The Curious Case Of Cereplast

Cereplast started out as a good idea when it was founded by Frederick Scheer 10 years ago. The company would compound biobased and compostable resins such polylactic acid. The companies developing biobased resins are, for the most part, focused on agricultural processing or biotechnology. There would be a place for a specialist sorting out the nitty gritty of making the plastics work in real-world applications.

But something, if not many things, have gone wrong for the company. And earlier this month, the Cereplast filed for chapter 11 bankruptcy protection.

What happened?

It’s hard to tell. The Cereplast story is a little vague.

2011 seemed to be a good year for Cereplast in terms of revenues, which climbed to a high of about $20 million. However, the company managed to lose $14 million on those sales.

The company might have been in the red, but CEO Scheer was securely in the black. He earned a more than $1 million: about $500,000 in salary, $400,000 in bonuses, and nearly in $100,000 in stock awards.

A year later, things were pretty unpleasant for Cereplast. The company had to write off $12 million in accounts receivable in 2012. (Can’t tell if these were booked as part of the 2011 sales.) It is tough to figure out what exactly happened here, but the default explanation is that some customer stiffed the company for $12 million worth of compounded plastic. Conference calls allude to efforts to get the inventory back. The company lost $30 million on $911,000 in sales in 2012. Scheer earned a mere $336,077.

The company delisted from NASDAQ in 2012. It picked up, earlier in the year, Paul Pelosi, Jr. as a director, who wanted to lend one of America’s most recognizable names to team Cereplast for some reason. As far as I can tell he was an uncompensated, outside director.

Cereplast also ran the stock certificate printing presses in 2012 to stave off bankruptcy. Ironridge Technology bought $5 million in Cereplast preferred shares. Some outfit named Magna promised to pay off $1 million Cereplast debt in exchange for common shares. Cereplast is suing Magna for breach of contract.

Last year brought new ways for Cereplast to lose money. The company had $2.1 million in revenues for the first nine months of the year. It lost $34 million. The biggest item on its income statements is a $21.6 million loss for “change in derivative liabilities.” Cereplastcs explanation is as follows:

“Our derivative financial instruments consist of embedded and free-standing derivatives related primarily to the convertibles notes. The embedded derivatives include the conversion features, and liquidated damages clauses in the registration rights agreement. The accounting treatment of derivative financial instruments requires that we record the derivatives and related warrants at their fair values as of the inception date of the agreement and at fair value as of each subsequent balance sheet date. The recorded value of all derivatives at September 30, 2013 totaled approximately $15.1 million. Any change in fair value of these instruments will be recorded as non-operating, non-cash income or expense at each reporting date. If the fair value of the derivatives is higher at the subsequent balance sheet date, the Company will record a non-operating, non-cash charge. If the fair value of the derivatives is lower at the subsequent balance sheet date, the Company will record non-operating, non-cash income. At September 30, 2013, derivatives were valued primarily using the Black-Scholes Option Pricing Model.”

The Chemical Notebook doesn’t know either.

In any case, the bankruptcy was filed, in response to a lender’s efforts to sell off its assets, which aren’t insignificant. The value of the company’s property and equipment amounts to $11.2 million.

Author: Alex Tullo

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