HONG YUAN HOLDING GROUP - Quarter Report: 2010 March (Form 10-Q)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
| þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2010
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934 |
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 N. Continental Avenue Suite 100 | ||
| El Segundo, California | 90245 | |
| (Address of Principal Executive Office) | (Zip Code) |
(310) 676-5000
(Registrant’s Telephone Number, Including Area Code)
(Registrant’s Telephone Number, Including Area Code)
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 or Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). Yes o
No 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 definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
| 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
Exchange Act).
Yes o No þ
The number of shares of common stock outstanding as of May 6, 2010 is 10,721,057.
CEREPLAST, INC.
FORM 10-Q
TABLE OF CONTENTS
FORM 10-Q
TABLE OF CONTENTS
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| Exhibit 31.1 | ||||||||
| Exhibit 32.1 | ||||||||
Unless otherwise indicated or unless the context requires otherwise, all references in this report
to “we,” “us,” “our,” “Cereplast” or the “Company” shall refer to Cereplast, Inc.
2
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PART I – FINANCIAL INFORMATION
| ITEM 1. | CONSOLIDATED FINANCIAL STATEMENTS |
CEREPLAST, INC.
CONSOLIDATED BALANCE SHEETS
| 3/31/2010 | 12/31/2009 | |||||||
| (Unaudited) | (Audited) | |||||||
ASSETS |
||||||||
Current Assets |
||||||||
Cash |
$ | 1,165,263 | $ | 1,305,771 | ||||
Accounts Receivable, Net |
261,877 | 325,270 | ||||||
Inventory, Net |
957,616 | 847,527 | ||||||
Prepaid Expenses |
34,557 | 215,356 | ||||||
Total Current Assets |
2,419,313 | 2,693,924 | ||||||
Property and Equipment |
||||||||
Property and Equipment |
5,438,179 | 5,416,436 | ||||||
Accumulated Depreciation and Amortization |
(1,652,517 | ) | (1,519,714 | ) | ||||
Net Property and Equipment |
3,785,662 | 3,896,722 | ||||||
Other Assets |
||||||||
Restricted Cash |
42,934 | — | ||||||
Intangibles, Net |
181,696 | 184,039 | ||||||
Deposits |
47,252 | 89,286 | ||||||
Total Other Assets |
271,882 | 273,325 | ||||||
Total Assets |
$ | 6,476,857 | $ | 6,863,971 | ||||
LIABILITIES AND SHAREHOLDERS’ EQUITY |
||||||||
Current Liabilities |
||||||||
Accounts Payable |
$ | 767,192 | $ | 989,927 | ||||
Other Payables |
1,329 | 1,413 | ||||||
Accrued Expenses |
684,618 | 604,015 | ||||||
Capital Leases, Current Portion |
15,900 | 25,341 | ||||||
Loan Payable, Current Portion |
3,203 | 53,487 | ||||||
Total Current Liabilities |
1,472,242 | 1,674,183 | ||||||
Long-Term Liabilities |
||||||||
Loan Payable |
16,875 | — | ||||||
Capital Leases |
8,897 | 8,897 | ||||||
Total Long-Term Liabilities |
25,772 | 8,897 | ||||||
Total Liabilities |
1,498,014 | 1,683,080 | ||||||
Shareholders’ Equity |
||||||||
Preferred Stock, $0.001 par value; 5,000,000 authorized preferred shares, 0 outstanding |
— | — | ||||||
Common Stock, $0.001 par value; 495,000,000 authorized shares; 10,576,726 shares & 9,825,476 shares issued and outstanding, respectively |
10,577 | 9,825 | ||||||
Additional Paid in Capital |
42,042,729 | 40,578,981 | ||||||
Retained Earnings/(Deficit) |
(37,129,562 | ) | (35,444,968 | ) | ||||
Other Comprehensive Income |
55,099 | 37,053 | ||||||
Total Shareholders’ Equity |
4,978,843 | 5,180,891 | ||||||
Total Liabilities and Shareholders’ Equity |
$ | 6,476,857 | $ | 6,863,971 | ||||
See accompanying notes to consolidated financial statements.
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CEREPLAST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED
(UNAUDITED)
| 3/31/2010 | 3/31/2009 | |||||||
GROSS SALES |
$ | 319,217 | $ | 564,383 | ||||
Sales Discounts, Returns & Allowances |
(29,389 | ) | (3,806 | ) | ||||
NET SALES |
289,828 | 560,577 | ||||||
COST OF SALES |
198,262 | 462,807 | ||||||
GROSS PROFIT |
91,566 | 97,770 | ||||||
OPERATING EXPENSES |
||||||||
Depreciation and Amortization |
155,112 | 135,910 | ||||||
Marketing Expense |
274,094 | 158,805 | ||||||
Professional Fees |
142,551 | 148,299 | ||||||
Rent Expense |
84,064 | 241,693 | ||||||
Research and Development |
60,238 | 141,210 | ||||||
Salaries & Wages |
388,197 | 748,320 | ||||||
Salaries & Wages — Stock Based Compensation |
116,308 | 349,255 | ||||||
Other Operating Expenses |
336,153 | 338,852 | ||||||
TOTAL OPERATING EXPENSES |
1,556,717 | 2,262,344 | ||||||
LOSS FROM OPERATIONS BEFORE OTHER INCOME(EXPENSES) |
(1,465,151 | ) | (2,164,574 | ) | ||||
OTHER INCOME (EXPENSES) |
||||||||
Loss on Sale of Equipment |
— | (25,449 | ) | |||||
Restructuring Costs |
(218,435 | ) | — | |||||
Interest Income |
117 | 8,279 | ||||||
Interest Expense |
(1,125 | ) | (11,811 | ) | ||||
TOTAL OTHER INCOME (EXPENSES) |
(219,443 | ) | (28,981 | ) | ||||
LOSS BEFORE PROVISIONS FOR TAXES |
(1,684,594 | ) | (2,193,555 | ) | ||||
Provision for Taxes |
— | — | ||||||
NET LOSS |
(1,684,594 | ) | (2,193,555 | ) | ||||
OTHER COMPREHENSIVE INCOME |
||||||||
Gain on Foreign Currency Translation |
18,046 | 261 | ||||||
TOTAL COMPREHENSIVE LOSS |
$ | (1,666,548 | ) | $ | (2,193,294 | ) | ||
BASIC AND DILUTED LOSS PER SHARE |
$ | (0.17 | ) | $ | (0.30 | ) | ||
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING |
||||||||
BASIC AND DILUTED |
9,868,143 | 7,277,295 | ||||||
See accompanying notes to consolidated financial statements.
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CEREPLAST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
(UNAUDITED)
| 3/31/2010 | 3/31/2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net loss |
$ | (1,684,594 | ) | $ | (2,193,555 | ) | ||
Adjustment to reconcile net loss to net cash
used in operating activities |
||||||||
Depreciation and amortization |
155,112 | 135,910 | ||||||
Reserve for Inventory Obsolescence |
— | 46,000 | ||||||
Allowance for Doubtful Accounts |
(385 | ) | (1,325 | ) | ||||
Loss on sale of equipment |
— | 25,449 | ||||||
Loss on disposal of leasehold improvements |
11,584 | — | ||||||
Common Stock Issued for Services, Salaries & Wages |
175,000 | 406,754 | ||||||
(Increase) Decrease in: |
||||||||
Accounts Receivable |
63,778 | 108,791 | ||||||
Inventory |
(110,089 | ) | 115,448 | |||||
Deposits |
42,034 | (3,084 | ) | |||||
Prepaid Expenses |
180,779 | 44,203 | ||||||
Restricted Cash |
(42,934 | ) | — | |||||
Intangibles |
(249 | ) | (6,557 | ) | ||||
Increase (Decrease) in: |
||||||||
Accounts Payable |
(223,156 | ) | 500,491 | |||||
Accrued Expenses |
80,603 | (68,909 | ) | |||||
Other Payables |
(84 | ) | (1,323 | ) | ||||
NET CASH USED IN OPERATING ACTIVITIES |
(1,352,601 | ) | (891,707 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Purchase of property and equipment, and intangibles |
(52,603 | ) | (6,869 | ) | ||||
Proceeds from sale of equipment |
— | 1,154 | ||||||
NET CASH USED IN INVESTING ACTIVITIES |
(52,603 | ) | (5,715 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Payments on Capital Leases |
(9,441 | ) | (14,811 | ) | ||||
Proceeds on Notes Payable |
20,524 | — | ||||||
Payments on Notes Payable |
(53,933 | ) | (2,903 | ) | ||||
Proceeds from issuance of common stock and subscriptions |
1,289,500 | 467,341 | ||||||
NET CASH PROVIDED BY FINANCING ACTIVITIES |
1,246,650 | 449,627 | ||||||
FOREIGN CURRENCY TRANSLATION |
18,046 | 261 | ||||||
NET DECREASE IN CASH |
(140,508 | ) | (447,534 | ) | ||||
CASH, BEGINNING OF PERIOD |
1,305,771 | 501,699 | ||||||
CASH, END OF PERIOD |
$ | 1,165,263 | $ | 54,165 | ||||
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
During the three months ended March 31, 2010, the Company issued 705,000 shares in exchange for
net proceeds of $1,289,500 under a private placement. During the three ended March 31, 2009, the
Company issued 233,670 shares in exchange for gross proceeds of $467,341 under a private
placement and 125,000 shares in fulfillment of subscriptions payable of $250,000. During the three
months ended March 31, 2010, and March 31, 2009, the company paid $1,125 and $6,571 for interest,
respectively. No taxes were paid during the three month periods ended March 31, 2010, or March
31,2009.
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS
During the three months ended March 31, 2010, the Company issued 31,250 shares valued at $125,000
for fees associated with an early lease termination and 12,500 shares valued at $50,000 for
board member services. During the three months ended March 31, 2009, the Company issued 73,414
shares valued at $264,607 for services to directors and employees and 200,313 shares valued at
$693,313 for prepaid services and debt repayment to third parties. The Company also recognized
$142,147 of expense related to vesting of employee stock options for the same period.
See accompanying notes to consolidated financial statements.
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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
1. ORGANIZATION AND LINE OF BUSINESS
Organization
We were incorporated on September 29, 2001 in the State of Nevada under the name 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 three complementary
product families: (i) Cereplast Compostables® Resins which are renewable, ecologically sound
substitute for petroleum-based plastics and (ii) Cereplast Hybrid® Resins, which replace up to 50%
of the petroleum-based content of traditional plastics with materials from renewable resources.
Our resins aim to be competitively priced compared to petroleum-based plastic resins and can be
converted into finished products using conventional manufacturing equipment without significant
additional capital investment by downstream converters and (iii) Cereplast Algae Plastics™. In
October 2009 we announced that we have been developing a new technology to transform algae into
bioplastics and intend to launch a new family of algae-based resins that will complement the
company’s existing line of Compostables & Hybrid resins
The demand for non-petroleum based, clean and renewable sources for materials, such as bioplastics,
and the demand for compostable/biodegradable products are being driven globally by a variety of
factors, including fossil fuel price volatility, energy security and environmental concerns. These
factors have led to increased spending on clean and renewable products by corporations and
individuals as well as legislative initiatives at the local and state level.
We are a full-service resin solution provider uniquely positioned to capitalize on the rapidly
increasing demand for sustainable and environmentally friendly alternatives to traditional plastic
products.
We primarily conduct our operations through three product families:
| • | Cereplast Compostables Resins® are renewable, ecologically-sound substitutes
for petroleum-based plastics targeting primarily single-use disposables and packaging
applications. We offer 17 commercial grades of Compostables Resins in this product line.
These resins are compatible with existing manufacturing processes and equipment making them
a ready substitute for traditional petroleum-based resins. We commercially introduced our
Compostables line in November 2006. |
| • | Cereplast Hybrid Resins® replace up to 50% of the petroleum content in
conventional plastics with bio-based materials such as industrial starches sourced from
plants. The Hybrid Resin line is designed to offer similar properties to traditional
polyolefins such as impact strength and heat deflection temperature, and is compatible with
existing converter processes and equipment. Hybrid Resins provide a viable alternative for
brand owners and converters looking to partially replace petroleum-based resins in durable
goods applications. Hybrid Resins address this need in a wide range of markets, including
automotive, consumer goods, consumer electronics, medical, packaging, and construction.
We commercially introduced our first grade of Hybrid Resin, Hybrid 150, at the end of 2007.
We currently offer two commercial grades in this product line. |
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| • | Cereplast Algae
Plastics™. In October 2009, we announced that we have been developing a
new technology to transform algae into bioplastics and intend to launch a new family of
algae-based resins that will complement the company’s existing line of Compostables &
Hybrid resins. Although we do not expect
this new technology to become commercial before the end of 2010 or early 2011, it remains an
important development as we believe that the potential open by algae is quite substantial.
Cereplast algae-based resins could replace in a first step 50% or more of the petroleum
content used in traditional plastic resins. Currently, Cereplast is using renewable material
such as starches from corn, tapioca, wheat and potatoes and Ingeo® PLA. The Company believes
that algae is a very attractive feedstock as it does offer a low carbon footprint
alternative and at the same time could be accessible in very large quantity. We also have a
future plan to create algae plastic made of 100% algae component abandoning any reliance on
fossils fuels. |
As of March 31, 2010, over 240 companies have requested and been provided with samples of our
bioplastic resin and 150 customers have purchased resin for trials and testing. Of these, 80
customers have advanced to prototype testing and qualification of more than 135 different product
applications. Thirty customers, including Dorel Industries, WNA, Alcoa, Genpak, Innoware, Penley,
Solo, Cadaco, Jatco, Dentek, CSI-Cosmolab, Warner Tools, Handgards and Pace Industries, have
commercialized and introduced 95 different bioplastic products using our resin. As a result of
successful testing and commercial product launches, some of our customers have signed multi-year
supply contracts with increasing volume.
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, 2009, for the purpose of conducting sales operations in Europe. Intercompany balances
and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the accompanying financial
statements. Significant estimates made in preparing these financial statements include the
estimate of useful lives of property and equipment, the deferred tax valuation allowance and the
fair value of stock options. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or
less to be cash equivalents. At various times throughout the year, the Company may have exceeded
federally insured limits.
Concentration of Credit Risk
We had unrestricted cash, cash equivalents, and short-term investment, totaling $1,165,263 and
$1,305,771 at March 31, 2010, and December 31, 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. As of March 31, 2010,
all of our investments were held in money market accounts and short-term instruments. We actively
monitor changes in interest rates.
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Other Concentration
During the three months ended months ended March 31, 2010, we had four significant suppliers that
accounted for 20.1%, 16.3%, 12.9%, and 12.1%, respectively, of total cost of goods sold and we had two
customers, Dorel Juvenile Group and A. Schulman GMBH, which accounted for 37.3% and 41.3%,
respectively, of total sales. No other supplier or customer accounted for more than 10% of cost of
sales or sales during this period.
Restricted Cash
We had restricted cash in the amount of $42,934 and $0 March 31, 2010, and December 31, 2009. 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
March 31, 2010, and December 31, 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 $33,116 and $34,337 as of
March 31, 2010, and December 31, 2009, respectively.
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. As of March 31, 2010, and December 31, 2009, the inventories are as
follows:
| 2010 | 2009 | |||||||
Raw Materials |
$ | 468,969 | $ | 344,489 | ||||
Bioplastic Resins |
384,129 | 355,082 | ||||||
Finished Goods |
71,485 | 76,458 | ||||||
Packaging Materials |
33,033 | 14,978 | ||||||
WIP |
— | 56,250 | ||||||
Total Inventories |
$ | 957,616 | $ | 847,527 | ||||
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:
| March 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
Equipment |
$ | 5,132,030 | $ | 2,518,132 | ||||
Construction in Progress |
— | 2,588,904 | ||||||
Furniture & Fixtures |
277,305 | 275,055 | ||||||
Automobile |
25,359 | — | ||||||
Leasehold Improvements |
3,485 | 34,345 | ||||||
| 5,438,179 | 5,416,436 | |||||||
Less Accumulated Depreciation |
(1,652,517 | ) | (1,519,714 | ) | ||||
Net Property and Equipment |
$ | 3,785,662 | $ | 3,896,722 | ||||
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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.
| March 31, | December 31, | |||||||
| 2010 | 2009 | |||||||
Intangibles |
$ | 208,104 | $ | 208,304 | ||||
Less Accumulated Amortization |
(26,408 | ) | (24,265 | ) | ||||
Net Intangibles |
$ | 181,696 | $ | 184,039 | ||||
Deferred Income Taxes
Deferred income taxes are provided using the liability method whereby deferred tax assets are
recognized for deductible temporary differences and operating loss and tax credit carry forwards
and deferred tax liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and liabilities and their
tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the deferred tax assets will not
be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in
tax laws and rates of the date of enactment.
The benefit of a tax position is recognized in the financial statements in the period during which,
based on all available evidence, management believes it is more likely than not that the position
will be sustained upon examination, including the resolution of appeals or litigation processes, if
any. Tax positions taken are not offset or aggregated with other positions. Tax positions that
meet the more-likely-than-not recognition threshold are measured as the largest amount of tax
benefit that is more than 50 percent likely of being realized upon settlement with the applicable
taxing authority. The portion of the benefits associated with tax positions taken that exceeds the
amount measured as described above is reflected as a liability for unrecognized tax benefits in the
accompanying balance sheet along with any associated interest and penalties that would be payable
to the taxing authorities upon examination.
Interest and penalties associated with unrecognized tax benefits are classified as additional
income taxes in the statement of income.
Revenue Recognition
We recognize revenue at the time of shipment of products, provided that evidence of an arrangement
exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and
collection of the related receivable is reasonably assured.
Marketing and Advertising
We expense marketing and advertising costs as incurred. Marketing and advertising costs for the
three months ended March 31, 2010, and 2009 were $274,094 and $158,805, respectively.
Research and Development Costs
Research and development costs are charged to expense as incurred. These costs consist primarily of
research with respect to new grades of bioplastic resins, testing of both the bioplastic resins as
well as testing of finished products made from the bio-based resins. The costs for the three months
ended March 31, 2010, and 2009 were $60,238 and $141,210, respectively.
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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. As of December 31, 2009, and March 31 ,2010, all awards were fully vested.
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 three months ended March 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 spit of our common stock in ratio of one-for-forty. The
reverse split was effective at 6:00 a.m. on March 15, 2010. All historical and per share amounts
have been adjusted to reflect the reverse stock split.
Capital Stock Issued
During the three months ended March 31, 2010, we issued shares of common stock as follows:
| • | 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 $1,289,500. |
| • | On January 4, 2010, we issued 31,250 shares of common stock valued at $125,000 for fees
associated with the early termination of a lease in California. |
| • | On January 6, 2010, we issued 12,500 shares of common stock valued at $50,000 to a board
member for services provided. |
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Valuation Assumptions for Stock Options
During the year ended
December 31, 2007, total stock options granted to employees were 290,625 with
estimated total grant-date fair values of $4,481,665. We estimate that stock-based compensation
for awards not expected to be exercised is $864,688. We did not issue any stock options to
employees during the three months ended March 31, 2010 or the year ended December 31, 2009.
During the three months ended March 31, 2010, and the year ended December 31, 2009, we recorded stock-based
compensation related to stock options of $0 and $273,919, respectively relating to the
vesting of the 2007 grants. 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. All stock options granted were fully
vested as of March 31, 2010 and December 31, 2009.
| 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, 2009, 2004 Employee Stock Option Plan, 334,375 shares are available for
future grants under the 2004 Employee Stock Option Plan. We settle stock option exercises with
newly issued common shares. The following is a summary of stock option activity (in thousands,
except per share data): All stock options were full vested as of December 31, 2009 and no shares
have been issued during the three months ended March, 31, 2010.
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The following tables summarize information about stock options as of March 31,
2010 and December 31, 2009, (in thousands, except per share data):
| 2010 | 2009 | |||||||||||||||
| Weighted Average | Weighted Average | |||||||||||||||
| Shares | Exercise Price | Shares | Exercise Price | |||||||||||||
Outstanding—beginning of year |
73 | $ | 0.56 | 249 | $ | 0.56 | ||||||||||
Granted at fair value |
— | — | — | — | ||||||||||||
Exercised |
— | — | — | — | ||||||||||||
Canceled/forfeited |
— | — | (176 | ) | 0.56 | |||||||||||
Outstanding—end of year |
73 | 0.56 | 73 | 0.56 | ||||||||||||
Options exercisable at year-end |
73 | $ | 0.56 | 0 | $ | 0.56 | ||||||||||
| 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-$0.56 |
73 | $ | 0.56 | 4 | — | 73 | $ | 0.56 | 4 | — | ||||||||||||||||||||||
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 average stock price of $1.30 and $0.37 during the three months ended March 31, 2010
and the year ended December 31, 2009, which would have been received by the option holders had
all option holders exercised their options as of that date. Based on the average stock price during
the three months ended March 31, 2010 and the year ended December 31, 2009, there were no
in-the-money options exercisable as of March 31, 2010 and March 31, 2009.
No options were granted and no
shares vested during the three months ended March 31, 2010.
Additionally, no options were exercised during the three months ended March 31, 2010, and as such no
cash was received from employees as a result of any such exercise of stock options.
4. REVOLVING LINE OF CREDIT
The Company has one revolving line of credit guaranteed by our Chief Executive Officer with total
availability of $25,000. As of March 31, 2010 and December 31, 2009, the Company did not have any
borrowings under the line of credit.
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 at $9,118 per month.
Indiana Facility — The 105,000 square foot Seymour facility is currently used as a distribution
facility for our products; construction and installation of our first production line is
mechanically completed. The Seymour facility is subject to a lease with monthly rents of $25,000
expiring in January 2018, however the rent agreement has been amended with a substantial rent
reduction for a period of several months ending at the end of 2010.
6. LOANS PAYABLE
Notes Payable
During the year ended December 31, 2008, the Company issued a promissory note to a vendor for
services provided in the amount of $152,648 which bears interest at the rate of 1.5% per month due
in full on February 6, 2009. A payment of $65,000 and stock valued at $62,400 was issued to the
vendor in December 2009. The remaining balance at December 31, 2009, of $53,487 was paid in
January 2010,
On February 11, 2010, the Company signed a promissory note in the amount of $20,359 for the
purchase on an automobile. The note bears interest at 7.44% per years and is to be repaid in 60
monthly payment of $410.67.
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7. INCOME TAX
We are subject to U.S. and California income tax. Subject to limited statutory exceptions, we are
no longer subject to federal, state and local or non-U.S. income tax examinations by tax
authorities for years before 2006. We are not presently liable for any income taxes nor are we
undergoing any tax examinations by the Internal Revenue Service. No Deferred Tax Assets and
Deferred Tax Liabilities are included in the balance sheets at March 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.
10. RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2010, we had no related party transactions.
11. SUBSEQUENT EVENTS
On April 8, 2010, our
application to list our common stock on NASDAQ’s Capital Market was approved. Trading on
NASDAQ’s Capital Market commenced on April 13,2010.
On Mary 17, 2010, 20,867 shares of
common stock
were issued for services to be rendered during the period of April 2010 to December 2010.
| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
CAUTIONARY STATEMENTS
This Form 10-Q 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 the Company contemplates or has 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-Q. You can
find many of these statements by looking for words such as believes, expects, anticipates,
estimates, “opines, or similar expressions used in this Form 10-Q. 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. The
most important facts that could prevent the Company from achieving its stated goals include, but
are not limited to, the following:
| • | inability to raise sufficient additional capital to finance operations; |
| • | potential fluctuation in quarterly results; |
| • | our failure to earn profits; |
| • | inadequate capital to expand 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 that encourage use of
bioplastics;
|
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| • | failure to successfully commence operations at our new Seymour facility and relocate
manufacturing activities from California to Indiana; |
| • | failure to commercialize new grades of resin being pursued in our technical / market
development “pipeline” |
| • | competitor actions that curtail our market share, negatively affect pricing or limit
sales growth; |
| • | inability to retain employees as a result of deferral of payment of salaries to preserve
cash; |
| • | litigation with or legal claims and allegations by outside parties; |
| • | insufficient revenues to cover operating costs; |
| • | inability to successfully implement our Strategic Restructuring Program, including the
successful negotiation of a strategic partnership to outsource our manufacturing
activities, consolidation of product lines and the sale of our commercial production
equipment at attractive prices. |
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 forward-looking 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 these statements, which speak only as of the date of this Form
10-Q. 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-Q, or to reflect the
occurrence of unanticipated events.
OVERVIEW
General.
We primarily conduct our operations through three product families:
| • | Cereplast Compostables Resins® are renewable, ecologically-sound substitutes
for petroleum-based plastics targeting primarily single-use disposables and packaging
applications. We offer 17 commercial grades of Compostables Resins in this product line.
These resins are compatible with existing manufacturing processes and equipment making them
a ready substitute for traditional petroleum-based resins. We commercially introduced our
Compostables line in November 2006. |
| • | Cereplast Hybrid Resins® replace up to 50% of the petroleum content in
conventional plastics with bio-based materials such as industrial starches sourced from
plants. The Hybrid Resin line is designed to offer similar properties to traditional
polyolefins such as impact strength and heat deflection temperature, and is compatible with
existing converter processes and equipment. Hybrid Resins provide a viable alternative for
brand owners and converters looking to partially replace petroleum-based resins in durable
goods applications. Hybrid Resins address this need in a wide range of markets, including
automotive, consumer goods, consumer electronics, medical, packaging, and construction.
We commercially introduced our first grade of Hybrid Resin, Hybrid 150, at the end of 2007.
We currently offer two commercial grades in this product line. |
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| • | Cereplast Algae Plastics™. In October 2009 we announced that we have been developing a
new technology to transform algae into bioplastics and intend to launch a new family of
algae-based resins that will complement the company’s existing line of Compostables &
Hybrid resins. Although we do not expect this new technology to become commercial before
the end of 2010 or early 2011, it remains an important development as we believe that the
potential open by algae is quite substantial. Cereplast algae-based resins could replace in
a first step 50% or more of the petroleum content used in traditional plastic resins.
Currently, Cereplast is using renewable material such as starches from corn, tapioca, wheat
and potatoes and Ingeo® PLA. Recently the algae production business has attracted a lot of
attention when Exxon announced a $600 million investment in Synthetic Genomics and BP’s $10
million investment in Martek Biosciences. The Company retains that algae is a very
attractive feedstock as it does offer a low carbon footprint alternative and at the same
time could be accessible in very large quantity. We also have a future plan to create algae
plastic made of 100% algae component abandoning any reliance on fossils fuels. |
The lead time for customer testing (which, for compostable products, includes the full product
lifecycle necessary to receive compostable certifications) of our resins generally ranges from one
to three years or more depending upon the industry, the customer and the specific application. As
of March 31, 2010, over 230 companies have requested and been provided with samples of our
bioplastic resin and 150 customers have purchased resin for trials and testing. Of these, 80
customers have advanced to prototype testing and qualification of more than 135 different product
applications. Thirty customers, including Dorel Industries, WNA, Alcoa, Genpak, Innoware, Penley,
Solo, Cadaco, Jatco, Dentek, CSI-Cosmolab, Warner Tools, Handgards and Pace Industries, have
commercialized and introduced 95 different bioplastic products using our resin. As a result of
successful testing and commercial product launches, some of our customers have signed multi-year
supply contracts with increasing volume.
Trends and Uncertainties that May Impact Future Results of Operations
Global Market and Economic Conditions. Recent global market and economic conditions have been
unprecedented and challenging with tighter credit conditions and slower growth through the first
half of 2009. For the nine-month period ended March 31, 2010, continued concerns about the
systemic impact of inflation, energy costs, geopolitical issues, the availability and cost of
credit, the U.S. mortgage market and a declining real estate market in the U.S. have contributed to
increased market volatility and diminished expectations for the U.S. economy. In the last half of
2008, concerns fueled by the federal government conservatorship of the Federal Home Loan Mortgage
Corporation and the Federal National Mortgage Association, the declared bankruptcy of Lehman
Brothers Holdings Inc., the U.S. government provided loan to American International Group Inc. and
other federal government interventions in the US credit markets lead to increased market
uncertainty and instability in both US and international capital and credit markets. These
conditions, combined with volatile oil prices, declining business and consumer confidence and
increased unemployment have contributed to continued 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
lead many lenders and institutional investors to reduce, and in some cases, cease to provide
funding to borrowers. 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.
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Sales. We record sales at the time that we ship our products, provided that evidence of an
arrangement exists, title and risk of loss have passed to the customer, fees are fixed or
determinable, and collection of the related receivable is reasonably assured. We record sales net
of sales discounts and allowances. For the three-month period ended March 31, 2010, we provided
price incentives to several customers that entered into multi-year supply contracts for their
initial purchase commitments to assist in testing and sample production. In the future, we may
offer these incentives on a selected basis as we continue to grow our customer base. The amount of
these incentives in the future periods will be a function of the growth of our customer base and
the particular commercialization. During the three-month period ended March 31, 2010 we signed
supply contracts with Dorel Juvenile Group, USA, a division of Dorel Industries, Inc. as well as
Georgia Pacific’s Dixie Cups and Tableware division. While we have started shipping to Dorel and
expect to start shipping to Georgia Pacific in the fourth quarter, sales under these agreements
will be dependent on retail market acceptance of the new Dorel and DIXIE products.
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, research and development and restructuring costs.
Salaries include all cash and non-cash compensation and related costs for all principal functions
including executive, finance, accounting, production, and human
resources. We have incurred certain one-time costs associated with the implementation of our
Strategic Restructuring Program, which occurred
primarily in the 4th quarter of 2009,
however we have also realized reductions in operating expenses across most other operating areas including salaries
and wages, rent, research and development and professional fees.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our
unaudited 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 ongoing 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.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2010 COMPARED TO THE THREE MONTHS ENDED
MARCH 31, 2010.
Sales
Gross sales decreased by $245,166 or 43.4% to $319,217 for the three months ended March 31, 2010,
compared to the three months ended March 31, 2009. Net sales decreased by $270,749 or 48.3% to
$289,828 for the three months ended March 31, 2010, compared to the three months ended March 31,
2009. The sales decrease for the period is attributable primarily to the fact that our
manufacturing operations were moving from California to Indiana from January 17, 2010, to March 15,
2010. During the course of our moving, our manufacturing operations were temporarily suspended.
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Gross Profit
Gross profit decreased by $6,204 from $97,770 to $91,566 for the three months ended March 31, 2010,
compared to the three months ended March 31, 2009. As a percentage of net sales, gross profit
margin increased from 17.44% for the three months ended March 31, 2009, to 31.59% for the three
months ended March 31, 2010. The increase in gross profit is primarily due to cost savings in our
Seymour facility as compared to the California facility.
Operating Expenses
Overall, total operating expenses decreased by $705,627 or 31,2%, to $1,556,717 for the three
months ended March 31, 2010, compared to the three months ended March 31, 2009. The decrease for
the period is largely attributable to the adoption of our Strategic Restructuring Program that
calls for a focus on product development and marketing and contracting for production. The related
reduction of in-house manufacturing capacity and the related workforce resulted in a reduction in
salaries and wages for the three months ended March 31, 2010, as compared to the three months ended
March 31, 2009.
| • | Salaries and wages, including stock based compensation, decreased by $593,070 or 54.0%,
to $504,505 for the three months ended March 31, 2010 as compared to the
three months ended March 30, 2009, largely as a result of the significant reductions in our
workforce in 2009 and associated reductions in compensation expense related to the vesting
of employee stock options to reflect actual stock option forfeiture rates. |
| • | Marketing expense increased $115,289, or 72.6%, to $274,094 for the three months ended
March 31, 2010, compared to the three months ended March 31, 2009. The increase is due
primarily to costs associated with stock issued for the termination of an existing
marketing agreement on March 23, 2010. |
| • | Research and Development costs decreased by $80,972, or 57.3% to $60,238 for the three
months ended March 31, 2010, compared to the three months ended March 31, 2009 also as a
result of an improved focus of our “pipeline process” for technical development and
expansion of our resin families and other cost cutting measures. |
| • | Rent expense decreased by $157,629, or 65.2%, to $84,064 for the three months ended
March 31, 2010 compared to the three months ended March 31, 2009. The decrease for the
period resulted for the termination of two leases for 30,000 sq. ft & 25,000 sq. ft. of
office and warehouse space during the prior year and the renegotiation of the lease of the
Indiana facility. |
Net Loss
Net loss decreased by $508,961 to $1,684,594 for the three months ended March 31, 2010 compared to
the three months ended March 31, 2009. This decrease in net loss was a result of reduced operating
expenses associated with the downsizing or our workforce related to manufacturing operations,
leveraging of our staff resources and, improved processes and cost control and rigorous market and
customer selection as well as enhanced gross profit margins.
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LIQUIDITY AND CAPITAL RESOURCES
We require working capital to fund our operations, including funds to finance our research and
development and expand sales and marketing, to purchase equipment, service indebtedness, satisfy
lease obligations and execute on
our business plan and growth strategy. Based on our current cash position and to complete the
development of our Seymour facility, we will be required to raise additional working capital,
either through commercial debt financing or through the issuance of debt or equity securities.
There is no assurance that we will be able to obtain additional sources of working capital on
commercially reasonable terms when needed, or at all.
We had net unrestricted cash of $1,165,263 at March 31, 2010, compared to net unrestricted cash of
$1,305,771 at December 31, 2009. The net decrease in unrestricted cash is attributed principally
to the funding of operating activities offset by funds received through successful private
placements.
We had positive working capital (the difference between current assets and current liabilities) of
$947,071 at March 31,2010, compared to positive working capital of $1,019,741 at December 31, 2009.
The decrease of $72,670 in working capital is primarily due to a reduction in accounts receivable
and prepaid expenses offset by a reduction in account payable.
During the three months ended
March 31, 2010, we used $1,352,601 of cash for operating activities
compared to $891,707 used for operating activities during the three months ended March 31,2009. The
increase in the use of cash for operating activities was primarily a result of inventory purchases
and payment of accounts payable.
Cash used in investing activities
during the three months ended March 31, 2010, was $52,603
compared to cash used in investing activities of $5,715 during the three months ended March 31,
2009. The increase is due to costs association with the Indiana facility start-up in 2010.
Cash provided by financing activities during the three months ended March 31, 2010, was $1,246,650
compared to cash provided by financing activities of $449,627, during the three months ended March
31, 2009. These funds are provided by proceeds from private placements of shares of our common
stock.
We have incurred a net loss of $1,684,594 for the three months ended March 31, 2010, and $6,072,948
for the year ended December 31, 2008, and have an accumulated deficit of $37,129,562 as of March
31, 2010. Based on our operating plan, our existing working capital will not be sufficient to meet
the cash requirements to fund our planned operating expenses, capital expenditures and working
capital requirements through December 31, 2010 without additional sources of cash.
CONTRACTUAL OBLIGATIONS
The following table summarizes
our contractual obligations at March 31, 2010, and the effects such
obligations are expected to have on our liquidity and cash flows in our future periods:
| Payments Due by Period | ||||||||||||||||||||
| Less Than | 2-3 | 4-5 | More Than | |||||||||||||||||
| Total | 1 year | Years | Years | 5 years | ||||||||||||||||
Capitalized lease obligations |
$ | 24,797 | $ | 15,900 | $ | 8,897 | $ | — | $ | — | ||||||||||
Purchase obligations |
214,452 | 214,452 | — | — | — | |||||||||||||||
Rental lease obligations |
3,241,975 | 409,737 | 409,737 | 409,737 | 2,012,764 | |||||||||||||||
Term loan obligations |
20,078 | 3,203 | 4,023 | 4,086 | 8,766 | |||||||||||||||
| $ | 3,501,302 | $ | 643,292 | $ | 422,657 | $ | 413,823 | $ | 2,021,530 | |||||||||||
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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 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are exposed to a number of market risks in the ordinary course of business. These risks, which
include interest rate risk, foreign currency exchange risk and commodity price risk, arise in the
normal course of business rather than from trading. We have examined our exposures to these risks
and concluded that none of our exposures in these areas is material to fair values, cash flows or
earnings. We regularly review these risks to determine if we should enter into active strategies,
such as hedging, to help manage the risks. At the present time, we do not have any hedging programs
in place and we are not trading in any financial or derivative instruments.
We currently do not have any material debt, so we do not have interest rate risk from a liability
perspective. We do have a significant amount of cash and short-term investments with maturities
less than three months. This cash portfolio exposes us to interest rate risk as short-term
investment rates can be volatile. Given the short-term maturity structure of our investment
portfolio, and the high-grade investment quality of our portfolio, we believe that we are not
subject to principal fluctuations and the effective interest rate of our portfolio tracks closely
to various short-term money market interest rate benchmarks.
| ITEM 4T. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure 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 chief 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 chief 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: (i)
recorded, processed, summarized and reported, within the time periods specified in the Commission’s
rules and forms, and (ii) accumulated and communicated to our management, including our chief
executive officer and chief financial officer, as appropriate to allow timely decisions regarding
required disclosure.
Changes in Internal Control Over Financial Reporting
During the quarter ended March 31, 2010, there have been no changes in our internal control over
financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that have
materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting.
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PART II – OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS |
From time to time, we may become involved in various lawsuits and legal proceedings that arise in
the ordinary course of business. However, litigation is subject to inherent uncertainties, and an
adverse result in matters that may harm our business may arise from time to time. We are currently
not aware of nor have any knowledge of any such legal proceedings or claims that we believe will
have, individually or in the aggregate, a material adverse effect on our business, financial
condition or operating results.
| ITEM 1A. | RISK FACTORS |
There are no material changes from the risk factors previously disclosed in the Registrant’s Form
10-K filed on March 31, 2010.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
We have issued the following
unregistered securities during the three months ended March 31, 2010:
| • | We sold 705,000 shares of common stock for net cash proceeds of $1,289,500. |
| • | On January 4, 2010, we issued 31,250 shares of common stock valued at $125,000 for fees
associated with the early termination of a lease. |
| • | On January 6, 2010, we issued 12,500 shares of common stock valued at $50,000 to a
board member for services provided. |
All of the offerings and sales above were deemed to be exempt under rule 506 of Regulation D and/or
Section 4(2) of the Securities Act, No advertising or general solicitation was employed in offering
the securities. The offerings and sales were made to a limited number of persons, all of whom were
accredited investors, our business associates or our executive officers, and transfers of the
securities were restricted by us in accordance with the requirements of the Securities Act. In
addition to representations by the above-referenced persons, we have made independent
determinations that all of the above-referenced persons were accredited or sophisticated investors,
were capable of analyzing the merits and risks of their investment, and understood the speculative
nature of their investment. Furthermore, all of the above-referenced persons were provided with
access to our SEC filings.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
| ITEM 4. | RESERVED |
| ITEM 5. | OTHER INFORMATION |
Not applicable.
| ITEM 6. | EXHIBITS |
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| Exhibit | ||||
| Number | Description | |||
| 31.1 | Certification of the Chief Executive Officer and Principal Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
|||
| 32.1 | Certification of the Chief Executive Officer and Principal Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *** |
|||
| (1) | Filed as an exhibit to the Form SB-2 Registration Statement declared effective on July 5,
2005 and incorporated herein by reference. |
|
| *** | In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed
“filed” for the purposes of Section 18 of the Exchange Act or otherwise subject to the
liability of that section, nor shall it be deemed incorporated by reference in any filing
under the Securities Act of 1933, as amended, or the Exchange Act. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Date: May 12, 2010 | CEREPLAST, INC. |
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| By: | /s/ Frederic Scheer | |||
| Frederic Scheer | ||||
| Chairman, Chief Executive Officer, Principal Financial Officer and Director | ||||
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