Cereplast Inc. (CERP.OB) Q2 2013 Earnings Call August 14, 2013 4:30 PM ET
Alan Sheinwald - Alliance Advisors, LLC
Frederic Scheer - Chairman and Chief Executive Officer
Michael Okada - Senior Vice President and Chief Financial Officer
Good day, ladies and gentlemen. Welcome to the Cereplast 2013 second quarter financial results conference call. (Operator Instructions) This conference is being recorded today, August 14, 2013. I would now like to turn the conference over to Mr. Alan Sheinwald of Alliance Advisors. Please go ahead, sir.
Good afternoon and welcome to the Cereplast 2013 second quarter financial results conference call. With us today is our Chairman and CEO, Frederic Scheer, and Mr. Michael Okada, Chief Financial Officer of Cereplast.
Before I introduce the speakers, I'd 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 SEC.
In addition, any projections as to the company's future performance represented by management include estimates today as of August 14, 2013, and the company assumes no obligation to update these projections in the future as market conditions change. At this time, I'd like to turn the call over to Frederic Scheer, Chairman and CEO.
Frederic, please go ahead. The floor is yours.
Thank you, Alan, and thank you, for everyone joining us today. On today's call, I will provide our shareholders with an update on Italy, India and United States, as well as discussed our products right through and our corporate initiatives.
First, let's share some prospective our company within the plastic and chemical industry and where we are trying to lead the company. As a reminder, Cereplast is a unique company with a very advance technology, which is clearly disturbing the traditional chemical industry.
The chemical and plastic industry have been very successful in the past 60 years growing from near $100 million in global revenue in 1950 to $1 trillion in 2010. We can say that it has been one of the most successful business story of the 20th century. However, the success is now challenged by two main issues, cost and littering.
On cost structure there are two considerations. First, plastic is made up oil, fossil fuel and is generating affordable plastic from a cheap raw material such as $0.50 a barrel of oil right in the 1950's was easy, today at $100 barrel it is close to impossible. However, the new emerging economies India, China and others are imitating our society with a plethora of plastic around in our daily lives.
Second, drilling oil for plastic is expensive. We need to go deeper and in the middle of the ocean, so the cost is high and will continue to rise.
Polyethylene, plastic has grown so much that is now perceived almost as the leader. You look at plastic bag around you and the millions of spoons and paper cups coated with plastic film. Something needs to be done and in its infinite wisdom populations around the world has started to say enough is enough, and are now demanding legislation to limit the amount of oil-based plastics being generated. This is the opportunity for Cereplast.
It is not easy and I can understand that some of you are frustrated by the slow pace at which we're making progress. We're sure that our management team is dedicated to change and with our passion we will make our imprint onto this industry. As I have been saying all along, our goal is to capture $300 million to $500 million in annual revenue and we will not stop until we reach it.
Our unique technology is organized around two major families of resins, the Cereplast Compostables resins. As the name is suggesting, our resins that we deign to biodegrade in a composing site. It will biodegrade in less than 180 days leading no chemical residues. The largest markets for compostable plastics are driven by legislation and it is in Europe that this legislation are the most demand. Trash bags and grocery bag made from our resin are being sold in supermarkets around Italy.
The Sustainables resins are probably the most exciting family we have to offer. These products are bio-based and has being designed to offer a lower carbon footprint compared to conventional plastics. With the Sustainables, we are targeting the durable application automotive, consumer product, electronic, toys and so on. Our offering is within the pricing of traditional resins, but we need to convince the operators to green their operation and offer consumers products with a lower carbon footprint.
We are seeing increased interest, which is probably fueled by the volatility of the barrel of oil. The potential market for Sustainables is infinite. As you do not have the limitation of composing infrastructure, no opportunity limitation. Our resins have a similar type of densities on traditional polyethylene and the heat resistance is almost the same. It is just racking into tradition and finding champion who are interested in bringing more eco-friendly product to the market. I am certain that in United States we will find this champion and then soon we will not need to cross the ocean to sell our U.S. made resins.
Now, let's turn to our financial results. Revenue during the first half of 2013 totaled $1.7 million as compared to $293,000 for the same period in the prior year and a total of $894,000 for the entire 2012. We expect to achieve similar type of growth for the second half of 2013 as compared to the first half. I would expect the fourth quarter to be bigger than the third as Europeans continue to practically close down their economy during the summer time.
The driving force in the accelerated growth of our revenue will be the finalization of sanction in Italy against merchants who do not make the switch from traditional plastic bag to alternative bioplastics that we are hopeful that it will happen at early as fall of this year.
Revenue growth is driven by sales in Europe specifically in Italy. We estimate that the potential addressable market for the blown film resin in Italy is approximately $50 million per year for our company. Again growth here will largely be attributed to the provision of the pending legislation to impose severe financial penalties on merchants who do not replace conventional signal-use plastic shopping bag with bioplastic alternatives.
Severe sanctions will be imposed upon merchants that do not comply. Also this legislation is in the hands of the European community. We expect a realistic timeframe to go into full effect to occur in the fall of 2013. Upon enforcement we believe that there will be a substantial increase in demand for our bioplastic resins. For the past 18 months, we have worked closely with over 70 Italian companies that have completed multiple successful tests with values grades of Cereplast Compostables blown film resin.
In early July, we received multiple purchase orders for Cereplast Compostables blown film resins totaling approximately $200,000 in sale, resins that will be used for the making bag, grocery. This resin will be used for the manufacturing of single-use plastic bag for use at about 45 supermarkets located in the Veneto and Trentino regions in Italy. It is a significant breakthrough to now have a working relationship directly with these supermarkets.
Our resin has been well received by Italian consumers and we strongly believe that these orders represent only a fraction of the overall market opportunity. Despite the short-term delays post to finalizing the Italian junction, we are seeing strong demand for our resin particularly from large retailers that are proceeding as the legislation is being fully enforced and continue to transition to bioplastic alternatives for single-use bag.
In India, our team has been actively educating local converters and introducing Cereplast resin. The demand is starting to accumulate and several significant agreements are currently being negotiated. India is one of the largest consumer of plastic polymers in the world the potential volume for bioplastic sales in the country is quite significant as they adopt bioplastic alternative to conventional plastic. India is also very sensitive to environment and has experienced first hand the calamities created by express industrialization and carbon dioxide emission.
We recently received and shipped orders to both new and existing customers in India, one of which is a well known polymer solution provider that has been in business for over 10 years in (Allahabad), India. This company produces the widest range of plastic stock shape and has been shipped a container of several bioplastic resin including Cereplast Biopropylene 101 for injection molding, Cereplast Biopropylene 111D, which is utilized for soft and pliable Thermoplastic Elastomer applications, and Compostables grades, which can be used for film and plastic sheets.
An existing customer was shipped a container of Cereplast Compostables blown film resins for the manufacture of plastic bags. For those customers we do have serious expectations to complete two significant million dollar agreement in the weeks to come.
n the United States, we are working on over ten new projects, both from Cereplast Compostables resins and Cereplast Sustainables resins. The steady increase in oil pricing is fueling a renewed interest in Cereplast resins and with two new business development managers dedicated to the domestic market.
We're pleased to strengthen our North American sales teams through the appointment Mr. Reddy Tudi as Vice President of Business Development and Mr. Kevin Fina as Regional Sales Manager. Together, Mr. Tudi and Mr. Fina are working on approximately 10 new projects in North America for both Compostables blown film and blown molding resins as well as Cereplast Sustainables resins for injection molding applications. The potential volume of this project is about $10 million per year with much larger potential beyond.
We continue to allocate the project within our means towards our research and development initiative. We retain that it is critical for us to keep our R&D going. We know that the large chemical companies are observing what we are doing and we know that intellectual property is a strong protection that will prevent others to come in our field when the markets will take off.
We have successfully commercialized two new resins, including Biopropylene A150D, an injection molding grade manufactured with 51% post-industrial algae biomass, and Compostable 2020D, an extrusion blow molding resin. Two new patents were granted and applications have been filed to protect the company's new innovation in nano materials and algae biobased resins. We also incorporated a new, wholly-owned subsidiary Algaeplast vehicle to develop algae-related research.
We believe that it is critical for our growth to diversify our raw material fixed cost and to explore non-food crops feedstock that will permit growth without trailing pressure on the price of food, when the market demand increases and starts to require very large quantities of feedstock.
Our Compostables blown film resins have received both DIN CERTCO and Vinçotte certifications for meeting EN 13432, the European standard for industrial compostability. Compostable 3002, 3010, 3015 and 3020 are Cereplast Compostables blown film grades, which are used for the manufacture of single-use grocery bags and trash bags. These grades also meet the ASTM D 6400 standard in the United States.
In Seymour, production has started at the slow pace, but about 50% of the sales we are making on new product, not product from inventory. We currently have about 20 employees and we run one eight hours shift in Seymour.
On the corporate side, we adopted an aggressive approach to make sure that our company was able to meet our financial litigation. We filed legal actions against certain clients for unpaid purchases. We have already been successful recouping valuable inventory in Italy as a settlement for outstanding receivables and we are optimistic about the overall outcome of these pending actions.
Additionally, we have evaluated all funding opportunities presented to us and opportunities displayed to use those sources available. I know that a lot of shareholders do not like the current illusion we are going through. As a shareholder myself, let me remind you that my equity has been drastically reduced. And in addition as CEO, I have voluntarily reduced my yearly compensation to $30,000 in salary. I have expanded very significant loans to the company, so we clearly have a vested interest in making this a success story.
Let me explain why we have to go down this path of selling more equity. First, the principal recipient of proceeds from our sales has been as follows: we have paid down $1.2 million to our senior lender Compass Horizon as well as provided direct funding to the company for about $2.7 million, and reduced our convertible debt by almost $2 million. Our company is not cash flow positive, which means that we needed to accept cash to stand our operation until we will reach cash flow breakeven.
We have reduced drastically our cost, which Michael will highlight in more details. And we are making a lot of efforts to increase our sales. We believe that based on the current trend we should be able to reach cash flow breakeven for operation as soon as we will reach our run rate of about $1 million a month, and depending on the Italian legislation this could occur by the end of this year.
I would now like to turn the call over to, Michael, to review our 2013 second quarter and first half financial results.
Thank you, Frederic. Although the current fiscal year continues to report significant charges to our income statements related to our complex financing transactions, there are few key few performance indicators which I would like to highlight.
Despite a sequential decline in net revenues for Q1, we have increased our gross margin percentage due to better pricing arrangement with new clients, as well as improving our operating margin by $321,000 from our reduction operating expenses. More importantly, we have reduced our quarterly cash run rate from $826,000 in Q1 to $571,000 in Q2 as reported in our cash used in operating activities for the first half of the year as presented in our cash flow statement. We continue to aggressively seek opportunities to reduce costs and improve our cost flow management to current initiatives, Frederic, has earlier described.
Now, I would like to review our financial results for the second quarter of 2013. Net sales for the three months ended June 30, 2013 were approximately $727,000 compared to $190,000 for the same period in 2012. Net sales for the first half of 2013 totaled $1.7 million as compared to $293,000 for the first half of 2012. The increase in sales over the prior year was due to lowering demand in our European markets primarily due to anticipated legislation in Italy, banning traditional plastic bags.
Cost of sales for the three months ended June 30, 2013, were approximately $655,000 compared to $197,000 for the same period in 2012. Cost of sales for the first half of 2013 totaled $1.5 million as compared to $387,000 for the same period in 2012. The increase in cost of sales is due to incremental variable costs incurred to fulfill our increased sales demand.
Research and development expenses or R&D for the three months ended June 30, 2013, were approximately $114,000 compared to $126,000 for the same period of 2012 or a decline of almost 10%. R&D expenses for the first half of 2013 were approximately $220,000 compared to $255,000 for the first half of 2012, or a decline of nearly 14%. R&D expenses have now increased due to our cost containment effort to preserve working capital.
Selling, general and administrative expenses or SG&A for the three months ended June 30, 2013, were approximately $1.2 million as compared to $2 million for the same period in 2012 or decline of almost 42%. SG&A for the first half of 2013 totaled approximately $2.7 million as compared to $3.7 million for the first half of 2012 or a decrease of over $1 million or nearly 28%. The decrease in SG&A expenses was primarily due to reduced headcount and fixed overhead costs reductions, due to our restructuring plan.
Other income and expense, net for the three months ended June 30, 2013, was a net expense of $7.5 million, as compared to our net expense of $1.8 million for the same period of 2012. Other income and expense for the first half of 2013 was a net expense of $24.1 million, as compared to $2.3 million for the first half of 2012. The increase in other income and expense was primarily non-cash charges including loss on debt establishment. Change in our derivative liability related to our warrants, short-term convertible debt and preferred stock agreements, and amortization of debt discount and deferred financing fees with interest expense.
Net loss for the three moths ended June 30th, 2013, was approximately $8.7 million as compared to $3.9 million for the same period in 2012. Net loss for the first half of 2013 was approximately $26.8 million as compared to $6.3 million for the first half of 2012. The increase in our net loss for 2013 was primarily driven by an increase to non-cash expenses incurred and other income expense offset by improvement in our operating margin.
Turning to the balance sheet. We had approximately $223,000 in unrestricted cash and $1.2 million in accounts receivable, net of allowance for doubtful accounts. Current assets and total assets was $7 million and $14.9 million respectively. Currently liabilities and total liabilities were $26 million and $34.8 million respectively. As of June 30, 2013, we had approximately 622.4 million shares issued.
I would now like turn the call back to Frederic for our closing comments.
Thank you, Michael. We are excited about the future of the company and look forward to our expected strong results in the second half of the year. I would like now to open the floors for questions. So operator, please if you could start the Q&A portion of the call.
(Operator Instructions) And I am showing no questions in the queue at this time. Please continue.
All right, thank you, operator. Well, I will thank everyone. I have nothing to add then and thank you for attending our call today. Thank you and bye for now.
Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation. You may now disconnect.
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