Analyst: Victor Sula, Ph.D. Report Update October 22th, 2009
10/21/09
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 $0.08 $1.12 Speculative Buy 337.89 Million $23.38 Million 501,265
Source: Yahoo Finance, Analyst Estimates
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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 Introduction 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 markets two families of bio-based resins: Cereplast Compostables™ and Cereplast Hybrid Resins™. Cereplast Compostables Resins® are renewable, ecologicallysound substitutes for petroleum-based plastics designed for use in single-use disposables and packaging applications. The Company 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. CERP commercially introduced the Compostables line in November 2006. Cereplast Hybrid Resins® replace up to 50% of the petroleum content in conventional plastics with bio-based materials such as industrial starches sourced from plants. The Hybrid Resin line is designed to offer properties comparable 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 brand owners and converters looking to partially replace petroleum-based resins in durable goods applications. Hybrid Resins have applications in a wide range of markets, including automotive, consumer goods, consumer electronics, medical, packaging, and construction. The Company commercially introduced the first grade of Hybrid Resin,
Cereplast Inc. (OTCBB: CERP)
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Analyst: Victor Sula, Ph.D. Report Update October 22th, 2009
Hybrid 150, at the end of 2007. CERP currently offer two commercial grades in this product line. Since CERP’s resins replace a significant amount of petroleum-based content with starches, costs are not as influenced by volatile fossil fuel prices. Also, Cereplast resin manufacturing requires less heat than traditional plastics manufacturing, further reducing manufacturing costs. In addition, CERP’s resins offer comparable or superior performance and environmental benefits resulting from reduced petroleum consumption.
New Technology for Transforming Algae into Bioplastics On October 20, 2009 CERP announced its new technology for transforming algae into bioplastics. The Company plans to launch a new family of algae-based resins which will complement its existing line of Compostables® and Hybrid ®resins. Cereplast uses renewable material such as starches from corn, tapioca, wheat and potatoes and Ingeo® PLA as feedstock to produce bioplastics. The Company estimates its algae-based resins could replace 50% or more of the petroleum content used in traditional plastic resins, resulting in significant cost savings, while become more environmentally sustainable and reducing the industry’s reliance on oil. CERP is still in the development phase with this product line, but its research has yielded promising results and management anticipates launching its new family of algae-based resins in the coming months. While the National Renewable Energy Laboratory had conducted research using algae as a fuel source between 1978 and 1996, interest tapered off because algae couldn’t compete with $20-a-barrel oil. More recently, rising oil prices and depleting fossil fuel resources have rekindled interest in algae research. In 2008, more than $300 million was invested in algae fuel-based public/ private partnerships, private algae companies, and first-stage commercial projects. Solazyme Inc., a partner of Chevron Corp., has raised about $25 million in venture capital, debt and federal grants for its process using fermentation to speed the growth of algae. Another company focused on producing algae-based oil, LiveFuels Inc., has raised $10 million since it was founded in 2006. Shell Oil, which is already the world’s largest distributor of biofuels, has been stepping up its investments in efforts to develop next-generation biofuels from marine algae. The renewable energy sector recognizes that algae represent one of the most viable feedstock for producing fuel and could potentially replace soybean, rapeseed and corn as the main feedstock for biofuel production. Algaeto-biofuel production is becoming a reality and we expect to see increasing production of algae or algae-biomass products within the next five years. CERP’s new technology comes at the same time interest in algae production is growing, as evidenced by Exxon’s $600 million investment in Synthetic Genomics and British Petroleum’s $10 million investment in Martek Biosciences.
Operations Realignment In May 2009, CERP announced a new strategic plan that better leverages its proprietary product development capabilities and marketing strengths. To accelerate growth, the Company plans to focus on product development and marketing the core product strengths that position CERP as a leader in proprietary bioplastics. As part of the realignment, the Company is reducing costs. Expense reductions began in Q2 2009 and will likely continue through the remainder of 2009. During Q2 2009 the Company reduced its footprint in Southern California from 85,000 sq. ft. to 25,000 sq. ft. by outsourcing some of its warehouse space to a third-party logistics company; cutting employee headcount from 70 to 25; cutting salaries for senior management and trimming inventories to reduce storage costs.
Cereplast Inc. (OTCBB: CERP)
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Analyst: Victor Sula, Ph.D. Report Update October 22th, 2009
Operations Realignment Management is implemented growth initiatives that improve the Company’s position in the current challenging economic environment. Strategic partnership to distribute bio-based resins in North America The Company formed a strategic partnership with Chase Plastics to distribute its bio-based resins in North America. Chase Plastics is one of North America’s fastest growing, full-service specialty engineering thermoplastic distributors, serving plastic processors in the United States, Canada, Mexico, and Central America. Chase operates more than 20 warehouses across North America and is able to carry and stock Cereplast’s bio-based resins for next day shipping. This agreement signals CERP’s intention to broaden the distribution of its bio-based resins to North American plastics processors. New patent for hybrid resins The Company has been granted a U.S. patent for its breakthrough Cereplast Hybrid Resins®, thus adding to its growing intellectual property portfolio. At present, Cereplast holds a total of 48 patents and patent applications in the United States and abroad covering two families of resins: Cereplast Compostables® and Cereplast Hybrid Resins®. Expansion into Brazil’s bio-plastics market The Company is increasing its penetration of the Brazilian market, which has over 200 million consumers. Bunge Alimentos, a Brazilian subsidiary of $49.5 billion in sales Bunge, Ltd, is rolling out nationwide with its Cyclus® line of containers made from Cereplast Compostables®. In June, 2009 Bunge Alimentos received the Embanews Award for the best renewable and biodegradable packaging. The thermo-formed packaging used for the Cyclus margarine tub is made entirely from Cereplast Compostables resins. Cereplast’s Brazilian distributor, IraPlastKrest, is also expanding distribution of their brand of “Mr. Green” items, which contain Cereplast Compostables resins. Success at a major industry trade show The Company attended NPE2009, the International Plastics Showcase in July and came away from this trade show with an impressive number of new business prospects. The event is produced by the Society of the Plastics Industry, Inc. and co-located with the Society of Plastics Engineers’ ANTEC 2009. It is the world’s largest plastics trade show and attracts in excess of 45,000 visitors. Despite the effects of the economic downturn, CERP reported strong interest in its biobased plastics and serious inquiries from a very large number of domestic and international plastic converters, brand-owners and designers.
Cereplast Inc. (OTCBB: CERP)
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Analyst: Victor Sula, Ph.D. Report Update October 22th, 2009
Financial Analysis Revenue The Company experienced a period of rapid growth following its public listing, but has experienced a slowdown in sales in recent months because of the economic downturn. Adverse business conditions were the major reason for a sequential decline in the Company’s revenues in Q4 2008 and Q1 2009. However, Cereplast’s revenues rebounded in Q2 2009 and we now expect the Company to resume its growth trajectory as a result of new customer contracts and the imminent launch of several new products. Net revenues, $ thousands
Source: SEC Filings
Income statement Net sales declined 15% year-over-year to $896,267 in Q2 2009. The sales decrease is attributable to lower sales volume of bioplastic resins as customers delayed orders and the launch of new products containing CERP resins. The decline in orders from existing customers was partially offset by sales to new customers under long-term contracts finalized during the first half of 2009, including Dorel Juvenile Group and Georgia-Pacific. The full benefit of these new contracts should become apparent in the second half of 2009 and early 2010.
Cereplast Inc. (OTCBB: CERP)
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Analyst: Victor Sula, Ph.D. Report Update October 22th, 2009
Income Statement, $ Q2 2008 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
1,054,398 1,127,621 (73,223) 136,283 284,788 210,274 263,343 389,202 833,712 364,190 649,960 3,131,752 (3,204,975) 23,609 (3,181,366) ($0.012)
2008
896,267 818,846 77,421 136,179 92,111 189,585 217,247 62,579 387,527 (166,738) 217,805 1,136,295 (1,058,874) 9,637 (1,049,237) ($0.003)
-15.0% -27.4% n/m -0.1% -67.7% -9.8% -17.5% -83.9% -53.5% n/m -66.5% -63.7% n/m -59.2% n/m n/m
1,945,628 1,906,410 39,218 265,747 680,360 556,314 527,985 546,300 1,563,486 1,876,971 1,151,244 7,168,407 (7,129,189) 103,414 (7,025,775) ($0.027)
% chg 1,456,844 1,281,653 175,191 272,089 250,916 337,884 458,940 203,789 1,135,847 182,517 548,639 3,390,621 (3,215,430) (27,362) (3,242,792) ($0.011)
-25.1% -32.8% 346.7% 2.4% -63.1% -39.3% -13.1% -62.7% -27.4% -90.3% -52.3% -52.7% n/m -126.5% n/m n/m
Source: SEC Filings
Despite lower revenues, Cereplast’s net loss fell 67%, year-over-year to $1,049,237 in Q2 2009. Reduced net losses are attributable to lower operating expenses resulting from downsizing of the Company’s workforce, better leveraging of staff resources and improved processes and cost controls. The Company recently introduced its Cereplast Hybrid Resins product line and expects revenues to increase in the second half of 2009. Liquidity The Company had cash and equivalents of $384,898 at June 30, 2009 and negative working capital of $326,515. The decline in cash reflects spending on operating activities partially offset by funds received through private placements and an equity investment agreement with Cumorah Capital. Balance sheet, $ thousands
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
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
2,242,107 40,045 5,362,857 (29,372,020)
2,970,111 13,718 4,239,704 (32,614,812)
Source: SEC Filings
Cereplast Inc. (OTCBB: CERP)
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Analyst: Victor Sula, Ph.D. Report Update October 22th, 2009
Funding from European group led by major Swedish bank Cereplast has received funding from a European group of investors led by a major Swedish bank. The funds will be used to implement the Company’s growth initiatives and finance manufacturing supply agreements for major new customers such as Georgia-Pacific and Dorel. The additional capital allows the Company to move forward aggressively with extending distribution of its bioplastics product offerings despite a challenging economic environment.
Cost Comparison: Bioplastic vs. Traditional According to Cereplast, at present the cost of raw materials are more or less at parity, which means that the Company can manufacture bioplastic resins at about the same price as traditional plastic resins. However, massive economies of scale in the traditional plastics industry make petroleum-based plastics a cheaper option for the end-user. The traditional plastic industry manufactures about one trillion pounds of resin annually. In contrast, the total output of the bioplastics industry is only about 500 million pounds. As a result, bioplastics continue to be more expensive. The price of traditional plastics depends on the application and prevailing oil prices. At present, oil costs approximately $70 per barrel and the price of traditional plastic resin is approximately $0.70 per pound. Prices for Cereplast’s bioplastic resin range between $0.85 and $1.30 per pound, or some 15% to 45% higher than petroleum-based plastics. The cost disparity is greater today than it was a few months ago when oil prices were approaching $150 a barrel. At oil prices that high, traditional plastics cost as much or more than bioplastics. There have been positive signs of a global economic recovery in the first half of 2009. According to the Energy Information Administration, oil prices hovered in the $67-to-$74-per-barrel range in August as expectations of an economic recovery and higher future consumption were weighed against weak current demand and high inventories. More recently, oil rose rallied to a 10-month high near $75 a barrel on positive economic news and economists forecast oil prices will average around $72 per barrel in 2010.
Analyst Summary Since our initial report, Cereplast’s share price has declined 67% to around eight cents per share. We think the major reasons for the price decline are slower-than-expected revenue growth, the general economic downturn, poor liquidity and dilution to existing shareholders from equity sales. Although the Company’s revenues fell 15% year-over-year in Q2 2009, Cereplast halted the sequential decline by reporting 59% growth and revenues of $0.90 million in Q2 2009. In the 2009 second half, the Company anticipates new customer contracts, expansion of existing agreements particularly with Dorel Juvenile Group and GeorgiaPacific, new distribution agreements that target North America and Brazil, new product launches and new applications for its resins that will fuel revenue growth. Despite current challenges, the growth potential for bioplastics products is enormous. Cereplast’s new licensing agreements are enabling it to place contracts with large packaging companies, which require enormous quantities of resin in a short time, without significantly increasing capital spending. In addition, a new patent further strengthens Cereplast’s intellectual property portfolio, by protecting the composition formulation for Cereplast’s Cereplast Inc. (OTCBB: CERP)
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Analyst: Victor Sula, Ph.D. Report Update October 22th, 2009
Hybrid Resins® line. CERP’s new technology for producing algae-based resins may position the Company as a leader in this exciting new space by further reducing bioplastics’ costs and reducing the plastics industry’s reliance on petroleum. Cereplast has begun discussions with chemical conversion companies which could potentially convert the algae biomass into viable monomers for further processing into biopolymers. There is no doubt that bioplastics are the future of the plastics industry and we anticipate that bioplastics applications will continue to expand. Cereplast’s resin products are ideal for nearly all brand owners and converters interested in enhancing sustainability and better managing the costs of their processes by substituting bioplastics for traditional petroleum-based plastics. Accordingly, 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 October 22th, 2009
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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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