Alan Sheinwald - Alliance Advisors, LLC
Frederic Scheer - Chairman, Chief Executive Officer
Michael Okada - Vice President, Chief Accounting Officer, & Interim Chief Financial Officer
Cereplast, Inc. (CERP) Q3 2012 Earnings Call November 14, 2012 4:30 PM ET
Welcome ladies and gentlemen to the Cereplast Incorporated Third Quarter 2012 Financial Results Conference Call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will open for questions. This conference call is being recorded today, November 14, 2012.
At this time, I would like to introduce Mr. Alan Sheinwald, President of Alliance Advisors, who will make the opening remarks and introductions for Cereplast. Mr. Sheinwald, please go ahead.
Thank you and good afternoon, and welcome everyone to the Cereplast's 2012 third quarter earnings conference call. With us today is, Frederic Scheer, Chairman and CEO, Mr. Michael Okada, Chief Accounting Officer, & Interim CFO.
Before I introduce the speakers, I would like to remind listeners that during the call, managements prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties. Management may make additional forward-looking statements in response to your questions today, therefore the company claims protection under Safe Harbor forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Actual results may differ from discussed today and therefore we refer to you a more detailed discussion of these risks and uncertainties in the company's filings with the SEC. In addition, any projections of the company's future performance represented by management include estimates today as of November 14, 2012 and the company assumes no obligation to update these projections of future as market conditions change.
This time, I would like to turn the call over to Frederic Scheer, Chairman and CEO. Fredric, Please go ahead. The floor is yours.
Thank you, Alan, and welcome and thank you to our shareholders and to the investors joining us today.
In addition to our ongoing efforts toward recovering our past due accounts receivables, we have also made it the priority to review and refine our strategy leading into 2013, as we prepare to emerge from our current situation, and believe that in spite of the economic recession coupled with the liquidity challenges we are facing, the fundamentals behind Cereplast's vision and our prediction of continued demand for bioplastics worldwide is still alive and well. Therefore, let's review our accomplishment and our paths forward.
First, we continue to evaluate any and all options to recover our past due receivables including the engagement of legal counsel to provide us guidance. We continue our efforts to assist our customers in monetizing their existing inventory as well, all in an effort to improve the working capital of the company.
With the support of legal counsel, we have been successful in repurchasing unsold inventory from one client in Italy for a value of about $1.8 million as a recovery against their net accounts receivable balance and we are negotiating an additional settlement out of court for other and sold inventory.
The opening of our office in India and relationship with A.R.M.Y has contributed towards reselling the existing inventory, establishing new relationships and assisting in the launching of new product applications. Although, our market penetration in India has extended longer than we expected, we are encouraged by the favorable reception we have received from converters interested in exploring bioresin as an alternative to traditional plastics.
I would like to expand on some of the recent events and milestones we have achieved during the quarter beginning with an update on India. In late August, we opened a corporate office in Allahabad within the offices of A.R.M.Y led by technical services to engineer to provide on-site advisory services.
We recognized immediate benefits of having our physical presences in India, and by early October, we were pleased to have our first sales of Hybrid Resins application initially for safety helmets. This purchase order for our resin is part of the unsold inventory held by our European clients.
A launch in India, the world's third largest consumer within the polymer market was a key milestone for us. Our management has traveled regularly to India to ensure that we continue to build upon this momentum and participating in a large proposal. The same resin was qualified by a larger converter of polymers to make buckets. The converter is one of three dedicated converters to make these specific buckets for a large brand owner in India. We have a formal presentation to their management team and project that demand to be in excess of several thousands of tons per month. We are quite encouraged that this brand owner is moving toward a more sustainable approach in the Indian subcontinent, which we believe is a growing trend in this region.
A.R.M.Y India made a formal presentation of our Compostable 3002 resin to the engineering and marketing departments of Tirumala Thirupathi Devastanam an independent trust, which managed the Tirumala Venkateswara Temple, the largest shrine in the world. The meeting resulted into commercial test of 25,000 bags made from our resin that test will last approximately 60 days to check strength and reception of the bag.
If we pass the testing phase, orders could be up to 300 tons a month based on the number of visitors that visit the shrine. Again, these resins are part of the unsold inventory we recouped from European clients.
Now with respect to developments in Italy, we are pleased to receive notice that the Italian government decided in September to reinstate the sanction on the legislation calling for the ban of non-compostable resins. We are hopeful that this legislation will be implemented before the end of 2012.
Through our subsidiary, Cereplast Italia, we have been kept up-to-date on the progress made. As a direct result of this development, several large supermarket chains have expressed an interest in our compostable resin for bags and several are being tested at this chain.
Three supermarket chains so far tested our resin and we estimate each chain could consume up to 500 tons of our resin per month. Testing will last for another 60 to 90 days. I would expect to see the first purchase orders to come as early as the first quarter of 2013.
We had the recent application development for our hybrid resins in Italy through the successful test of hybrid 101 for fruit and vegetable shipping baskets. The potential orders are significant and we are hopeful to get the first purchase order in the first quarter of 2013.
We have been active in Europe, outside of Italy by working with several large companies that have also successfully tested our resin. Tests are ongoing at both, the technical and marketing level. We have also brought on board a new business development director for Europe, [Frank], an 18 years veteran of the food packaging industry in Europe.
Frank's task is to establish a clear path to facilitate sales of the European inventories to new converters in the first half of 2013 as well as set up a limited amount of new clients to introduce a new higher performing resins and this will serve as a good transition for me to highlight our strategy for new sales and marketing plan for 2013.
Through our recent experience, we understand the specific resin the market demands, therefore we believe that it is important for us to target specific applications and tailor our product for them. While our approach was broader during 2012, we plan to concentrate on specifically targeted application.
To do so, our technology department has developed new resins and worked to improve properties on existing resins. We believe that differing resin will attract the attention of our existing and prospective clients.
Cereplast Hybrid 651D, the first EA and starch hybrid resin recently won the prestigious MATERIALICA Design Technology 2012 silver award for outstanding innovation in the Material category. Distinguished panel of judges including Christian Labonte of Audi and Prof. Peter Naumann from University of Munich scrutinized about 100 submissions in consideration for the award.
Cereplast Hybrid 651D was the only bioplastic material to be nominated for and to win the MATERIALICA award, an extrusion and soft injection moldable grade 651D is an innovative solution for applications require durability, flexibility and toughness providing the durable properties of conventional EA while offering a lower carbon footprint.
The soft touch material may be used for the manufacture of consumer goods and packaging such as footwear, handbags and other fashion accessories, as well as wire and cable insulation, soft plastic such as tubes and hoses and adhesion layers for multi-layer films.
The second one ISBM or injection stretch blow molding grade 2020D. It's an improvement over our previous grade based upon feedback from potential customers around the globe. We can now make bottles for mineral water for instance.
Next one, the first P starch grade polyethylene starch grade have been trialed by customers. Further feedback on properties from potential customers is needed for refinement, but we anticipating producing this new grade in the weeks to come.
Four companies have been requited to health, understand and research ways to increase the thermal degradation temperature of starch and plastic processing increasing the thermal degradation temperature will help in reusing an outcrop post consumer recycling and in processability. What we learn is that existing converters in processing resin is as important as presenting a new product.
A team of engineers is critical to our success and these results are coming from feedback they obtain in their interaction with our clients. Finally, with help of an outside laboratory, we are now close to removing the odor and color from algae biomass. The results are promising and we are excited by this potential outcome that could open the path to use of algae in very large quantities.
Management remains dedicated to defining a new winning strategy that will allow us to move forward in 2013. Despite the dilutions we have incurred with our recent financing transactions, we have been successful in securing a recurring source of liquidity that will continue to fund our operations towards recovery of our unpaid receivable or reposition [product].
I am hopeful that you continue to support our efforts. I would like now turn the call over to Michael to review our 2012 third quarter financial results in more details.
Thank you, Fredric. As we highlighted in our 10-Q disclosures, we continue to operate in cash preservation mode in order to provide the necessary liquidity to operate the company.
During the third quarter of 2012, we reduced our cash used in operations to approximately $344,000, a decrease of a $1.2 million in the prior quarter. We continue to reduce our operating cost and have extended our vendor payables in order to create the necessary runway to receive our planned financings.
During the quarter, we raised an additional $150,000 from the issuance of short-term convertible notes to our current investors as well as $400,000 for Ironridge Global in connection with our $5 million stock purchase agreement.
Under our agreement with Ironridge Global, the shares were granted registration rights, which we filed a form S-3 on November 2nd. Once this S-3 becomes effective, we are able to receive $250,000 investment tranches each month up to the $5 million commitment subject to customary reps and warranties and market volume related closing conditions.
Subsequent to the end of quarter, we entered into an Exchange Agreement with Magna Group pursuant to which we agreed to issue convertible notes in aggregate principle amount of $4.6 million as a condition for posting our outstanding term loan with Compass Horizon. This purchase Magna will occur in tranches of $500,000 over a specified period in order for us to conduct our annual shareholders meeting to satisfy a NASDAQ list requirement associating with quantity of shares issued.
We expect this purchase to be completed in the first quarter of 2013; however this allows us to eliminate our future principle and interest payments to Compass Horizon. Once this purchase is completed resulting in a quarterly cash flow savings in excess of $600,000.
Based on our expectations on a timing of this repayment, we have reclassified the full carrying value of our term loan to current liabilities. In connection with our agreement with Magna, we entered into a Note Purchase Agreement with Hanover Holdings for an aggregate of $800,000 of convertible promissory notes. These notes will be sold and funded in tranches of $100,000 over specified periods through the first quarter of 2013 also related to our Annual Shareholders Meeting requirement.
Accessing additional working capital for the company was imperative to continue as growing concern. In completing these transactions, we were not able to negotiate from a position of strength in order to minimize our dilution, however we are grateful for the support and what a confidence we receive Ironridge and Magna.
We believe this will provide us with the necessary liquidity to continue to bridge our efforts towards realizing new revenue opportunities in emerging markets as well as significantly reducing our future cash requirements associated with repayment of our senior term loan.
Now, I would like to review our financial results for the third quarter and first nine months of 2012.
Net sales for the third quarter of 2012 were approximately $477,000, compared to $5.4 million for the same period in 2011. Net sales for the first nine months of 2012 totaled $770,000 as compared to $20.2 million for the same period in 2011. The decrease in sales over the prior year was due to our planned transitioning of all our sales and marketing resources as well as senior managements ongoing efforts towards recovery of past due accounts receivables from our customers and minimizing any additional exposure to our accounts receivable credit risk.
Our current period sales were primarily to primarily to established existing U.S. customers and Italy with low risk credit limits and prepaid shipment for sample material to new emerging markets.
Cost of sales for the third quarter of 2012, were approximately $910,000, compared to $4.5 million for the same period in 2011. Costs of sales for the first nine months of 2012 totaled $2.1 million as compared to $17.7 million for the same period in 2011. The decline in cost of sales is due to our lower variable manufacturing costs from the company's reduced sales volumes and reduction in manufacturing overhead through lower supplies utilization and headcount attrition.
Research and development expenses for the third quarter of 2012 were approximately $115,000, compared to approximately $280,000 for the same period in 2011, or a decline of nearly 59%. Research and development expenses for the first nine months of 2012 were approximately$371,000, compared to approximately $789,000 for the same period in 2011, or decline of nearly 53%. Our decrease in research and development expenses was primarily attributable to lower outside services costs related to our current projects.
Selling, general and administrative expenses, or SG&A, for the third quarter of 2012 were approximately $6.4 million as compared to $3.7 million for the same period in 2011. SG&A for the first nine months of 2012 totaled approximately $9.3 million as compared to $8.5 million for the same period in 2011. Our increase in SG&A expenses was primarily due to an increase in our allowance for doubtful accounts of $4.8 million incurred in the third quarter, offset by reduced headcount and variable sales and marketing expenses due to lower sales volumes in the current year.
As the years progressed and our remediation efforts for India transaction have moved slower than anticipated, we felt it's necessary to increase our AR allowance to reflect our expected recovery. In addition to uncertainty of timing, our additional reserves reflect volatility in the polypropylene market potential for our quality exposures and increased cost which may be incurred in proceed with repossession.
We remain confident in our ability to recover the full value of these receivables, however we acknowledge the timeframe has not been in line with our initial expectations.
Other income and expense for the third quarter of 2012 was approximately $3 million as compared to $513,000 for the same period in 2011. Other income and expenses for the first nine months of 2012 was approximately $5.3 million as compared to $1 million for the first nine months in 2011. The increase in expense for 2012 was primarily due to interest expense related to the coupon of our convertible debentures issued in May of 2011, non-cash interest expense of $2.9 million recognized from our Forbearance Agreement with the holders of our convertible debentures which reduced the conversion price in the indenture from $5.80 to $1 per share.
Debt extinguishment cost of $427,000 related to exchange retirement of our convertible debentures and a lots of VAT of $55,000 on the change of embedded derivative within our warrants.
Turning to the balance sheet, we had approximately $237,000 in cash and $7.3 million in accounts receivable, net of our allowance for doubtful accounts. Current assets and total assets were $14.1 million and $25.5 million, respectively.
Current liabilities and total liabilities were $9 million and $22.1 million, respectively, for working capital of $5.1. As of September 30, 2012, we had approximately 29 million shares of common stock issued and outstanding.
I would now like to turn the call back to Frederic for our closing comments.
Thank you, Michael. Again, I want to thank all our shareholders for their support. We'll do our best to communicate to our shareholders of date as we can. This will conclude our formal comments and presentation. And, at this time, I would like to open the floor for questions.
So, operator, if you could please the Q&A portion of the call. Thank you.
Yes. Of course. (Operator Instructions). So, we'll take our question from Kevin (Inaudible). Please go ahead, Kevin.
I just had a question regarding. I mean, you mentioned obviously the liquidity issues. And, obviously, from the liquidity constraints you weren't really in a position to sort of avoid dilution that might be associated with the notes convertibles and tranches for your stock, but I was wondering if you could just give me the number I guess on shares outstanding currently and also the dilution that is exercisable at this point, but also if you could maybe give us some color into maybe middle of next year to be fully diluted I guess.
Hi, Kevin. It's Mike. Thanks for the question. Currently, as we disclosed on the cover of our 10-Q as recently this week, we currently have 34.3 million shares outstanding. It's been kind of a moving target based on how we are funding both the preferred stock investments as well as the convertible notes. As we are funding these tranches, we are issuing convertible notes that are convertible with the election of holders, so it's a little bit tough to project the timing and depending on what's happening with the stock prices, what the shares would calculate into.
So, we've had to file with NASDAQ cost for additional issuance and we had projected on a fully diluted basis and again, there is a lot of variables that go into that number depending on what happens to the stock price, so it's tough to project what it will look like going out. I think, we've disclosed on a per diluted basis what the dollar amount that we will be funding. And then depending on what the shares, the discount rates they would take the new shares issuance through 20 million to 30 million shares into next year.
All right. That's great. That's really the only question I had. Thank you.
(Operator Instructions). Okay. So, at this time, I think, we are concluding the Q&A session, and I'll turn it back to your host for any concluding remarks at this time.
Great. Thank you, operator. Well, I thank you everyone today and I look forward to talk to you at the next earnings call. Thank you. Bye, bye, now.
Thank you, ladies and gentlemen. This does conclude your conference. You may now disconnect.
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