Cereplast Inc. (CERP) Q3 2013 Earnings Conference Call November 14, 2013 4:30 PM ET
Valter Pinto – Alliance Advisors, LLC
Frederic Scheer – Chairman and Chief Executive Officer
Michael Okada – Senior Vice President and Chief Financial Officer
Good day, ladies and gentlemen and thank you for standing by. Welcome to the Cereplast 2013 Third Quarter Financial Results Conference Call. During today’s presentation all participants will be in a listen-only mode, after presentation the conference will be opened for questions (Operator Instructions).
I would now like to turn the presentation over to Valter Pinto of Alliance Advisors. Go ahead.
Thank you, good afternoon and welcome to the Cereplast 2013 third quarter financial results conference call. With us today is Frederic Scheer, Chairman and CEO, and Michael Okada, Chief Financial Officer.
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 November 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, Valter. And thank you to 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 in our recent corporate initiatives.
First, I would like to provide a perspective on Cereplast 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 advanced technology, which is clearly disturbing the traditional chemical industry. The chemical and plastic industry, have been very successful in the past 60 years growing to approximately $1 trillion in 2010. However, the success is now challenged by two main issues, cost and littering.
On cost structure there are two considerations. First, plastic is made compositive fuel palm olein oil. In the 1960’s when a barrel of oil costs $0.50 it was a cheap raw materials and it made economical sense, at a pit stop to make plastic. They had a $100 barrel it is nearly impossible. However, the new emerging economies such as India, China and others are copying a society with a plethora of plastic around in their daily lives.
Directly increasing the demand of plastic around the world; Second drilling oil for plastic is expensive, we need to go deeper and deeper in the middle of the ocean, so the cost is high and will continue to rise. On littering now plastic has grown so much that it is now perceived almost as leader creating a major environmental issue. Look at plastic bags around you and the millions of spoons and paper cups coated with plastic film. Something needs to be done in its infinite wisdom populations around the world, have started to say enough is enough.
And I’m now demanding legislation to limit the amount of oil based plastic being generated. The good news for the picture of our global environment is that these process has already began as we have seen in India, Europe and parts of the United States, this is the opportunity for Cereplast and the timing is now.
It is not easy and it is taking time, but we see progress, we assure that our management team is confident in the path, the industry is heading and is confident that our [indiscernible] technology will make the substantial imprint on this industry, as I have been saying over the past year, our goal is to capture a significant fraction of the market and we will not stop until we reach our goal.
Our unique technology is organized around two major families of presence, the Cereplast composible resin, as the name suggests are resins that we designed to biodegrade in an industrial composing side, these products are made with resins and biodegrade in less than 180 days leaving no chemical residue, the largest market for composible plastic are driven by legislation and it is in Europe that this participation of the most event, and trash bags and grocery bags made from our resin are being sold in supermarkets around Italy.
More recently half of the city of Milan, Italy reducing trash bag to collect organic material, made from Cereplast resin. The Cereplast sustainable resin are probably the most exciting product family we have to offer, this week we announced that we are expanding this family of resin, these products of Biovail and had been designed to offer a lower carbon footprint and back to conventional plastic, with the sustainable we are targeting durable applications, automotive, consumer product, electronics, files et cetera.
Our offering is within the pricing of transition resin, but we need to convince the operators to grain their operations and offer consumers products with the lower carbon footprint, we are seeing increased interest which is probably fueled by the volatility of the biodegradable product, the potential market for sustainable is infinite, I do not have the limitation of composting infrastructure, no property limitation, our resin have a similar type of density as compared to traditional polyurethane and the heat resistance is almost as paying, today we are working on educating the marketplace, on the benefit of this technology and finding those who are interested in bringing more eco-friendly products to the market.
In United States, I’m confident will be a key market for this business. Recently, we announced the creation of ReVive. ReVive 11 are currently offered at the recycle polyethylene with biobase tendon and also offer that trade recycle polyethylene.
In doing so, we are trying to reach out the companies that are not ready yet to use bioplastic, but have an appetite for more sustainable offering than active in reducing the carbon footprint. We will offer ReVive online in the North American market as it is where see the most demand for recycle material. We are able to offset the ReVive pipeline under the price of traditional polyethylene.
Now let’s turn to our financial results, revenues during the third quarter of 2013 totaled $436,000 as compared to $477,000 for the same period of the prior year, and $2.1 million for the first nine months of 2013 as compared to $770,000 for the same period in 2012.
Revenue did not increase for the quarter as a direct result of the current confusion created by the hold on the Italian legislation requested by the European Community. I would expect revenue to increase sequentially acting as a situation that’s clarified as European are now starting to gear up to what the application of the pro-bioplastic regulation in 2014.
Driving force in the accelerated growth of our revenue will be this canalization of sanctions in Italy again we made some, we do not make the switch from traditional plastic bag to bio-plastic alternative. Gains on related development we are hopeful that it will happen in the first quarter of 2014.
One last point on our financial is to highlight the aspect of our restructuring that is now in full effect and that’s allowed us to control our expenses. As soon as the revenue will kick in, we believe that we will reach cash flow break-even. Revenue growth is driven by sales in Europe, specifically in Italy.
We estimate that the potential addressable market for [indiscernible] in Italy it’s approximately $50 million per year. Again growth here will largely be attributed to the provision of the pending legislation to include to their financial penalties on merchants. We do not replace conventional, single used plastic shopping bag with bio-plastic alternative.
So their sanctions will be imposed from merchants that we do not comply. Also this legislation is now in the hands of the European Parliament. The committee on the environment has decided to present the Parliament, legislation that clearly would stay for the use of bio-plastic and will dry down the use of traditional polyethylene as it requires a reduction of the use of conventional plastic bag by 80% in two years. I remind all our shareholders that the timing of a conclusion in this matter is in the hands of the European political systems, and difficult to predict when it will be resolved.
It is difficult to give a realistic timeframe to go into full effect, but early 2014 being realistic at this point. Upon the European Parliament though the Italian decree will enter into full effect and the Italian regulators will enforce the application of severe sanction on retail outlet for agencies that will continue to use traditional polyethylene. We believe that there will be a substantial increase in demand for our bioplastic resin.
For the past 18 months, we have worked closely with over 50 Italian companies that have completed multiple successful tests with values grades of Cereplast’s Compostables blown film resin. It is now just a question of time before we see the demand surge. Despite the short-term delays post to finalizing the Italian junction, we are seeing strong interest 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. We anticipate announcing earlier contract before the end of this year.
In India, our team has been actively educating local converters and introducing Cereplast resin. India is one of the largest consumers 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 the environment and has experienced first hand the calamities created by express industrialization and carbon dioxide emission.
We recently received purchase orders aggregating approximately $1.4 million. We are beginning to ship 1000 tons of materials. We continue to explore other possibilities with additional converters that are Indian [indiscernible]. In the United States, we are working on several new projects, both for Cereplast Compostables resins and Cereplast Sustainables resins. The steady increase in oil pricing is fueling a renewed interest in Cereplast resins and we are also adapted to the demands from the market. We believe that reVive could become serious profit center for our company as recycling has been a long-lasting trend in the U.S.
Polypropylene has a very low level of recycling, less than 3% in the United States. Offering to recycle TPE as well as recycle TPE with Bio-Content should drive the interest of a lot of company. We are excited about the possibilities opened by reVive and we are already working on several projects, where the volume is quite significant.
In terms of certain breakthrough in our technology, we will be able to offer the reVive Bio-Content material of sizing deals, additional virgin polypropylene making it a fantastic alternative. We’ll continue to allocate the brochure within our means towards our research and development initiative. It is critical for the future success of our company as we continue to make this investment in R&D.
We know that the large chemical companies are observing what we are doing and we know that intellectual properties a strong protection as we prevent process from coming into our steel when the market picks up.
On the corporate side, we have dramatically reduced our costs while concentrating and building our revenue base, which Michael will highlight in more detail. We believe that based on our current trend, we should be able to reach cash flow break-even for operations, as soon as we will reach our run rate of about $1 million a month, a number that we are hopeful we should reach in 2014.
I would now like to turn the call over to Michael to review our 2013 third quarter and first nine months financial results.
Thank you, Frederic. I would like to review our financial results during the third quarter of 2013. Net sales for the three months ended September 30, 2013 were approximately $436,000 and further $475,000 same period of 2012. Net sales for the first nine months of 2013 totaled $2.2 million, as compared to $770,000 for the same period of 2012. This increase in sales over the prior year was due to growth demand in our European markets, primarily due to anticipated legislation in Italy earning plastic bags.
Cost of sales for the three months ended September 30, 2013 were approximately $386,000 compared to $473,000 for the same period in 2012. Cost of sales for the first nine months of 2013 totaled $1.9 million as compared to $851,000 for the same period of 2012, the increase in cost of sales due to incremental variable costs incurred to forward increased sales again.
Research and development expenses for R&D for the three months ended September 30, 2013 are approximately $75,000, compared to $115,000 for the same period of 2012 or required about of 35%. R&D expenses for the first nine months 2013 were approximately $295,000, compared to $370,000 for the same period of 2012 or a decline of nearly 12%. R&D expenses increased due to cost containment effort to prevent working capital as Frederic mentioned very important aspect to our business.
Selling, general and administrative expenses or SG&A for the three months ended September 30, 2013 were approximately $1.1 million as compared to $6.8 million for the same period in 2012 or a decline of over 23%. SG&A for the first nine months of 2013 totaled approximate $3.8 million as compared to $10.5 million for the same period 2012 or a decrease of over $6.7 million or nearly 4%. Our decrease in SG&A expenses were primarily due to $5.1 million bad debt expense recorded in Q3 of 2012 as well as reduced head count – over cost reduction charges in 2013.
We recorded a non-cash asset impairment charge of $547,000 for the third quarter of 2013 to adjusted carrying value of our facility in Italy offset amount in mortgage. Other income and expense that for the three months ended September 30, 2013 was net expense of $5.7 million as compared to a net expense of $3 million in the same period of 2012.
Other income and expense for the first nine months 2013 was net expense of $29.7 million as compared to $5.3 million for the same period 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 months ended September 30, 2013 were approximately $7.8 million as compared to $10 million for the same period of 2012. Net loss for the first nine months of 2013 was approximately $34 million as compared to approximately $15.3 million for the same period of 2012; the increase in our net loss for 2013 primarily attributable by an increase in non-cash expenses or other income and expense offset by an improvement in our operating margin.
Now turning to the balance sheet; we had approximately $273,000 in cash and $1 million in accounts receivable. Current assets and total assets was $7.2 million and $14.3 million respectively. Current liabilities and total liabilities were $29.1 million at $36.7 million respectively. As of September 30, 2013 we had approximately 811 million shares issued in outstanding.
I would now like to turn the call back to Frederic for closing comments.
Thank you, Michael and I would like now to open the call for questions operator could we start the Q&A portion of the call. Thank you.
Thank you, sir. (Operator Instructions) We will now begin the question-and-answer session (Operator Instructions) Our first question is from Tom Djokovich [ph], please go ahead. Actually our question is from Dave Gonzalez from DLG Industries [ph]. Please go ahead.
Yes, thanks for taking my call, since most of the revenues seem to be going to be coming from Europe and India. I would like to know what the statuses of the plant in Italy and is there a timeline in place to bring this up to full production?
Good afternoon and it’s a very good question, as of today the situation is following we put on hold the contract in Italy as we consider that our first responsibility is really is that to develop and fill up those in fact the plants that we have currently operating and fully operational in India now, all we don’t need to do anything we are basically absolutely no CapEx and no equipment, compact investment to do in the United States, when clearly the project that we have in Europe is a project in which we should do some investments at that stage.
We have decided to could visit on old and we are in the process of first rate didn’t completely what we want to do with respect to Europe as [indiscernible] said that as we expect that the low in Europe come to fruition sometime in 2014, and that the numbers that we are expecting come from Europe and then definitely have the sign to an extend for us effect two consider manufacturing in Europe, will it be Italy or something else as of today I really don’t know because we want to be very careful with respect to the very effective spending, we are spending our money, we also are expecting that the legislation coming from Europe will grow way beyond Italy and therefore the time will have to make the profit decision.
With respect to India the sales that we currently are enjoying in India are probably sales of existing material that we have recouped from some clients that didn’t pay us and but we are shipping those materials from Europe. When the Indian market will develop then at the time we are exploring – frankly the way I’m seeing 2014 going to be primarily a surging demand coming from Europe for the European market and I believe that will manufacture everything else of our Indian market.
And our next question is from Greg Peterson with Peterson Financial [ph]. Please go ahead.
Yeah, thanks for taking my call. I was wondering if there is any plans to restructure your liability and then trying to get those interest rates down on the debt.
Hi, this is Mike. We continue to look at all alternatives for our current liabilities as you will see on our balance sheet. We do have our – original convertible notes that we issued in 2011 will be coming due in 2014, we have worked with our – with our lenders in our sectors, the potential stuffs an opportunity, overall we remain in compliance with all of the covenants and departments of that liability and will continue to work towards that – towards favorable solution for us to working in that.
(Operator Instructions) And I’m showing no questions on my end. Please continue.
Okay, well thank you operator and I want to thank everyone for participating today and we look forward to talking to you some time in March and also good results. Thank you.
Ladies and gentlemen, that concludes the conference call for today. Thank you for your participation. You may now disconnect.
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