Cereplast, Inc. (CERP.OB) F4Q 2012 Earnings Call April 16, 2013 4:30 PM ET
Alan Sheinwald - Alliance Advisors, LLC
Frederic Scheer - Chairman & CEO
Michael Okada - SVP & CFO
Jason D'Amico - JPMorgan Chase
Neil Larsen - KMS Financial Services
Good afternoon ladies and gentlemen. Thank you for standing-by. Welcome to the Cereplast 2012 Year-End Financial Results Conference Call. During today’s presentation, all participants will be in a listen-only mode. Following the presentation, the conference will be open for questions. (Operator Instructions)
At this time, I would like to turn the conference over to Alan Sheinwald with Alliance Advisors. Please go ahead, sir.
Thank you, operator. Good afternoon, and welcome to the Cereplast 2012 year-end earnings conference call. With us today is, Frederic Scheer, Chairman and CEO and Mr. Michael Okada, Chief Financial Officer.
Before I introduce the speakers, I would like to remind listeners that during the call, management’s 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 for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Actual results may differ from results discussed today and therefore we refer you to a more detailed discussion of these risks and uncertainties in the company's filings with the Securities and Exchange Commission.
In addition, any projections as for the company's future performance represented by management include estimates today as of April, 16, 2013 and the company assumes no obligation to update these projections in the future as market conditions change.
At 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 thank you to our shareholders and to the investors joining us today. For our today’s conference call, I will bring investors up-to-speed on our progress in Europe, India and the United States followed by our Chief Financial Officer Michael Okada who will provide an overview of our 2012 financial results. Finally, I will address specific investor questions that we have received recently and would provide an outlook for the future.
2012 was a year of transition for Cereplast. As Michael will detail later in the call, we took a conservative approach during the year to take the necessary write-downs and financial measures to begin 2013 with a clean-slate Amidst this, we are more pleased with revenues during the first quarter of 2013 which exceeded all of our 2012; our path forward is what we are concentrating on and it is reflected in the decisions we strategically made at the end of 2012.
First as well documented, the Italian Plastic Bag Application Decree has been published and enforcement should begin at the end of May, 2013. This is a critical milestone and finally we have affirmed timeline to prepare for. As part of the decree, merchants must discontinue the use of traditional single-use plastic bags in favor of bio-plastic bag or other alternatives; the law permits the use of [upscale] [ph] biodegradable additive and require Italian merchants to only use compostable application as defined by EN 13432 that Cereplast resin comply with.
The fine for non-compliant range between €2,500 and €25,000 a [may] [ph] increase for large quantities of bags. This plastic bag ban is a first step by the Italian government to make Italy plastic-free. We estimate that after the initial condition period, the total addressable market for compostable blown film grades in Italy will exceed 500 million. Currently, there are four legitimate competitors who produce compostable blown film that are predominantly based in Europe each varying in size from approximately $5 million to $120 million in yearly revenue.
Based on current competition, current production capacity, a full production staff and sufficient working capital, the estimated market opportunity for Cereplast exceeds $50 million a year. The manufacturing capacity of the company’s Seymour, Indiana plant is currently up to 3,000 tons a month. Based on current market price of $4,500 per ton for blown film, this plant is capable of producing in excess of $10 million per month at full capacity. The Cereplast compostable blown film resin has a competitive advantage because it can be processed on traditional equipment without requiring modification and they do not emit problematic fumes.
Coinciding with the publication and anticipation of the demand we will receive for our product we have bolstered our sales team in Italy. We've added sales agents to promote the company product in Italy and neighboring countries. The sales agents will concentrate on Cereplast compostables blown film grade. Sales agents are not employees of the company and have been retained with the commission based structure, so there is no cost to the company unless the agents successfully close sale.
We have received orders for our blown film resins and I can share with you that we will report in May approximately $1 million in revenue for the first quarter of 2013, this exceeds our total revenue for 2012 of $900,000. All customer payments were received in advance of shipments or within conservative credit terms. The company expects continued growth in demand of blown film as a result of the anticipated legislation in Italy. We now have a very conservative credit policy with our client and we require payment in advance, cash on delivery or bank guarantee.
Now that the Italian government has formally detailed the plastic bag sanction and have established an enforcement date, it is our belief that we will begin to see other European countries follow suit. Specifically in the wake of this news, Arnaud Montebourg, the French Minister of Industrial Renewal stated like Italy, France favored the use of biodegradable plastic bag for all single use bag, an important first step by the end of the year 2013 will be to encourage the use of biodegradable shopping bag.
Therefore also we are conservatively estimating the market opportunity for Cereplast in Italy to be $50 million. This number will grow dramatically as other countries follow with similar mandate. Clearly, this may take some time, but we are confident that within the next three years we should see continued growing demand for our blown film resin all across Europe. For the recent events that unfolded Europe is our number one target right now, but India remains the close second.
We maintain our office there with feet on the ground. In India three dozen companies have been testing our bioplastic resin including Cereplast Compostables resin and Cereplast Bio-[polyolefins grade] [ph] for a variety of different applications. We are pleased to report that the very first shipment should occur this month as we are receiving payments from at least two clients.
We are encouraged by the progress made in India [and the rest this week] [ph] and anticipate that our investments in these two markets will translate into additional purchase and future revenue growth in 2013.
Lastly in the United States, also the US market remains very sporadic as American consumers have been slower to accept environmental friendly alternative and large brand owners to look at the environment as a marketing opportunity more than a necessity. There remains an opportunity for us in the United States. We have seen a discrete but steady push in legislation to extend the reach of compostable food service ware and compostable bag.
Finally on the West Coast including cities of Portland, Seattle and San Francisco which are pushing a very strangest agenda through our compostable alternative to conventional plastic. We can expect that in the weeks and months to come the demand will grow. We recently received several orders for compostable resin that would be used for food service ware application. We fulfill these orders and all payments have been received.
I would now like to turn the call over to Michael to review our 2012 year-end financial result in more detail.
Thank you, Frederic. As we disclosed in our 10-K, we continue to operate in cash preservation mode in order to provide a bridge to realize many of the opportunities Frederic previously described. Although our income statement has evolved into a complex P&L report combining both cash and non-cash items, our cost reduction efforts are represented in our reduction in our cash used in operations to approximately $5.4 million in 2012, which is a decrease of 17% or over $19.3 million reduction in 2011. We continue to reduce our operating costs to tightly manage our working capital to continue our operation.
Since our last quarter we raised an additional $450,000 from issuance of short-term convertible notes to both new and current investors as well as an additional $100,000 from Ironridge Global in connection with our $5 million stock purchase agreement.
Also in the fourth quarter, we commenced our transaction with the Magna Group, which paid $1 million to our senior lender Compass Horizon Tech Finance in exchange for shares of common stock. In addition to these equity-based financings, we negotiated an amendment with our senior lender Compass Horizon for additional funding under our term loan of $400,000.
The additional working capital for the company has been imperative to continue our operation. In completing these transactions, we were not able to negotiate for a position of strength in order to minimize our dilution. However, we are grateful for the support and the vote of confidence we received from our investors.
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 our fiscal year 2012. Net sales for 2012 were approximately $894,000 compared to $20.3 million in the same period in 2011. The decrease of sales over the prior year was due to our planned transition of all of our sales and marketing resources as well as senior management efforts toward recovery of all account receivables from our customers and minimizing any additional exposure to our credit risk. Our current period sales were primarily to our established existing US customers with low risk client payment and prepaid shipments of advance material through emerging markets.
Cost to sales totaled $975,000 as compared to $18.2 million for the same period in 2011. The decline in cost of sales is due to our lower available manufacturing costs from the company's reduced sales volumes and the reclassification of fixed production overhead from cost of sales to selling, general and administrative expense due to extended period of abnormally low production volumes experienced during the current year.
Research and development expense for 2012 were approximately $471,000 compared to approximately $1 million for the same period in 2011 or a decline of over 55%. The decrease was primarily due to a reduction in legal expenses and outside services used in our current product development project.
Selling, general and administrative expenses or SG&A for 2012 totaled $18.9 million compared to $13.4 million for the same period in 2011. Our increase in SG&A expenses was primarily due to an increase charges in our bad debt expense of $12.3 million incurred in the current year and the reclassification of fixed overhead expenses from cost of sales to SG&A in the current year, offset by reduced headcount and variable sales and marketing expenses due to lower sales volumes in the current year.
As the year has progressed and our remediation efforts, our marketing efforts in Europe and India have moved smaller than anticipated, we felt it's necessary to increase our accounts receivable allowance of bad debt to reflect our expected recovery as well as protect our balance sheet against adverse future event.
In addition, this uncertainty of timing, our additional reserves reflect volatility in the product portfolio market, potential product quality exposure and increased costs which may be incurred if we proceed with (inaudible). We remain confident in our ability to recover the full value of these receivables. However we acknowledge the time frame has not been in line with our initial expectations.
Other income and expense for 2012 was approximately $10.7 million as compared to $1.6 million 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 $4.4 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 $954,000 related to exchange and retirement of our convertible debentures and a loss of $1.8 million on exchange of our embedded derivative within our warrants and conversion rights granted to note holders.
Turning to the balance sheet we had approximately $183,000 in cash and $6.9 million in net inventory. Current assets and total assets were $7.5 million and $16.2 million respectively. Current liabilities and total liabilities were $15.1 million and $26.2 million respectively.
I would now like to turn the call back to Frederic for our closing comments.
Thank you, Michael. In the recent months, we have received and documented 50 questions from investors. During this portion of the call I would like to address them and give it really the best I can. Those questions were sent through our Investor Relations directly to the company. So I will try in fact to go through those questions.
The first one was, how much cash did you have currently and are you raising capital today?
As of December 31, 2012 we had approximately $200,000 in cash. We are managing our capital as best as we can and as evaluated all financing opportunities we have been presented with. As the current shareholder I understand investors concern of a resolution that our financing structure brought upon our company. We are hopeful that we will be able to increase our revenue generation and cash flow and avoid going to market for further financing. We have reduced our operating cost and continued to [extra] creative ways to manage cash flow.
Second question is your Seymour facility idle which will be difficult to ramp up production to fulfil orders, how much production capacity do you have at Seymour?
Manufacturing capacity at the company’s Seymour, Indiana plant is currently 3,000 tons per month based on current market pricing of lets say $4500 per ton at least per [month] is capable of producing in excess of $10 million per month at full capacity. Our subsidiary is currently not idle and is fulfilling orders as they come.
We do not foresee any issue with ramping our production buying capital expenditure requirement. We are well prepared to increase our labor force as it becomes necessary. Other creation was the Cereplast going bankrupt. We are not considering bankruptcy today.
We have an obligation to our shareholder, the Board, lenders and creditors to manage our assets and liabilities in the utmost responsible manner and have done still to the best of our ability today. We believe that the Chapter 11 restructuring is the last resort and also our shareholders do not like the mission, it remains a better alternative than the Chapter 11 filing.
Another question, as you collected all of the investor refund from the [billing] customers in Europe how much have you liquidated today and how much is remaining and where is this [invested]. We have not collected the entire unsold interest rate from client and we have engage legal counsel to attempt to recruit more of the receivables or unsold inventory.
We have taken a very conservative accounting approaching in 2012 financial statement as Michael just explained, and therefore we carry the inventory at cost, that allows us to consider liquidating some of this inventory at cost without penalizing the 2013 result. The inventory is located in Seymour and (inaudible) Italy for the ones that we recruit and in different locations in Italy and Germany. This inventory consists primarily of Hybrid Resins and its value is indicated in our balance sheet under inventory.
Another question why did the company really drove the [F1] filing with the SEC, how does this affect your financing with (inaudible). We found our removal of the F1 filing in the best interest of the company and our shareholders. We are encouraged by the revenue trend we are currently experiencing, and are hopeful that will not need the (inaudible) results. Additionally, the filing process is expensive, complex and time consuming for our management team. We view this event as a positive. We do entertain a good and constructive relationship with Ironridge and I understood and it’s according to position we took (inaudible).
And the final question I get very often as well; now that the reverse stock split and increase in authorized shares is approved, what is the company plan for (inaudible) going forward. It is not the intention of management at this stage to go through a major reverse split, and we are hopeful that our stock will recover along the good result we will be able to announce. Clearly we need to keep all options open, but at the present time this is the last option.
The final question, why did Cereplast establish Algae Plast, how does it affect my investment in Cereplast. Well Algae Plast was established for several reasons. First, the research and development that goes into Algae based resin is served from the rest of our bioplastic reserves. Additionally, we anticipate the possibility of (inaudible) to come into the sector and therefore having separate entities make that possibility (inaudible). Algae Plast is a wholly owned subsidiary of Cereplast and does not affect the investment made in Cereplast. We do foresee some very good development in the weeks to come for Algae Plast and you will be kept abreast of such development, the press releases as well as on our Facebook and Twitter pages.
Again I want to thank all of our shareholders for their support and this concludes our formal comments and presentation. At this time, I would like to open the call for questions. Operator if you could please start the Q&A portion of the call.
(Operator Instructions) We have a question from the line of Eric (inaudible). Please go ahead.
Yes, I am wondering when the reverse stock split will most likely be put into effect.
Well sir as I mentioned at this time management has no intention of going through a reverse split. We will use the reverse split as a last option if the work and the releases that's been put out will not allow the stock in fact to get back up. As you know we got that authorization and it’s now at the discretion of management and the Board to basically decide if we need to go through a reverse split. Right now, the consensus both from the Board and management is that we should not go through a reverse split. That authorization that we received during the special meeting is good for one year and for the time being we have no intention of going through the reverse split.
Our next question comes from the line of Jason D'Amico with JPMorgan Chase. Please go ahead.
Jason D'Amico - JPMorgan Chase
Actually, pretty good question. Can you please repeat the dates that you had mentioned in terms of the legality change in Italy?
The date, the decree was published on the 27 of March and therefore there is 60 days from the date of publication which is pushing to 27 of May, 2013, subject to certain European confirmation. But we're looking at basically an application as of end of May, or beginning of June 2013.
Jason D'Amico - JPMorgan Chase
And if I understand correctly, this decree is essentially limiting - is it all stores in Italy that have (inaudible) of bags or the wholeseller…?
The decree is basically is following a law that was passed and voted in December of 2010 and confirmed by the Italian parliament in November and December of 2012 and that decree is basically imposing sanction on either state agencies or retail stores small and large that will be using polyethylene bags. They are basically to ban on the use of polyethylene bags which is traditional plastic, and the decree is mentioning that those sanction will go from anywhere from 2500 up to 25,000 euro for non-compliance and therefore it’s basically pushing people to use bioplastic as an alternative. This is what the decree is doing.
Thank you. Our next question comes from the line of Neil Larsen, KMS Financial Services. Please go ahead.
Neil Larsen - KMS Financial Services
Yes, thank you. My question has to do with your receivables. On June 30th of last year you had little over 14 million in receivables, and you are showing that you have a 149,000 now and you had mentioned in your press release today that you had written off 12 million I guess I am going to assume you have written off 12 million, so what about the other 2 million are they collectible?
Hi this is Mike. We did collect some of the receivables this year, and in the third quarter we had also announced that we reached [the mid-range] [ph] with company in Italy where we were able to recover the inventory net of the settlement amount, while some of those receivables came back to balance sheet in the form of inventory, but no we were able to monetize a portion of that remaining receivables outstanding and [in those days] [ph] the amount that’s left at the end of the year is or has been a collectible in the first part of 2013.
Neil Larsen - KMS Financial Services
Okay. So we are correct that the only thing that’s outstanding is 149,000 of receivables?
That’s correct, there is an account receivable reserve for the [large sum] [ph] balances that are still outstanding related to inventories that we have not yet recovered. But we have fully reserved against those (inaudible).
And Mr. Scheer I am showing no further questions at this time, sir. I would like to turn the conference back over to you for closing remarks.
Well, thank you operator, and I would like to thank everyone who participated today in our call. Thank you very much ladies and gentlemen.
Thank you, Ladies and Gentlemen that does conclude our conference for today. Thank you very much for your participation. You may now disconnect.
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