Small Cap Profits Exclusive CEO Interview's

www.SmallCapProfits.com Exclusive CEO Interview (NASDAQ: CERP)

Cereplast (NASDAQ: CERP)

Participants

• Dominick Bianco
• Frederic Scheer

Dominick Bianco:This is Dominick Bianco, Senior Financial Analyst of SmallCapProfits.com. I am here today with the CEO of Cereplast, Frederic Scheer. Frederic, thank you for joining us today. Before we get started, would you give our subscribers some background information about Cereplast and a little bit about your experience?
Frederic Scheer:Sure. First of all, thank you for inviting us and Cereplast. My name is Frederic Scheer and I am the CEO and Chairman of the Board of Cereplast. I have been in the business of bioplastics for over 20 years, at a time where clearly the concept of having alternative plastic and alternative energy was something that nobody was following. So I would say in a way that I was a visionary or precursor. I worked on a lot of potential applications for bioplastics in a lot of events such as the Salt Lake City Olympics. I have worked with Coca Cola and a lot of large companies with an interest in the use of bioplastics. But I would say the most successful story that I had in bioplastic was a creation of an organization called the BPI, which stands for the Biodegradable Product Institute. The BPI is a non-profit association that is policing the terms biodegradable, compostable, and biobased. I felt that when I studied to be involved in the world of bioplastics, it was necessary to have an organization that would basically define those terms. Very often those terms are used and people don’t put a lot of substance behind it. I can tell you that 20 years ago everything was biodegradable if it was allowing people to sell products. Today, I think that because of the work that has been done, the terms definitely have scientific support. This is the work I did at BPI. Moving on, I work with the SPI, which is the Society of Plastic Industry. In fact I am the Chair of the SPI Bioplastic Council, which works also with trying to define those terms and trying, in fact, to expand the world of bioplastic at large. Finally, it is 9 years ago almost to the day that we created Cereplast. Cereplast is a NASDAQ company now and we’ve been going through a lot of different things to get where we are. But there is one word that I would like to say, which is that the time is right now for bioplastics. The time is right because people do realize the risk of having a society that is based only on traditional plastics and traditional chemicals. I think people realize, especially with what happened in the Gulf of Mexico, that it makes sense to have an alternative. In addition to this I will say that if you look at the price of what we have to offer, it is very competitive with traditional oil based resin. Therefore, it makes more sense for people to use it.
Dominick Bianco: Could you tell us the major differences between bioplastic and traditional plastic, and if there are any negatives, as well as what your major objectives are in penetrating the marketplace?
Frederic Scheer: The main difference between bioplastic and any kind of traditional resin is the following: the feedstock, which is being used to create traditional plastics or traditional chemicals is one single feedstock. That single feedstock is petroleum - oil. Plastics are made of oil. Some plastics are made from natural gas, but they represent less than 15%. The bulk of the feedstock is oil. So at a time when the price of oil is very low, it’s ok. But when the price of oil starts to go up, that creates problems. When you look at bioplastics, bioplastics are made up of renewable resources. Currently, bioplastics are working prominently from agricultural based resources, such as starches, cornstarch, tapioca starch, potato starch, wheat starch, rice starches, etc. Here at Cereplast, we are also working with other biomass materials, such as flex, wood chips, and more recently algae biomass. This is the main difference between a traditional and renewable plastic: one is made from oil while the latter from renewable resources. The plastic industry has been the most successful industry in the past 50 years. As a matter of fact, in1950, the traditional plastic industry was about $10 billion, and today it’s $2.5 trillion. Clearly, that’s a very significant growth that even the software industry has not been able to copy. What I believe is going to happen in the next few years is that the bioplastic industry will substitute a substantial fraction of the traditional plastic industry. Why? Because of one single reason – if you look at the growth of the plastic industry in the 20th century, the growth was fueled, if I may say, by one point – the cost of oil was extremely low. It was anywhere from $.50-$6/barrel. It is only in the early 2000s that the price of oil started to go up. Knowing that the supply and demand are clearly going to become in complete opposite directions, now it’s going to be a problem. First of all, the supply. The supply of oil will clearly become more problematic. Not that we’re running out of oil - I don’t think so. We need to have access to oil in situations that are much more complex than it was 20, 30 or 40 years ago. The best example is what is happening in the Gulf of Mexico. The second point is the demand. The demand on oil will continue to grow, because new countries are coming to a level of development which will require the use of more plastic. Because of this equation, what is going to happen is the price of oil and chemicals will go up. Clearly, what we have to offer as an alternative to traditional resin will make more and more sense for people to use. This is why I sit here in Cereplast in a very comfortable situation. I am looking at a TV set right now, which is showing me the price of oil going up almost every day - $76, $77… and the price is going up. I know that for us, the price difference between the product that we offer and traditional resin is going down by the day. So, you wait another 2-3 years when the price of oil will be well above $100, and at that time, people and chemical companies will have no other choice than to use alternative feedstock. This is when we will be in a very strong position.
Dominick Bianco: How can you assure yourself you will find the appropriate inventories of feedstock?
Frederic Scheer:There is no question and no problem there. Let me tell you a little bit about it. The feedstock that we use at Cereplast is what we call Industrial Native Starches – Industrial Starch. The larger user of Industrial Starch in our country is the paper industry. About 15 years ago, the paper industry was using somewhere around 18 billion pounds of starch every year, primarily corn starch. Today, the paper industry, due to the development of media, electronics, and so on, they only use 11 billion pounds. This has created a depressed market of industrial starches. Because of this, there is plenty of feedstock down the road. So we have no issue there – 3-5 years. What I can see however, is if the bioplastic industry is extremely successful as I am expecting, we will eventually not run out of it, but start to put pressure on the whole agricultural supply chain. It is the reason why I was mentioning earlier that we are working on alternative feedstock such as biomass, woodchips, or the algae, which I personally believe will be one of the most exciting developments we will have in the years to come.
Dominick Bianco: So I assume that if the product does not have petroleum base, bisphenol a that leaks out of plastic, will not be an issue in your product?
Frederic Scheer: You are absolutely right. It is not an issue because we have no BPAs inside. The product is extremely safe, as a matter of fact, because frankly you could eat them. They are made up of agricultural resource base. They present absolutely no risk whatsoever to human contact or human consumption. So it is a very safe product. I live in California and people are very sensitive to young children. Several counties in Northern California around San Francisco have banned the use of certain plastics because of the problem of BPAs inside. Well, it is not a problem with our resin. There is absolutely no BPA inside.
Dominick Bianco: Has your company received any endorsements for your products?
Frederic Scheer:Well, we have significant endorsements from organizations like the BPI, which I had mentioned before, from ASTM, from a European organization called Dincerco. They are definitely guaranteeing the quality of the product and that the product is absolutely clean. In fact, the products are all FDA approved. The U.S. Department of Agriculture is controlling and has controlled several times when our product has gone to a compost site where they basically biodegrade. There is absolutely no chemical coming out of it. Each time, the product came out very well with absolutely no chemical leakage whatsoever. It’s fairly easy – we’re not using them so they are not inside.
Dominick Bianco: How has the economic downturn affected your company?
Frederic Scheer:That’s a good question. I look at what is happening right now and I am trying to be positive. I believe we are not in an economic downturn. I believe that 2008 and 2009 were very difficult years. But I am hopeful that we are not in an economic downturn. I am hopeful that the growth is taking a breather and that we will go back into growth. I will say with respect to our product that 2008 and 2009 were difficult years because of a culmination of reasons. First of all, we saw the price of oil basically collapse at $35/barrel for a few days and then climb back up. Clearly, the day when the price of oil went back to $35/barrel, the economy saw bioplastics as marginal. The second issue is with respect to the fact that credit for small companies has disappeared from the map due to the economic downturn. Clearly, this has created some problems. I will say that in 2010, Cereplast has been fairly successful. We have been able to secure some serious financing in the company. The company went to NASDAQ recently and successfully. We closed a large financing in June of this year very successfully. We find we have not been affected by what is going on right now. What I am hopeful for, as what I mentioned earlier, that when we see the volatility of the market, it’s making everybody nervous. I personally believe we will see good things happening. We have a full backlog of orders for 2010. We have not received any information from our clients telling us that they are not going to go forward. So, we feel very comfortable about the current economy right now. We have been creating new green jobs. We have a good handle on the current economy right now. I really wish we had much less volatility, but so far we have not been damaged or have seen any kind of issues with respect to the current state of the economy. Clearly, I would prefer 5% growth and much less unemployment, but it’s the way it is.
Dominick Bianco: You said you just completed financing. Is that the most recent financing where you closed at $7.5 million?
Frederic Scheer:Yes. This is correct.
Dominick Bianco: Was that done through a broker dealer?
Frederic Scheer: It was done through an investment bank –Ladenburg Thalman. We did a Register Direct offering at a price of $3.50 which is currently above market. It was a common stock deal which is ideal for the company.
Dominick Bianco: Does your company qualify for any Federal Green Initiatives?
Frederic Scheer:Yes we do but we have not received any so far, which is a pity. I think that a lot of the Administration and a lot of the grants that have been created are really targeting energy more than alternative plastics. If you are in the solar or wind business you are entitled to get some of that financing. When you are in the alternative plastics, those kinds of grants are not really available. We are currently and we did file a demand for a grant for the algae development that we have. We feel fairly comfortable that we will be able to get something. We are in the process of receiving grants from the state of Indiana because we have a large plant located in a depressed area there. We are also a part of the Green Procurement Policy of the U.S. Department of Agriculture. But in terms of receiving funding from the government, we have not been part of that unfortunately.
Dominick Bianco: How many shares are issued and outstanding?
Frederic Scheer:The company currently has a little bit above 12 million shares of which about 40% are institutional investors and management. Management has about 26% and institutional investors have a little over 14%. The rest is in the public.
Dominick Bianco: How many shares on a fully diluted basis?
Frederic Scheer:In the recent financing, we issued 1,000,000 warrant. So on a fully diluted basis we have about 13 million shares.
Dominick Bianco: As you said, 26% is owned by senior management and directors?
Frederic Scheer:Correct.
Dominick Bianco: With the new finance - $7.5 million, what were the use of proceeds?
Frederic Scheer:Up to 80% will be used for working capital. On the horizon for 2010, we have about $8-10 million worth of orders, and we need to basically finance the orders. So I would say 80% of that money will be used to finance those orders. The rest will be to basically cover deficit, to take care of a little bit of CAPEX and less than one-half million dollars in marketing and sales.
Dominick Bianco: So each $10 million in revenue in 2010-2011 would represent revenue growth? Last year I think you did $2.7 million.
Frederic Scheer:Yes. Last year we were about $3 million. This year we are expecting $8-10 million. And the following year, based on the current contracts, we are looking at about $25-30 million in sales. So there is no question that there has been a very significant growth. We really hope we’re not going to go back into another financial downturn, because if we do then there will be an impact – not much in 2010 but perhaps in 2011.
Dominick Bianco: When do you expect to turn profitable?
Frederic Scheer:We are expecting to break even by the fourth quarter of this year. We are looking to getting into real profitability by next year. By 2011 we should be able to show a nice profit.
Dominick Bianco: What assumptions are you making, then, as far as the economic climate goes? Are those just orders in hand or are you assuming the economic climate is going to be conducive to business?
Frederic Scheer:It is basically based on orders in hand. I have as of now about $7.5 million worth of contracts that are several year contracts. Those contracts are calling $25 million in sales for the following year.
Dominick Bianco: Who are some of your larger clients?
Frederic Scheer: Georgia Pacific, Dixie, who buys a resin used to make hot cups for coffee. Dorel is another company that makes infant furniture like step stools, baby baths and car seats. We have companies like Solo cup, Dannone, Bunge, which makes a dairy product that distributes their product in a container using our resin. So very large names are using our resins.
Dominick Bianco: Being the CEO of a NASDAQ company, what challenges have you faced that were unexpected?
Frederic Scheer:To be honest with you, not really. The company has been public since 2005. As you know, Sarbanes-Oxley was supposed to be applied to. So we were ready. Clearly, there is more regulation on NASDAQ and this is requiring different talents to make sure we are doing everything properly. So it might be a little bit more expensive to run a NASDAQ company, but I would say nothing out of the ordinary happened that wasn’t expected. We’re just going with it. We realize that we have 10,000 shareholders and we need to make sure everything is done properly. So we are very particular with respect to all internal controlling, procedures and regulations, etc. The only thing I may not like is spending a little bit more money on lawyers and accountants than I would like. But, for Cereplast to move to NASDAQ, it was a very good move in the sense that it will bring us much more credibility with our clients and visibility on Wallstreet.
Dominick Bianco: How much time is spent being an Administrator of a publicly traded company as opposed to running a business?
Frederic Scheer:We have good organization so I have people to help me run a lot of things. I try to spend less time on administrative aspects of the company, but I try to spend 25% of my time of those types of things. The key thing for us now is making sure that we have the right people in terms of personnel – people who are going to have that passion you need to have when you work in an environmental company; people who will run for the company, and people who are at the same time going to be conscious of all the regulatory aspects of it. So I would say about 25% of that. To be honest with you, in the past year I spent a lot of time on raising money for the company because it was the name of the game. The main issue was cutting costs and putting money into the company for its survival. Now that there is enough cash in our bank account, I really try to dedicate much more time to sales and marketing and advertising than in raising money.
Dominick Bianco: Recently you retained the company MicroStockProfit.com. They issued stock alerts regarding your company. Is that done through Blue Wave Advisors?
Frederic Scheer: I am not really aware of that. Those are companies doing things unsolicited by us and they are not retained by us. We have an investor relation company called Earth Communication and they are handling all our work. But, we do not retain the company you just mentioned.
Dominick Bianco: You have been upgraded by some research companies like Ardour Capital.
Frederic Scheer:Yes. Ardour Capital is an investment bank on Wall Street that contacted us and talk to us every quarter to find out where we are, what we’re doing, and so on. They basically upgraded us which is good. I’ve been talking to their Senior Analyst for several years. One of his major concerns was credibility and visibility of the company. The fact that we went on to NASDAQ, raised money and got money in the bank made him feel much more confident about the outcome of the company.
Dominick Bianco: Have any other analysts reached out to you since you’ve been listed on NASDAQ?
Frederic Scheer:Yes. We have been talking to several companies. I know we will be picked up by at least a couple of highly significant investment banks. I cannot reveal the name yet because I signed a nondisclosure.
Dominick Bianco:Before we conclude the interview, is there anything we missed that you would like to share with our subscribers?
Frederic Scheer:There is maybe one point which is I really believe that what people are going to see in the years to come is going to be an explosion in the use of alternative plastics. I think a company like Cereplast is in a very good position, not only because we know what we are doing and have been doing it for a long period of time, but because we have a very strong IP Portfolio. We have about 50 patents and patent applications worldwide that are clearly protecting our business and our industry. So we are really creating a barrier to entry for large companies when large companies will come. There is not a doubt in my mind that large chemical groups will come into that industry when they have reached that critical point. When they enter the industry they will have no choice but partner with Cereplast because of the patents we have.
Dominick Bianco: I really appreciate your time here today and hopefully our subscribers will be following your stock.

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