UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q/A
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| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2011
OR
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| 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 | 91-2154289 | ||
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No.) | ||
300 N. Continental Boulevard, Suite 100 El Segundo, California | 90245 | ||
| (Address of Principal Executive Office) | (Zip Code) | ||
(310) 615-1900
(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. Yesþx Noo¨
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). Yesþx Noo¨
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.
| Large accelerated filer | ¨ | Accelerated filer | ¨ | |||
| Non-accelerated filer | ¨ | Smaller reporting company | x | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso¨ Noþx
The number of shares of common stock outstanding as of November 11, 201112, 2012 is 15,793,553.
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PART I—FINANCIAL INFORMATION | ||||||||||||
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PART II—OTHER INFORMATION | ||||||||||||
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Exhibit 31.1 | ||||||||||||
Exhibit 31.2 | ||||||||||||
Exhibit | ||||||||||||
Exhibit | ||||||||||||
EX-101 INSTANCE DOCUMENT | ||||||||||||
EX-101 SCHEMA DOCUMENT | ||||||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||||||
EX-101 DEFINITION LINKBASE DOCUMENT | ||||||||||||
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.
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CEREPLAST, INC.
(in thousands, except shares data)
| September 30, 2011 | December 31, 2010 | |||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current Assets | ||||||||
| Cash | $ | 4,030 | $ | 2,391 | ||||
| Accounts Receivable, Net | 19,119 | 5,289 | ||||||
| Inventory, Net | 3,486 | 1,392 | ||||||
| Prepaid Expenses and Other Current Assets | 1,593 | 65 | ||||||
| Total Current Assets | 28,228 | 9,137 | ||||||
| Property and Equipment | ||||||||
| Property and Equipment | 7,007 | 5,564 | ||||||
| Accumulated Depreciation and Amortization | (2,894 | ) | (2,213 | ) | ||||
| Property and Equipment, Net | 4,113 | 3,351 | ||||||
| Other Assets | ||||||||
| Restricted Cash | 43 | 43 | ||||||
| Deferred Loan Costs | 1,459 | 266 | ||||||
| Intangible Assets, Net | 160 | 173 | ||||||
| Deposits | 49 | 14 | ||||||
| Total Other Assets | 1,711 | 496 | ||||||
| Total Assets | $ | 34,052 | $ | 12,984 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
| Accounts Payable | $ | 3,207 | $ | 2,567 | ||||
| Accrued Expenses | 2,095 | 1,251 | ||||||
| Capital Leases, Current Portion | 36 | 9 | ||||||
| Loan Payable, Current Portion | 1,504 | 149 | ||||||
| Total Current Liabilities | 6,842 | 3,976 | ||||||
| Long-Term Liabilities | ||||||||
| Loan Payable | 3,318 | 2,119 | ||||||
| Convertible Subordinated Notes | 12,500 | — | ||||||
| Capital Leases, Long-Term | 59 | — | ||||||
| Total Long-Term Liabilities | 15,877 | 2,119 | ||||||
| Total Liabilities | 22,719 | 6,095 | ||||||
| Equity | ||||||||
| Shareholders’ Equity | ||||||||
| Preferred Stock, $0.001 par value; 5,000,000 shares authorized and none outstanding | — | — | ||||||
| Common Stock, $0.001 par value; 495,000,000 shares authorized; 15,793,553 and 12,992,195 shares issued and outstanding at September 30, 2011 and December 31, 2010, respectively | 16 | 13 | ||||||
| Additional Paid in Capital | 61,992 | 49,737 | ||||||
| Accumulated Deficit | (50,658 | ) | (42,933 | ) | ||||
| Accumulated Other Comprehensive Income | (21 | ) | 72 | |||||
| Total Shareholders’ Equity | 11,329 | 6,889 | ||||||
| Noncontrolling Interests | 4 | — | ||||||
| Total Equity | 11,333 | 6,889 | ||||||
| Total Liabilities and Shareholders’ Equity | $ | 34,052 | $ | 12,984 | ||||
| September 30, 2012 | December 31, 2011 | |||||||
| (Unaudited) | ||||||||
ASSETS | ||||||||
Current Assets | ||||||||
Cash | $ | 237 | $ | 3,940 | ||||
Accounts Receivable, Net | 7,293 | 14,744 | ||||||
Inventory, Net | 5,424 | 4,406 | ||||||
Prepaid Expenses and Other Current Assets | 1,136 | 966 | ||||||
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Total Current Assets | 14,090 | 24,056 | ||||||
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Property and Equipment | ||||||||
Property and Equipment | 13,836 | 13,752 | ||||||
Accumulated Depreciation and Amortization | (3,668 | ) | (3,151 | ) | ||||
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Property and Equipment, Net | 10,168 | 10,601 | ||||||
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Other Assets | ||||||||
Restricted Cash | 43 | 43 | ||||||
Deferred Loan Costs | 867 | 1,321 | ||||||
Intangible Assets, Net | 248 | 183 | ||||||
Deposits | 47 | 47 | ||||||
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Total Other Assets | 1,205 | 1,594 | ||||||
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Total Assets | $ | 25,463 | $ | 36,251 | ||||
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LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
Current Liabilities | ||||||||
Accounts Payable | $ | 1,134 | $ | 1,813 | ||||
Accrued Expenses | 3,049 | 2,760 | ||||||
Capital Leases, Current Portion | 77 | 73 | ||||||
Loan Payable, Current Portion | 4,023 | 1,855 | ||||||
Convertible Subordinated Notes, Current Portion | 357 | — | ||||||
Derivative Liability | 344 | — | ||||||
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Total Current Liabilities | 8,984 | 6,501 | ||||||
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Long-Term Liabilities | ||||||||
Loan Payable | 4,423 | 7,307 | ||||||
Convertible Subordinated Notes | 8,532 | 12,500 | ||||||
Capital Leases, Long-Term | 191 | 245 | ||||||
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Total Long-Term Liabilities | 13,146 | 20,052 | ||||||
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Total Liabilities | 22,130 | 26,553 | ||||||
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Shareholders’ Equity | ||||||||
Preferred Stock, $0.001 par value; 5,000,000 shares authorized; 73 and 0 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively | — | — | ||||||
Common Stock, $0.001 par value; 495,000,000 shares authorized; 28,989,829 and 18,933,139 shares issued and outstanding at September 30, 2012 and December 31, 2011, respectively | 29 | 19 | ||||||
Additional Paid in Capital | 76,398 | 66,524 | ||||||
Accumulated Deficit | (73,210 | ) | (56,935 | ) | ||||
Accumulated Other Comprehensive Income (Loss) | 112 | 86 | ||||||
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| 3,329 | 9,694 | |||||||
Noncontrolling Interests | 4 | 4 | ||||||
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Total Equity | 3,333 | 9,698 | ||||||
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Total Liabilities and Shareholders’ Equity | $ | 25,463 | $ | 36,251 | ||||
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See accompanying notes to unaudited consolidated financial statements.
CEREPLAST, INC.
(unaudited, in thousands, except per share data)
| Three months ended | Nine months ended | |||||||||||||||
| September 30, 2011 | September 30, 2010 | September 30, 2011 | September 30, 2010 | |||||||||||||
| GROSS SALES | $ | 5,414 | $ | 1,515 | $ | 20,849 | $ | 2,519 | ||||||||
| Sales Discounts, Returns and Allowances | (45 | ) | (2 | ) | (628 | ) | (70 | ) | ||||||||
| NET SALES | 5,369 | 1,513 | 20,221 | 2,449 | ||||||||||||
| COST OF SALES | 4,475 | 1,132 | 17,701 | 1,778 | ||||||||||||
| GROSS PROFIT | 894 | 381 | 2,520 | 671 | ||||||||||||
| Research and Development | 280 | 106 | 789 | 302 | ||||||||||||
| Selling, General and Administrative | 3,689 | 2,233 | 8,457 | 5,432 | ||||||||||||
| LOSS FROM OPERATIONS BEFORE OTHER EXPENSES | (3,075 | ) | (1,958 | ) | (6,726 | ) | (5,063 | ) | ||||||||
| OTHER EXPENSES | ||||||||||||||||
| Restructuring Costs | — | (275 | ) | — | (586 | ) | ||||||||||
| Interest Expense, Net | (513 | ) | 1 | (999 | ) | — | ||||||||||
| TOTAL OTHER EXPENSE, NET | (513 | ) | (274 | ) | (999 | ) | (586 | ) | ||||||||
| NET LOSS BEFORE PROVISION FOR INCOME TAXES | (3,588 | ) | (2,232 | ) | (7,725 | ) | (5,649 | ) | ||||||||
| Provision for Income Taxes | — | — | — | — | ||||||||||||
| NET LOSS | (3,588 | ) | (2,232 | ) | (7,725 | ) | (5,649 | ) | ||||||||
| OTHER COMPREHENSIVE INCOME | ||||||||||||||||
| Gain (Loss) on Foreign Currency Translation | (54 | ) | 52 | (93 | ) | 52 | ||||||||||
| TOTAL COMPREHENSIVE LOSS | $ | (3,642 | ) | $ | (2,180 | ) | $ | (7,818 | ) | $ | (5,597 | ) | ||||
| BASIC AND DILUTED LOSS PER SHARE | $ | (0.23 | ) | $ | (0.17 | ) | $ | (0.50 | ) | $ | (0.49 | ) | ||||
| WEIGHTED AVERAGE COMMON SHARES OUTSTANDING, BASIC AND DILUTED | 15,778 | 12,925 | 15,470 | 11,400 | ||||||||||||
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, 2012 | September 30, 2011 | September 30, 2012 | September 30, 2011 | |||||||||||||
Gross Product Sales | $ | 481 | $ | 5,414 | $ | 786 | $ | 20,849 | ||||||||
Sales Discounts, Returns and Allowances | (4 | ) | (45 | ) | (16 | ) | (628 | ) | ||||||||
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Net Sales | 477 | 5,369 | 770 | 20,221 | ||||||||||||
Cost of Goods Sold | 910 | 4,475 | 2,093 | 17,701 | ||||||||||||
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Gross Profit (Loss) | (433 | ) | 894 | (1,323 | ) | 2,520 | ||||||||||
Operating Expenses: | ||||||||||||||||
Research and Development | 115 | 280 | 371 | 789 | ||||||||||||
Selling, General and Administrative | 6,410 | 3,689 | 9,286 | 8,457 | ||||||||||||
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Total Operating Expenses | 6,525 | 3,969 | 9,657 | 9,246 | ||||||||||||
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Operating Loss | (6,958 | ) | (3,075 | ) | (10,980 | ) | (6,726 | ) | ||||||||
Debt Extinguishment Costs | — | — | (427 | ) | — | |||||||||||
Loss on Derivative Liability | 47 | — | (52 | ) | — | |||||||||||
Interest and Other Income | — | — | 18 | — | ||||||||||||
Interest Expense | (3,057 | ) | (513 | ) | (4,834 | ) | (999 | ) | ||||||||
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Loss Before Provision for Income Taxes | (9,968 | ) | (3,588 | ) | (16,275 | ) | (7,725 | ) | ||||||||
Provision for Income Taxes | — | — | — | — | ||||||||||||
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Net Loss | (9,968 | ) | (3,588 | ) | (16,275 | ) | (7,725 | ) | ||||||||
Gain (Loss) on Foreign Currency Translation | (95 | ) | (54 | ) | 26 | (93 | ) | |||||||||
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Total Comprehensive Loss | $ | (10,063 | ) | $ | (3,642 | ) | $ | (16,249 | ) | $ | (7,818 | ) | ||||
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Net Loss Per Share—Basic and Diluted | $ | (0.40 | ) | $ | (0.23 | ) | $ | (0.77 | ) | $ | (0.50 | ) | ||||
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Weighted Average Common Shares Outstanding—Basic and Diluted | 24,739,449 | 15,777,793 | 21,242,115 | 15,470,324 | ||||||||||||
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See accompanying notes to unaudited consolidated financial statements.
4
(unaudited, in thousands, except shares data)
| Nine Months Ended | ||||||||
| September 30, 2011 | September 30, 2010 | |||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
| Net Loss | $ | (7,725 | ) | $ | (5,649 | ) | ||
| Adjustment to Reconcile Net Loss to Net Cash Used in Operating Activities | ||||||||
| Depreciation and Amortization | 694 | 588 | ||||||
| Allowance for Doubtful Accounts | 1,780 | 33 | ||||||
| Common Stock Issued for Services, Salaries and Wages | 874 | 1,333 | ||||||
| Amortization of Loan Discount | 57 | — | ||||||
| Loss on Disposal of Leasehold Improvements | — | 15 | ||||||
| Impairment of Intangible Assets | 64 | — | ||||||
| Changes in Operating Assets and Liabilities | ||||||||
| Accounts Receivable | (15,609 | ) | (1,263 | ) | ||||
| Deferred Loan Costs | 223 | — | ||||||
| Inventory | (2,095 | ) | (210 | ) | ||||
| Deposits | (35 | ) | 56 | |||||
| Prepaid Expenses and Other Current Assets | (1,514 | ) | 92 | |||||
| Restricted Cash | — | (43 | ) | |||||
| Accounts Payable | 269 | (315 | ) | |||||
| Accrued Expenses | 864 | 58 | ||||||
| NET CASH USED IN OPERATING ACTIVITIES | (22,153 | ) | (5,305 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
| Purchase of Property and Equipment, and Intangibles | (1,290 | ) | (184 | ) | ||||
| NET CASH USED IN INVESTING ACTIVITIES | (1,290 | ) | (184 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
| Payments on Capital Leases | (13 | ) | (23 | ) | ||||
| Proceeds from Capital Leases | 96 | — | ||||||
| Noncontrolling Interest Activities | 4 | — | ||||||
| Payments made on Notes Payable | — | (59 | ) | |||||
| Proceeds from Loan Payable, Net of Loan Costs | 2,500 | 20 | ||||||
| Proceeds from Convertible Subordinated Notes, Net of Issuance Costs | 11,225 | — | ||||||
| Proceeds from Issuance of Common Stock and Subscriptions, Net of Issuance Costs | 11,363 | 7,507 | ||||||
| NET CASH PROVIDED BY FINANCING ACTIVITIES | 25,175 | 7,445 | ||||||
| FOREIGN CURRENCY TRANSLATION | (93 | ) | 52 | |||||
| NET INCREASE IN CASH | 1,639 | 2,008 | ||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 2,391 | 1,306 | ||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 4,030 | $ | 3,314 | ||||
| SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
| Cash Paid During the Year For: | ||||||||
| Interest | $ | 417 | $ | 2 | ||||
| Income Taxes | $ | — | $ | — | ||||
| Nine Months Ended | ||||||||
| September 30, 2012 | September 30, 2011 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net Loss | $ | (16,275 | ) | $ | (7,725 | ) | ||
Adjustment to Reconcile Net Loss to Net Cash Used in Operating Activities | ||||||||
Depreciation and Amortization | 536 | 694 | ||||||
Allowance for Doubtful Accounts | 5,082 | 1,780 | ||||||
Common Stock Issued for Services, Salaries and Wages | 160 | 874 | ||||||
Amortization of Loan Discount | 3,223 | 57 | ||||||
Impairment of Intangible Assets | — | 64 | ||||||
Extinguishment of Convertible Debt | 368 | — | ||||||
Loss on Derivative Liability | 52 | — | ||||||
Changes in Operating Assets and Liabilities | ||||||||
Accounts Receivable | 537 | (15,609 | ) | |||||
Deferred Loan Costs | 458 | 223 | ||||||
Inventory | 814 | (2,095 | ) | |||||
Deposits | — | (35 | ) | |||||
Prepaid Expenses | (171 | ) | (1,514 | ) | ||||
Accounts Payable | 659 | 269 | ||||||
Accrued Expenses | 288 | 864 | ||||||
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NET CASH USED IN OPERATING ACTIVITIES | (4,269 | ) | (22,153 | ) | ||||
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CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of Property and Equipment, and Intangibles | (180 | ) | (1,290 | ) | ||||
Proceeds from Sale of Equipment | 15 | — | ||||||
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NET CASH USED IN INVESTING ACTIVITIES | (165 | ) | (1,290 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Payments on Capital Leases | (50 | ) | (13 | ) | ||||
Proceeds from Capital Leases | — | 96 | ||||||
Noncontrolling Interest Activities | — | 4 | ||||||
Payments made on Notes Payable | (603 | ) | — | |||||
Proceeds from Loan Payable, Net of Loan Costs | — | 2,500 | ||||||
Proceeds from Convertible Notes, Net of Issuance Costs | 600 | 11,225 | ||||||
Proceeds from Issuance of Common Stock and Subscriptions, Net of Issuance Costs | 400 | 11,363 | ||||||
Proceeds from Issuance of Preferred Stock, Net of Issuance Costs | 400 | — | ||||||
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NET CASH PROVIDED BY FINANCING ACTIVITIES | 747 | 25,175 | ||||||
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FOREIGN CURRENCY TRANSLATION | (15 | ) | (93 | ) | ||||
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NET INCREASE (DECREASE) IN CASH | (3,702 | ) | 1,639 | |||||
CASH, BEGINNING OF PERIOD | 3,940 | 2,391 | ||||||
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CASH, END OF PERIOD | $ | 237 | $ | 4,030 | ||||
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | ||||||||
Cash Paid During the Year For: | ||||||||
Interest | $ | 460 | $ | 417 | ||||
Income Taxes | $ | — | $ | — | ||||
SUPPLEMENTAL DISCLOSURE OF NON-CASH TRANSACTIONS | ||||||||
During the nine months ended September 30, 2011,2012, the Company issued 2,596,50084,478 shares in exchangevalued at $88 to employees for net proceedsservice rendered during the period, 50,000 shares valued at $11 to a vendor for services rendered during the period and 9,587 shares valued at $10 for a settlement agreement. The Company also recognized $51 of $11,208 under a private placement. Duringexpense related to vesting of employee stock options for the nine months ended September 30, 2010, the Company issued 2,842,642 shares in exchange for net proceeds of $7,507 under a private placement.
See accompanying notes to unaudited consolidated financial statements.
5
September 30, 2011
2012
(Unaudited)
1. ORGANIZATION AND LINE OF BUSINESS
Organization
Cereplast, Inc. (“we” or “Cereplast”) was 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 articlescertificate of incorporation to change our name to Cereplast, Inc. (the “Company”).
Line of Business
We have developed and are commercializing proprietary bio-based resins through two complementary product families: (1) Cereplast Compostables® resins which are compostable, renewable, ecologically sound substitutes for traditional petroleum-based non-compostable plastics, and (2) Cereplast Sustainables®Sustainables™ resins (including the Cereplast Hybrid Resins product line), which replacereplaces up to 90% of the petroleum-based content of traditional plastics with materials from renewable resources. Our resins aim to be competitively priced compared to fully 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 is eachare being driven globally by a variety of factors, including environmental concerns, new stringent regulations on compostable material, fossil fuel price volatility, energy security and energy security.environmental concerns. These factors have led to increased spending on clean and sustainablerenewable products by corporations and individuals as well as legislative initiatives at thenational, state and 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® resinsare compostable and bio-based, ecologically sound substitutes for petroleum-based plastics targeting primarily compostable bags, single-use food service products and packaging applications. We offer |
| • | Cereplast |
| • | Cereplast Hybrid Resins® products replace up to |
| • | Cereplast Algae Plastic® resins. In October of 2009 we announced that we have been developing a new technology to transform algae into bioplastics and intend to launch a new resin family containing algae-based materials that will complement our existing line of resins. The first commercial product with Cereplast Algae Plastic® resin is now being produced and sold as part of our Sustainables resin family. We believe that it is important to enhance research on non-food crops as we expect a surge in demand in bioplastics in future years, thus potentially creating pressure on food crops. Algae |
Our patent portfolio is currently comprised of five patents in the United States (“U.S. patents,”), one Mexican patent, and eightseven pending patent applications in the U.S. and abroad. Our trademark portfolio is currently comprised of approximately 4147 registered marks, 4 allowed marks and 1112 pending applications in the U.S. and abroad.
6
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 unaudited 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.Europe through two subsidiaries: Cereplast Europe SAS,a French company and Cereplast Italia SPA, an Italian corporation. Intercompany balances and transactions have been eliminated in consolidation. The results of operations for interim periods are not necessarily indicative of the results that may be expected for a full year. These financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in ourthe Company’s Annual Report on Form 10-K for the year ended December 31, 2010.
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 the allowance for doubtful accounts and the fair value of stock options. Actual results could differ from those estimates.
Cash and Cash Equivalents
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. At various times throughout the year, wethe Company may have exceeded federally insured limits. At September 30, 2011 and December 31, 2010,2011, balances in our cash accounts exceeded federally insured limits of $0.25 million by approximately $4.0 million and $2.3 million, respectively.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 investments totaling $4.0$0.2 million and $2.4$3.9 million at September 30, 20112012 and December 31, 2010,2011, 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.
Concentration of credit risk with respect to accounts receivable is limited to certain European customers to whom we make substantial sales. As of September 30, 20112012 we had onetwo large European customercustomers that accounted for $7.6$13.7 million, or 36%74% of our accounts receivable balance, which is past due. We have another large European customer with $6.1 million, or 29% of our receivable balance, which is expected to be paid as current invoices come due, during the period December 2011 through February 2012, in accordance with agreed payments terms. Agreed upon payment terms for both of these customers are 90 days from receipt of goods. These customers are distributors and have acknowledged to us their agreement with the amounts owing and no amounts recognized in revenue or recorded in accounts receivable from these customers are in dispute. These distributor product sales were sold under agreements with generally the same terms of sale and credit as all other customer agreements. These sales are not contingent upon the distributor selling the product to the end-user and there is no right of return. To reduce risk, we routinely assess the financial strength of our most significant customers, using standard credit risk evaluation methods with reference to publicly available and customer supplied information, and monitor the amounts owed to us, taking appropriate action when necessary. As a result of the recent deterioration in the general economic conditions in Europe and the slow payment by some of our European customers, we have increased ourestablished an allowance for doubtful accounts by $1.7of $10.5 million to reflect management’s assessment of credit risk associated with these customer balances. We are working with all customers to mitigate credit risk and ensure collection of all outstanding amounts.
7
During the nine months ended months ended September 30, 2011,2012, we had twodid not have any significant suppliers that accounted for 34.0% and 27.6%greater than 10% of total cost of goods sold, respectively.sold. During the same period in the prior year, we had two significant suppliers that accounted for 25.7%34.0%, and 24.7%27.6% of total cost of goods sold, respectively.sold. No other suppliers accounted for more than 10% of cost of goods sold during these periods.
Liquidity and Capital Resources
We have incurred a net loss of $16.3 million for the nine months ended September 30, 2012, and $14.0 million for the year ended December 31, 2011, and have an accumulated deficit of $73.2 million as of September 30, 2012. 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, 2012 without additional sources of cash.
In order to provide and preserve the necessary working capital to operate, we have successfully completed the following transactions in 2012:
Entered into an Exchange Agreement with Magna Group LLC (“Magna”), pursuant to which we agreed to issue to Magna convertible notes, in the aggregate principal amount of up to $4.6 million, in exchange for repayment of our Term Loan with Compass Horizon Funding Company, LLC.
Obtained a Forbearance Agreement on our semi-annual coupon payment due on June 1, 2012 with certain holders of our Senior Subordinated Notes to defer payment until December 1, 2012.
Reduced future interest payments through executing an Exchange Agreement for $2.5 million with certain holders of our Senior Subordinated Notes for conversion of their Notes and accrued interest into shares at an exchange rate of one share of our common stock for each $1.00 amount of the Note and accrued interest.
Issued 6,375,000 shares of our common stock to an institutional investor in settlement of approximately $1.3 million of our outstanding accounts payable balances.
Completed a Registered Direct offering to issue 1,000,000 shares of common stock at $0.50 per share for gross proceeds of $0.5 million.
Obtained unsecured short-term convertible debt financing of $0.6 million with additional availability of approximately $0.6 million at the lender’s sole discretion.
Returned unused raw materials to our suppliers in exchange for refunds net of restocking charges of approximately $0.3 million.
Our plan to address the shortfall of working capital is to generate additional financing through a combination of sale of our equity securities, additional funding from our new short-term convertible debt financings, incremental product sales into new markets with advance payment terms and collection of outstanding past due receivables. We are confident that we will be able to deliver on our plans, however, there are no assurances that we will be able to obtain any sources of financing on acceptable terms, or at all.
If we cannot obtain sufficient additional financing in the short-term, we may be forced to curtail or cease operations or file for bankruptcy. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be forced to take such actions.
Restricted Cash
We had restricted cash in the amount of approximately $43,000 on September 30, 20112012 and December 31, 2010.2011. 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 September 30, 2011,2012, which include cash, equivalents, accounts receivable, unbilled receivable, accounts payable, accrued expenses, loans payable and convertible subordinated notes 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 quantitative and qualitative review of the receivables past due from customers on a monthly basisbasis. Quantitative factors include customer’s past due balance, prior payment history, recent sales activity and reservesdays sales outstanding. Qualitative factors include macroeconomic environment, current product demand, estimated inventory levels and customer’s financial position. In certain cases, we may have access to repossess unsold products held at customer locations as recourse for payment defaults. The fair market value of these products are considered as potential recovery in estimating net losses from uncollectible accounts. On July 27, 2012, we entered into a Settlement Agreement with Colortec S.r.l. (“Colortec”) to resolve a dispute regarding our claims on outstanding accounts receivable balances. In exchange for renouncing our claim on outstanding accounts receivable from Colortec, we were granted access to recover unused containers of our products held by Colortec, valued at approximately $1.8 million. We have eliminated the outstanding accounts receivable balance due from Colortec in exchange for the value of inventory we recovered.
We record an allowance 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 approximately $1.8$10.5 million and $66,000$5.4 million as of September 30, 20112012 and December 31, 2010,2011, respectively.
InventoryInventories
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 reviewedassessed for recoverability through an ongoing review of inventory levels in relation to foreseeable demand, which is typically six to twelve months. We consider any quantities in excess of three years of inventory to be excessive due to the shelf life of our products. A significant qualitative factor used in our evaluation is the fact that polypropylene is a core ingredient to our bioplastic resin products. Polypropylene is a multi-billion dollar commodity market within the plastics industry, which provides us an active marketplace to monetize potential excess or obsolete inventory. Our foreseeable demand is based upon all available information, including sales forecasts, new product marketing plans and obsolescenceproduct life cycles. When the inventory on hand exceeds the foreseeable demand, we write down the value of those inventories which, at the time of our review, we expect to be unable to sell or return to the vendor. The amount of the inventory write down is the excess of historical cost over estimated realizable value. Once established, these write downs are considered permanent adjustments to the cost basis of the excess inventory. As of September 30, 2012 and a reserve is established accordingly. InventoriesDecember 31, 2011, inventories consisted of the following (following(in thousands):
| September 30, 2011 | December 31, 2010 | |||||||
| (Unaudited) | ||||||||
| Raw Materials | $ | 2,029 | $ | 936 | ||||
| Bioplastic Resins | 1,542 | 318 | ||||||
| Finished Goods | 41 | 44 | ||||||
| Packaging Materials | 66 | 53 | ||||||
| WIP | — | 41 | ||||||
| Obsolescence Reserve | (192 | ) | — | |||||
| Inventory, Net | $ | 3,486 | $ | 1,392 | ||||
8
| September 30, 2012 | December 31, 2011 | |||||||
| (Unaudited) | ||||||||
Raw Materials | $ | 2,030 | $ | 2,565 | ||||
Bioplastic Resins | 3,475 | 1,959 | ||||||
Finished Goods | 41 | 42 | ||||||
Packaging Materials | 72 | 69 | ||||||
WIP | — | — | ||||||
Obsolescence Reserve | (194 | ) | (229 | ) | ||||
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Inventories, net | $ | 5,424 | $ | 4,406 | ||||
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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 equipmentEquipment consist of the following (in thousands):
| September 30, 2011 | December 31, 2010 | |||||||
| (Unaudited) | ||||||||
| Equipment | $ | 5,506 | $ | 5,074 | ||||
| Construction in Progress | 952 | 135 | ||||||
| Furniture & Fixtures | 296 | 279 | ||||||
| Automobile | 25 | 25 | ||||||
| Leasehold Improvements | 228 | 51 | ||||||
| 7,007 | 5,564 | |||||||
| Less Accumulated Depreciation | (2,894 | ) | (2,213 | ) | ||||
| Property and Equipment, Net | $ | 4,113 | $ | 3,351 | ||||
| September 30, 2012 | December 31, 2011 | |||||||
| (Unaudited) | ||||||||
Equipment | $ | 5,772 | $ | 5,434 | ||||
Building | 5,906 | 5,906 | ||||||
Land | 32 | 32 | ||||||
Construction In Progress | 1,526 | 1,743 | ||||||
Auto | — | 37 | ||||||
Furniture and Fixtures | 327 | 327 | ||||||
Leasehold Improvements | 273 | 273 | ||||||
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| 13,836 | 13,752 | |||||||
Accumulated Depreciation | (3,668 | ) | (3,151 | ) | ||||
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Property and Equipment, Net | $ | 10,168 | $ | 10,601 | ||||
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Intangible Assets
Intangible assets 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. Intangible assets consist of the following(in thousandsthousands):):
| September 30, 2011 | December 31, 2010 | |||||||
| (Unaudited) | ||||||||
| Intangible Assets | $ | 196 | $ | 206 | ||||
| Less Accumulated Amortization | (36 | ) | (33 | ) | ||||
| Intangible Assets, Net | $ | 160 | $ | 173 | ||||
| September 30, 2012 | December 31, 2011 | |||||||
| (Unaudited) | ||||||||
Intangible Assets | $ | 295 | $ | 222 | ||||
Accumulated Amortization | (47 | ) | (39 | ) | ||||
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Intangible Assets, Net | $ | 248 | $ | 183 | ||||
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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.
9
We recognize revenue at the time of shipment of products, when the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred; (iii) the price to the customer is fixed or determinable; and (iv) collection of the sales price is probable.
Certain of our product sales are made to distributors under agreements with generally the same terms of sale and credit as all other customer agreements. Revenue from product sales to our customers, including our customers who are distributors, is recognized upon shipment provided the above noted fundamental criteria of revenue recognition are met. The sale of products to our customers who are distributors is not contingent upon the distributor selling the product to the end-user, and our current agreements with distributors do not have any rights of return.
MarketingImpairment of Long-Lived Assets
We review long-lived assets for possible impairment by evaluating whether the carrying amount of assets exceed its recoverable amount. Our judgment regarding the existence of impairment is based on legal factors, market conditions and Advertising
Comparative Figures
Certain of the prior year figures have been reclassified to conform to the presentation adopted in the current year.
10
Capital Stock Issued
During the nine months ended September 30, 2011,2012, we issued shares of common stock as follows:
We issued 2,596,50084,478 shares of restricted common stock valued at approximately $88,000 to various employees for services rendered during the period.
We issued 9,587 shares of common stock and 649,128valued at approximately $10,000 pursuant to a settlement agreement.
We issued 1,000,000 shares of common stock for gross proceeds of $0.5 million in a registered direct offering pursuant to a Subscription Agreement dated April 30, 2012.
We issued 100,000 warrants with an exercise price of $6.35$0.50 per share for gross proceedsoffering costs related to our registered direct offering. The relative fair value of $12.3 million pursuantthese offering costs was $23,000 and recorded to a securities purchase agreement dated January 26, 2011 between us and eachAdditional Paid In Capital. We estimated the fair value of the signatories thereto. We incurred stock issuance costs of $1.1 million.warrant using the Black-Scholes option pricing model using the following assumptions:
Assumptions: | May 2, 2012 | |||
Expected life | 1.7 years | |||
Expected volatility | 89.4 | % | ||
Dividends | None | |||
Risk-free interest rate | 0.27 | % | ||
We issued 35,000 shares of common stock pursuant to a warrant exercise for gross proceeds of $0.2 million.
We issued 4,0626,375,000 shares of common stock valued at $20,000 pursuantapproximately $1.2 million in settlement of our accounts payable.
We issued 50,000 shares of common stock valued at approximately $11,500 to a settlement agreement.vendor in exchange for services.
Valuation Assumptions for Stock Options
During the nine monthsyear ended September 30,December 31, 2011, we granted options to our employees to purchase an aggregate of 300,000 shares of our common stock, with estimated total grant-date fair values of $0.7 million. We estimate that stock-based compensation for awards not expected to be exercised is $0.2 million. During the three and nine months ended September 30, 2011,2012, we recorded stock-based compensation related to stock options of $23,000 and $0.2 million, respectively.$51,000. The grant date fair value was estimated at the date of grant using the Black-Scholes option pricing model, assuming no dividends and the following assumptions:
| January 14, 2011 | ||||
Average risk-free interest rate | 2.29 | % | ||
Average expected life (in years) | 6.0 | |||
Volatility | 41.9 | % | ||
| • | 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 |
Stock Option Activity
Under the 2004 Employee Stock Option Plan adopted by our board of directors (the “Plan”), our board of directors may issue incentive and non-qualified stock options to our employees. Options granted under the Plan generally expire at the end of five or ten years and vest in accordance with a vesting schedule determined by our board of directors, usually over three years from the grant date. As of September 30, 2011,2012, we have 34,375 shares available for future grants under the Plan. We settle stock option exercises with newly issued shares of our common stock.
11
| 2011 | 2010 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Average | Average | |||||||||||||||
| Shares | Exercise Price | Shares | Exercise Price | |||||||||||||
| Outstanding—January 1 | 73 | $ | 22.40 | 73 | $ | 22.40 | ||||||||||
| Granted at fair value | 300 | 5.31 | — | — | ||||||||||||
| Exercised | — | — | — | — | ||||||||||||
| Canceled/forfeited | — | — | — | — | ||||||||||||
| Outstanding—September 30 | 373 | 8.65 | 73 | 22.40 | ||||||||||||
| Options exercisable at September 30 | 133 | $ | 14.69 | 73 | $ | 22.40 | ||||||||||
| 2012 | 2011 | |||||||||||||||
| Shares | Weighted Average Exercise Price | Shares | Weighted Average Exercise Price | |||||||||||||
Outstanding—January 1 | 373 | $ | 8.65 | 73 | $ | 22.40 | ||||||||||
Granted at fair value | — | — | 300 | 5.31 | ||||||||||||
Exercised | — | — | — | — | ||||||||||||
Cancelled/forfeited | (169 | ) | 12.26 | — | — | |||||||||||
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Outstanding—September 30 | 204 | 5.62 | 373 | 8.65 | ||||||||||||
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Options exercisable at September 30 | 84 | $ | 6.08 | 133 | $ | 14.69 | ||||||||||
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The following table summarizes information about stock options as of September 30, 20112012, (in thousands, except per share data):
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||||||
| Weighted | Weighted | |||||||||||||||||||||||||||||||
| Weighted | Average | Weighted | Average | |||||||||||||||||||||||||||||
| Average | Remaining | Aggregate | Average | Remaining | Aggregate | |||||||||||||||||||||||||||
| Exercise | Contract | Intrinsic | Exercise | Contract | Intrinsic | |||||||||||||||||||||||||||
| Range of Exercise Prices | Shares | Price | Life | Value | Shares | Price | Life | Value | ||||||||||||||||||||||||
| $0.0 - $5.31 | 300 | $ | 5.31 | 9.42 | $ | — | 60 | $ | 5.31 | 9.42 | $ | — | ||||||||||||||||||||
| $5.32 - $22.40 | 73 | $ | 22.40 | 3.17 | $ | — | 73 | $ | 22.40 | 3.17 | $ | — | ||||||||||||||||||||
| Options Outstanding | Options Exercisable | |||||||||||||||||||||||||||||||
Range of Exercise Prices | Shares | Weighted Average Exercise Price | Weighted Average Remaining Contract Life | Aggregate Intrinsic Value | Shares | Weighted Average Exercise Price | Weighted Average Remaining Contract Life | Aggregate Intrinsic Value | ||||||||||||||||||||||||
$0.0—$5.31 | 200 | $ | 5.31 | 8.66 | $ | — | 80 | $ | 5.31 | 8.66 | $ | — | ||||||||||||||||||||
$5.32—$22.40 | 4 | $ | 22.40 | 2.42 | $ | — | 4 | $ | 22.40 | 2.42 | $ | — | ||||||||||||||||||||
The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our closing stock price of $2.80$0.26 at September 30, 20112012 which would have been received by the option holders had all option holders exercised their options as of that date.
| 2011 | 2010 | |||||||||||||||
| Weighted | Weighted | |||||||||||||||
| Number of | Average | Number of | Average | |||||||||||||
| Warrants | Exercise Price | Warrants | Exercise Price | |||||||||||||
| Outstanding— January 1, | 1,273 | $ | 4.44 | — | $ | — | ||||||||||
| Issued | 649 | 6.35 | 1,133 | 4.44 | ||||||||||||
| Exercised | (35 | ) | 4.44 | — | — | |||||||||||
| Outstanding—September 30 | 1,887 | $ | 5.09 | 1,133 | 4.44 | |||||||||||
| Warrants exercisable at end of period | 1,887 | $ | 5.09 | 1,133 | $ | 4.44 | ||||||||||
12
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” or “Horizon”). 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. Loan B was funded on February 17, 2011 and also 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, in effect on the date precedingwhich is five business days before the funding of such loan by five business days 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. Any payments received after five days of written notice from the Lender will be assessed a 4% late payment fee. We granted a security interest to the Lender in all of our assets to the Lender.
In connection with loan, we issued a seven year warrant to the Lender to purchase 140,000 shares of our common stock of the Company at an exercise price of $4.40. The relative fair value of the warrants was $0.2 million and will be recorded as interest expense over the term of the loan. We estimated the fair value of the warrants using the Black-Scholes option pricing model using the following assumptions:
Assumptions: | December 22, | |||
| 2010 | ||||
Expected | 7 years | |||
Expected volatility | 39.9 | % | ||
Dividends | None | |||
Risk-free interest rate | 2.74 | % | ||
Also in connection with the Loan Agreement, we incurred $0.4 million of debt issue costs which were deferred and are being amortized to interest expense over the term of the loan.
On June 29, 2012, we amended the Loan Agreement (the “Amendment”) to change the Maturity Date to the earlier to occur of (i) August 1, 2014, or (ii) the date of acceleration of a promissory noteLoan following an event of default or the date of prepayment of the Loan. In addition, the definition of Scheduled Payments was amended. The definition of Events of Default was expanded to include the failure to pay certain late fees and amendment fees, which were agreed upon among the parties.
In connection with the Amendment, we issued a warrant to Horizon representing the right to purchase 225,000 shares of our common stock at an exercise price of $0.01 per share (the “new Warrant”). In addition, we issued a restated and amended warrant to purchase 140,000 shares of the Company’s common stock at an exercise price of $0.26 (the “amended Warrant”). The relative fair value of the new Warrant was $117,000. The change in the amountrelative fair value of $20,359 related to the purchaseamended Warrant was $32,000. These amounts will be recorded as interest expense over the remaining term of an automobile in fiscal year 2010. The note bears interest at 7.69% per annumthe loan. We estimated the fair value of the new and is to be repaid over a period of 60 months.
Assumptions: | May 1, 2012 | |||
Expected life | 7 years | |||
Expected volatility | 88.2 | % | ||
Dividends | None | |||
Risk-free interest rate | 1.35 | % | ||
Convertible Subordinated Notes
On May 24, 2011, we issued $12.5 million in aggregate principal amount of 7% Senior Subordinated Convertible Notes due June 1, 2016 (the “Notes”). The Notes were issued pursuant to an indenture (the “Indenture”), entered into between us and Wells Fargo Bank, National Association, as trustee, on May 24, 2011. In connection with the issuance of the Notes, we entered into a Waiver to our Venture Loan and Security Agreement with Horizon, dated May 18, 2011 pursuant to which Horizon provided its consent to the offering of the Notes and waived any restrictions in the Loan Agreement.
The Notes are senior subordinated unsecured obligations which will rank subordinate in right to payment to all of our existing and future senior secured indebtedness and bear interest at a rate of 7% per annum payable semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2011. The Notes mature on June 1, 2016, with an early repurchase date of June 15, 2014 at the option of the purchaser. The Notes are convertible into shares of our common stock in accordance with the terms of the Notes and the Indenture, at the initial conversion rate of 172.4138 shares of our common stock per $1,000 principal amount of Notes, equivalent to a conversion price of approximately $5.80 per share, subject to adjustment. If the Notes are converted into shares of our common stock prior to June 2, 2014, an interest make-whole payment will be due based on the conversion date up until June 2, 2014. Upon a non-stock change in control, additional shares of our common stock may need to be issued upon conversion, with a maximum additional shares of 25.606 per $1,000 in principal amount of Notes being issuable thereunder, for a total maximum of 198.0198 shares per $1,000 Note. Certain customary anti-dilution provisions included in the Indenture and/or the Notes could adjust the conversion rate. At September 30, 2011, the Notes are convertible into 2,155,173 shares of our common stock.
13
Also in connection with the issuance of the Notes, we entered into a Securities Purchase Agreement dated May 18, 2011 pursuant to which we agreed to prepare and file a registration statement with the Securities and Exchange Commission (the “SEC”) registering the resale of the Notes and the shares of common stock underlying the Notes. The registration statement was declared effective on August 10, 2011.
On June 1, 2012, we entered into an Exchange Agreement and a Forbearance Agreement with certain of El Segundo, California, Seymour, Indianathe holders of our Notes. Pursuant to the terms of the Exchange Agreement, certain of the holders agreed to exchange the Notes for shares at an exchange rate of one share of our common stock for each $1.00 amount of the Notes exchanged.
Pursuant to the terms of the Forbearance Agreement, certain of the holders agreed to forbear from exercising their rights to require us to pay accrued interest on June 1, 2012 until the earlier of December 1, 2012 or our failure to meet certain milestones. In addition, pursuant to the terms of the Forbearance Agreement, we agreed to amend the conversion rate of the Notes as set forth in the Indenture to provide for an effective conversion rate of $1.00.
At September 30, 2012, the Notes are convertible into 9,586,207 shares of our common stock.
Short-Term Convertible Notes
The total amount of Short-Term Convertible Notes Payable as of September 30, 2012 was $646,500, offset by a discount of $289,957. These Notes are comprised of the following:
On June 1, 2012 and Bönen, Germany.July 3, 2012, we issued Convertible Promissory Notes to Asher Enterprises, Inc. (the “Asher Notes”) with a principal amount of $206,500 and bears 8% annual interest. The leases underlying these three facilities are summarized below:
On June 26, 2012, we issued a Promissory Note to JMJ Financial (the “JMJ Note”) of $1.1 million and bears 0% interest if repaid at maturity. The JMJ Note has a termmaturity date of five years.180 days Effective Date of each funding. The lease was subsequently amendedPrincipal Sum due to JMJ Financial (“JMJ”) shall be prorated based on April 1, 2011the consideration actually paid by JMJ, plus an approximate 10% Original Issue Discount (“OID”) that is prorated based on the consideration actually paid by JMJ as well as any other interest or fees. In addition, we will issue 100% warrant coverage for each amount funded under the JMJ Note. In addition, JMJ has the right, at any time at its election, to add additional office space.convert all or part of the outstanding and unpaid Principal Sum and any other fees, into shares of fully paid and non-assessable shares of our common stock. The lease term relatingConversion Price is a variable calculation of 80% of the average of the three lowest closing prices for our common stock during the 20 days prior to the additional office space expires on May 31, 2013. Our current monthly rentconversion date. We are only required to repay the amount funded and we are not required to repay any unfunded portion of the JMJ Note. The consideration received as of the date of this report is $13,124,$400,000, in exchange for a Principal Sum of $440,000 and issuance of warrants totaling 1,886,792 shares with 3% annual escalation.
Assumptions: | June 26, 2012 | August 9, 2012 | ||||||
Expected life | 4 years | 4 years | ||||||
Expected volatility | 95.4 | % | 97.7 | % | ||||
Dividends | None | None | ||||||
Risk-free interest rate | 0.59 | % | 0.66 | % | ||||
For financial accounting purposes, the JMJ Warrant has a net settlement feature with the cashless exercise provision and a make whole provision which are considered embedded derivatives. The fair value of the JMJ Warrant is recorded as a manufacturingdebt discount at inception and distribution facility for our products.recorded to interest expense over the life of the JMJ Note. The lease commencedderivative will be valued at each reporting date and the change in January 2008, withfair value of the JMJ Warrants will result in a ten year term expiring in January 2018. Our current monthly rent is $25,000.
| Three Months Ended | Nine Months Ended | |||||||||||||||
| September 30, | September 30, | |||||||||||||||
| 2011 | 2010 | 2011 | 2010 | |||||||||||||
| Customer A | 68.0 | % | — | 27.0 | % | — | ||||||||||
| Customer B | 29.2 | % | — | 26.8 | % | — | ||||||||||
| Customer C | — | — | 26.3 | % | — | |||||||||||
| Three Months Ended September 30, | ||||||||||||||||
| 2011 | 2010 | |||||||||||||||
| North America | $ | 81 | 1.5 | % | $ | 440 | 29.0 | % | ||||||||
| International | ||||||||||||||||
| Italy | 5,262 | 97.2 | % | 1,022 | 67.5 | % | ||||||||||
| Other | 71 | 1.3 | % | 53 | 3.5 | % | ||||||||||
| Gross sales | $ | 5,414 | 100.0 | % | $ | 1,515 | 100.0 | % | ||||||||
| Nine Months Ended September 30, | ||||||||||||||||
| 2011 | 2010 | |||||||||||||||
| North America | $ | 749 | 3.6 | % | $ | 1,139 | 45.2 | % | ||||||||
| International | ||||||||||||||||
| Italy | 12,470 | 59.8 | % | 1,022 | 40.6 | % | ||||||||||
| Germany | 5,494 | 26.4 | % | 210 | 8.3 | % | ||||||||||
| Other | 2,136 | 10.2 | % | 148 | 5.9 | % | ||||||||||
| Gross sales | $ | 20,849 | 100.0 | % | $ | 2,519 | 100.0 | % | ||||||||
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Assumptions: | September 30, 2012 | |||
Expected life | 3.9 years | |||
Expected volatility | 101.8 | % | ||
Dividends | None | |||
Risk-free interest rate | 0.47 | % | ||
Mortgage Payable
Effective October 24, 2011, Cereplast Italia S.p.A (“Cereplast Italia”), our wholly owned subsidiary, completed its acquisition of an industrial plant and the real estate on which the industrial plant is located in Cannara, Italy. The Deed of Sale between Cereplast Italia and Societa Regionale Per Lo Sviluppo Economico Dell’Umbria — Sviluppumbria S.p.A, provided for an aggregate purchase price of €4,577,750 ($6,355,748).approximately $6.4 million. In connection with the acquisition, Cereplast Italia entered into the following financing transactions:
Mortgage loan with Banca Monte Dei Paschi Di Sienna S.p.A for the principal of €3,440,000 ($4,776,096).$4.5 million. The loan bears interest of Euribor (6-month) plus 5.7%. The loan is for a term of 15 years with interest only payments for the first two years, payable January 1 and July 1 each year and principal and interest payments thereafter according to an amortization schedule. Twenty percent20% of the principal is guaranteed for 10 years by Gepafin, a local government agency; €400,000 ($555,360)$0.5 million of the principal is guaranteed by Eurofidi through December 31, 2016.
Credit facility with Intesa Sanpaolo for up €500,000 ($694,200).$0.7 million. The facility is for a term of eight months with a floating interest rate based on Euribor (3 month), currently 5.85%. Interest is deferred for the first two months of the term. Cereplast Italia obtained a guarantee of 60% of the amount drawn on the facility from Eurofidi.
Credit facility with Unicredit Bank for up to €600,000 ($833,040).$0.8 million. The facility is for a term of 18 months with a floating interest rate based on Euribor (3 month), currently 5.93%. Cereplast Italia obtained a guarantee of 60% of the amount drawn on the facility from Eurofidi.
5. FAIR VALUE MEASUREMENTS
We estimatehave certain financial instruments that are measured at fair value on a recurring basis. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in additionan orderly transaction between market participants at the measurement date. A three-tier fair value hierarchy has been established which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (level 1 measurements) and the lowest priority to unobservable inputs (level 3 measurements). These tiers include:
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
We measure certain financial instruments at fair value on a recurring basis. Assets and liabilities measured at fair value on a recurring basis are as follows at September 30, 2012 (in thousands):
| Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
Assets | ||||||||||||||||
None | $ | — | $ | — | $ | — | $ | — | ||||||||
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Total assets measured at fair value | $ | — | $ | — | $ | — | $ | — | ||||||||
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Derivative liability (1) | $ | 344 | $ | — | $ | — | $ | 344 | ||||||||
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Total liabilities measured at fair value | $ | 344 | $ | — | $ | — | $ | 344 | ||||||||
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(1) See Note 4 for additional discussion. | ||||||||||||||||
The table below presents our assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at September 30, 2012. We classify financial instruments in Level 3 of the fair value hierarchy when there is reliance on at least one significant unobservable input to the purchase price, Cereplast Italia will incur estimated additional feesvaluation model.
| (in thousands) | Derivative Liability | |||
Balance at December 31, 2011 | $ | — | ||
Total gains or losses (realized and unrealized) | ||||
Included in net loss | 52 | |||
Valuation adjustment | — | |||
Purchases, issuances, and settlements, net | 292 | |||
Transfers to Level 3 | — | |||
Balance at September 30, 2012 | $ | 344 | ||
6. LEASES
We currently operate out of €400,000 ($555,360)El Segundo, CA, Seymour, IN, and Bönen, Germany. The leases underlying these three facilities are summarized below:
| • | California Facility — The El Segundo facility consists of approximately 5,475 square feet of corporate office space. The lease commenced on March 1, 2010 and has a term of five years. The lease was subsequently amended on April 1, 2011 to add additional office space. The lease term relating to the additional office space expires on May 31, 2013. Our current monthly rent is $13,654, with 3% annual escalation. |
| • | Indiana Facility — The Seymour facility consists of approximately 105,000 square feet used as a manufacturing and distribution facility for our products. The lease commenced in January 2008, with a ten year term expiring in January 2018. Our current monthly rent is $25,000. |
| • | Bönen Facility— The Bönen facility consists of approximately 1,000 square feet of corporate office space. The facility is subject to a lease with monthly rents of approximately $2,000 expiring in December 2018. |
7. MAJOR CUSTOMERS AND FOREIGN SALES
The following customers accounted for 10% or more of net revenue in the periods presented:
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2012 | 2011 | 2012 | 2011 | |||||||||||||
Customer A | — | 68.0 | % | — | 27.0 | % | ||||||||||
Customer B | — | 29.2 | % | — | 26.8 | % | ||||||||||
Customer C | — | — | — | 26.3 | % | |||||||||||
Customer D | 80.3 | % | — | 49.8 | % | — | ||||||||||
Customer E | 14.5 | % | 18.0 | % | — | |||||||||||
Customer F | — | 10.5 | % | — | ||||||||||||
Our net sales were made up of sales to customers in the following geographic regions (in thousands):
Three Months Ended | ||||||||||||||||
2012 | 2011 | |||||||||||||||
North America | $ | 94 | 19.7 | % | $ | 81 | 1.5 | % | ||||||||
International | ||||||||||||||||
Germany | — �� | — | % | — | — | % | ||||||||||
Italy | 383 | 80.3 | % | 5,262 | 97.2 | % | ||||||||||
Other | — | — | % | 71 | 1.3 | % | ||||||||||
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Net sales | $ | 477 | 100.0 | % | $ | 5,414 | 100.0 | % | ||||||||
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2012 | 2011 | |||||||||||||||
North America | $ | 338 | 44.0 | % | $ | 749 | 3.6 | % | ||||||||
International | ||||||||||||||||
Germany | 14 | 1.8 | % | 5,494 | 26.4 | % | ||||||||||
Italy | 389 | 50.6 | % | 12,470 | 59.8 | % | ||||||||||
Other | 28 | 3.6 | % | 2,136 | 10.2 | % | ||||||||||
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Net sales | $ | 769 | 100.0 | % | $ | 20,849 | 100.0 | % | ||||||||
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8. 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 2009. 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 or Deferred Tax Liabilities are included in our balance sheets at September 30, 2012 or December 31, 2010.
Our policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.
9. COMMON STOCK WARRANTS
In connection with the acquisition.
In connection with the issue of 2,596,500 shares of common stock to accredited investors pursuant to the Securities Purchase Agreement entered into on January 26, 2011, we issued warrants to purchase 649,128 shares of the saleour common stock. The warrants have an exercise price of $6.35 per share and issuanceare exercisable for a period of five years commencing August 1, 2011.
In connection with the issue of 1,000,000 shares of common stock pursuant to a Subscription Agreement entered into on April 30, 2012, we issued a warrant to purchase 100,000 shares of our common stock for offering costs. The warrants have an exercise price of $0.50 per share and are exercisable for a period of seven years.
In connection with the Amendment with Compass Horizon Funding Company, LLC, we issued a warrant representing the right to purchase 225,000 shares of our common stock at an exercise price of $0.01 per share. In addition, we issued a restated and amended warrant to purchase 140,000 shares of the UnitsCompany’s common stock at an exercise price of $0.26.
In connection with our JMJ Note, we issued a warrant to purchase 1,886,792 shares of our common stock. The warrants have an exercise price of $0.21per share and are exercisable for a period of four years.
A summary of warrant activity for the period ending September 30 is expectedas follows(in thousands except per share data):
| 2012 | 2011 | |||||||||||||||
| Number of Warrants | Weighted Average Exercise Price | Number of Warrants | Weighted Average Exercise Price | |||||||||||||
Outstanding—January 1, | 4,219 | $ | 5.09 | 1,273 | $ | 4.44 | ||||||||||
Issued | 2,212 | 0.20 | 649 | 6.35 | ||||||||||||
Exercised | — | — | (35 | ) | 4.44 | |||||||||||
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Outstanding—September 30 | 6,431 | 2.27 | 1,887 | 5.09 | ||||||||||||
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Warrants exercisable at end of period | 6,431 | $ | 2.27 | 1,887 | $ | 5.09 | ||||||||||
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10. SUBSEQUENT EVENTS
On October 15, 2012, we entered into an Exchange Agreement (the “Exchange Agreement”) with Magna Group LLC (“Magna”), pursuant to take placewhich we agreed to issue to Magna convertible notes (the “Magna Notes”), in the aggregate principal amount of up to $4.6 million, in exchange for an equal amount of participation interests in our Venture Loan with Compass Horizon Funding Company, LLC (“Horizon”) to be acquired by Magna. Pursuant to a participation purchase agreement dated as of October 15, 2012, Magna agreed to acquire, in tranches through on or about November 16, 2011, subjectaround February 15, 2013, participation interests in the Venture Loan from Horizon up to the satisfactionmaximum amount of customary closing conditions.
the principal outstanding, together with accrued interest and fees. As of November 9, 2012, we have issued approximately 2.1 million shares under the Exchange Agreement.
On October 15,
As of November 9, 2012, we have issued 3.3 million shares since September 30, 2012 in connection with the settlement of our outstanding accounts payable balances.
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 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-Q. You can find many of these statements by looking for words such as “believe”, “expect,” “anticipate,” “estimate,” “opine,” andbelieves, 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 us from achieving our stated goals include, but are not limited to, the following:
inability to raise sufficient additional capital to finance operations;
potential fluctuation in quarterly results;
worsening economic conditions affecting the economic health of our clients;
uncertain global economic conditions
failure to earn profits;
inadequate capital to expand our business;business, inability to raise additional capital or financing to implement our business plans;
decline in demand for our products and services;
inability to source raw materials in sufficient quantities to support growth in customer demand;
rapid and significant changes in markets and other factors, including national, state and local legislation, that encourage use of bioplastics;
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;
litigation with or legal claims and allegations by outside parties;
insufficient revenues to cover operating costs;
There can be no assurance that we will be profitable. We may not be able to successfully manage or market our products, attract or retain qualified executives and technology personnel or obtain additional customers for our products. Our products 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, and/or other securities convertible into, and/or exercisable or exchangeable for, shares of our common stock, or the exercise of outstanding warrants and stock options, and other risks inherent in our business.
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, other than as required by law, or to reflect the occurrence of unanticipated events.
16
OVERVIEW
We have developed and are commercializing proprietary bio-based resins through two complementary product families: (1) Cereplast Compostables® resins, which are compostable and bio-based, ecologically sound substitutes for traditional petroleum-based non-compostable plastics, and (2) Cereplast Sustainables®Sustainables™ resins, which replace up to 90% of the petroleum-based content of traditional plastics with materials from renewable resources. Our resins aim to be competitively priced compared to fully 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, is each being driven globally by a variety of factors, including environmental concerns, new stringent regulations on compostable material, fossil fuel price volatility and energy security. These factors have led to increased spending on clean and sustainable 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 compostable and bio-based, |
| • | Cereplast |
| • | Cereplast Hybrid Resins® products replace up to |
| • | Cereplast Algae Plastic® |
Our patent portfolio is currently comprised of five patents in the United States (“U.S. patents,”), one Mexican patent, and eightseven pending patent applications in the U.S. and abroad. Our trademark portfolio is currently comprised of approximately 4147 registered marks, 4 allowed marks and 1112 pending applications in the U.S. and abroad.
17
Global Market and Economic Conditions.Recent global market and economic conditions particularly in Europe, 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 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 led many lenders and institutional investors to reduce, and in some casecases, cease to provide funding to borrowers and to developing companies, such as our company.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.
18
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, sales commissions, rent and research and development and other administrative expenses, including allowances for estimated losses that may arise if any of our customers are unable to make required payments on accounts receivable.development. Salaries include all cash and non-cash compensation and related costs for all principal selling, general and administrative functions. 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. Recently the financial crisis in Europe and the general economic downturn has resulted in longer customer payment cycles in excess of management’s expectations. If financial or credit conditions worsen in Europe we may continue to experience difficulties collecting these outstanding balances from our European customers, resulting in additional expenses for estimated losses that may arise due to non payment.
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.
Revenue Recognition
We recognize revenue at the time of shipment of products, provided thatwhen the following fundamental criteria are met: (i) persuasive evidence of an arrangement exists, title and risk of loss have passedexists; (ii) delivery has occurred; (iii) the price to the customer fees areis fixed or determinable,determinable; and (iv) collection of the related receivablesales price is reasonably assured.
probable.
19
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 quantitative and qualitative review of the receivables past due from customers on a monthly basisbasis. Quantitative factors include customer’s past due balance, prior payment history, recent sales activity and reservesdays sales outstanding. Qualitative factors include macroeconomic environment, current product demand, estimated inventory levels and customer’s financial position. In certain cases, we may have access to repossess unsold products held at customer locations as recourse for payment defaults. The fair market value of these products are considered as potential recovery in estimating net losses from uncollectible accounts. On July 27, 2012, we entered into a Settlement Agreement with Colortec S.r.l. (“Colortec”) to resolve a dispute regarding claims on outstanding accounts receivable balances. In exchange for renouncing our claim on outstanding accounts receivable from Colortec, we were granted access to recover unused containers of our products held by Colortec, valued at approximately $1.8 million. We have eliminated the outstanding accounts receivable balance due from Colortec in exchange for the value of inventory we recovered. We record an allowance 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 reviewedassessed for recoverability through an ongoing review of inventory levels in relation to foreseeable demand, which is typically six to twelve months. We consider any quantities in excess of three years of inventory to be excessive due to the shelf life of our products. A significant qualitative factor used in our evaluation is the fact that polypropylene is a core ingredient to our bioplastic resin products. Polypropylene is a multi-billion dollar commodity market within the plastics industry, which provides us an active marketplace to monetize potential excess or obsolete inventory. Our foreseeable demand is based upon all available information, including sales forecasts, new product marketing plans and obsolescence and a reserveproduct life cycles. When the inventory on hand exceeds the foreseeable demand, we write down the value of those inventories which, at the time of our review, we expect to be unable to sell or return to the vendor. The amount of the inventory write down is the excess of historical cost over estimated realizable value. Once 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 fivethree 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.
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alesSales
Net sales for the three months ended September 30, 20112012 were approximately $0.5 million, compared to $5.4 million an increase of $3.9 million or 257.4%, compared toin the same period in 2010.2011. The decrease in sales increase for thewas due to transitioning significant resources and efforts toward recovery of past due accounts receivables from customers and minimizing any additional exposure to our accounts receivable credit risk. Our current period is attributablesales were primarily prepaid shipments of sample materials and nominal shipments to volume increases associatedestablished existing customers with both existing customer contracts and new contracts with European customers. Environmental legislation, such as that banning the use of plastic bags in Italy that took effect on January 1, 2011, as well as the increased volatility in oil prices, were key drivers of demand for our bioplastic resins in the current year.
Cost of Sales
Cost of sales includesis comprised of both fixed and variable costs, including materials and supplies, labor, facilities and other overhead costs associated with our product revenues. Cost of sales for the three months ended September 30, 2011 was2012 were approximately $0.9 million, compared to $4.5 million or 83.3% of net sales, compared to $1.1 million, or 74.8% of net sales, for the same period in 2010.2011. The increasedecline in cost of sales over the same periodis due to our lower variable manufacturing costs from our reduced sales volumes and reduction in the prior year is attributable to two main factors: (1) Cost of sales in the prior year period cannot be considered representative of normal sales or operations as we were in the process of relocating our production operations from California to Indianamanufacturing overhead through reduced supplies and therefore had minimal production during this period in 2010, and (2) Cost of sales in the current period reflects the tremendous growth in sales volume from the prior year.
Gross Profit (Loss)
Gross profit (loss) for the three months ended September 30, 20112012 was $0.9approximately ($0.4) million, or 16.7% of net sales, compared to $0.4$0.9 million or 25.2% of net sales, for the same period in 2010. The decrease2011. Our decline in gross profit margin reflects the unusually high margins on very low volumewas attributable to our decline in sales in the prior year period combined our sales strategy to gain critical market share by offering low introductory pricing to some key customers to support their programs to bring new bioplastic products to market. This strategy has proven effective in contributing to strong sales growth and growing market share. We were successful in improving gross profit margins by 37.3% in the three month period ended September 30, 2011 compared to the three month period ended June 30, 2011, in line with expectations that margins will improve gradually through 2011 as we capitalize on demand growth to diversify our customer base, implement strategic price increases, and continue to gain operational efficiencies.
Research and Development Expenses
Research and development expenses for the three months ended September 201130, 2012 were $0.3$0.1 million, or 5.2% of net sales, compared to approximately $0.1$0.3 million or 7.0% of net sales, for the same period in 2010. Although2011. Our decrease in research and development expenses decreased as a percentage of net sales, we incurred higher expenses in 2011was primarily attributable to lower outside services costs related to additional headcount, including the appointment of a new Chief Technology Officer and increased manufacturing supplies used for new product development.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended September 30, 20112012 were $3.7$6.4 million, or 68.7% of net sales, compared to $2.2$3.7 million or 147.6% of net sales, for the same period in 2010. The2011. Our increase is entirely attributablein sales, general and administrative expenses was primarily due to the $1.7 millionan increase in our allowance for doubtful accounts of $4.8 million, offset by reduced headcount and variable sales and marketing expenses due to lower sales volume in the quarter. current year.
Other than this increase, selling generalIncome and administrative expenses remained relatively flat year over year.
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Other income and expense, net for the three months ended September 30, 20112012 was $0.5$3.1 million, as compared to $0.3$0.5 million in the same period in 2010. Other expense in 2011 consists of2011. The increase was primarily related to additional interest expense related to our Loan Agreement andthe issuance of our convertible senior subordinated notes. There was no interest expense reported fordebentures in May 2011, the same periodimpact from our Forbearance and Exchange Agreement with certain holders of our convertible debentures and the change in the prior year. Other expense in 2010 consisted of restructuring charges which were not incurred in the current year period.
Net Loss
Net loss for the three months ended September 30, 20112012 was $3.6$10.1 million, as compared to $2.2$3.6 million in the same period in 2010.2011. As discussed above, our results were favorablyunfavorably impacted by increasesour decrease in net sales and gross profit, offset by interest expense and the increase in the allowance for doubtful accounts in 2011.
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 20112012 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2010
alesSales
Net sales for the nine months ended September 30, 20112012 were approximately $0.8 million, compared to $20.2 million an increase of $17.8 million or 725.7%, compared toin the same period in 2010.2011. The decrease in sales increase for thewas due to transitioning significant resources and efforts toward recovery of past due accounts receivables from customers and minimizing any additional exposure to our accounts receivable credit risk. Our current period is attributablesales were primarily prepaid shipments of sample materials and nominal shipments to volume increases associatedestablished existing customers with both existing customer contracts and new contracts with European customers. Environmental legislation, such as that banning the use of plastic bags in Italy that took effect on January 1, 2011, as well as the increased volatility in oil prices, were key drivers of demand for our bioplastic resins in the current year.
Cost of Sales
Cost of sales includesis comprised of both fixed and variable costs, including materials and supplies, labor, facilities and other overhead costs associated with our product revenues. Cost of sales for the nine months ended September 30, 2011 was2012 were approximately $2.1 million, compared to $17.7 million or 87.5% of net sales, compared to $1.8 million, or 72.6% of net sales, for the same period in 2010.2011. The increasedecline in cost of sales over the same periodis due to our lower variable manufacturing costs from our reduced sales volumes and reduction in the prior year is attributable to two main factors: (1) Cost of sales in the prior year period cannot be considered representative of normal sales or operations as we were in the process of relocating our production operations from California to Indianamanufacturing overhead through reduced supplies and therefore had minimal production during this period in 2010, and (2) Cost of sales in the current period reflects the tremendous growth in sales volume from the prior year.
Gross Profit (Loss)
Gross profit (loss) for the nine months ended September 30, 20112012 was $2.5approximately ($1.3) million, or 12.5% of net sales, compared to $0.7$2.5 million or 27.4% of net sales, for the same period in 2010. The decrease2011. Our decline in gross profit reflects the unusually high margins on very low volumewas attributable to our decline in sales in the prior year period combined our sales strategy to gain critical market share by offering low introductory pricing to some key customers to support their programs to bring new bioplastic products to market. This strategy has proven effective in contributing to strong sales growth and growing market share. We expect that margins will improve gradually through 2011 as we capitalize on demand growth to diversify our customer base, implement strategic price increases, and continue to gain operational efficiencies.
Research and Development Expenses
Research and development expenses for the nine months ended September 30, 20112012 were $0.8$0.4 million, or 3.9% of net sales, compared to approximately $0.3$0.8 million or 12.3% of net sales, for the same period in 2010. Although2011. Our decrease in research and development expenses decreased as a percentage of net sales, we incurred higher expenses in 2011was primarily attributable to lower outside services costs related to additional headcount, including the appointment of a new Chief Technology Officer, increased manufacturing supplies used for new product development and impairment charges on intangible assets.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the nine months ended September 30, 20112012 were $8.5$9.3 million, or 41.8% of net sales, compared to $5.4$8.5 million or 221.8% of net sales, for the same period in 2010. Although selling,2011. Our increase in sales, general and administrative expenses decreased as a percentage of net sales, we incurred incremental expenses in 2011 across all areas of the business, including compensation associated with increased headcount, performance related compensation, marketing, sales commissions, professional fees (including legal and accounting fees)was primarily due to support the rapid growth of the business, including the expansion of European operations, specifically in Italy, as well as an increase in our allowance for doubtful accounts.
accounts of $4.8 million in the third quarter of 2012, offset by reduced headcount and variable sales and marketing expenses due to lower sales volume in the current year.
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Other income and expense, net for the nine months ended September 30, 20112012 was $1.0$5.3 million, as compared to $0.6$1.0 million in the same period in 2010. Other expense in 2011 consists of2011. The increase was primarily related to additional interest expense related to our Loan Agreement andthe issuance of our convertible senior subordinated notes. There was no interest expensedebentures in May 2011, the impact from our Forbearance and Exchange Agreement with certain holders of our convertible debentures and the change in our derivative liability related to these items reported for the same period in the prior year. Other expense in 2010 consisted of restructuring charges which were not incurred in the current year period.
Net Loss
Net loss for the nine months ended September 30, 20112012 was $7.7$16.3 million, as compared to $5.6$7.8 million in the same period in 2010.2011. As discussed above, our results were favorablyunfavorably impacted by increasesour decrease in net sales and gross profit, offset by higher research and development, and selling, general and administrative expenses incurred to support the growth of the business.
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 $4.0$0.2 million at September 30, 20112012 as compared to $2.4$3.9 million at December 31, 2010.2011. The net increasedecrease in unrestricted cash is attributable principallyprimarily due to funds received through equity sold through a private placement and proceeds received from our venture loan and convertible senior subordinated notes, offset by cash used in operations.
Cash used in operating activities during the nine months ended September 30, 20112012 was $22.2$4.3 million, compared to $5.3$22.2 million during the same period in the 2010.2011. The increasedecrease in the use of cash for operating activitiesused in operations was primarily a result of an increase in working capital, including increases in accounts receivable and inventory, which reflect the significant sales growthreducing our cash expenses in the 2011 comparedcurrent year due to 2010.
Cash used in investing activities during the nine months ended September 30, 20112012 was $1.3$0.2 million compared to cash used in investing activities of approximately $0.1$1.3 million during the same period in 2010. Investing activities during 2011 consist primarily of purchase of capital equipment to improve operational efficiency and capacity at our Seymour manufacturing facility.
Cash provided by financing activities during the nine months ended September 30, 2011 was $25.2$0.7 million compared to $7.4$25.2 million provided by financing activities during the same period in 2010.2011. The increasedecrease is attributable to $25.1 million of debt and equity financing that occurred in the prior year, compared to $1.4 million in debt and equity financing that occurred during the current year.
We have incurred a net loss of $16.3 million for the nine months ended September 30, 2012, and $14.0 million for the year ended December 31, 2011, and have an increaseaccumulated deficit of $73.2 million as of September 30, 2012. 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, 2012 without additional sources of cash.
In order to provide and preserve the necessary working capital to operate, we have successfully completed the following transactions in funds received2012:
Entered into an Exchange Agreement with Magna Group LLC (“Magna”), pursuant to which we agreed to issue to Magna convertible notes, in the aggregate principal amount of up to $4.6 million, in exchange for repayment of our Term Loan with Compass Horizon Funding Company, LLC.
Obtained a Forbearance Agreement on our semi-annual coupon payment due on June 1, 2012 with certain holders of our Senior Subordinated Notes to defer payment until December 1, 2012.
Reduced future interest payments through executing an Exchange Agreement for $2.5 million with certain holders of our Senior Subordinated Notes for conversion of their Notes and accrued interest into shares at an exchange rate of one share of our common stock for each $1.00 amount of the Note and accrued interest.
Issued 2,225,000 shares of our common stock to an institutional investor in settlement of approximately $0.8 million of our outstanding accounts payable balances.
Completed a Registered Direct offering to issue 1,000,000 shares of common stock at $0.50 per share for gross proceeds of $0.5 million.
Obtained unsecured short-term convertible debt financing of $0.6 million with additional availability of approximately $0.6 million at the lender’s sole discretion.
Returned unused raw materials to our suppliers in exchange for refunds net of restocking charges of approximately $0.2 million.
Our plan to address the shortfall of working capital is to generate additional financing through a private placement offering consummated on February 1, 2011, proceedscombination of sale of our equity securities, additional funding from our issuancenew short-term convertible debt financings, incremental product sales into new markets with advance payment terms and collection of convertible senior subordinated notesoutstanding past due receivables. We believe that we will be able to deliver on our plans, however, there are no assurances that we will be able to obtain any sources of financing on acceptable terms, or at all, increase product sales into new markets and proceeds from a venture loan from Compass Horizon Technology.
collect outstanding past receivables.
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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 Not applicable.
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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 Securities Exchange Act of 1934, as amended (the “Exchange Act”))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 SECCommission’s rules and forms, and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act, during the fiscal quarter ended September 30, 20112012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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 other than as noted below, from the risk factors previously disclosed in the Registrant’s Form 10-K filed on March 31, 2011.
We have a large accounts receivable balance, any default in payment by one or more customers could adversely impact our results of operations, financial condition and liquidity.
We issued the following unregistered securities during the threenine months ended September 30, 2011:
On August 9, 2011,14, 2012, we issued 36,24850,000 shares of common stock valued at $0.1 millionapproximately $11,500 to various employeesa vendor for services rendered.
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 of 1933, as amendedAct.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
On November 8, 2012, the Company entered into amendments (the “Securities Act”“Amendments”) to the Note Purchase Agreement with Hanover Holdings I, LLC, the (“NPA”) and the Exchange Agreement with Magna Group, LLC, the (“Exchange Agreement”). No advertising or general solicitation was employed in offeringPursuant to 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 transfersAmendments, the Company shall issue upon conversion of the securities were restricted by usNotes issuable under the Exchange Agreement and the NPA, in accordance with the requirementsaggregate, no more than 19.99% of the Securities Act. In addition to representationscommon stock of the Company outstanding on the date of the Exchange Agreement and the NPA unless its shareholders shall have approved the transactions contemplated 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 meritsNPA 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.
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Exhibit Number | Description |
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| 10.4 | Note Purchase Agreement dated October 15, 2012 (Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC on October 19, 2012). | ||||
| 10.5 | Form of Note issued pursuant to Note Purchase Agreement dated October 15, 2012 (Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC on October 19, 2012). | ||||
| 10.6 | Exchange Agreement dated October 15, 2012 (Incorporated by reference to the Company’s current report on Form 8-K filed with the SEC on October 19, 2012). | ||||
| 10.7 | |||||
| 31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | ||||
| 31.2 | Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | ||||
| 32.1 | Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *** | ||||
| 32.2 | Certification of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*** | ||||
| 101 | XBRL (Extensible Business Reporting Language) The following materials from Cereplast Inc.’s Quarterly Report on Form 10-Q for the quarter ended | ||||
| *** | 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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| Date: | CEREPLAST, INC. | ||||
| By: | /s/ Frederic Scheer | ||||
Frederic Scheer Chairman and Chief Executive Officer (Principal Executive Officer) | |||||
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