Mail Stop 3561
August 3, 2005
Via U.S. Mail and Fax
Frederic Scheer
President and CEO
Cereplast, Inc.
3421-3433 West El Segundo Blvd.
Hawthorne, CA 90250
Re: Cereplast, Inc.
Form SB-2
Filed July 5, 2005
File No. 333-126378
Dear Mr. Scheer:
We have reviewed your filing and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
information so we may better understand your disclosure. After
reviewing this information, we may raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
General
1. We note that people can request an investment package on your
website at http://www.cereplast.com/request_package.html. When
you
respond to this comment letter, please provide us at the same time
with any materials you send to investors when they fill out the
request for an investment package. Please tell us in your
response
whether you have already sent any of these materials to investors
and, if so, when.
Prospectus Cover Page, page 1
2. You state here, and elsewhere in the document, that your stock
may
be "listed on the OTC Bulletin Board." Please revise to clarify
that
your stock will not be listed, but instead that brokers must apply
with the OTC Bulletin Board to quote Cereplast`s securities for a
market to develop and your securities to be quoted.
3. Your common stock does not appear to be registered under
Section
12(g) of the Securities Exchange Act. Please remove this
statement
from your registration statement.
Risk Factors, page 4
General
4. Please revise to highlight each risk factor heading in bold or
underlined type so that each risk factor stands out. We also
encourage you to capitalize only the first word of each sentence
in
the first two risk factor headings to make the headings more
readable.
5. Please delete any mitigating language from your discussion of
risk
factors. For instance, we note the following mitigating
statements:
* Your statement on page 6, under the risk factor "We have not yet
commenced full scale production of our resins...," that you
believe
you can engineer your resins to meet many of the critical
performance
requirements for specific applications;
* Your statement on page 6, under the risk factor "Unavailability
of
raw materials used to manufacture our products...," that "we
believe
that sufficient quantities of all raw materials used in our resins
are generally available." In the alternative, create a separately
captioned risk factor discussing the risk arising from the
scarcity
and difficulty in obtaining polymer lactic acid;
* You statement on page 6, under the risk factor "Our operations
are
subject to regulation by the U.S. Food and Drug Administration,"
that
you "believe that [your] resins and all other current and
prototype
resins are in compliance with all requirements of the FDA and do
not
require additional FDA approval."
"We Have A History of Incurring Net Losses..., page 4
6. It appears you refer to another company`s horseshoes business
in
this risk factor. Please revise to tailor the risk factor to your
company and the risks it may encounter. If the risk factor could
apply to any company, then it is too generic.
"If we do not obtain financing when needed...," page 5
7. According to your consolidated balance sheet for the quarter
ended
March 31, 2005, you had no cash. Please revise your disclosure
accordingly.
8. Please revise to quantify the amount of additional financing
you
will need to fund your operations.
"Unavailability of raw materials used to manufacture our
products...," page 6
9. It appears that one of the primary reasons why polymer lactic
acid
is not readily available is because NatureWorks, one of your
primary
suppliers, controls approximately 90% of the market for polymer
lactic acid worldwide. Please revise to create a separately
captioned risk factor directly following this risk factor that
discusses the risk of losing NatureWorks as a supplier, as noted
on
page 19.
Management`s Discussion and Analysis..., page 11
Overview, page 11
10. Please revise your overview section to create a clearer
picture
of management`s view of the bio-based plastics industry and the
most
important factors management considers when dealing with the day-
to-
day operations of Cereplast. For example, how do you earn
revenues,
and which of your products generate the greatest proportion of
your
revenues? What are the principal geographic markets for your
products? Is the source of your sales limited to California? Is
the
bio-degradability of your products contingent upon the use of
special
facilities that are not widely available, and if so, are your
sales
impacted by the accessibility of those facilities? As yet another
example, how is the company marketing its resins to distinguish
them
from those sold by larger, more established companies? You should
discuss these and other material matters in your executive
overview
of Management`s Discussion and Analysis.
11. Please clarify what "100% environmentally friendly" means.
12. Please revise to explain the significance of the ASTM
standards
and why it is important that several of your resins have passed
those
standards. In addition, clarify whether you sell several types of
resins or one type of resin. What are the product characteristics
and target markets for each of those resins?
13. Please disclose your basis for the statement that finished
products made of your resins have "demonstrated to exhibit
comparable
or superior performance characteristics, such as greater
strength/rigidity...," and your statement that you introduced on
the
market products that were the "first of their class."
14. Disclose who has tested your products for their compostability
under US standards.
15. We note your statement in the Business section that you have
devoted substantial resources to demonstrate the commercial
viability
of your resins, but have only produced limited amounts to date.
Please discuss your future plans regarding the production of your
resins. How will you increase efficiency and decrease costs in
the
manufacture of your resins? Will you need to incur additional
capital expenditures to increase your manufacturing efficiency?
If
so, do you have the funds available to pay for those expenditures,
or
will you need to obtain additional financing? What are the
chances
you will be able to obtain the needed financing to fund expansion
of
your manufacturing output, and how soon will you be able to secure
the needed financing? Based on your current production output,
are
you capable of effectively competing with other manufacturers of
bio-
based resins?
16. We note your statement on page 16 that you intend to enter
into a
supply agreement with NatureWorks in the "months to come." You
also
state on page 19, "in the event that we are unable to obtain poly
lactic acid resins from NatureWorks our operations may be
negatively
impacted." Please revise your overview section of Management`s
Discussion and Analysis to discuss the likelihood that you will be
able to obtain resins from NatureWorks. Is this a material
uncertainty, i.e., is it either (1) reasonably likely that you
will
be unable to purchase poly lactic acid from NatureWorks in the
near
future, or (2) would the loss of NatureWorks as a supplier have a
material effect on Cereplast`s liquidity, capital resources, or
results of operations? If yes, then also revise to discuss and
quantify what effect the loss of NatureWorks as a supplier will
have
on your liquidity, capital resources, or results of operations.
17. Please identify material customers who accounted for ten
percent
or more of your revenues in each period.
Liquidity and Capital Resources, page 15
18. Please quantify the amount of funding you will need to
increase
your capital resources and revenues. When do you anticipate
receiving money, and from what sources do you expect to obtain
those
funds?
19. We note your discussion of your $7,700 lease obligation on
page
20, your subleasing agreement on page F-17, your capital lease
obligations on page F-16, and your loan terms on page F-16.
Please
discuss these obligations in Management`s Discussion and Analysis.
Revise to analyze how these obligations fit into your operations,
how
you plan on meeting these obligations, and the effect on your
results
of operations, liquidity, and ability to obtain needed financing
if
you are unable to meet these obligations.
20. Your balance sheet for the quarter ended March 31, 2005
indicates
that your bank overdraft fee increased by $ 76,707 to $206,525, an
increase of approximately 62%. Please discuss this line item in
Management`s Discussion and Analysis. Quantify the causes of this
increase in overdraft fees. In addition, analyze how management
plans on paying for the increased fees, whether you anticipate
these
fees to continue to increase, and quantify the effect on your
balance
sheet and results of operations if this line item continues to
increase at the current rate.
21. We note that you believe existing capital and anticipated
funds
may not be sufficient to meet your anticipated cash needs for
working
capital and capital expenditures for the foreseeable future.
Expand
this disclosure to discuss the issuance of a going concern opinion
from your auditors and include a detailed discussion of
management`s
viable plan for overcoming your financial difficulties. Discuss
in
detail your cash requirements during the next twelve months and
your
ability to generate sufficient cash to support operations. Please
refer to Section 607.02 of the Financial Reporting Codification
for
further guidance.
22. Revise to explain how you would restructure your company in a
way
to preserve your resin product business if cash flows from
operations
became insufficient to continue operations at the current level.
Cash Flows, page 15
23. Please revise to discuss changes in material line items in
your
Statement of Cash flows from year to year and between your March
31,
2004 and March 31, 2005 quarters. To the extent material, please
discuss the reasons for those changes, quantify those changes, and
explain and quantify the principal causes of the changes.
Business, page 17
24. We note that the Biodegradable Products Institute has approved
your food service products, but has not approved your resins,
having
approved NatureWorks`s resin instead. You also state on page 11
that
your utensils sold under the Nat-Ur brand name were granted the
first
Biodegradable Products Institute logo. Please revise your
business
section to clarify whether you not only manufacture and sell
resins,
but also food service items such as utensils, plates, and cups.
If
it is true that you also manufacture food service items, discuss
these products and how the manufacture and sale of those products
fits into your business plan.
25. With regard to your reference to the Biodegradable Products
Institute logo, please revise to explain the significance of the
receipt of that logo and to disclose that your CEO, Frederic
Scheer,
created the Biodegradable Products Institute. Disclose whether
the
institute evaluated your products and whether you pay for the use
of
the institute`s logo.
26. You state on page 12 that the increase in your net sales was
due
partly to the introduction of new products. Please revise your
Business section to discuss those products.
27. We encourage you to disclose your website address.
Competition, page 19
28. Please revise to identify your primary competitors, quantify
and
explain your position in the industry, and more specifically
discuss
your methods of competition. In addition, please specifically
discuss how you plan to compete with companies such as
NatureWorks,
DuPont, and BASF AG.
Government Regulation, page 19
29. You state on page 20 that you cannot be certain that the FDA
will
agree with your conclusion that your resins are in compliance with
all FDA requirements. Please revise to clarify whether you need
FDA
approval before you sell your food and beverage containers, and if
so, whether you have already received that approval. In addition,
explain the FDA approval process.
Executive Compensation, page 23
30. Your statement that the table includes your CEO and the
executive
officers whose total annual salary and bonus exceeded $100,000 for
the years listed is confusing, since the table shows that Messrs.
Scheer, Altounian, and Jensen received no compensation. Please
confirm that Messrs. Scheer, Altounian, and Jensen have not
received
any salary, bonus, or long term compensation for 2004. In this
regard, please note that you must report compensation awarded to,
earned by, or paid to the named executive officers for all
services
rendered in all capacities to the company. Furthermore,
compensation
may consist of cash or stock and other non-cash consideration. In
addition, since you are not a reporting company, you only need to
include the last completed fiscal year in the summary compensation
table. See Item 402 of Regulation S-B.
Certain Relationships and Related Transactions, page 26
31. Please confirm that you have provided the disclosure required
by
Item 404(d) of Regulation S-B regarding promoters.
32. Please disclose whether the memorandum of understanding sets
forth consideration that Mr. Kelly has or will receive for
providing
technical assistance to the company. In addition, please complete
the last sentence to state when a final, definitive agreement must
be
entered into.
33. If more than $60,000, disclose the consideration that Messrs.
Kelly, Wegner, and Dobbs have received under their agreements with
the company.
Selling Stockholders, page 29
34. Please explain in your response letter why there is no
corresponding footnote 3 in the selling shareholders table. We
note
that footnote 3 to the table states, "Executive officer and
director
of our company."
Item 26. Recent Sales of Unregistered Securities, page II-2
35. Please provide the disclosure required by Item 701 of
Regulation
S-B for the issuance of 1.5 million shares to Sichenzia, Ross and
the
private placements that occurred during the first quarter of 2005
and
in April of 2005 (as noted on page F-17).
36. Please clarify whether you paid any underwriting discounts or
commissions when the securities were sold for cash. Where the
securities were not sold for cash, please describe the nature of
the
services that Cereplast received for the shares.
37. We note that you issued 2,475,000 shares of common stock to
Ms.
Leblanc in consideration for the conversion of preferred shares.
Please disclose the number of preferred shares that were
converted.
In addition, provide the disclosure required by Item 701 of
Regulation S-B for the sale of the preferred shares to Ms.
Leblanc.
38. Please disclose when you sold 872,000 shares to accredited
investors for $0.10 per share and the number of accredited
investors.
Available Information, page 32
39. Please revise to provide the new address for the Securities
and
Exchange Commission: 100 F St. NE, Washington, D.C. 20549.
Item 28. Undertakings, page II-4
40. Please explain in your response letter why you have included
the
undertaking in paragraph (4), as it appears you are not relying on
Rule 430A to omit information from the prospectus. If you decide
to
retain this undertaking after responding to this comment, please
revise the registration statement to include both subsections of
the
required Rule 430A undertaking, as set forth in Item 512(f) of
Regulation S-B.
Exhibits
General
41. We note that you have not filed any material contracts with
your
registration statement. Please file the following exhibits with
the
next amendment to your registration statement, or tell us why you
do
not believe they are required to be filed under Item 601 of
Regulation S-B:
* Agreements between your executive officers and the company,
including the agreements discussed on pages 23-24;
* The 2004 employee stock incentive agreement;
* Contracts between Cereplast and material customers and suppliers
disclosed in Note 9 to the financial statements, including the
agreement between Cereplast and NatureWorks disclosed on page 19;
* Your leasing agreement and subleasing agreement, discussed on
page
20 under "Description of Property" and on page F-17 under Note 10;
and
* Agreements defining the rights of your securityholders, such as
registration rights agreements.
Signatures, page II-5
42. Please revise your signature page to include the signature of
the
principal financial officer. If the officer serving as your
principal financial officer has already signed the document,
please
make sure to list his role as the principal financial officer
underneath his signature line.
* * * *
As appropriate, please amend your Form SB-2 in response to
these comments. You may wish to provide us with marked copies of
the
amendment to expedite our review. Please file on EDGAR a cover
letter with your amendment that keys your responses to our
comments
and provides any requested information. Detailed cover letters
greatly facilitate our review. Please understand that we may have
additional comments after reviewing your amendment and responses
to
our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filings reviewed by the staff to
be
certain that they have provided all information investors require
for
an informed decision. Since the Company and its management are in
possession of all facts relating to a company`s disclosure, they
are
responsible for the accuracy and adequacy of the disclosures that
they have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that:
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the Company may not assert this action as a defense in any
proceeding initiated by the Commission or any person under the
federal securities laws of the United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they may relate to the proposed public
offering of the securities specified in the above registration
statement. We will act on the request and, pursuant to delegated
authority, grant acceleration of the effective date.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of any amendment for further review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
You may contact Christine Bashaw, Staff Accountant, at (202)
551-3363 or Terry French, Accountant Branch Chief, at (202) 551-
3828
if you have questions regarding comments on the financial
statements
and related matters. Please contact Derek Swanson, Staff
Attorney,
at (202)551-3366, Kathleen Krebs, Special Counsel, at (202) 551-
3810,
or me at (202) 551-3810 with any other questions.
Sincerely,
/s/ Kathleen Krebs
For Larry Spirgel
Assistant Director
cc: Stephen M. Fleming, Esq.
Sichenzia Ross Friedman Ference LLP
Via Facsimile: (212) 930-9725
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Frederic Scheer
Cereplast, Inc.
August 3, 2005
Page 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
DIVISION OF
CORPORATION FINANCE