Item 1B.
Unresolved Staff Comments
Not applicable.
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.
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.
PART II
Item 5.
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.
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:
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:
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.
(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.
Not applicable
Item 7.
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:
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Inability to raise sufficient additional capital to finance operations
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potential fluctuation in quarterly results
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inadequate capital to expand our business, inability to raise additional capital or financing to implement our business plans;
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decline in demand for our products and services;
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rapid and significant changes in markets and other factors which encourage use of bioplastics;
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failure to commercialize sufficient new grades of resin being pursued in our technical / market development “pipeline”;
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competitor actions which curtail our market share, negatively affect pricing or limit sales growth;
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litigation with or legal claims and allegations by outside parties;
•
insufficient revenues to cover operating costs.
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.
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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®”.
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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.
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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 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.
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.
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.
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,
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.
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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.
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.
Item 7A.
Quantitative and Qualitative Disclosures about Market Risk
Not Applicable
Item 8.
Item 8.
Financial Statements and Supplementary Data
Financial statements required by this item are included after the signature page of this filing.
Item 9.
Item 9.
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None
Item 9A.
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.
None.
PART III
Item 10.
Item 10.
Directors, Executive Officers, and Corporate Governance
Our directors and executive officers are as follows:
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.
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.
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.
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.
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.
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.
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.
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 executive officers; and
•
our executive officers and directors as a group.
Beneficial ownership has been determined in accordance with the rules and regulations of the SEC and includes voting or investment power with respect to the shares. Unless otherwise indicated, the persons named in the table below have sole voting and investment power with respect to the number of shares indicated as beneficially owned by them. Common stock beneficially owned and percentage ownership is based on 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.
*
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.
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.
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):
(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.
Item 15.
Item 15.
Exhibits and Financial Statement Schedules
(a)(1) Index to Consolidated Financial Statements
Report of the Independent Registered Public Accounting Firm
Consolidated Balances Sheets
Consolidated Statements of Operations
Consolidated Statements of Shareholders’ Equity and Comprehensive Loss
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(b)
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.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
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
HJ Associates & Consultants, LLP
Salt Lake City, Utah
March 31, 2011
CEREPLAST, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share data)
See accompanying notes to consolidated financial statements.
CEREPLAST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
(In thousands, except per share data)
See accompanying notes to consolidated financial statements.
CEREPLAST, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY AND COMPREHENSIVE INCOME
(In thousands, except share data)
See accompanying notes to consolidated financial statements.
CEREPLAST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands, except share data)
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.
CEREPLAST, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
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.
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.
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):
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):
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):
Deferred Income Taxes
Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statement of income.
Revenue Recognition
We recognize revenue at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.
Marketing and Advertising
We expense marketing and advertising costs as incurred.
Research and Development Costs
Research and development costs are charged to expense as incurred. These costs consist primarily of research with respect to new grades of bioplastic resins, testing of both the bioplastic resins as well as testing of finished products made from the bio-based resins.
Stock-Based Compensation
Compensation cost for all stock-based awards is measured at fair value on the date of grant and recognized over the service period for awards expected to vest. The fair value of stock options is determined using the Black-Scholes valuation model. Such value is recognized as expense over the service period, net of estimated forfeitures, using the straight-line method. Adjustments to this expense are made periodically to recognize actual rates of forfeiture which vary significantly from estimates.
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:
During the twelve months ended December 31, 2009, we issued shares of common stock as follows:
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.
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Expected Volatility: The fair values of stock based payments were valued using a volatility factor based on our historical stock prices.
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Expected Term: We elected to use the “simplified method” as discussed in SAB No. 107 to develop the estimate of the expected term.
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Expected Dividend: We have not paid any dividends and do not anticipate paying dividends in the foreseeable future.
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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):
The following table summarizes information about stock options as of December 31, 2010 (in thousands, except per share data):
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.
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:
The Loan is to be repaid over 39 months as follows (in thousands):
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):
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):
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):
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):
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):
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.
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.