Analyst: Victor Sula, Ph.D. Report Update January 20th, 2010
1/20/10
CERP daily
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Website: www.cereplast.com E-mail: investor.relations@cereplast.com MARKET DATA
Symbol Exchanges Current Price Price Target Rating Outstanding Shares Market Cap. Average 3M Volume
CERP OTCBB $0.11 $1.12 Speculative Buy 387.55 Million $41.66 Million 661,708
Source: Yahoo Finance,
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Cereplast Inc. 3411-3421 West El Segundo Boulevard Hawthorne, CA 90250 Tel: (310) 676-5000 Fax: (310) 676-5003
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Company Overview Cereplast Inc. (OTCBB: CERP) develops, manufactures and markets bio-based resins that supplement or even replace conventional petroleum-based plastics in a wide range of converting applications. CERP’s resins are made from renewable resources such as corn, wheat, tapioca and potato starches. The Company conducts operations primarily through three product families: Cereplast Compostables Resins®, Cereplast Hybrid Resins®, and Cereplast Algae Plastics™. Cereplast Compostables Resins® are renewable, ecologically sound substitutes for petroleum-based plastics intended primarily for single-use disposables and packaging applications. CERP offers 17 commercial grades of Compostables Resins in this product line. These resins are compatible with existing manufacturing processes and equipment, making them a ready substitute for traditional petroleum-based resins. The Company commercially introduced the Compostables Resins line in November 2006. Cereplast Hybrid Resins® replace up to 50% of the petroleum content in conventional plastics with bio-based materials such as starches sourced from plants. The Hybrid Resin line offers properties similar to traditional polyolefins such as impact strength and heat deflection temperature, and is compatible with existing converter processes and equipment. Hybrid Resins provide a viable alternative for customers who want to partially replace petroleumbased resins in durable goods applications. Hybrid Resins address the needs of a wide range of markets, including automotive, consumer goods, consumer electronics, medical, packaging and construction. CERP commercially introduced its first grade of
Cereplast Inc. (OTCBB: CERP)
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Analyst: Victor Sula, Ph.D. Report Update January 20th, 2010
Hybrid Resin, Hybrid 150, in late 2007, and presently offers two commercial grades in this product line. Cereplast Algae Plastics™ is a new technology CERP is developing to transform algae into bioplastics. The Company plans to launch a new family of algae-based resins that will complement its existing Compostables & Hybrid resins product lines. Although CERP does not expect this new technology to become commercially available before late 2010 or early 2011, its development opens the door algae-based resins, which could eventually replace 50% or more of the petroleum content used in traditional plastic resins. Algae is attractive as a feedstock because of its low carbon footprint and availability in large quantities. In the future the Company hopes to create algae plastic made of 100% algae content, eliminating the need for fossil fuels in plastics. Because CERP resins replace a significant amount of petroleum-based content with starches, resin costs are less impacted by volatile fossil fuel prices. CERP’s resin manufacturing also requires less heat than traditional plastics manufacturing, further reducing manufacturing costs. In addition, CERP’s resins offer comparable or superior performance, as well as environmental benefits resulting from reduced petroleum consumption. CERP’s proprietary bio-based renewable plastics are used as substitutes for petroleum-based plastics in all major converting processes – injection molding, thermoforming, blow molding and extrusions – and are priced competitively with petroleum-based plastics. CERP’s Business Model
Source: http://www.cereplast.com/pdfs/RoadshowPresentation_January_21-09.pdf
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Analyst: Victor Sula, Ph.D. Report Update January 20th, 2010
Strategic Restructuring Program In May 2009, CERP announced a restructuring to accelerate growth and reduce costs by outsourcing manufacturing and focusing its activities in its core strengths of product design and development. As part of this restructuring, CERP reduced its workforce, consolidated product lines, inventories and facilities, and is exploring the sale of some of its commercial production equipment. Sales and distribution As of September 30, 2009, more than 230 companies had requested and been provided with samples of the Company’s bioplastic resin, and 150 customers have purchased resin for trials and testing. Of these, 80 customers have advanced to prototype testing and qualification on more than 135 different product applications. Thirty customers, including Dorel Industries, WNA, Alcoa, Genpak, Innoware, Penley, Solo, Cadaco, Jatco, Dentek, CSI-Cosmolab, Warner Tools, Handgards and Pace Industries, have commercialized and introduced 95 different bioplastic products using CERP’s resin. Some of these customers have signed multi-year supply contracts that call for annual volume increases. In January 2010, the Company extended its distribution agreement with A. Schulman to include all of Europe. A. Schulman is a leading international supplier of high-performance plastic compounds and resins with annual sales of $1.8 billion. A. Schulman is launching products incorporating CERP bioplastic resins for customers interested in more environmentally friendly solutions. Under the terms of the agreement, A. Schulman will distribute Cereplast Compostables® and Hybrids Resins® to converters and manufacturers across Europe. The combined efforts of A. Schulman and CERP should result in growth in the number of plastic processers using CERP bioplastic resins and increased revenues for both companies. Relocation of operations to Indiana facility As part of its restructuring, CERP has reduced its footprint in California from 85,000 sq. ft. to 3,000 sq. ft. by outsourcing some of its warehouse and logistics operations to a third-party supplier. The Company has also reduced employee headcount by more than 60%, cut salaries for senior management, and trimmed inventories to reduce storage costs. In January 2010, the Company announced plans to move all of its R&D and production to a much larger, state-of-the-art facility in Seymour, Indiana. CERP began work on this new facility in late 2007 but has delayed its opening due to the economic downturn. The Company will begin utilizing this facility for R&D and resin manufacturing in February 2010. The Indiana plant should allow CERP to drastically reduce utility, real estate, and other costs and better serve its clients, many of which are located in the Midwest and central U.S. The Company plans to discontinue operations at its Hawthorne manufacturing facility, which will reduce costs, and use its Seymour facility to supply current customers for a transitory period. Its long-term plan is to partner with a resin compounder to manufacture its proprietary resins.
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Analyst: Victor Sula, Ph.D. Report Update January 20th, 2010
Other Developments World Packaging Organization presents WorldStar Packaging Award for product incorporating Cereplast Compostables® The Company’s Brazilian partner, Bunge Alimentos, received a 2009 WorldStar Packaging Award for its biodegradable margarine tub, which is 100% based on Cereplast Compostables® resins. WorldStar Awards, presented by the World Packaging Organization, recognize innovations in state- of-the-art packaging and products that set new standards for international packaging excellence. By honoring Bunge Alimentos’ biodegradable margarine tub, the global plastic industry demonstrates a keen awareness of the importance of bioplastics in creating sustainable products and cost-effective alternatives to traditional petroleum-based plastics. CERP’s CEO appointed as SPI BioPlastics Council Chair The Company’s founder, chairman and CEO, Frederic Scheer, has been selected as 2010 BioPlastics Council Chair by the Society of the Plastics Industry. The BioPlastics Council is a special interest group focused on advancing the development and use of bioplastics. Scheer was nominated and unanimously approved as Chair because of his two decades of bioplastics experience. He is recognized as a pioneer in this evolving industry and was instrumental in the promotion of bioplastics at many prominent public events such as the Sydney 2000 Olympics. Scheer not only won the exclusive distributorship for plasticware and waste bags, but was also recognized by Greenpeace as making the 2000 Olympics the “Greenest Games Ever.” He continues to work to actively promote the use of bioresins and spread the word regarding the environmental benefits of sustainable plastics. Steps to list CERP shares on a national exchange CERP has filed a Certificate of Amendment to its Articles of Incorporation to implement a 1-for-40 reverse stock split, appointed an additional independent director and licensed CPA to its board, and hired a law firm specializing in securities law to act as its legal counsel. These actions are in preparation for an application to list CERP shares on either the NYSE-AMEX or NASDAQ. A national exchange listing would increase the Company’s visibility within the investment community and help build further public awareness of the advantages of green products and eco-friendly packaging materials.
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Analyst: Victor Sula, Ph.D. Report Update January 20th, 2010
Industry Overview Consulting firm Freedonia estimates that global demand for bioplastics will grow nearly 35% annually through 2013. U.S. demand for bioplastics was 200,000 metric tons in 2008 and is forecast to grow to 900,000 metric tons by 2013, creating a market valued at approximately $2.6 billion1. Growth will be fueled by a number of factors, including consumer demand for environmentally sustainable products, the development of bio-based feedstocks for commodity plastic resins and increasing restrictions on the use of nondegradable plastic products, particularly plastic bags. Global biodegradable plastics demand (metric tons)
Source: http://www.freedoniagroup.com/brochure/25xx/2548smwe.pdf
Average bioplastic prices are likely to continue to fall as a result of expanding capacity and greater production efficiencies, as well as price mixes attributable to increased use of lower priced resins. Bioplastic demand in North America was estimated at 58,000 metric tons in 2008 while demand in Western Europe was 77,000 metric tons and demand in Asia/Pacific was 58,000 tons. Aggregate demand in other parts of the world was 7,000 metric tons. CERP expects the U.S. bioplastics market to grow 10-fold over the next 10 years to $10 billion, compared to sales of $1 billion in 2007. The predicted boom will be fueled by demand from a variety of consumer goods markets, including the beauty industry, and may boost share for bioplastics to 30% of the total U.S. plastics market by 2020. According to Helmet Kaiser statistics, the European and Asian markets for bioplastics are likely to show growth patterns similar to the U.S., with bioplastics representing 31% and 28% respectively, of the total market for plastics in these regions by 2025. Although market growth will be positively impacted by new applications in the automotive and electronics industries, consumer packaging is likely to remain the largest bioplastics market. A significant trend driving this growth is increased interest in green products and eco-friendly packaging materials. The creation of one kilo of traditional polypropylene results in the creation of 3.15 kilos of CO2. When Cereplast 1. http://www.icis.com/blogs/green-chemicals/2009/11/us-bioplastics-reached-1bn-in.html
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Analyst: Victor Sula, Ph.D. Report Update January 20th, 2010
creates one kilo of bio-propylene, it creates only 1.40 kilos of CO2, resulting in substantially fewer greenhouse gases. Oil prices Demand for bioplastics is impacted by the price of oil since fossil fuels are consumed in making traditional plastics. CERP estimate bioplastics become cheaper than conventional plastics at oil prices exceeding $95 per barrel. Oil prices have fallen from highs of $145 per barrel in mid-2008 to under $50 per barrel in early 2009. Prices rose during the summer of 2009, in part because of stronger-than-anticipated global economic activity, primarily in Asia. Market sentiment continues to reflect expectations of an economic recovery and a future rebound in oil demand that outweighs weak current oil consumption and high inventory levels. Continued production restraint by members of the Organization of the Petroleum Exporting Countries (OPEC) and unrest in Iran and Nigeria, respectively OPEC’s second- and seventh-biggest oil producers, are also supporting prices2. Oil is trading above $81 a barrel in early 2010, almost double what it fetched in early 2009. Prices have been propped up by a weak dollar and unusually cold weather in many parts of the northern hemisphere. The U.S. may be using less crude, but China and other developing nations are using more to fuel their growing manufacturing industries. Foreign demand could push prices higher in the U.S. as well.
Source: www.wtrg.com/daily/crudeoilprice.html
The U.S. Energy Information Administration expects the price of benchmark West Texas Intermediate (WTI) crude oil to average around $80 and $84 per barrel in 2010 and 2011, respectively3. 2. www.eia.doe.gov/emeu/steo/pub/contents.html 3. http://www.eia.doe.gov/emeu/steo/pub/contents.html
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Analyst: Victor Sula, Ph.D. Report Update January 20th, 2010
Industry Overview Revenue The Company experienced a period of rapid growth following its public listing, but reported a sales slowdown in recent quarters because of the economic downturn. Adverse business conditions were the major reason for a sequential decline in the Company’s revenues that began in Q1 09. Net revenues, $ thousands
Source: SEC Filings
Third-quarter results The Company’s net sales declined 51.7% to $681k for the three months ended September 30, 2009, compared to the three months ended September 30, 2008. The sales drop is attributable to reduced consumption of bioplastic resins as customers delayed orders and postponed launches of their own commercial applications for CERP resins due to the general economic downturn. The impact of reduced orders by existing customers was partially offset by sales to new and significant customers under long-term contracts finalized during Q1 09 and Q2 09, including Dorel Juvenile Group and Georgia-Pacific. The full benefit of these new sales contracts should be reflected in Q1 10 results. Solo Cup, a large food service ware manufacturer, introduced a new “compostable” cup made with CERP resin in its BARE branded line. The cups are sold at Target stores across the U.S.
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Analyst: Victor Sula, Ph.D. Report Update January 20th, 2010
Income statement, $
Net sales Cost of sales Gross profit Depreciation and amortization Marketing expense Professional fees Rent expense Research and development Salaries wages Stock based compensation Other operating expenses Total operating expenses Operating income Total other income Net loss Diluted EPS
Q3 2008
Q3 2009
% Chg.
1,409,867 1,470,045 (60,178) 3,013,753 141,879 314,765 239,257 194,330 267,589 926,643 352,762 576,528 (3,073,931) (1,297) (3,075,228) -0.01
680,964 577,217 103,747 958,079 136,188 59,434 195,823 51,027 54,183 277,949 (199,841) 383,316 (854,332) (134,906) (989,238) 0.00
-51.7% -60.7% n/m -68.2% -4.0% -81.1% -18.2% -73.7% -79.8% -70.0% n/m -33.5% n/m n/m n/m n/m
9 months 2008
9 months 2009
3,355,495 3,376,455 (20,960) 10,182,160 407,626 995,125 795,571 722,315 813,889 2,490,129 2,229,733 1,727,772 (10,203,120) 102,117 (10,101,003) -0.04
2,137,808 1,858,870 278,938 4,348,701 408,277 310,350 533,707 509,969 257,972 1,413,796 (17,324) 931,954 (4,069,763) (162,267) (4,232,030) -0.01
% Chg. -36.3% -44.9% n/m -57.3% 0.2% -68.8% -32.9% -29.4% -68.3% -43.2% n/m -46.1% n/m n/m n/m n/m
Source: SEC Filings
Net losses declined to $989k in Q3 09 from $3.1 million one year earlier because of expense reductions associated with CERP’s restructuring and adjustments to stock- based compensation expense to reflect actual vs. estimated forfeiture of stock options. Liquidity The Company had cash and equivalents of $410k at September 30, 2009, and negative working capital of $142k. The cash decline reflects spending on operating activities partially offset by funds received through private placements and an equity investment agreement with Cumorah Capital. Balance sheet, $
Total Current Assets, including Cash and equivalents Net Property and Equipment Total Other Assets Total Assets Total Current Liabilities Total Long-Term Liabilities Total Shareholders Equity, including Retained Earnings
12/31/08
6/30/09
9/30/09
2,781,439 $501,699 4,596,714 266,856 $7,645,009
2,643,596 $384,898 4,301,281 278,656 $7,223,533
2,474,261 $410,009 4,042,394 227,592 $6,744,247
2,242,107 40,045 5,362,857 (29,372,020)
2,970,111 13,718 4,239,704 (32,614,812)
2,616,479 11,334 4,116,434 -33,604,050
Source: SEC Filings
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Analyst: Victor Sula, Ph.D. Report Update January 20th, 2010
New funding to support algae program In December 2009, CERP closed a private placement of its shares to accredited investors and qualified institutional buyers that generated proceeds of $2.2 million. The funds will be used for work in algae and other R&D initiatives. The financing strengthens CERP’s balance sheet and increases shareholder equity.
Analyst Summary Since our last update, CERP’s share price has increased 37% from $0.08 in October 2009 to $0.11 in January 2010. We think there are several major reasons for share price appreciation: the new Algae to plastic development announced by the Company in October, new funding to support this program, the announcement of preparations to list CERP shares on a senior exchange (NASDAQ or NYSE-AMEX), higher oil prices, which make bioplastics more cost-competitive, and finally CERP’s restructuring, which has slowed the Company’s cash burn and refocused its resources on product design and development. While Q3 09 revenues declined year-over-year, reductions in orders from existing customers were partially offset by sales to new customers under long-term contracts. The Company expects the full benefit of these new sales contracts to be reflected in Q 1 10 results. Solo Cup has introduced a new “compostable” cup made with CERP resin that is being sold in Target stores across the U.S. Despite current challenges presented by the economic downturn, the growth potential for bioplastics remains enormous. Global demand for bioplastics is forecast to grow nearly 35% per year through 2013. CERP anticipates ten-fold growth in the U.S. bioplastics market over the next 10 years and bioplastic annual sales exceeding $10 billion, bioplastics may represent 30% of the total U.S. plastics market by 2020. In addition, the development of algae-based resins represents an outstanding growth opportunity for the Company and could further reduce the cost of bioplastics as well as the industry’s reliance on fossil fuel. CERP is talking with chemical conversion companies about partnering with it to convert algae biomass into viable monomers for further conversion into biopolymers. This step could open the door for a major switch from traditional plastics to bioplastic. The cost structure is appealing, CERP is a clear leader in this field and such a breakthrough could position the Company far ahead of its competitors. Taking all of this into account, we are confident that CERP can resume top-line growth in Q1 10. The Company’s bioresins are ideal for brand owners and converters interested in enhancing sustainability and reducing overall costs by substituting bioplastics for traditional petroleum-based plastics. We reiterate our Speculative Buy rating for Cereplast Inc. and our $1.12 long-term price target.
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Analyst: Victor Sula, Ph.D. Report Update January 20th, 2010
Disclaimer DO NOT BASE ANY INVESTMENT DECISION UPON ANY MATERIALS FOUND ON THIS REPORT. We are not registered as a securities broker-dealer or an investment adviser either with the U.S. Securities and Exchange Commission (the “SEC”) or with any state securities regulatory authority. We are neither licensed nor qualified to provide investment advice. The information contained in our report should be viewed as commercial advertisement and is not intended to be investment advice. The report is not provided to any particular individual with a view toward their individual circumstances. The information contained in our report is not an offer to buy or sell securities. We distribute opinions, comments and information free of charge exclusively to individuals who wish to receive them. Our newsletter and website have been prepared for informational purposes only and are not intended to be used as a complete source of information on any particular company. 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This compensation constitutes a conflict of interest as to our ability to remain objective in our communication regarding the profiled companies. BlueWave Advisors, LLC, and/or its affiliated will hold, buy, and sell securities in the companies profiled. When compensated in shares, all readers should be aware that is our policy to liquidate all shares immediately. We reserve the right to buy or sell the shares of any the companies mentioned in any materials we produce at any time. This compensation constitutes a conflict of interest as to our ability to remain objective in our communication regarding the profiled companies. BeaconEquity is a Web site wholly owned by BlueWave Advisors, which has been compensated one million five hundred restricted rule 144 shares from CERP, in addition to previous compensation of five thousand dollars from CERP for this e-mail distribution and fifteen-thousand dollars by a non-controlling third party for previous contracts that have expired done, as a marketing budget to manage a comprehensive investor awareness program including the creation and distribution of this report as well as other investor relations efforts. Information contained in our report will contain “forward looking statements” as defined under Section 27A of the Securities Act of 1933 and Section 21B of the Securities Exchange Act of 1934. Subscribers are cautioned not to place undue reliance upon these forward looking statements. These forward looking statements are subject to a number of known and unknown risks and uncertainties outside of our control that could cause actual operations or results to differ materially from those anticipated. Factors that could affect performance include, but are not limited to, those factors that are discussed in each profiled company’s most recent reports or registration statements filed with the SEC. You should consider these factors in evaluating the forward looking statements included in the report and not place undue reliance upon such statements. We are committed to providing factual information on the companies that are profiled. However, we do not provide any assurance as to the accuracy or completeness of the information provided, including information regarding a profiled company’s plans or ability to effect any planned or proposed actions. We have no first-hand knowledge of any profiled company’s operations and therefore cannot comment on their capabilities, intent, resources, nor experience and we make no attempt to do so. Statistical information, dollar amounts, and market size data was provided by the subject company and related sources which we believe to be reliable. To the fullest extent of the law, we will not be liable to any person or entity for the quality, accuracy, completeness, reliability, or timeliness of the information provided in the report, or for any direct, indirect, consequential, incidental, special or punitive damages that may arise out of the use of information we provide to any person or entity (including, but not limited to, lost profits, loss of opportunities, trading losses, and damages that may result from any inaccuracy or incompleteness of this information). We encourage you to invest carefully and read investment information available at the websites of the SEC at http://www.sec.gov and FINRA at http://www. finra.org. All decisions are made solely by the analyst and independent of outside parties or influence. I, Victor Sula, Ph.D, the author of this report, certify that the material and views presented herein represent my personal opinion regarding the content and securities included in this report. In no way has my opinion been influenced by outside parties, nor has my compensation been either directly or indirectly tied to the performance of any security listed. I certify that I do not currently own, nor will own and shares or securities in any of the companies featured in this report. Victor Sula, Ph.D. - Senior Analyst Victor Sula, Ph.D. has held the position of Senior Analyst with several independent investment research firms since 2004. Prior to 2004, Mr. Sula held Senior Financial Consultant positions within the World Bank sponsored Agency for Restructuring and Enterprise Assistance and TACIS sponsored Center for Productivity and Competitiveness of Moldova, where he was involved in corporate reorganization and liquidation. He is also employed as Associate Professor at the Academy of Economic Studies of Moldova. Mr. Sula earned his Ph.D. degree in 2001 and bachelor’s degree in Finance in 1997 from the Academy of Economic Studies of Moldova. Mr. Sula is currently a level III candidate in the CFA program.
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