##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-K
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the fiscal year ended December 31, 2008
 Or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from  to
 Commission file number: 333-126378
 Cereplast, Inc.
 (Exact name of registrant as specified in its charter)
 
 Nevada
    
    91-2154289(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)3411-3433 West El Segundo BoulevardHawthorne, California
    
    90250(Address of principal executive office)
    
    (Zip Code)
 (310) 676-5000
(Registrants telephone number, including area code)
 Securities registered pursuant to Section 12(b) of the Act:
 Securities registered pursuant to Section 12(g) of the Act:
 Yes o No þ
 Yes o No þ
 þ o
 o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer o
    
    Smaller reporting company þ
 o þ




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##### 



Table of Contents
 PagePART IItem 1. Business
    
    
    4Item 1A. Risk Factors
    
    
    10Item 1B. Unresolved Staff Comments
    
    
    15Item 2. Properties
    
    
    15Item 3. Legal Proceedings
    
    
    15Item 4. Submission of Matters to a Vote of Security Holders
    
    
    15PART IIItem 5. Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
    
    
    16Item 6. Selected Financial Data
    
    
    18Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    18Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    23Item 8. Financial Statements and Supplementary Data
    
    
    24Item 9. Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
    
    
    25Item 9A. Controls and Procedures
    
    
    25Item 9B. Other Information
    
    
    25PART IIIItem 10. Directors, Executive Officers, and Corporate Governance
    
    
    26Item 11. Executive Compensation
    
    
    29Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholders Matters
    
    
    30Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    31Item 14. Principal Accountant Fees and Services
    
    
    31PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    32SIGNATURES
    
    
    34Exhibit 31.1Exhibit 32.1
   2




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STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
   3




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PART I
 
 Item 1. Business
 GENERAL
 History
  Overview
 ® ®
    
    
    Cereplast Compostables® Resins are renewable, ecologically-sound substitutes
for petroleum-based plastics targeting primarily single-use disposables and packaging
applications. We offer 14 commercial grades of compostable 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. We commercially introduced our
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 similar properties 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 address this need in a wide range of markets, including
automotive, consumer goods, consumer electronics, medical, packaging and construction. We
commercially introduced our first grade of Hybrid Resin, Hybrid 150, at the end of 2007.
We currently offer two commercial grades in this product line.
 Business Strengths
  Technology Leadership and Processing Expertise.
 Competitive Pricing with Traditional Plastic.
  4




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Scalable and Low-Cost Manufacturing Platform. ® ®
 Close Consultative Relationship with Customers.
 Highly Experienced Management and Technical Team.
 Business Strategy
 Target High-Growth Segments with Commercial Products.
 Closely support converter partners and brand owners in the adoption of bio-based plastics to expand
our customer base.
  Expand manufacturing capabilities.
 Strengthen our product leadership by developing new formulations and product lines in conjunction
with customer demands.
 Pursue Strategic Alliances.
  5




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Industry Overview and Outlook
  ®
 Market Opportunity
 Greater Environmental Concerns.
 National Security Concerns. Health and Safety
Concerns.
 Our Resin Products
 ® ®
 
    
    Injection molding
    
    Thermoforming
    
    Blown film
    
    Blow molding
  6




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
    
    Extrusion for profiles
    
    Extrusion coating
  Cereplast Compostables ® Resins
     Cereplast Hybrid Resins ®
    Sales and Marketing
   
    
    Targeted marketing aimed at the highest potential opportunities together with industry
leaders in each market segment
    
    Extensive commercial and technical support to customers to enhance their processing and
product economics and speed to market
    
    Assistance to our converter customers with end-user customer demand creation as well as
product performance improvement and end user positioning
  7




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
    
    Selective extension of our global sales reach through our own resources and exclusive
distributors
    
    Pursuit of certain key market commercialization opportunities through exclusive,
co-development agreements
 Manufacturing
      Annual Compostable Resin
    
    
    Annual Hybrid ResinProduction Capacity
    
    
    Production CapacityProduction Line 1
    
    
    9,600,000
    
    
    
    Production Line 2
    
    
    11,200,000
    
    
    
    Production Line 3
    
    
    17,600,000
    
    
    
    Production Line 4 (Seymour)
    
    
    
    
    
    
    50,000,000Total
    
    
    38,400,000
    
    
    
    50,000,000
 Competition
     8




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Government Regulation
  Research and Development
  
    
    Improve the properties and processing window of our portfolio of resins
    
    Broaden the suitable conversion technologies and market applications of our resins
    
    Reduce the cost of our resins to improve their competitiveness with fossil fuel
alternatives
    
    Continue to introduce and patent new resins to satisfy the demand of our converter
customers and protect our intellectual property
    
    Explore new alternatives and source new natural raw materials as platforms for new types
of bio-based resins
    
    Explore the possibility to increase the renewable content in Hybrid resins
 Patents, Licenses and Trade Secrets
 ® ®
  Employees
   9




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Item 1A. Risk Factors
 Risks Relating to Our Business
 We have incurred net losses in the past and we may incur net losses in the future.
  
    
    expansion of operations, resources and working capital to support our business
growth;
    
    start up of continuous production at our new bioplastic facility in Seymour, Indiana
and subsequent consolidation of all core manufacturing to this location;
    
    continued development of new products and associated intellectual property
protection;
    
    enhancements to our application development and testing facilities;
    
    expanded marketing and other promotional activities; and
    
    joint development of proprietary products with key strategic business partners.
   We have a limited operating history, which makes it difficult to evaluate our financial
performance and prospects.
  In the current economic environment we will be required to raise additional capital to fund
our research and development efforts, marketing programs, as well as our continuing operations. If
such additional financing is not available, we may need to cease operations.
  
    
    the speed at which our products are accepted into the market;
    
    the level of spending to increase and enhance manufacturing capacity;
    
    costs of recruiting and retaining qualified personnel; and
    
    the level of research and development and market commercialization spending.
  The commercial success of our business depends on the widespread market acceptance of products
manufactured with our bio-based resins. If we are unable to generate interest in our bio-based
resins or if the manufacturers are unable to generate interest in products produced with our
resins, we will be unable to generate increased sales and we will be forced to cease operations.
   10




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We have only recently commenced industrial scale production of our bio-based resins and it is
possible that some of our bio-based resins or plastic products made with our bio-based resins may
not perform as well as other resins or traditional plastics.
  We may not be successful in protecting our intellectual property and proprietary rights and
may be required to expend significant amounts of money and time in attempting to protect these
rights. If we are unable to protect our intellectual property and proprietary rights, our
competitive position in the market could suffer.
     Confidentiality agreements with employees and others may not adequately prevent disclosure of
trade secrets and other proprietary information.
   11




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Management and affiliates own enough shares to have a substantial impact on shareholder vote
which could cause us to take action that may not be in the best interest of all shareholders.
  Given our limited resources, we may not effectively manage our growth.
  Established product manufacturers could improve the ability to recycle their existing products
or develop new environmentally preferable products which could render our technology less
competitive.
  Many potential competitors who have greater resources and experience than we do may develop
products and technologies that compete with ours.
  We rely on prime grade polylactic acid (PLA) supplied from NatureWorks, LLC in manufacturing
some of our Compostables resins. If we lose NatureWorks, LLC as a supplier, the price
of these resins may increase or the introduction and market acceptance of these resins may be
delayed and our results of operations could be materially adversely affected.
 ® ®
  12




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Fluctuations in the costs of our raw materials and competitive products could have an adverse
effect on our results of operations and financial condition.
  During the year ended December 31, 2008, we had one significant customer that accounted for
54% of total sales. The loss of this customer could adversely affect our short-term sales and
profitability.
  Our operations are subject to regulation by the U.S. Food and Drug Administration.
   Regulatory changes applicable to us, or the products in our end-use markets, could adversely
affect our financial condition and results of operations.
  We may be liable for damages based on product liability claims brought against our customers
in our end-use markets.
  Loss of key personnel or our inability to attract and retain new qualified personnel could
hurt our business and inhibit our ability to operate and grow successfully.
  We currently manufacture our bio-based resins at a 55,000 square foot facility in Hawthorne,
California. Full or partial loss of use of this facility could materially impair our business.
   13




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Disruptions or delay in the commencement of continuous operation of our new Seymour bioplastic
production facility could materially and adversely affect our results of operations.
   Downturns in general economic conditions could adversely affect our profitability.
  Risks related to our stock
 Our common stock is subject to the Penny Stock rules of the SEC and the trading market in
our securities is limited, which makes transactions in our stock cumbersome and may reduce the
value of an investment in our stock.
  
    
    that a broker or dealer approve a persons account for transactions in penny stocks;
and
    
    that the broker or dealer receives from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to be purchased.
  
    
    obtain financial information concerning the persons financial situation, and
investment experience and investment objectives of the person; and
    
    make a reasonable determination that the transactions in penny stocks are suitable
for that person and the person has sufficient knowledge and experience in financial
matters to be capable of evaluating the risks of transactions in penny stocks.
  
    
    sets forth the basis on which the broker or dealer made the suitability
determination; and
    
    that the broker or dealer received a signed, written agreement from the investor
prior to the transaction.
   14




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Item 1B . Unresolved Staff Comments
  
 Item 2. Properties
  
 Item 3. Legal Proceedings
  
 Item 4. Submission of Matters to a Vote of Security Holders .
   15




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PART II
 
 Item 5.

    Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
 Market Information
  2008
    
    
    2007High
    
    
    Low
    
    
    High
    
    
    LowFirst Quarter ended March 31
    
    $
    0.70
    
    
    $
    0.52
    
    
    $
    0.40
    
    
    $
    0.36Second Quarter ended June 30
    
    $
    0.53
    
    
    $
    0.32
    
    
    $
    0.59
    
    
    $
    0.37Third Quarter ended September 30
    
    $
    0.35
    
    
    $
    0.19
    
    
    $
    0.91
    
    
    $
    0.58Fourth Quarter ended December 31
    
    $
    0.23
    
    
    $
    0.08
    
    
    $
    0.71
    
    
    $
    0.52
 Holders
  Dividend Policy
  Recent Sale of Unregistered Securities
  
    
    Through a private placement, completed on September 8, 2008, which was made in reliance
upon an exemption from registration under rule 506 of Regulation D promulgated under
Section 4(2) of the Securities Act of 1933, we issued 11,988,637 restricted shares of
common stock to Accredited Investors, as defined in Rule 501(a) of Regulation D as
promulgated by the SEC, for gross cash proceeds of $2,637,500 less related fees and
expenses in the amount of $287,184.
 Equity Compensation Plan Information
 As of December 31, 2008:
 Number of shares remaining availableNumber of shares to be issued
    
    
    Weighted-average exercise
    
    
    for future issuance under equityupon exercise of outstanding
    
    
    price of outstanding options
    
    
    compensation plans (excludingPlan Category
    
    options and warrants
    
    
    and warrants
    
    
    securities reflected in column (a))Equity Compensation
Plans approved by
security holders
    
    
    
    
    
    
    
    
    
    
    Equity Compensation
Plan not approved
by security holders
    
    
    9,975,000
    
    
    $
    0.56
    
    
    
    13,375,000Total
    
    
    9,975,000
    
    
    
    
    
    
    
    13,375,000
  16




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STOCK OPTION PLAN
 GENERAL
   PURPOSE
  ADMINISTRATION
    ELIGIBILITY
  TERMS OF OPTIONS
      17




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Item 6. Selected Financial Data
  
 Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 CAUTIONARY STATEMENTS
  
    
    Inability to raise sufficient additional capital to finance operations
    
    potential fluctuation in quarterly results
    
    our failure to earn profits
    
    inadequate capital to expand its business, inability to raise additional capital or
financing to implement its business plans;
    
    decline in demand for our products and services;
    
    rapid and significant changes in markets and other factors which encourage use of
bioplastics;
    
    successful commencement of operations at our new Seymour facility and relocation of
manufacturing activities from California to Indiana;
    
    failure to commercialize sufficient new grades of resin being pursued in our technical /
market development pipeline;
    
    competitor actions which curtail our market share, negatively affect pricing or limit
sales growth;
  18




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
    
    litigation with or legal claims and allegations by outside parties;
    
    insufficient revenues to cover operating costs.
   OVERVIEW
 General
  
    
    Cereplast Compostables®Resins are renewable, ecologically-sound substitutes
for petroleum-based plastics targeting primarily single-use disposables and packaging
applications. We offer 14 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. We commercially introduced our
Compostables line in November 2006.
    
    Cereplast HybridResins®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 similar properties 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 application. Hybrid Resins address this need in a wide range of
markets, including automotive, consumer goods, consumer electronics, medical, packaging,
and construction. We commercially introduced our first grade of Hybrid Resin, Hybrid 150,
at the end of 2007. We currently offer two commercial grades in this product line.
  Trends and Uncertainties that May Impact Future Results of Operations
 Global Market and Economic Conditions.
  19




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Sales.
 Operating Expenses.
 Expansion
of Operations.
  20




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CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
  RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2008 COMPARED TO THE YEAR ENDED DECEMBER 31,
2007.
 Sales
 ®
 Gross Profit
 ®
 Operating Expenses
  
    
    Salaries and wages, including non-cash stock based compensation of $2,859,680,
increased by $953,182 for the year ended December 31, 2008 compared to the year ended
December 31, 2007. The increase is attributable to head count increases and strengthening
of functional management across all departments to support the commercial introduction of
our resins and upgrading of our business processes. Non-cash compensation for the year was
comprised of the issue of 6,777,223 restricted common shares, valued at $1,688,813 to
employees for services rendered together with $578,066 of expenses relating to employee
stock options granted in the prior year.
    
    Marketing expense increased by $1,295,272 for the year ended December 31, 2008 compared
to the year ended December 31, 2007. The increase for the period is attributable to
increased spending to support the commercial expansion of the two families of resins and
the development of a direct sales team.
    
    Rent expense increased by $697,489 for the year ended December 31, 2008 compared to the
year ended December 31, 2007. The increase was the result of manufacturing and logistics
expansions both in California and also at our new Seymour facility. We currently have our
primary resin manufacturing operations in California and have mechanically completed a new
large scale manufacturing line located in our present distribution facility in Indiana to
support sales and production growth.
  21




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
    
    Research and development expenses increased by $750,364 for the year ended December 31,
2008 compared to the year ended December 31, 2007. The increase for the period is the
result of our expanding effort to develop both specific new grades of resins for the
current and targeted customer applications as well as additional standard grades of resins
within the Hybrid family.
 Net Loss
  LIQUIDITY AND CAPITAL RESOURCES
            22




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OFF-BALANCE SHEET ARRANGEMENTS
  
 Item 7A. Quantitative and Qualitative Disclosures about Market Risk
   23




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Item 8. Financial Statements and Supplementary Data
   24




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Item 9 . Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
  
 Item 9A. Controls and Procedures
  Evaluation of Disclosure Controls and Procedures.
  Managements Annual Report on Internal Control over Financial Reporting
   
 Item 9B. Other
   25




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PART III
 
 Item 10. Directors, Executive Officers ,and Corporate Governance
  Name
    
    Age
    
    PositionFrederic Scheer
    
    54
    
    CEO,  Founder and Chairman of the Board of DirectorsRandy Woelfel
    
    54
    
    President, Chief Operating OfficerStephan Garden
    
    35
    
    Senior  Vice President - Finance & Business Dev.William Kelly
    
    63
    
    Senior Vice President TechnologyPhilippe Ravera
    
    51
    
    Senior Vice President Sales & MarketingMark Barton
    
    50
    
    Senior Vice President, OperationsShriram Bagrodia
    
    57
    
    Senior Vice President R&D Blends & ChemistryHeather Sheehan
    
    46
    
    Vice President, Chief Accounting OfficerThomas Bash
    
    48
    
    Vice President Process & EngineeringMargaret McMurray
    
    61
    
    Chief Administrative OfficerPetros Kitsos
    
    43
    
    DirectorJacques Vincent
    
    61
    
    Director
 FREDERIC SCHEER
 RANDY WOELFEL
 STEPHAN GARDEN
 WILLIAM KELLY
  26




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PHILIPPE RAVERA
 MARK BARTON
 HEATHER SHEEHAN
 SHRIRAM BAGRODIA
 THOMAS BASH
 MARGARET McMURRAY
  27




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INDEPENDENT DIRECTORS
 PETROS KITSOS
 JACQUES VINCENT
 BOARD COMMITTEES
 AUDIT COMMITTEE
  COMPENSATION COMMITTEE
  
    
    Reviews and recommends to the board the compensation and benefits of our executive
officers;
    
    Administers our stock option plans and employee stock purchase plan; and
    
    Establishes and reviews general policies relating to compensation and employee benefits.
  DIRECTOR COMPENSATION
  CODE OF ETHICS
   28




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Item 11 . Executive Compensation
  SUMMARY COMPENSATION TABLE
 Change inPension ValueNon-
    
    
    and Non-Equity
    
    
    QualifiedIncentive
    
    
    Deferred
    
    
    AllStock
    
    

    Option
    
    
    Plan
    
    
    Compensation
    
    
    OtherSalary
    
    
    Bonus
    
    
    Awards
    
    
    Awards
    
    
    Compensation
    
    
    Earnings
    
    
    Compensation
    
    
    TotalName & Principal Position
    
    Year
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)Frederic Scheer, CEO(1)
    
    
    2008
    
    
    $
    202,909
    
    
    
    
    
    
    $
    164,367
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    98,422
    
    
    $
    465,6982007
    
    
    $
    223,278
    
    
    
    
    
    
    $
    198,327
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    421,6052006
    
    
    $
    163,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    163,000Randy Woelfel, President and COO(2)
    
    
    2008
    
    
    $
    158,654
    
    
    
    
    
    
    $
    382,831
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    66,459
    
    
    $
    607,944Stephan Garden, SVP Finance & Bus.
Dev.(3)
    
    
    2008
    
    
    $
    184,887
    
    
    
    
    
    
    $
    418,821
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    28,508
    
    
    $
    ,632,2162007
    
    
    $
    157,732
    
    
    
    
    
    
    $
    327,133
    
    
    $
    1,022,912
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    1,507,7772006
    
    
    $
    54,000
    
    
    
    
    
    
    $
    341,750
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    395,750
 (1)
    
    Frederic Scheers annual cash base salary for 2008 was $285,000; however he
has agreed to defer a portion of this cash compensation until the cash flow of the company will
permit payment.(2)
    
    Randy Woelfel became a full time employee on March 31, 2008. His annual cash base
salary is $250,000; however he has agreed to defer a portion of this cash compensation until the
cash flow of the company will permit.(3)
    
    Stephan Gardens annual cash base salary for 2008 was $200,000; however he has
agreed to defer a portion of this cash compensation until the cash flow of the company will permit. OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
  OPTION AWARDS
    
    
    STOCK AWARDSEquity
    
    
    EquityEquity
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Incentive Plan
    
    
    Incentive PlanIncentive Plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Awards:
    
    
    Awards:Number of
    
    
    Awards:
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Market
    
    
    Number of
    
    
    Market orNumber of
    
    
    Securities
    
    
    Number of
    
    
    
    
    
    
    
    
    
    
    Number of
    
    
    Value of
    
    
    Unearned
    
    
    Payout Value ofSecurities
    
    
    Underlying
    
    
    Securities
    
    
    
    
    
    
    
    
    
    
    Shares or
    
    
    Shares or
    
    
    Shares, Units
    
    
    UnearnedUnderlying
    
    
    Unexercised
    
    
    Underlying
    
    
    
    
    
    
    
    
    
    
    Units of
    
    
    Units of
    
    
    or Other
    
    
    Shares, Units orUnexercised
    
    
    Unearned
    
    
    Unexercisable
    
    
    Option
    
    
    Option
    
    
    Stock That
    
    
    Stock that
    
    
    Rights That
    
    
    Other RightsOptions (#)
    
    
    Options (#)
    
    
    Unearned
    
    
    Exercise
    
    
    Expiration
    
    
    Have Not
    
    
    Have Not
    
    
    Have Not
    
    
    That HaveName
    
    Exercisable
    
    
    Unexercisable
    
    
    Options (#)
    
    
    Price ($)
    
    
    Date
    
    
    Vested (#)
    
    
    Vested ($)
    
    
    Vested (#)
    
    
    Not Vested (#)Frederic Scheer
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Randy WoelfelStephan Garden,
    
    
    2,824,565
    
    
    
    
    
    
    
    
    
    
    $
    0.56
    
    
    
    12/20/2011
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    175,435
    
    
    
    
    
    
    
    
    
    
    $
    0.56
    
    
    
    12/18/2017
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 DIRECTOR COMPENSATION
  Change in PensionValue andFees Earned

    
    
    
    
    
    
    
    
    
    
    Non-Equity
    
    
    Nonqualifiedor Paid in
    
    
    
    
    
    
    Option
    
    
    Incentive Plan
    
    
    Deferred Compensation
    
    
    All OtherCash
    
    
    Stock Awards
    
    
    Awards
    
    
    Compensation
    
    
    Earnings
    
    
    Compensation
    
    
    TotalName
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)Petros Kitsos
    
    
    
    
    
    $
    316,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    316,250Jacques Vincent
    
    
    
    
    
    $
    316,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    316,250
  29




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##### Table of Contents



EMPLOYMENT AND OTHER AGREEMENTS
  
    
    In November 2006, we entered into an Employment Agreement effective January
1st, 2007 with our Chief Executive Officer by which he has agreed to serve as
CEO for a period of five (5) years. He is entitled to a yearly cash compensation of
$400,000 but has agreed to substitute part of his cash compensation for restricted stock
until the cash flow of the company will permit.
    
    In March 2008, we entered into an Employment Agreement effective March 31, 2008 with our
President, Chief Operating Officer by which he has agreed to serve as President, COO for a
period of three (3) years. He is entitled to annual cash compensation of $350,000 but has
agreed to substitute a significant part of his cash compensation for restricted stock until
the cash flow of the company will permit.
  
 Item 12.
    
    Security Ownership of Certain Beneficial Owners and Management and Related Stockholders
Matters.
  
    
    each person known by us to be the beneficial owner of more than 5% of our Common Stock;
    
    each of our directors;
    
    each of our executive officers; and
    
    our executive officers and directors as a group.
  Name and Address of Beneficial Owner
    
    Number of Shares Beneficially Owned
    
    
    Percent of ClassUBS Global Asset Management (Americas), Inc.
Bahnhofstrasse 45
PO Box CH-8021
Zurich, Switzerland
    
    
    17,462,656
    
    
    
    5.7
    %Frederic Scheer (1)(2)
    
    
    112,964,959
    
    
    
    37.0
    %Stephan Garden
    
    
    6,011,954
    
    
    
    2.0
    %William Kelly
    
    
    2,735,102
    
    
    
    
    *Randy Woelfel
    
    
    1,384,931
    
    
    
    
    *Shriram Bagrodia
    
    
    1,223,472
    
    
    
    
    *Thomas Bash
    
    
    815,682
    
    
    
    
    *Heather Sheehan
    
    
    705,311
    
    
    
    
    *Gary Larrivee
    
    
    664,612
    
    
    
    
    *Mark Barton
    
    
    538,376
    
    
    
    
    *Margaret McMurray
    
    
    248,661
    
    
    
    
    *Petros Kitsos
    
    
    3,045,455
    
    
    
    1.0
    %Jacques Vincent
    
    
    1,000,000
    
    
    
    
    *All officers and directors as a group (12 people)
    
    
    131,338,535
    
    
    
    43.0
    %
 *
    
    Less than one percent(1)
    
    Mr. Scheer beneficially owns such shares jointly with his wife, Jocelyne Scheer and through
their private foundation The Frederic & Jocelyne Sheer Foundation.(2)
    
    Mr. Scheer gifted 1,685,000 shares to certain members of the management of Cereplast on March
10, 2009.  30




---



##### Table of Contents



Item 13. Certain Relationships, Related Transactions, and Director Independence .
  
 Item 14. Principal Accountant Fees and Services
  Fee Type
    
    2008
    
    
    2007Audit Fees
    
    $
    67,485
    
    
    $
    100,500Tax Fees
    
    
    2,281
    
    
    
    1,470$
    69,766
    
    
    $
    101,970
    31




---



##### Table of Contents



Item 15. Exhibits and Financial Statement Schedules
 Page(a)(1) Index to Consolidated Financial StatementsReport of the Independent Registered Public Accounting Firm
    
    35Consolidated Balances Sheets
    
    36Consolidated Statements of Operations
    
    37Consolidated
Statements of Shareholders Equity and Comprehensive Loss

    
    38Consolidated Statements of Cash Flows
    

    39Notes to Consolidated Financial Statements

    
    40
 ExhibitNumber
    
    Description3.1
    
    
    Articles of Incorporation. (1)3.2
    
    
    Certificate of Amendment to the Articles of Incorporation dated February 26, 2003 (1)3.3
    
    

Certificate
of Amendment to the Articles of Incorporation dated July 19, 2004 (1)3.4
    
    
    Certificate of Amendment to the Articles of Incorporation dated March 18, 2005 (1)3.5
    
    
    Bylaws (1)4.1
    
    
    Form of Subscription Agreement used in connection with private offering dated April 2005 (2)4.2
    
    
    Stock Option Plan(2)4.3
    
    
    Form of Subscription Agreement used in connection with private offering of 872,000 shares of
common stock (2)4.4
    
    
    Periodic Equity Investment Agreement dated February 13, 2006 between the Company and Cumorah Capital,
Inc. (4)4.5
    
    
    Registration Rights Agreement dated February 13, 2006 between the Company and Cumorah Capital, Inc. (4)4.6
    
    
    Letter Agreement dated March 31, 2006 by and between the Company and Cumorah Capital, Inc. (5)4.7
    
    
    Periodic Equity Investment Agreement dated December 8, 2008 between the Company and Cumorah Capital,
Inc. (7)10.1
    
    
    Sale and Purchase Agreement entered between the Company and Cargill Dow LLC(2)10.5
    
    
    Lease entered with El Segundo / Yukon Partners LLC (3)
  32




---



##### Table of Contents



ExhibitNumber
    
    Description10.6
    
    
    Promissory Note in the amount of $100,000 in the name of Wings Fund Inc. (3)10.7
    
    
    Promissory Note in the amount of $50,000 in the name of Yanosan Group (3)10.8
    
    
    Form of Subscription Agreement used in connection with private offering of 38,341,053 shares of
common stock (6)14.1
    
    
    Code of Ethics (1)23.1
    
    
    Consent of HJ Associates & Consultants, LLP (6)31.1
    
    
    Certification of the Chief Executive Officer and the Principal Accounting Financial Officer
pursuant to Section 302 of the Sarbanes Oxley Act of 200232.1
    
    
    Certification of the SVP Finance and Business Development pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 (1)
    
    Incorporated by reference to the Form SB-2 Registration Statement filed with the Securities and
Exchange Commission dated July 5, 2005.(2)
    
    Incorporated by reference to the Form SB-2 Registration Statement filed with the Securities and
Exchange Commission dated August 26, 2005.(3)
    
    Incorporated by reference to the Form SB-2 Registration Statement filed with the Securities and
Exchange Commission dated September 21, 2005.(4)
    
    Incorporated by reference to the Form SB-2 Registration Statement filed with the Securities and
Exchange Commission dated February 14, 2006.(5)
    
    Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange
Commission dated December 21, 2006.(6)
    
    Incorporated by reference to the Form SB-2 Registration Statement filed with the Securities and
Exchange Commission dated July 6, 2007.(7)
    
    Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange
Commission dated December 8, 2008.  33




---



##### Table of Contents



SIGNATURES
  CEREPLAST, INC.Dated: March 30, 2009
    By:
    /s/    Frederic ScheerFrederic Scheer, Chairman,Chief Executive Officer, and Director  Dated: March 30, 2009
    By:
    /s/ Frederic ScheerFrederic  Scheer,Chairman, Chief Executive Officer,
and DirectorDated: March 30, 2009
    By:
    /s/ Jacques VincentJacques Vincent, DirectorDated: March 30, 2009
    By:
    /s/ Petros KitsosPetros Kitsos, Director  34




---



##### Table of Contents



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      By:
    
    /s/ HJ Associates & Consultants, LLPHJ Associates & Consultants, LLP 
Salt Lake City, Utah
   35




---



##### Table of Contents



12/31/08
    
    
    12/31/07ASSETSCurrent AssetsCash
    
    $
    501,699
    
    
    $
    8,593,714Accounts Receivable, Net
    
    
    280,102
    
    
    
    431,020Inventory, Net
    
    
    1,838,775
    
    
    
    1,827,667Prepaid Expenses
    
    
    160,863
    
    
    
    67,590Total Current Assets
    
    
    2,781,439
    
    
    
    10,919,991Property and EquipmentProperty and Equipment
    
    
    5,729,051
    
    
    
    2,847,956Accumulated Depreciation and Amortization
    
    
    (1,132,337
    )
    
    
    (596,361
    )Net Property and Equipment
    
    
    4,596,714
    
    
    
    2,251,595Other AssetsRestricted Cash
    
    
    48,628
    
    
    
    72,892Investments
    
    
    
    
    
    
    500Intangibles, Net
    
    
    173,285
    
    
    
    18,721Deposits
    
    
    44,943
    
    
    
    30,478Total Other Assets
    
    
    266,856
    
    
    
    122,591Total Assets
    
    $
    7,645,009
    
    
    $
    13,294,177LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts Payable
    
    $
    1,114,744
    
    
    $
    600,289Other Payables
    
    
    33,634
    
    
    
    146Accrued Expenses
    
    
    829,933
    
    
    
    152,947Capital Leases, Current Portion
    
    
    47,440
    
    
    
    71,812Convertible Shareholder Loan
    
    
    212,482
    
    
    
    Loan Payable, Current Portion
    
    
    3,874
    
    
    
    11,139Total Current Liabilities
    
    
    2,242,107
    
    
    
    836,333Long-Term LiabilitiesCapital Leases
    
    
    40,045
    
    
    
    87,440Loan Payable
    
    
    
    
    
    
    3,874Total Long-Term Liabilities
    
    
    40,045
    
    
    
    91,314Total Liabilities
    
    
    2,282,152
    
    
    
    927,647Shareholders EquityPreferred Stock, $0.001 par value;
5,000,0000 authorized preferred shares
    
    
    
    
    
    
    Common Stock, $0.001 par value;
495,000,000 authorized shares; 281,134,359 shares &
259,302,409 shares issued and outstanding, respectively
    
    
    281,134
    
    
    
    259,302Common Stock subscribed, not issued
    
    
    250,000
    
    
    
    Additional Paid in Capital
    
    
    34,175,023
    
    
    
    28,730,547Retained Earnings/(Deficit)
    
    
    (29,372,020
    )
    
    
    (16,623,319
    )Other Comprehensive Income
    
    
    28,720
    
    
    
    Total Shareholders Equity
    
    
    5,362,857
    
    
    
    12,366,530Total Liabilities and Shareholders Equity
    
    $
    7,645,009
    
    
    $
    13,294,177
   36




---



##### Table of Contents



Years Ended12/31/2008
    
    
    12/31/2007GROSS SALES
    
    $
    4,599,303
    
    
    $
    2,348,068Sales Discounts, Returns & Allowances
    
    
    (87,147
    )
    
    
    (168,070
    )NET SALES
    
    
    4,512,156
    
    
    
    2,179,998COST OF SALES
    
    
    4,431,976
    
    
    
    2,090,730GROSS PROFIT
    
    
    80,180
    
    
    
    89,268OPERATING EXPENSESDepreciation and Amortization
    
    
    545,832
    
    
    
    373,687Financing Costs
    
    
    100,027
    
    
    
    Financing Discount Costs
    
    
    
    
    
    
    3,243,460Marketing Expense
    
    
    1,547,547
    
    
    
    252,275Professional Fees
    
    
    996,322
    
    
    
    856,705Rent Expense
    
    
    1,064,765
    
    
    
    367,276Research and Development
    
    
    1,071,814
    
    
    
    321,450Salaries & Wages
    
    
    3,263,518
    
    
    
    2,027,539Salaries & Wages  Stock Based Compensation
    
    
    2,859,680
    
    
    
    3,142,477Other Operating Expenses
    
    
    1,829,864
    
    
    
    1,429,672TOTAL OPERATING EXPENSES
    
    
    13,279,369
    
    
    
    12,014,541LOSS FROM OPERATIONS BEFORE OTHER INCOME (EXPENSES)
    
    
    (13,199,189
    )
    
    
    (11,925,273
    )OTHER INCOME (EXPENSES)Gain on Sale of Marketable Securities
    
    
    346,280
    
    
    
    Loss on Sale of Equipment
    
    
    (4,588
    )
    
    
    Interest Income
    
    
    117,628
    
    
    
    285,083Interest Expense
    
    
    (8,832
    )
    
    
    (38,045
    )TOTAL OTHER INCOME (EXPENSES)
    
    
    450,488
    
    
    
    247,038LOSS BEFORE PROVISIONS FOR TAXES
    
    
    (12,748,701
    )
    
    
    (11,678,235
    )Provision for Taxes
    
    
    
    
    
    
    NET LOSS
    
    
    (12,748,701
    )
    
    
    (11,678,235
    )OTHER COMPREHENSIVE INCOMEGain on Foreign Currency Translation
    
    
    28,720
    
    
    
    TOTAL COMPREHENSIVE LOSS
    
    $
    (12,719,981
    )
    
    $
    (11,678,235
    )BASIC AND DILUTED LOSS PER SHARE
    
    $
    (0.05
    )
    
    $
    (0.05
    )WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED
    
    
    265,767,377
    
    
    
    238,393,888
   37




---



##### Table of Contents



CEREPLAST, INC.
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE LOSS
 OtherCommon Stock
    
    
    Preferred Stock
    
    
    Additional
    
    
    Def. Equity
    
    
    Accumulated
    
    
    Comprehensive
    
    
    SubscribedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Paid-In Capital
    
    
    Offering Cost
    
    
    Deficit
    
    
    Income
    
    
    Stock
    
    
    TotalBalance, December 31, 2006
    
    
    203,266,102
    
    
    $
    203,267
    
    
    
    
    
    
    $
    
    
    
    $
    8,718,157
    
    
    $
    (3,040,125
    )
    
    $
    (4,945,084
    )
    
    $
    
    
    
    $
    
    
    
    $
    936,215Issuance of common stock for cash. Stock price ranging from
$0.30 per share to $0.41 per share
    
    
    50,994,697
    
    
    
    50,995
    
    
    
    
    
    
    
    
    
    
    
    18,594,105
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,645,100Amortization of financing discount cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    203,335
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    203,335Amortization of deferred equity offering costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,040,125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,040,125Issuance of common stock as compensation. Stock price ranging
from $0.40 per share to $0.70 per share
    
    
    2,309,617
    
    
    
    2,309
    
    
    
    
    
    
    
    
    
    
    
    1,203,685
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,205,994Issuance of stock options under employee stock option plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,887,515
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,887,515Issuance of common stock for 3rd party services. Stock price
ranging from $0.36 per share to $0.91 per share
    
    
    2,731,993
    
    
    
    2,731
    
    
    
    
    
    
    
    
    
    
    
    1,455,635
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,458,366Stock Offering Costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,331,885
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,331,885
    )Loss for the year ended December 31, 2007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,678,235
    )
    
    
    
    
    
    
    
    
    
    
    (11,678,235
    )Balance, December 31, 2007
    
    
    259,302,409
    
    
    
    259,302
    
    
    
    
    
    
    
    
    
    
    
    28,730,547
    
    
    
    
    
    
    
    (16,623,319
    )
    
    
    
    
    
    
    
    
    
    
    12,366,530Issuance of common stock as compensation. Stock price ranging
from $0.11 per share to $0.64 per share
    
    
    6,777,223
    
    
    
    6,777
    
    
    
    
    
    
    
    
    
    
    
    1,682,036
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,688,813Issuance of common stock to 3rd parties and directors for
services. Stock price ranging from $0.11 per share to $0.64 per
share
    
    
    2,066,090
    
    
    
    2,066
    
    
    
    
    
    
    
    
    
    
    
    747,047
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    749,113Expense relating to stock options under employee stock option plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    578,066
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    578,066Issuance of common stock for cash. Stock price ranging from
$0.22 per share to $0.38 per share
    
    
    11,988,637
    
    
    
    11,989
    
    
    
    
    
    
    
    
    
    
    
    2,625,511
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,637,500Issuance of common stock to Cumorah for commitment fee on equity
line of financing
    
    
    1,000,000
    
    
    
    1,000
    
    
    
    
    
    
    
    
    
    
    
    99,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000Stock subscription for stock not issued
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    250,000
    
    
    
    250,000Stock Offering Costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (287,184
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (287,184
    )Net loss for the year ended December 31, 2008
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,748,701
    )
    
    
    
    
    
    
    
    
    
    
    (12,748,701
    )Gain on foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,720
    
    
    
    
    
    
    
    28,720Balance, December 31, 2008
    
    
    281,134,359
    
    
    $
    281,134
    
    
    
    
    
    
    $
    
    
    
    $
    34,175,023
    
    
    $
    
    
    
    $
    (29,372,020
    )
    
    $
    28,720
    
    
    $
    250,000
    
    
    $
    5,362,857
   38




---



##### Table of Contents



Years Ended12/31/2008
    
    
    12/31/2007CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (12,748,701
    )
    
    $
    (11,678,235
    )Adjustment to reconcile net loss to net cash
used in operating activitiesDepreciation and amortization
    
    
    545,832
    
    
    
    373,687Allowance for doubtful accounts
    
    
    18,051
    
    
    
    Loss on sale of equipment
    
    
    4,588
    
    
    
    Gain on sale of securities
    
    
    (346,280
    )
    
    
    Financing Discount Costs
    
    
    
    
    
    
    3,243,460Common Stock Issued for Services, Salaries & Wages
    
    
    3,115,992
    
    
    
    4,551,875(Increase) Decrease in:Accounts Receivable
    
    
    132,867
    
    
    
    (298,549
    )Inventory
    
    
    (143,108
    )
    
    
    (851,587
    )Reserve for obsolescence
    
    
    132,000
    
    
    
    Deposits
    
    
    (14,465
    )
    
    
    (4,134
    )Prepaid Expenses
    
    
    (93,273
    )
    
    
    (19,531
    )Restricted Cash
    
    
    24,264
    
    
    
    (72,892
    )Intangibles
    
    
    (161,122
    )
    
    
    Increase (Decrease) in:Accounts Payable
    
    
    514,455
    
    
    
    (166,661
    )Other Payables
    
    
    33,488
    
    
    
    (755
    )Accrued Expenses
    
    
    676,986
    
    
    
    95,591NET CASH USED IN OPERATING ACTIVITIES
    
    
    (8,308,426
    )
    
    
    (4,827,731
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of property and equipment, and intangibles
    
    
    (2,891,918
    )
    
    
    (1,418,680
    )Proceeds from sale of equipment
    
    
    2,936
    
    
    
    Proceeds of sale of securities
    
    
    346,780
    
    
    
    NET CASH USED IN INVESTING ACTIVITIES
    
    
    (2,542,202
    )
    
    
    (1,418,680
    )CASH FLOWS FROM FINANCING ACTIVITIES:Advances/(Payments) on Shareholder Loans
    
    
    212,482
    
    
    
    (362,628
    )Payments on Credit Lines
    
    
    
    
    
    
    (47,468
    )Payments on Capital Leases
    
    
    (71,767
    )
    
    
    (7,601
    )Payments on Notes Payable
    
    
    
    
    
    
    (250,000
    )Payments on Term Loan Payable
    
    
    (11,138
    )
    
    
    (10,416
    )Proceeds from issuance of common stock and subscription receivable
    
    
    2,600,316
    
    
    
    15,313,215NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    2,729,893
    
    
    
    14,635,102FOREIGN CURRENCY TRANSLATION
    
    
    28,720
    
    
    
    NET (DECREASE)/ INCREASE IN CASH
    
    
    (8,092,015
    )
    
    
    8,388,691CASH, BEGINNING OF PERIOD
    
    
    8,593,714
    
    
    
    205,023CASH, END OF PERIOD
    
    $
    501,699
    
    
    $
    8,593,714
       39




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##### Table of Contents



CEREPLAST, INC.
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
  Organization
  Line of Business
 ® ®
    
    
    Cereplast Compostables Resins®are renewable, ecologically-sound substitutes
for petroleum-based plastics targeting primarily single-use disposables and packaging
applications. We offer 14 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. We commercially introduced our
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 similar properties 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 address this need in a wide range of markets, including
automotive, consumer goods, consumer electronics, medical, packaging, and construction.
We commercially introduced our first grade of Hybrid Resin, Hybrid 150, at the end of 2007.
We currently offer two commercial grades in this product line.
   Basis of Consolidation
   40




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##### Table of Contents



Use of Estimates
  Basis of Presentation and Going Concern
     Recently Issued Accounting Pronouncements
      41




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##### Table of Contents



Cash and Cash Equivalents
  Concentration of Credit Risk
  Other Concentration
 ®
 Restricted Cash
  Fair Value of Financial Instruments
  Accounts Receivable
  Inventories
  2008
    
    
    2007Raw Materials
    
    $
    608,984
    
    
    $
    1,214,519Bioplastic Resins
    
    
    1,040,255
    
    
    
    472,195Finished Goods
    
    
    291,890
    
    
    
    126,039Packaging Materials
    
    
    29,646
    
    
    
    14,264Promo & Misc.
    
    
    
    
    
    
    650Reserve for Obsolescence
    
    
    (132,000
    )
    
    
    Inventories, Net
    
    $
    1,838,775
    
    
    $
    1,827,667
  42




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##### Table of Contents



Property and Equipment
  2008
    
    
    2007Equipment
    
    $
    2,582,204
    
    
    $
    2,371,194Construction in Progress
    
    
    2,593,937
    
    
    
    Furniture & Fixtures
    
    
    325,738
    
    
    
    284,613Leasehold Improvements
    
    
    227,172
    
    
    
    192,1495,729,051
    
    
    
    2,847,956Less Accumulated Depreciation
    
    
    (1,132,337
    )
    
    
    (596,361
    )Net Property and Equipment
    
    $
    4,596,714
    
    
    $
    2,251,595
 Intangibles
  2008
    
    
    2007Intangibles
    
    $
    188,927
    
    
    $
    27,805Less Accumulated Amortization
    
    
    (15,642
    )
    
    
    (9,084
    )Net Intangibles
    
    $
    173,285
    
    
    $
    18,721
 Deferred Income Taxes
    Revenue Recognition
  Marketing and Advertising
  Research and Development Costs
   43




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##### Table of Contents



Stock-Based Compensation
   Loss per Share Calculations
  Legal Proceedings
    
    
    In a private placement transaction completed on September 8, 2008, which was made in
reliance upon an exemption from registration under rule 506 of Regulation D promulgated
under Section 4(2) of the Securities Act of 1933, as amended (the Securities Act), we
issued 11,988,637 restricted shares of common stock for gross cash proceeds of $2,637,500,
less related fees and expenses in the amount of $287,184.
 
    
    We issued 1,000,000 shares of restricted common stock valued at $100,000 as a commitment
fee related to a Periodic Equity Investment Agreement with Cumorah Capital, Inc entered
into on December 8, 2008.
 
    
    We issued 8,843,313 shares of common stock valued at $2,437,926 to various employees,
directors, and third parties for services rendered.
  
    
    Through an initial private placement completed on March 10, 2007, which was made in
reliance upon an exemption from registration under rule 506 of Regulation D promulgated
under Section 4(2) of the Securities Act of 1933, we issued 7,484,999 restricted shares of
common stock for gross cash proceeds of $2,245,500.
 
    
    Through an initial private placement completed on July 2, 2007, which was made in
reliance upon an exemption from registration under rule 506 of Regulation D promulgated
under Section 4(2) of the Securities Act of 1933, we issued 38,341,053 restricted shares of
common stock for gross cash proceeds of $14,569,600. The subscribers to the private
placement were primarily comprised of institutions focused on the renewable and clean
technology sectors, including UBS, Fortis Investments, Clariden Leu, Credit Suisse and
Swisscanto. The shares acquired through this private placement were subsequently
registered with the SEC through an SB-2 filing, which was declared effective on July 11,
2007.
 
    
    We received funds of $1,830,000 under its Equity Line of Financing for 5,168,645 common
stock shares issued.
 
    
    We issued 5,041,610 shares of common stock valued at $2,644,360 to various employees and
consultants for services rendered.
  44




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##### Table of Contents



Valuation Assumptions for Stock Options
  Year endedDecember 31,2007Average risk-free interest rate
    
    
    3.84
    %Average expected life (in years)
    
    
    5.1Volatility
    
    
    102.2
    %
 
    
    Expected Volatility:The fair values of stock based payments were valued using a
volatility factor based on our historical stock prices.
 
    
    Expected Term:We elected to use the simplified method as discussed in SAB No. 107 to
develop the estimate of the expected term.
 
    
    Expected Dividend:We have not paid any dividends and does not anticipate paying
dividends in the foreseeable future.
 
    
    Risk-Free Interest Rate:We base the risk-free interest rate used on the implied yield
currently available on U.S. Treasury zero-coupon issues with remaining term equivalent to
the expected term of the options.
 Stock Option Activity
  2008
    
    
    2007Weighted Average
    
    
    
    
    
    
    Weighted AverageShares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise PriceOutstandingbeginning of year
    
    
    11,625
    
    
    $
    0.56
    
    
    
    
    
    
    $
    Granted at fair value
    
    
    
    
    
    
    
    
    
    
    11,625
    
    
    
    0.56Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Canceled/forfeited
    
    
    1,650
    
    
    
    0.56
    
    
    
    
    
    
    
    Outstandingend of year
    
    
    9,975
    
    
    
    0.56
    
    
    
    11,625
    
    
    
    0.56Options exercisable at year-end
    
    
    6,873
    
    
    $
    0.56
    
    
    
    3,000
    
    
    $
    0.56
  Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    WeightedWeighted
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    Aggregate
    
    
    
    
    
    
    Average
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contract
    
    
    Intrinsic
    
    
    
    
    
    
    Exercise
    
    
    Contract
    
    
    IntrinsicRange of Exercise Prices
    
    Shares
    
    
    Price
    
    
    Life
    
    
    Value
    
    
    Shares
    
    
    Price
    
    
    Life
    
    
    Value$0.0$0.56
    
    
    9,975
    
    
    $
    0.56
    
    
    
    5.00
    
    
    
    
    
    
    
    6,873
    
    
    $
    0.56
    
    
    
    4.68
    
    
    
    
   45




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##### Table of Contents



California Facilities
 
    
    a lease for office, industrial and warehouse space with monthly rents of $15,405
expiring in January 2010;
 
    
    a lease for office and warehouse space with monthly rents of $20,644 expiring in April
2012; and
 
    
    a lease for office and warehouse space with monthly rents of $26,105 expiring in January
2010.
 Indiana Facility 
  Term Loan
  Year ending December 31, 2009
    
    $
    3,874Less Current Portion of Loan Payable
    
    
    (3,874
    )Long Term Portion of Loan Payable
    
    
    
 Shareholder Loan
     46




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##### Table of Contents



47




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##### Table of Contents



2008
    
    
    2007Income tax benefit computed at U.S. Federal statutory rate (34%)
    
    $
    (4,231,111
    )
    
    $
    (3,960,272
    )State income taxes, net of benefit federal taxes
    
    
    (622,222
    )
    
    
    (582,887
    )Meals & Entertainment
    
    
    3,225
    
    
    
    3,085Stock for services
    
    
    1,201,189
    
    
    
    483,390R&D
    
    
    
    
    
    
    29,468Amortization of Equity Offering Costs
    
    
    
    
    
    
    1,185,649Depreciation
    
    
    (80,980
    )
    
    
    (75,170
    )Accruals
    
    
    153,850
    
    
    
    (4,395
    )Disposal of Assets
    
    
    1,593
    
    
    
    Less Valuation Allowance
    
    
    3,574,456
    
    
    
    2,921,132Income tax expense
    
    $
    
    
    
    $
    
  2008
    
    
    2007Deferred Tax Assets:NOL Carryover
    
    $
    7,572,160
    
    
    $
    4,710,600 R&D Carryover
    
    
    48,630
    
    
    
    75,560 Allowance for Doubtful Accounts
    
    
    11,125
    
    
    
    4,400Inventory Reserve
    
    
    51,480
    
    
    
    RP Accruals
    
    
    95,655
    
    
    
    Deferred tax Liabilities:Depreciation
    
    
    (290,900
    )
    
    
    (155,400
    )Less Valuation Allowance
    
    
    (7,488,150
    )
    
    
    (4,635,160
    )Income Tax Expense
    
    $
    
    
    
    $
    
  48




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##### Table of Contents



2008
    
    
    2007Capital lease at 20% interest, with monthly
principal and interest payments of $674 due
December 2008, secured by mold equipment. The
purchase option at the end of the lease is $1.00.
    
    $
    
    
    
    $
    7,263Capital lease at 15% interest, with monthly
principal and interest payments of $513 due
January 2010, secured by mold equipment. The
purchase option at the end of the lease is $1.00.
    
    
    6,125
    
    
    
    10,970Capital lease at 9.99% interest, with monthly
principal and interest payments of $2,054 due May
2010, secured by MAS Computer Software. The
purchase option at the end of the lease is $1.00.
    
    
    30,249
    
    
    
    50,662Capital lease at 13% interest, with monthly
principal and interest payments of $1,128 due
April 2009, secured by equipment. The purchase
option at the end of the lease is $1.00.
    
    
    4,389
    
    
    
    16,452Capital lease at 29% interest, with monthly
principal and interest payments of $1,369 due June
2010, secured by equipment. The purchase option
at the end of the lease is $1.00.
    
    
    19,757
    
    
    
    28,893Capital lease at 21% interest, with monthly
principal and interest payments of $1,028 due
November 2008, secured by equipment. The purchase
option at the end of the lease is $1.00.
    
    
    
    
    
    
    10,165Capital lease at 8% interest, with monthly
principal and interest payments of $505 due
November 2011, secured by equipment. The purchase
option at the end of the lease is $1.00.
    
    
    15,662
    
    
    
    20,493Capital lease at 13% interest, with monthly
principal and interest payments of $385 due
November 2011, secured by equipment. The purchase
option at the end of the lease is $1.00.
    
    
    11,303
    
    
    
    14,35487,485
    
    
    
    159,252Less Current Portion
    
    
    (47,440
    )
    
    
    (71,812
    )$
    40,045
    
    
    $
    $87,440
  Years ending December 31,2009
    
    $
    56,2512010
    
    
    26,2262011
    
    
    16,1052012
    
    
    2013
    
    
    Total Payments
    
    
    98,582Less Interest Portion
    
    
    (11,097
    )Present Value of Future Payments
    
    $
    87,485
  2008
    
    
    2007Assets Under Capital Leases
    
    $
    318,122
    
    
    $
    318,122Less Accumulated Amortization
    
    
    (172,236
    )
    
    
    (123,710
    )$
    145,886
    
    
    $
    194,412
   
    
    We received funds of $212,482 pursuant to a loan agreement with one of our shareholders,
Mrs. Nathalie Leblanc, a sibling of our CEO, in the amount of $212,482. The loan is
secured by the Companys assets up to the value of the loan, bears no interest, and is
repayable on or before January 15, 2009 at the Companys discretion in cash or 1,450,000
shares of Cereplast common stock. In February, 2009 this loan was repaid in full through
the issue of 2,450,000 shares of Cereplast common stock, including the 1,450,000 shares
related to the original principal conversion and 1,000,000 additional shares related to the
agreement to waive default penalties.
  49




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##### Table of Contents



Lease
  Issuance of Capital Stock
 
    
    On January 21, 2009 we issued 250,000 shares of restricted common stock to each of our
two independent Directors for services rendered.
 
    
    Also, subsequent to December 31,2008 we issued 5,000,000 shares of common stock in a
private placement transaction which was made in reliance upon an exemption from
registration under rule 506 of Regulation D promulgated under Section 4(2) of the
Securities Act of 1933, for which gross subscription proceeds of $250,000 had been received
prior to December 31, 2008. We issued an additional 9,346,819 share of common stock under
the same private placement for gross proceeds of $467,340 which were received after
December 31, 2008.
 
    
    In February, 2009 we issued 2,450,000 shares of common stock in full settlement of the
shareholder loan from Mrs. Nathalie Leblanc. (See Note 10)
  50




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNumber
    
    Description3.1
    
    
    Articles of Incorporation. (1)3.2
    
    
    Certificate of Amendment to the Articles of Incorporation dated February 26, 2003 (1)3.3
    
    

Certificate
of Amendment to the Articles of Incorporation dated July 19, 2004 (1)3.4
    
    
    Certificate of Amendment to the Articles of Incorporation dated March 18, 2005 (1)3.5
    
    
    Bylaws (1)4.1
    
    
    Form of Subscription Agreement used in connection with private offering dated April 2005 (2)4.2
    
    
    Stock Option Plan(2)4.3
    
    
    Form of Subscription Agreement used in connection with private offering of 872,000 shares of
common stock (2)4.4
    
    
    Periodic Equity Investment Agreement dated February 13, 2006 between the Company and Cumorah Capital,
Inc. (4)4.5
    
    
    Registration Rights Agreement dated February 13, 2006 between the Company and Cumorah Capital, Inc. (4)4.6
    
    
    Letter Agreement dated March 31, 2006 by and between the Company and Cumorah Capital, Inc. (5)4.7
    
    
    Periodic Equity Investment Agreement dated December 8, 2008 between the Company and Cumorah Capital,
Inc. (7)10.1
    
    
    Sale and Purchase Agreement entered between the Company and Cargill Dow LLC(2)10.5
    
    
    Lease entered with El Segundo / Yukon Partners LLC (3)10.6
    
    
    Promissory Note in the amount of $100,000 in the name of Wings Fund Inc. (3)10.7
    
    
    Promissory Note in the amount of $50,000 in the name of Yanosan Group (3)10.9
    
    
    Form of Subscription Agreement used in connection with private offering of 38,341,053 shares of
common stock (6)14.1
    
    
    Code of Ethics (1)23.1
    
    
    Consent of HJ Associates & Consultants, LLP (6)31.1
    
    
    Certification of the Chief Executive Officer and the Principal Accounting Financial Officer
pursuant to Section 302 of the Sarbanes Oxley Act of 200232.1
    
    
    Certification of the SVP Finance and Business Development pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 (1)
    
    Incorporated by reference to the Form SB-2 Registration Statement filed with the Securities and
Exchange Commission dated July 5, 2005.(2)
    
    Incorporated by reference to the Form SB-2 Registration Statement filed with the Securities and
Exchange Commission dated August 26, 2005.(3)
    
    Incorporated by reference to the Form SB-2 Registration Statement filed with the Securities and
Exchange Commission dated September 21, 2005.(4)
    
    Incorporated by reference to the Form SB-2 Registration Statement filed with the Securities and
Exchange Commission dated February 14, 2006.(5)
    
    Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange
Commission dated December 21, 2006.(6)
    
    Incorporated by reference to the Form SB-2 Registration Statement filed with the Securities and
Exchange Commission dated July 6, 2007.(7)
    
    Incorporated by reference to the Form 8-K Current Report filed with the Securities and Exchange
Commission dated December 8, 2008.  51