsos, Jacques Vincent, Craig Peus, and Franklin Hunt are independent as provided
in NASDAQ Marketplace Rule 5605(a)(2).
| 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, 2010, and 2009 (in
thousands):
| Fee Type | 2010 | 2009 | ||||||
Audit Fees |
$ | 73 | $ | 67 | ||||
Tax Fees |
2 | 2 | ||||||
All Other Fees(1) |
7 | 1 | ||||||
| $ | 82 | $ | 70 | |||||
| (1) | All Other Fees include fees related to reviews and issuance of documents
related to Registration Statements that we filed during the year. |
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.
30
| Item 15. | Exhibits and Financial Statement Schedules |
(a)(1) Index to Consolidated Financial Statements
| 34 | ||||
| 35 | ||||
| 36 | ||||
| 37 | ||||
| 38 | ||||
| 39 |
(b)
| 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) |
|||
| 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) |
|||
| 4.8 | Form of Warrant issued in connection with the Securities Purchase Agreement, dated June 9, 2010 entered into between the Company and each investor,
party thereto (Incorporated by reference to the Registrant’s current
report on Form 8-K filed with the SEC on June 15, 2010) |
|||
31
| Exhibit | ||||
| Number | Description | |||
| 4.9 | Form of Placement Agent Warrant issued in connection with the Securities Purchase Agreement, dated June 9, 2010 entered into between the Company and
each investor, party thereto (Incorporated by reference to the Registrant’s current report on Form 8-K filed with the SEC on June 15, 2010) |
|||
| 4.10 | Form of Warrant issued in connection with the Venture Loan and Security Agreement by and between Compass Horizon Funding Company, LLC and the Company
dated as December 21, 2010 (Incorporated by reference to the Registrant’s current report on Form 8-K filed with the SEC on December 22, 2010) |
|||
| 4.11 | Form of Warrant issued in connection with the Securities Purchase Agreement dated as January 26, 2011 entered into between the Company and each
investor, party thereto (Incorporated by reference to the Registrant’s current report on Form 8-K filed with the SEC on February 1, 2011) |
|||
| 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) |
|||
| 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) |
|||
| 10.11 | Form of Securities Purchase Agreement, dated June 9, 2010 entered into between the Company and each investor, party thereto (Incorporated by reference
to the Registrant’s current report on Form 8-K filed with the SEC on June 15, 2010) |
|||
| 10.12 | Placement Agent Agreement between Cereplast, Inc and Ladenburg Thalmann & Co., Inc.(Incorporated by reference to the Registrant’s current report on Form
8-K filed with the SEC on June 15, 2010) |
|||
| 10.13 | Employment agreement between Heather Sheehan and Cereplast, Inc. dated August 16, 2010. (Incorporated by reference to the Registrant’s quarterly report
on Form 10-Q filed with the SEC on August 16, 2010) |
|||
| 10.14 | Venture Loan and Security Agreement by and between Compass Horizon Funding Company, LLC and Cereplast, Inc. dated as December 21,
2010(Incorporated by reference to the Registrant’s current report on Form 8-K filed with the SEC on December 22, 2010) |
|||
| 10.15 | Securities Purchase Agreement dated as January 26, 2011 entered into between the Company and each investor, party thereto (Incorporated by reference to
the Registrant’s current report on Form 8-K filed with the SEC on February 1, 2011) |
|||
| 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 pursuant to Section 302 of the Sarbanes Oxley Act of 2002 |
|||
| 31.2 | Certification of the Principal and Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 2002 |
|||
| 32.1 | Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
|||
| 32.2 | Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes — Oxley Act of 2002 |
|||
32
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 31, 2011,
thereunto duly authorized.
| CEREPLAST, INC. |
||||
| Dated: March 31, 2011 | By: | /s/ Frederic Scheer | ||
| Frederic Scheer, | ||||
| Chairman, Chief Executive Officer, and Director (Principal Executive Officer) |
||||
| Dated: March 31, 2011 | By: | /s/ Heather E. Sheehan | ||
| Heather E.Sheehan | ||||
| Senior Vice President & Chief Financial Officer (Principal Financial and Accounting 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, 2011
|
By: | /s/ Frederic Scheer
Chairman, Chief Executive Officer, and Director (Principal Executive Officer) |
||||
Dated: March 31, 2011
|
By: | /s/ Heather E. Sheehan | ||||
| Heather E. Sheehan Senior Vice President & Chief Financial Officer (Principal Financial and Accounting Officer) |
||||||
Dated: March 31, 2011
|
By: | /s/ Jacques Vincent | ||||
| Jacques Vincent, Director | ||||||
Dated: March 31, 2011
|
By: | /s/ Petros Kitsos | ||||
| Petros Kitsos, Director | ||||||
Dated: March 31, 2011
|
By: | /s/ Craig Peus | ||||
| Craig Peus, Director | ||||||
Dated: March 31, 2011
|
By: | /s/ Franklin Hunt | ||||
| Franklin Hunt, Director |
33
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Cereplast, Inc.
El Segundo, California
Cereplast, Inc.
El Segundo, California
We have audited the accompanying consolidated balance sheets of Cereplast, Inc. and subsidiaries as
of December 31, 2010 and 2009, and the related consolidated statements of operations and other
comprehensive income, stockholders’ equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company’s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform an audit of its internal control
over financial reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the circumstances, but
not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management,
as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Cereplast, Inc. and subsidiaries as of December 31,
2010 and 2009, and the results of their operations and their cash flows for the years then ended in
conformity with U.S. generally accepted accounting principles.
By:
|
/s/ HJ Associates & Consultants, LLP
|
|||
| Salt Lake City, Utah | ||||
March 31, 2011 |
34
CEREPLAST, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
| 12/31/2010 | 12/31/2009 | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash |
$ | 2,391 | $ | 1,306 | ||||
Accounts Receivable, Net |
5,289 | 325 | ||||||
Inventory, Net |
1,392 | 847 | ||||||
Prepaid Expenses |
65 | 215 | ||||||
Total Current Assets |
9,137 | 2,693 | ||||||
Property and Equipment |
||||||||
Property and Equipment |
5,564 | 5,416 | ||||||
Accumulated Depreciation and Amortization |
(2,213 | ) | (1,520 | ) | ||||
Net Property and Equipment |
3,351 | 3,896 | ||||||
Other Assets |
||||||||
Restricted Cash |
43 | — | ||||||
Deferred Loan Costs |
266 | — | ||||||
Intangibles, Net |
173 | 184 | ||||||
Deposits |
14 | 89 | ||||||
Total Other Assets |
496 | 273 | ||||||
Total Assets |
$ | 12,984 | $ | 6,862 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current Liabilities |
||||||||
Accounts Payable |
$ | 2,566 | $ | 989 | ||||
Other Payables |
1 | 1 | ||||||
Accrued Expenses |
1,251 | 604 | ||||||
Capital Leases, Current Portion |
9 | 25 | ||||||
Loan Payable, Current Portion |
149 | 53 | ||||||
Total Current Liabilities |
3,976 | 1,672 | ||||||
Long-Term Liabilities |
||||||||
Loan Payable |
2,119 | 9 | ||||||
Total Long-Term Liabilities |
2,119 | 9 | ||||||
Total Liabilities |
6,095 | 1,681 | ||||||
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; 12,992,195 Shares & 9,825,476 Shares Issued and Outstanding, Respectively |
13 | 10 | ||||||
Additional Paid in Capital |
49,737 | 40,578 | ||||||
Retained Earnings/(Deficit) |
(42,933 | ) | (35,444 | ) | ||||
Other Comprehensive Income |
72 | 37 | ||||||
Total Shareholders’ Equity |
6,889 | 5,181 | ||||||
Total Liabilities and Shareholders’ Equity |
$ | 12,984 | $ | 6,862 | ||||
See accompanying notes to consolidated financial statements.
35
CEREPLAST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
(In thousands, except per share data)
| Year Ended | Year Ended | |||||||
| 12/31/2010 | 12/31/2009 | |||||||
GROSS SALES |
$ | 6,416 | $ | 2,751 | ||||
Sales Discounts, Returns & Allowances |
(72 | ) | (12 | ) | ||||
NET SALES |
6,344 | 2,739 | ||||||
COST OF SALES |
5,247 | 2,401 | ||||||
GROSS PROFIT |
1,097 | 338 | ||||||
OPERATING EXPENSES |
||||||||
Depreciation and Amortization |
803 | 538 | ||||||
Marketing Expense |
1,789 | 371 | ||||||
Professional Fees |
867 | 728 | ||||||
Rent Expense |
425 | 550 | ||||||
Research and Development |
447 | 313 | ||||||
Salaries & Wages |
1,721 | 1,709 | ||||||
Salaries & Wages — Stock Based Compensation |
490 | 274 | ||||||
Other Operating Expenses |
1,443 | 1,231 | ||||||
TOTAL OPERATING EXPENSES |
7,985 | 5,714 | ||||||
LOSS FROM OPERATIONS BEFORE OTHER INCOME(EXPENSES) |
(6,888 | ) | (5,376 | ) | ||||
OTHER INCOME (EXPENSES) |
||||||||
Restructuring Costs |
(586 | ) | (449 | ) | ||||
Loss on Settlement of Litigation |
— | (67 | ) | |||||
Loss on Sale of Equipment |
— | (172 | ) | |||||
Interest Income |
2 | 21 | ||||||
Interest Expense |
(17 | ) | (29 | ) | ||||
TOTAL OTHER INCOME (EXPENSES) |
(601 | ) | (696 | ) | ||||
LOSS BEFORE PROVISIONS FOR TAXES |
(7,489 | ) | (6,072 | ) | ||||
Provision for Taxes |
— | — | ||||||
NET LOSS |
(7,489 | ) | (6,072 | ) | ||||
OTHER COMPREHENSIVE INCOME |
||||||||
Gain on Foreign Currency Translation |
35 | 8 | ||||||
TOTAL COMPREHENSIVE LOSS |
$ | (7,454 | ) | $ | (6,064 | ) | ||
BASIC AND DILUTED LOSS PER SHARE |
$ | (0.63 | ) | $ | (0.75 | ) | ||
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING BASIC AND DILUTED |
11,779,087 | 8,044,487 | ||||||
See accompanying notes to consolidated financial statements.
36
CEREPLAST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(In thousands, except share data)
| Other | ||||||||||||||||||||||||||||||||||||
| Common Stock | Preferred Stock | Additional | Accumulated | Comprehensive | Subscribed | |||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | Paid-In Capital | Deficit | Income | Stock | Total | ||||||||||||||||||||||||||||
Balance, December 31, 2008 |
7,028,359 | $ | 7 | — | $ | — | $ | 34,449 | $ | (29,372 | ) | $ | 29 | $ | 250 | $ | 5,363 | |||||||||||||||||||
Stock issued in fulfillment of subscriptions at $2.00 per share |
125,000 | 0 | — | — | 250 | — | — | (250 | ) | — | ||||||||||||||||||||||||||
Issuance of common stock in repayment of a convertible shareholder loan at $3,47
per share |
61,250 | 0 | — | — | 213 | — | — | — | 213 | |||||||||||||||||||||||||||
Issuance of common stock as compensation. Stock at prices ranging from $3.60 per
share to $6.00 per share |
212,400 | 0 | — | — | 860 | — | — | — | 860 | |||||||||||||||||||||||||||
Issuance of common stock to 3rd parties and directors for services. Stock price
ranging from $3.60 per share to $5.20 per share |
318,590 | 0 | — | — | 1,301 | — | — | — | 1,301 | |||||||||||||||||||||||||||
Expense relating to cancellation of stock options under employee stock option plan |
— | — | — | — | (259 | ) | — | — | — | (259 | ) | |||||||||||||||||||||||||
Issuance of common stock for cash. Stock price ranging from $1.60 per share to
$2.00 per share |
1,948,170 | 2 | — | — | 3,894 | — | — | — | 3,896 | |||||||||||||||||||||||||||
Issuance of common stock to Cumorah for commitment fee on equity line of financing |
114,207 | 0 | — | — | 300 | — | — | — | 300 | |||||||||||||||||||||||||||
Issuance of common stock for litigation settlement |
17,500 | 0 | — | — | 67 | — | — | — | 67 | |||||||||||||||||||||||||||
Stock Offering Costs |
— | — | — | — | (496 | ) | — | — | — | (496 | ) | |||||||||||||||||||||||||
Net loss for the year ended December 31, 2009 |
— | — | — | — | — | (6,072 | ) | — | — | (6,072 | ) | |||||||||||||||||||||||||
Gain on foreign currency translation |
— | — | — | — | — | — | 8 | — | 8 | |||||||||||||||||||||||||||
Balance, December 31, 2009 |
9,825,476 | 10 | — | — | 40,578 | (35,444 | ) | 37 | — | 5,181 | ||||||||||||||||||||||||||
Issuance of common stock as compensation. Stock at prices ranging from $2.82 per
share to $5.10 per share |
104,785 | — | — | — | 375 | — | — | — | 375 | |||||||||||||||||||||||||||
Issuance of common shares under a private placement at a net price of $2.00 per
share |
705,000 | 1 | — | — | 1,288 | — | — | — | 1,289 | |||||||||||||||||||||||||||
Sales of shares made pursuant to an effective to a Registration Statemetn on Form
S-3 (Registration No. 333-166307) at a net price of $2.91 per share |
2,137,642 | 2 | — | — | 6,216 | — | — | — | 6,218 | |||||||||||||||||||||||||||
Fees association with an early lease termination |
31,250 | — | — | — | 125 | — | — | — | 125 | |||||||||||||||||||||||||||
Issuance of stock in for board member services |
12,500 | — | — | — | 50 | — | — | — | 50 | |||||||||||||||||||||||||||
Shares issued pursuant to settlement agreement |
20,162 | — | — | — | 75 | — | — | — | 75 | |||||||||||||||||||||||||||
Issuance of common stock for vendor services |
153,802 | — | — | — | 782 | — | — | — | 782 | |||||||||||||||||||||||||||
Rounding due to Stock Spilt |
1,578 | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||
Warrants
issued in connection with debt financing arrangements |
— | — | — | — | 248 | — | — | — | 248 | |||||||||||||||||||||||||||
Net loss for the year ended December 31, 2010 |
— | — | — | — | — | (7,489 | ) | — | — | (7,489 | ) | |||||||||||||||||||||||||
Gain on foreign currency translation |
— | — | — | — | — | — | 35 | — | 35 | |||||||||||||||||||||||||||
Balance, December 31, 2010 |
12,992,195 | $ | 13 | — | $ | — | $ | 49,737 | $ | (42,933 | ) | $ | 72 | $ | — | $ | 6,889 | |||||||||||||||||||
See accompanying notes to consolidated financial statements.
37
CEREPLAST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
| Year Ended | Year Ended | |||||||
| 12/31/2010 | 12/31/2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (7,489 | ) | $ | (6,072 | ) | ||
Adjustment to Reconcile Net Loss to Net Cash
Used in Operating Activities |
||||||||
Depreciation and Amortization |
803 | 538 | ||||||
Reserve for Inventory Obsolescence |
— | (132 | ) | |||||
Allowance for Doubtful Accounts |
32 | 5 | ||||||
Loss on Sale of Equipment |
— | 172 | ||||||
Loss on Disposal of Leasehold Improvements Due to Restructuring |
14 | — | ||||||
Common Stock Issued for Services, Salaries & Wages |
1,407 | 712 | ||||||
Amortization of Debt Discount |
2 | — | ||||||
Loss on Settlement of Litigation |
— | 67 | ||||||
(Increase) Decrease in: |
||||||||
Accounts Receivable |
(4,992 | ) | (50 | ) | ||||
Deferred Loan Costs |
(130 | ) | — | |||||
Inventory |
(543 | ) | 1,123 | |||||
Deposits |
75 | (44 | ) | |||||
Prepaid Expenses |
149 | 1,026 | ||||||
Restricted Cash |
(43 | ) | 49 | |||||
Intangibles |
(2 | ) | (19 | ) | ||||
Increase (Decrease) in: |
||||||||
Accounts Payable |
1,578 | 88 | ||||||
Accrued Expenses |
511 | (226 | ) | |||||
Other Payables |
— | (32 | ) | |||||
NET CASH USED IN OPERATING ACTIVITIES |
(8,628 | ) | (2,795 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchase of Property and Equipment, and Intangibles |
(263 | ) | (18 | ) | ||||
Proceeds from Sale of Equipment |
— | 4 | ||||||
NET CASH USED IN INVESTING ACTIVITIES |
(263 | ) | (14 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Payments on Capital Leases |
(25 | ) | (53 | ) | ||||
Payments from Notes Payable |
(59 | ) | (4 | ) | ||||
Proceeds on Loan Payable, Net of Loan Costs |
2,520 | (37 | ) | |||||
Proceeds from Issuance of Common Stock and Subscription Receivable |
7,505 | 4,196 | ||||||
Stock Offering Costs |
— | (496 | ) | |||||
NET CASH PROVIDED BY FINANCING ACTIVITIES |
9,941 | 3,606 | ||||||
FOREIGN CURRENCY TRANSLATION |
35 | 8 | ||||||
NET INCREASE (DECREASE) IN CASH |
1,085 | 805 | ||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
1,306 | 501 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 2,391 | $ | 1,306 | ||||
During the year ended December 31, 2010 the Company issued 2,137,642 shares in exchange for net
proceeds of $6,216 pursuant to an effective Registration Statement on Form S-3 and 705,000 shares
for net cash proceeds of $1,289 in a private placement. During the year ended December 31, 2009 the
Company issued 1,948,170 shares in exchange for gross proceeds of $3,896 under private placements,
114,207 shares in exchange for net proceeds of $300 pursuant to a Periodic Equity Investment
Agreement, and 125,000 shares in fulfillment of subscription payable of $250.
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS
During the year ended December 31, 2010, the Company issued 31,250 shares valued at $125 for fees
associated with an early lease termination, 12,500 shares valued at $50 for board member services,
153,802 shares valued at $782 for professional services and rent and 20,162 shares of common stock
valued at $75 pursuant to a settlement agreement and 104,785 shares valued at $375 to employees for
services. During the year ended December 31, 2009 the Company issued 212,400 shares valued at $860
for services to directors and employees and 318,590 shares valued at $1,301 for prepaid services
and debt repayment to third parties. 61,250 shares of restricted common stock valued at $213 were
issued to one of our shareholders in repayment of a convertible shareholder loan and 17,500 shares
of restricted stock valued at $67 were issued under the terms of a litigation settlement. The
Company also recognized $(259) of net expense related to vesting of employee stock options for the
same period.
38
CEREPLAST, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
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 substitutes for petroleum-based plastics, and Cereplast Sustainables™ 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 two product families:
| • | Cereplast Compostables® resins are renewable, ecologically-sound
substitutes for petroleum-based plastics targeting primarily single-use disposables and
packaging applications. We offer 12 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 Sustainables™ resins are renewable, ecologically-sound substitutes
for petroleum-based plastics targeting primarily single-use disposables and packaging
applications. We offer eight commercial grades of Sustainables 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 Sustainables line in late 2007 under the name “Cereplast Hybrid Resins®”. |
| • | 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 resins 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. Cereplast 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 three 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 & Sustainable resins. Although we do not expect this new technology
to become commercial before mid 2011, it remains an important development as we
believe that the potential open by algae is quite substantial. |
39
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.
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. At December 31, 2010 and 2009, balances in our cash accounts exceeded
federally insured limits of $0.25 million by approximately, $2.3 million and $1.0 million. We have
not experienced any losses in such accounts and we do not believe we are exposed to any significant
credit risk on cash and cash equivalents.
Concentration of Credit Risk
We had unrestricted cash, cash equivalents, and short-term investment, totaling $2.4 million and
$1.3 million at December 31, 2010 and 2009, 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. We actively monitor
changes in interest rates.
Other Concentration
During the year ended December 31, 2010, we had two significant suppliers that accounted for 45.9%
and 23.2% of total cost of goods sold and had two customers, RI. ME. Masterbatch and Dorel Juvenile
Group, which accounted for 48.8% and 14.1% of total sales, respectively. No other supplier or
customer accounted for more than 10% of cost of sales or sales during this period. During the year
ended December 3,1 2009, we had also had two significant suppliers that accounted for 27.9% and
18.7% of total cost of goods sold and had three customers, Dorel Juvenile Group, Solo Cup Company
and Innoware Plastics Inc. which accounted for 32.7%, 11.3% and 10.3% of total sales, respectively.
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 $43,000 and $0 at December 31, 2010 and 2009, 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, 2010 and 2009, 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 $66,000 and $34,000 as of
December 31, 2010 and 2009, respectively.
40
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. Inventories on hand at December 31, 2010 and 2009 are as follows (in
thousands):
| 2010 | 2009 | |||||||
Raw Materials |
$ | 936 | $ | 344 | ||||
Bioplastic Resins |
318 | 355 | ||||||
Finished Goods |
44 | 76 | ||||||
Packaging Materials |
53 | 15 | ||||||
WIP |
41 | 57 | ||||||
Obsolescence Reserve |
— | — | ||||||
Inventories, Net |
$ | 1,392 | $ | 847 | ||||
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 (in thousands):
| 2010 | 2009 | |||||||
Equipment |
$ | 5,074 | $ | 2,518 | ||||
Automobile |
25 | — | ||||||
Construction in Progress |
135 | 2,589 | ||||||
Furniture & Fixtures |
279 | 275 | ||||||
Leasehold Improvements |
51 | 34 | ||||||
| 5,564 | 5,416 | |||||||
Less Accumulated Depreciation |
(2,213 | ) | (1,520 | ) | ||||
Net Property and Equipment |
$ | 3,351 | $ | 3,896 | ||||
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. Intangibles consist of (in thousands):
| 2010 | 2090 | |||||||
Intangibles |
$ | 206 | $ | 208 | ||||
Less Accumulated Amortization |
(33 | ) | (24 | ) | ||||
Net Intangibles |
$ | 173 | $ | 184 | ||||
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.
41
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.
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, 2010 and 2009 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 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.
During the twelve months ended December 31, 2010, we issued shares of common stock as follows:
| • | We issued 2,137,642 shares of common stock for net cash proceeds of $6.2 million
pursuant to an effective Registration Statement on Form S-3 (Registration No. 333- 166307)
initially filed with the Securities and Exchange Commission on April 26, 2010, and amended
on May 21, 2010. The Registration Statement was declared effective on May 26, 2010. |
| • | In a private placement transactions 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 705,000 shares of common stock for net
cash proceeds of $1.3 million. |
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| • | We issued 268,587 shares of common stock valued at $1.2 million to various employees,
directors, and third parties for services rendered during the period. |
| • | We issued 31,250 shares of common stock valued at $125,000 for fees associated with the
early termination of a lease in California. |
| • | We issued 20,162 shares of common stock valued at $75,000 pursuant to a settlement
agreement. |
| • | We issued 2,500 shares of common stock valued at $12,000 as a termination fee related to
the Periodic Equity Investment Agreement with Cumorah Capital, Inc. dated December 8, 2008 |
During the twelve months ended December 31, 2009, we issued shares of common stock as follows:
| • | In a 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 833,170 restricted
shares of common stock for gross cash proceeds of $1.7 million, and 125,000 restricted
shares of common stock in fulfillment of subscriptions received prior to December 31, 2008
of $0.25 million. |
| • | We issued 61,250 shares of restricted common stock valued at $0.2 million 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 $0.2 million and 25,000 additional shares related to an
agreement to waive default penalties. |
| • | We issued 259,525 shares of restricted common stock valued at $1.1 million to third
parties for services to be rendered over twelve-month terms beginning in March 2009, May
2009 and July 2009. |
| • | We issued 226,462 shares of restricted common stock valued at $0.9 million to various
employees, directors, and third parties for services rendered during the period. |
| • | We issued 114,207 shares of restricted common stock for net cash proceeds of $0.3
million 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 $0.07 million under the
terms of a litigation settlement. |
| • | We issued 1,115,000 shares of restricted common stock at $2.00 per share for total
gross proceeds of $2.2 million under the terms of a private placement. |
| • | We issued 45,000 shares of common stock valued at $0.2 million in settlement of
outstanding obligations. |
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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 $4.5 million. We estimate that stock-based compensation
for awards not expected to be exercised is $0.9 million. We did not issue any stock options to
employees during 2010 or 2009. During the year ended December 31, 2010 and 2009, we recorded
stock-based compensation related to stock options of $0 and $0.3 million, respectively. All stock
options granted were fully vested as of December 31, 2009. The fair value for each stock option
granted during the twelve months 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 these Plans 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, 2010, 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):
| 2010 | 2009 | |||||||||||||||
| Weighted Average | Weighted Average | |||||||||||||||
| Shares | Exercise Price | Shares | Exercise Price | |||||||||||||
Outstanding—beginning of year |
73 | $ | 22.40 | 249 | $ | 22.40 | ||||||||||
Granted at fair value |
— | — | — | — | ||||||||||||
Exercised |
— | — | — | — | ||||||||||||
Canceled/forfeited |
— | — | (176 | ) | 22.40 | |||||||||||
Outstanding—end of year |
73 | 22.40 | 73 | 22.40 | ||||||||||||
Options exercisable at year-end |
73 | $ | 22.40 | 73 | $ | 22.40 | ||||||||||
The following table summarizes information about stock options as of December 31, 2010 (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 |
73 | $ | 22.40 | 3.90 | — | 73 | $ | 22.40 | 3.90 | — | ||||||||||||||||||||||
All awards were fully vested as of December 31, 2009.
The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based
on our closing stock price of $4.14 as at December 31, 2010 which would have been received by the
option holders had all option holders exercised their options as of that date. Based on the closing
stock price at December 31, 2010, there were no in-the-money options exercisable as of December 31,
2010.
44
No options were granted during the year ended December 31 2010. No options were granted and 42,351
shares vested during the year ended December 31, 2009. Additionally, no options were exercised
during the years ended December 31, 2010 and 2009, and as such no cash was received from employees
as a result of any such exercise of stock options.
4. LOANS PAYABLE
Venture Loan Payable
On December 21, 2010, we entered into a Venture Loan and Security Agreement (the “Loan Agreement”)
with Compass Horizon Funding Company, LLC (the “Lender”). The Loan Agreement provides for a total
loan commitment of $5.0 million comprising of Loan A and Loan B, each in the amount of $2.5
million. Loan A was funded at closing on December 21, 2010 and matures 39 months after the date of
advance. We are obligated to pay interest per annum equal to the greater of (a) 12% or (b) 12% plus
the difference between (i) the one month LIBOR Rate, on the date which is five business days before
the funding of such loan and (ii) .30%. We are required to make interest only payments for the
first nine months of each loan and equal payments of principal over the final thirty months of each
loan. We granted a security interest to the Lender in all of our property.
In connection with loan, we issued a seven year warrant to the Lender to purchase 140,000 shares of
common stock of the Company at an exercise price of $4.40. The relative fair value of the warrants
was $0.2 million and will be recorded as interest expense over the term of the loan. We estimated
the fair value of the warrants using the Black-Scholes option pricing model using the following
assumptions:
| Assumptions: | Dec 22, 2010 | |||
Expected Life |
7 years | |||
Expected volatility |
39.9 | % | ||
Dividends |
None | |||
Risk-free interest rate |
2.74 | % | ||
The Loan is to be repaid over 39 months as follows (in thousands):
| Principal Repayment | ||||
2011 |
$ | 144 | ||
2012 |
930 | |||
2013 |
1,048 | |||
2014 |
378 | |||
| $ | 2,500 | |||
Also in connection with the Loan Agreement, we incurred $0.3 million of debt issue costs which
are deferred and amortized to interest expense over the term of the loan.
Promissory Note
During the year ended December 31, 2010, we signed a promissory note in the amount of $20,359
related to the purchase of an automobile. The note bears interest at 7.69% per annum and is to be
repaid over a period of 60 months.
5. LEASES
We currently operate out of two locations in El Segundo, California and Seymour, Indiana. The
leases underlying these two facilities are summarized below:
California Facilities — The El Segundo facility consists of 3,634 square feet of corporate office
space. The lease commenced on March 1, 2010, for a period of five years with monthly rents of
$9,118.
Indiana Facility — The 105,000 square foot Seymour facility is currently used as a manufacturing
and distribution facility for our products. The Seymour facility is subject to a lease with monthly
rents of $25,000 expiring in January 2018.
The future minimum lease payments are as follows (in thousands):
2011 |
$ | 409 | ||
2012 |
409 | |||
2013 |
409 | |||
2014 |
409 | |||
2015 |
318 | |||
Thereafter |
600 | |||
| $ | 2,556 | |||
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6. MAJOR CUSTOMERS AND FOREIGN SALES
During year ended December 31, 2010 we had two customers, RI.ME. Masterbatch S.r.l. and Dorel
Juvenile Group, a Division of Dorel Industries, Inc., that accounted for 48.8% and 14.1%,
respectively, of total sales. During the year ended December 31, 2009, we had three customers,
Dorel Juvenile Group, Innoware Plastics Inc., and Solo Cup Company that accounted for 32.7%, 10.3%
and 11.3% of total sales. No other customer accounted for more than 10% of sales during this
period.
Our gross sales were made up of sales to customers in the following geographic regions (in
thousands):
| 2010 | 2009 | |||||||||||||||
North America |
$ | 1,455 | 22.9 | % | $ | 2,444 | 88.8 | % | ||||||||
International |
||||||||||||||||
Italy |
3,091 | 48.8 | % | — | ||||||||||||
Germany |
1,074 | 16.9 | % | — | ||||||||||||
Other |
796 | 11.4 | % | 307 | 11.2 | % | ||||||||||
Gross sales |
$ | 6,416 | 100.0 | % | $ | 2,751 | 100.0 | % | ||||||||
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 2007. 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, 2010, or December 31,
2009.
Our policy is to recognize interest accrued related to unrecognized tax benefits in interest
expense and penalties in operating expenses.
8. DEFERRED TAX BENEFIT
At December 31, 2010, we have available federal and state cumulative net operating loss carry
forwards of $30.7 million, which expire at various dates from 2011 through 2030.
The differences between our effective income tax rate and the statutory federal rate for the years
ended December 31, 2010 and 2009 relate primarily to losses incurred for which no tax benefit was
recognized, due to the uncertainty of realization. The valuation allowance was $11.4 million and
$9.2 million at December 31, 2010 and 2009 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, 2010 and
2009, with federal income tax expense presented in the financial statements is as follows (in
thousands):
| 2010 | 2009 | |||||||
Income tax benefit computed at U.S. Federal statutory rate (34%) |
$ | (2,546 | ) | $ | (1,442 | ) | ||
State income taxes, net of benefit federal taxes |
(374 | ) | (211 | ) | ||||
Meals & Entertainment |
39 | 1 | ||||||
Stock for services |
589 | 723 | ||||||
Allowance for Doubtful Accounts |
12 | 1 | ||||||
Inventory Reserve |
— | (51 | ) | |||||
Depreciation |
(456 | ) | (37 | ) | ||||
Deferred Loan Costs |
(50 | ) | — | |||||
Accruals |
(66 | ) | 25 | |||||
Disposal of Assets |
3 | (23 | ) | |||||
Less Valuation Allowance |
2,849 | 940 | ||||||
Income tax expense |
$ | — | $ | — | ||||
46
The deferred income tax benefit at December 31, 2010 and 2009 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 (in thousands):
| 2010 | 2009 | |||||||
Deferred Tax Assets: |
||||||||
NOL Carryover |
$ | 11,973 | $ | 9,146 | ||||
R&D Carryover |
104 | 84 | ||||||
Contribution Carryover |
1 | 1 | ||||||
Allowance for Doubtful Accounts |
26 | 93 | ||||||
RP Accruals |
54 | 121 | ||||||
Deferred tax Liabilities: |
||||||||
Depreciation |
(689 | ) | (210 | ) | ||||
Deferred Loan Costs |
(50 | ) | 13 | |||||
Less Valuation Allowance |
(11,419 | ) | (9,155 | ) | ||||
Income Tax Expense |
$ | — | $ | — | ||||
9. COMMON STOCK WARRANTS
In connection with the issue of 2,137,642 shares of common stock to accredited investors pursuant
to an effective Registration Statement on Form S-3, we also issued warrants to purchase 1,132,950
shares of common stock of the Company. The warrants have an exercise price of $4.44 per share and
are exercisable for a period of five years commencing December 2010.
In connection with the Venture Loan and Security Agreement (the “Loan Agreement”) with Compass
Horizon Funding Company, LLC (See Note 4), we issued a warrant to purchase 140,000 shares of common
stock of the Company. The warrants have at an exercise price of $4.40 and are exercisable for a
period of seven years commencing December 2010.
A summary of the warrant activity is as follows (in thousands except per share data):
| 2010 | 2009 | |||||||||||||||
| Number of | Weighted Average | Number of | Weighted Average | |||||||||||||
| Warrants | Exercise Price | Warrants | Exercise Price | |||||||||||||
Outstanding—beginning of year |
— | $ | — | — | $ | — | ||||||||||
Issued |
1,140 | $ | 4.44 | — | — | |||||||||||
Exercised |
— | — | — | — | ||||||||||||
Outstanding—end of year |
— | 4.44 | — | — | ||||||||||||
Warrants exercisable at year-end |
1,140 | $ | 4.44 | — | $ | — | ||||||||||
10. SUBSEQUENT EVENTS
Issuance of Capital Stock
On January 26, 2011, we entered into a Securities Purchase Agreement pursuant to which, on February
1, 2011 the Company issued and sold to accredited investors 2,596,500 shares of common stock for a
purchase price of $4.75 per share for aggregate gross proceeds of $12.3 million. We also issued
warrants to purchase an aggregate of 649,128 shares of the Company’s common stock at an exercise
price of $6.35. The Warrants have a five-year term commencing on August 1, 2011.
On February 28, 2011, we issued 99,939 shares of restricted common stock valued at $0.5 million to
various employees, directors and third parties for services rendered.
47
Notes Payable
On February 17, 2011, we received $2.5 million of additional debt financing from Compass Horizon
Funding Company, LLC (the “Lender”) under the Venture Loan and Security Agreement (see Note 4).
This Loan B also matures 39 months after the date of advance and bears annual interest of the
greater of (a) 12% or (b) 12% plus the difference between (i) the one month LIBOR Rate, on
the date which is five business days before the funding of such loan and (ii) .30%. We are required
to make interest only payments for the first nine months of the loan and equal payments of
principal over the final thirty months of each loan.
Stock Options
On January 14, 2011, the Board of Directors approved grants of 300,000 stock options to key
employees under the 2004 Employee Stock Option Plan. These options have a strike price of $5.31
and vest over a 4 year period.
Other Items
We have evaluated subsequent events pursuant to ASC Topic 855 and have determined that there are no
additional events that require disclosure.
48