##### 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, 2009
 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.)300 Continental Blvd., Suite 100El Segundo, California
    
    90245(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 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
 PART IItem 1. Business
    
    
    4Item 1A. Risk Factors
    
    
    10Item 1B. Unresolved Staff Comments
    
    
    15Item 2. Properties
    
    
    15Item 3. Legal Proceedings
    
    
    15Item 4. Reserved
    
    
    15PART IIItem 5. Market for Registrants Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
    
    
    16Item 6. Selected Financial Data
    
    
    19Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    19Item 7A. Quantitative and Qualitative Disclosures About Market Risk
    
    
    24Item 8. Financial Statements and Supplementary Data
    
    
    25Item 9 Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
    
    
    26Item 9A Controls and Procedures
    
    
    26Item 9B Other Information
    
    
    26PART IIIItem 10. Directors, Executive Officers, and Corporate Governance
    
    
    27Item 11. Executive Compensation
    
    
    30Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholders Matters
    
    
    31Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    32Item 14. Principal Accountant Fees and Services
    
    
    32PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    33SIGNATURES
    
    
    35Exhibit 31.1Exhibit 32.1
   2




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STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
   3




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##### Table of Contents



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 17 commercial grades of Compostables Resins in this product line.
These resins are compatible with existing manufacturing processes and equipment making them
a ready substitute for traditional petroleum-based resins. 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.
 
    
    Cereplast Algae Plastics. In October 2009, we announced that we have been developing a
new technology to transform algae into bioplastics and intend to launch a new family of
algae-based resins that will complement the companys existing line of Compostables &
Hybrid resins. Although we do not expect this new technology to become commercial before
the end of 2010 or early 2011, it remains an important development as we believe that the
potential open by algae is quite substantial. Cereplast algae-based resins could replace in
a first step 50% or more of the petroleum content used in traditional plastic resins.
Currently, Cereplast is using renewable material such as starches from corn, tapioca, wheat
and potatoes and Ingeo® PLA. Recently the algae production business has attracted a lot of
attention when Exxon announced a $600 million investment in Synthetic Genomics and BPs $10
million investment in Martek Biosciences. The Company retains that algae is a very
attractive feedstock as it does offer a low carbon footprint alternative and at the same
time could be accessible in very large quantity. We also have a future plan to create algae
plastic made of 100% algae component abandoning any reliance on fossils fuels.
  4




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Business Strengths
  Technology Leadership and Processing Expertise.
 Competitive Pricing with Traditional Plastic.
 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.
  5




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Expand manufacturing capabilities.
 Strengthen our product leadership by developing new formulations and product lines in conjunction
with customer demands.
 Pursue Strategic Alliances.
 Industry Overview and Outlook
  biodegradable/ ®
 Market Opportunity
 Greater Environmental Concerns.
  6




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National Security Concerns. Health and Safety
Concerns.
 Our Resin Products
 ® ®
 
    
    Injection molding
 
    
    Thermoforming
 
    
    Blown film
 
    
    Blow molding
 
    
    Extrusion for profiles
 
    
    Extrusion coating
  Cereplast Compostables ® Resins
     Cereplast Hybrid Resins ®
   7




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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
 
    
    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
      8




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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
    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
  9




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Patents, Licenses and Trade Secrets
 ® ®
  History
  Employees
  
 Item 1A. Risk Factors
 Risks Relating to Our Business
 We have incurred net losses in the past.
   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 and
have been successful at doing so.
  
    
    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.
  10




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The commercial success of our business depends on the widespread market acceptance of products
manufactured with our bio-based resins.
  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.
      11




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Confidentiality agreements with employees and others may not adequately prevent disclosure of
trade secrets and other proprietary information.
  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.
   12




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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.
 ® ®
 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, 2009, we had three significant customers that accounted
for 54.4% of total sales. The loss of these customers 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.
   13




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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.
  Disruptions 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
  California Facilities
 
    
    a lease for office, industrial and warehouse space with monthly rents of $15,405 which
expired in January 2010;
 
    
    a lease for office and warehouse space with monthly rents of $20,644 expiring in April
2012 has been vacated and terminated prior to expiration; and
   Indiana Facility 
 
 Item 3.
    
    Legal Proceedings
  
 Item 4.
    
    Reserved
  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
   2009
    
    
    2008High
    
    
    Low
    
    
    High
    
    
    LowFirst Quarter ended March 31
    
    $
    6.80
    
    
    $
    2.80
    
    
    $
    28,00
    
    
    $
    20.80Second Quarter ended June 30
    
    $
    6.40
    
    
    $
    2.80
    
    
    $
    21.20
    
    
    $
    12.80Third Quarter ended September 30
    
    $
    6.00
    
    
    $
    3.60
    
    
    $
    14.00
    
    
    $
    7.60Fourth Quarter ended December 31
    
    $
    6.00
    
    
    $
    3.20
    
    
    $
    9.20
    
    
    $
    3.20
 Holders
  Dividend Policy
  Recent Sale of Unregistered Securities
  
    
    On December 11, 2009,we issued 1,090,000 shares of the Companys common
stock at a price of $2.00 per share on a post-split basis, for aggregate net proceeds
of $2,230,000.
   16




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Equity Compensation Plan Information
 As of December 31, 2009:
 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
    
    
    71,250
    
    
    $
    18.40
    
    
    
    334,375Total
    
    
    71,250
    
    
    
    
    
    
    
    334,375
  17




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STOCK OPTION PLAN
 GENERAL
   PURPOSE
  ADMINISTRATION
    ELIGIBILITY
  TERMS OF OPTIONS
      18




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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;
 
    
    litigation with or legal claims and allegations by outside parties;
 
    
    insufficient revenues to cover operating costs.
  19




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OVERVIEW
 General
  
    
    Cereplast Compostables Resins®are renewable, ecologically-sound substitutes
for petroleum-based plastics targeting primarily single-use disposables and packaging
applications. We offer 17 commercial grades of Compostables Resins in this product line.
These resins are compatible with existing manufacturing processes and equipment making them
a ready substitute for traditional petroleum-based resins. 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.
 
    
    Cereplast Algae Plastics. In October 2009 we announced that we have been developing a
new technology to transform algae into bioplastics and intend to launch a new family of
algae-based resins that will complement the companys existing line of Compostables &
Hybrid resins. Although we do not expect this new technology to become commercial before
the end of 2010 or early 2011, it remains an important development as we believe that the
potential open by algae is quite substantial. Cereplast algae-based resins could replace in
a first step 50% or more of the petroleum content used in traditional plastic resins.
Currently, Cereplast is using renewable material such as starches from corn, tapioca, wheat
and potatoes and Ingeo® PLA. Recently the algae production business has attracted a lot of
attention when Exxon announced a $600 million investment in Synthetic Genomics and BPs $10
million investment in Martek Biosciences. The Company retains that algae is a very
attractive feedstock as it does offer a low carbon footprint alternative and at the same
time could be accessible in very large quantity. We also have a future plan to create algae
plastic made of 100% algae component abandoning any reliance on fossils fuels.
   20




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Trends and Uncertainties that May Impact Future Results of Operations
 Global Market and Economic Conditions.
  Sales.
 Operating Expenses.
  21




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CRITICAL ACCOUNTING POLICIES Basis of Presentation and Consolidation The accompanying consolidated financial statements
have been prepared in accordance with generally accepted accounting principles in the United States. (GAAP) The consolidated financial statements include
the financial condition and results of operations of our wholly-owned subsidiary, Cereplast International, S.A., a
Luxembourg company organized during the year ended December 31, 2009, for the purpose of conducting sales operations in
Europe. Intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions
that affect the amounts reported in the accompanying financial statements. Significant estimates made in
preparing
these financial statements include the estimate of useful lives of property and equipment, the deferred tax
valuation
allowance and the fair value of stock options. Actual results could differ from those estimates. Cash and Cash Equivalents The Company considers all highly liquid investments with an original
maturity of three months or less to be cash
equivalents. At various times throughout the year, the Company may have exceeded federally insured limits. Concentration of Credit Risk We had unrestricted cash, cash equivalents, and short-term
investment, totaling $1,291,353 and $501,699 at December 31,
2009 and 2008, respectively. The unrestricted cash and cash equivalents are held for working capital
purposes. We
do not enter into investments for trading or speculative purposes. Some of the securities in which we invest,
however,
may be subject to market risk. This means that a change in prevailing interest rates may cause the principal
amount of
the investment to fluctuate. To minimize this risk, we intend to maintain our portfolio of cash equivalents
and
short-term investments in a variety of securities, including commercial paper, money market funds, debt
securities and
certificates of deposit. Due to the short-term nature of these investments, we believe that we do not have
any
material exposure to changes in the fair value of our investment portfolio as a result of changes in interest
rates.
As of December 31, 2009, all of our investments were held in money market accounts and short-term
instruments. We
actively monitor changes in interest rates. Other Concentration During the year ended months ended December 31, 2009, we had two
significant suppliers that accounted for 27.9% and
18.7%, respectively, of total cost of goods sold and had one customer, Dorel Juvenile Group, which accounted
for 32.7%
of total sales. No other supplier or customer accounted for more than 10% of cost of sales or sales during
this period Restricted Cash We had restricted cash in the amount of $0 and $48,628 at
December 31, 2009 and 2008, respectively. The restricted
cash amount consists of a Certificate of Deposit which supports a Letter of Credit
for a leased facility. Accounts Receivable We maintain an allowance for doubtful accounts for estimated losses
that may arise if any of our customers are unable
to make required payments. Management performs a review of the receivables past due from customers on a
monthly basis
and reserves against uncollectible items for each customer after all reasonable means of collection have been
exhausted, and the potential for recovery is considered remote. The allowance for doubtful accounts was
$39,743 and $29,350 as of December 31, 2009 and 2008, respectively.  22




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Inventories Inventories are stated at the lower of cost (first-in, first-out
basis) or market, and consist primarily of raw
materials used in the manufacturing of bioplastic resins, finished bioplastic resins and finished goods.
Inventories
are reviewed for excess and obsolescence and a reserve is established accordingly. Property and Equipment Property and equipment are stated at cost, and depreciation is
computed on the straight-line method over the estimated
useful lives of the assets. The estimated useful lives of the assets are between five and seven years. Repairs and
maintenance expenditures are charged to expense as incurred. Intangibles Intangibles are stated at cost and consist primarily of patents and
trademarks. Amortization is computed on the
straight-line method over the estimated life of these assets, estimated to be between five and fifteen years. Deferred Income Taxes Deferred income taxes are provided using the liability method whereby
deferred tax assets are recognized for deductible
temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are
recognized for
taxable temporary differences. Temporary differences are the differences between the reported amounts of
assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the
opinion of
management, it is more likely than not that some portion or all of the deferred tax assets will not be
realized.
Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the
date of
enactment. The benefit of a tax position is recognized in the financial

statements in the period during which, based on all
available evidence, management believes it is more likely than not that the position will be sustained upon
examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not
offset
or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold
are
measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon
settlement
with the applicable taxing authority. The portion of the benefits associated with tax positions taken that
exceeds the
amount measured as described above is reflected as a liability for unrecognized tax benefits in the
accompanying
balance sheet along with any associated interest and penalties that would be payable to the taxing
authorities upon
examination. Interest and penalties associated with unrecognized tax benefits are
classified as additional income taxes in the
statement of income. Revenue Recognition We recognize revenue at the time of shipment of products, provided
that evidence of an arrangement exists, title and
risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related
receivable is
reasonably assured. Marketing and Advertising We expense marketing and advertising costs as incurred. Research and Development Costs Research and development costs are charged to expense as incurred.
These costs consist primarily of research with
respect to new grades of bioplastic resins, testing of both the bioplastic resins as well as testing of
finished
products made from the bio-based resins. Stock-Based Compensation Compensation cost for all stock-based awards is measured at fair
value on the date of grant and recognized over the
service period for awards expected to vest. The fair value of stock options is determined using the
Black-Scholes
valuation model. Such value is recognized as expense over the service period, net of estimated forfeitures,
using the
straight-line method. Adjustments to this expense are made periodically to recognize actual rates of
forfeiture which
vary significantly from estimates.  23




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Loss per Share Calculations Basic earnings per share is computed by dividing income available to

common shareholders by the weighted-average
number of common shares available. Diluted earnings per share is computed similar to basic earnings per share

except
that the denominator is increased to include the number of additional common shares that would have been

outstanding if
the potential common shares had been issued and if the additional common shares were dilutive. Our diluted

loss per
share is the same as the basic loss per share for the years ended December 31, 2009 and 2008 as

inclusion of any
potential shares would have had and anti-dilutive effect due to us generating a loss. Legal Proceedings From time to time, we may become involved in various lawsuits and

legal proceedings, which arise in the ordinary course
of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or

other matters
may arise from time to time that may harm our business. We are currently not aware of any such legal

proceedings or
claims that we believe will have, individually or in the aggregate, a material adverse affect on our

business,
financial condition or operating results. RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2009 COMPARED TO THE YEAR ENDED DECEMBER 31,
2008.
 Sales
 ®
 Gross Profit
  Operating Expenses
  
    
    Salaries and wages, including non-cash stock based compensation of $273,919, decreased
by $4,140,742 for the year ended December 31, 2009, compared to the year ended December 31,
2008. The decrease is attributable to head count reductions in accordance with our
restructuring program. Non-cash compensation for the year was comprised of the issuance of
137,400 restricted common shares, valued at $563,309 to employees for services rendered
together with $259,056 of expenses relating to unvested employee stock options granted in the prior
year.
 
    
    Marketing expense decreased by $1,176,310 for the year ended December 31, 2009, compared
to the year ended December 31, 2008. The decrease for the period is directly attributable
to focusing our pipeline process and implementing more rigorous market and customer
selection processes.
 
    
    Research and Development costs decreased by $758,736, or 70.8%, to $313,078, for the year
ended December 31, 2009, compared to the year ended December 31, 2008. This is also as a
result of an improved focus of our pipeline process for technical development and
expansion of our resin families.
 
    
    Rent expense decreased by $514,810 or 48.3%, to $549,995 for the year ended December 31,
2009, compared to the year ended December 31, 2008. The decrease for the period was the
result of rental income from the sublease of one of our office and warehouse premises in
Hawthorne offsetting rent expense and the
subsequent termination of this lease. No
rental income was earned on any of our leased premises for the year ended December 31,
2008.
  24




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Net Loss
 ®
 LIQUIDITY AND CAPITAL RESOURCES
          OFF-BALANCE SHEET ARRANGEMENTS
   25




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Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
   26




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Item 8.
    
    Financial Statements and Supplementary Data
   27




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Item 9 (T).
    
    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
    Changes in Internal Controls .
 
 Item 9B.
    
    Other Information
   28




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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 DirectorsWilliam Kelly
    
    
    63
    
    
    Senior Vice President TechnologyMark Barton
    
    
    50
    
    
    Senior Vice President, OperationsMargaret McMurray
    
    
    61
    
    
    Chief Administrative OfficerPeter Kitsos
    
    
    43
    
    
    DirectorJacques Vincent
    
    
    63
    
    
    DirectorSteve Hanni
    
    
    42
    
    
    Director
 FREDERIC SCHEER
  WILLIAM KELLY
 MARK BARTON
 MARGARET McMURRAY
  29




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INDEPENDENT DIRECTORS
 PETROS KITSOS
  JACQUES VINCENT
  STEVE HANNI
  BOARD COMMITTEES
 BOARD LEADERSHIP STRUCTURE AND ROLE IN RISK OVERSIGHT
   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.
   NOMINATING COMMITTEE The functions of the Nominating
Committee are: (i) leading the search for, screening, evaluating and
recommending to the Board qualified candidates or nominees for election or
appointment as directors; (ii) recommending the number of members that
shall serve on the Board; and (iii) reviewing the processes and
performance of the Board in order to identify areas of concern or potential
issues relating to Board and committee processes, performance and effectiveness
and to assess and evaluate the overall effectiveness of individual directors.
Petros Kitsos, Jacques Vincent and Steve Hanni were on our Nominating Committee.  30




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##### Table of Contents



CODE OF ETHICS
  INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
  
    
    convicted in a criminal proceeding or is subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses);
 
    
    subject to any order, judgment, or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction or any Federal or State
authority, permanently or temporarily enjoining, barring, suspending or otherwise limiting
his involvement in any type of business, securities or banking activities;
 
    
    found by a court of competent jurisdiction (in a civil action), the Commission
or the Commodity Futures Trading Commission to have violated a federal or state securities
or commodities law.
 
    
    the subject of, or a party to, any Federal or State judicial or administrative
order, judgment, decree, or finding, not subsequently reversed, suspended or vacated,
relating to an alleged violation of (a) any Federal or State securities or commodities law
or regulation; (b) any law or regulation respecting financial institutions or insurance
companies including, but not limited to, a temporary or permanent injunction, order of
disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist
order, or removal or prohibition order; or (c) any law or regulation prohibiting mail or
wire fraud or fraud in connection with any business entity; or
 
    
    the subject of, or a party to, any sanction or order, not subsequently
reversed, suspended or vacated, of any self-regulatory organization (as defined in Section
3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in
Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent
exchange, association, entity or organization that has disciplinary authority over its
members or persons associated with a member.
  31




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##### Table of Contents



Item 11.
    
    Executive Compensation
  Change inPension ValueNon-
    
    
    and Non-Equity
    
    
    QualifiedIncentive
    
    
    Deferred
    
    
    AllStock
    
    
    Option
    
    
    Plan
    
    
    Compensation
    
    
    OtherName & Principal Position
    
    Year
    
    
    Salary ($)
    
    
    Bonus ($)
    
    
    Awards ($)
    
    
    Awards ($)
    
    
    Compensation ($)
    
    
    Earnings ($)
    
    
    Compensation ($)
    
    
    Total ($)Frederic Scheer, CEO
    
    
    2009
    
    
    $
    112,201
    
    
    $
    
    
    
    $
    83,836
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    74,400
    
    
    $
    270,4372008
    
    
    $
    202,909
    
    
    $
    
    
    
    $
    164,367
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    98,422
    
    
    $
    465,698Kelly,
William, Senior VP Technology
    
    
    2009
    
    
    $
    135,247
    
    
    $
    
    
    
    $
    106,250
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    241,4972008
    
    
    $
    135,347
    
    
    $
    
    
    
    $
    76,755
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    212,102Larrivee,
Gary, Senior VP Technology Services
    
    
    2009
    
    
    $
    109,314
    
    
    $
    
    
    
    $
    25,686
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    135,0002008
    
    
    $
    106,795
    
    
    $
    
    
    
    $
    53,543
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    160,338
  32




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##### Table of Contents



DIRECTOR COMPENSATION
  Change in PensionFees Earned
    
    
    
    
    
    
    
    
    
    
    Non-Equity
    
    
    Value and Nonqualifiedor Paid in
    
    
    
    
    
    
    Option
    
    
    Incentive Plan
    
    
    Deferred Compensation
    
    
    All OtherName
    
    Cash ($)
    
    
    Stock Awards ($)
    
    
    Awards ($)
    
    
    Compensation ($)
    
    
    Earnings ($)
    
    
    Compensation ($)
    
    
    Total ($)Petros Kitsos
    
    $
    
    
    
    $
    54,572
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    54,572Jacques Vincent
    
    $
    
    
    
    $
    54,572
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    54,572Steve Hanni
    
    $
    
    
    
    $
    49,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    49,000
  EMPLOYMENT AND OTHER AGREEMENTS
  
    
    In November 2006, we entered into an Employment Agreement effective January 1,
2007 with our Chief Executive Officer pursuant to which he 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.
  
 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 ClassFrederic Scheer (1)(2)
    
    
    2,732,621
    
    
    
    27.66
    %William Kelly
    
    
    66,009
    
    
    
    *Gary Larrivee
    
    
    18,545
    
    
    
    *Mark Barton
    
    
    13,459
    
    
    
    *Margaret McMurray
    
    
    8,421
    
    
    
    *Petros Kitsos
    
    
    31,250
    
    
    
    *Jacques Vincent
    
    
    31,250
    
    
    
    *Steve Hanni
    
    
    12,500
    
    
    
    *All officers and directors as a group
    
    
    2,914,055
    
    
    
    29.50
    %
 *
    
    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 Scheer Foundation.(2)
    
    Mr. Scheer gifted 42,125 shares to certain members of the management of Cereplast on March
10, 2009.  33




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##### Table of Contents



Item 13.
    
    Certain Relationships, Related Transactions, and Director Independence
  
 Item 14.
    
    Principal Accountant Fees and Services
  Fee Type
    
    2009
    
    
    2008Audit Fees
    
    $
    68,000
    
    
    $
    67,485Tax Fees
    
    
    1,871
    
    
    
    2,281$
    69,871
    
    
    $
    69,766
    34




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##### Table of Contents



ExhibitNumber
    
    Description3.1
    
    
    Articles of Incorporation. (Incorporated by reference to the
Form SB-2 Registration Statement filed with the Securities and Exchange
Commission dated July 5, 2005.)3.2
    
    
    Certificate of Amendment to the Articles of Incorporation
dated February 26, 2003 (Incorporated by reference to the Form SB-2
Registration Statement filed with the Securities and Exchange Commission dated
July 5, 2005.)3.3
    
    
    Certificate of Amendment to the Articles of Incorporation dated
July 19, 2004 (Incorporated by reference to the Form SB-2 Registration
Statement filed with the Securities and Exchange Commission dated July 5,
2005.)3.4
    
    
    Certificate of Amendment to the Articles of Incorporation
dated March 18, 2005 (Incorporated by reference to the Form SB-2
Registration Statement filed with the Securities and Exchange Commission dated
July 5, 2005.)3.5
    
    
    Certificate of Amendment to the Articles of Incorporation filed
January 6, 2010 (Incorporated by reference to the Registrants current report
on Form 8-K filed with the SEC on January 8, 2010)3.6
    
    
    Bylaws (Incorporated by reference to the Form SB-2 Registration
Statement filed with the Securities and Exchange Commission dated July 5,
2005.)3.7
    
    
    Amendment to Bylaws (Incorporated by reference to the Registrants
current report on Form 8-K filed with the SEC on
December 28, 2009)3.8
    
    
    Employment Agreement effective January 1, 2007, with our Chief Executive Officer.4.1
    
    
    Form of Subscription Agreement used in connection with
private offering dated April 2005 (Incorporated by reference to the Form
SB-2 Registration Statement filed with the Securities and Exchange Commission
dated August 26, 2005)4.2
    
    
    Stock Option Plan(Incorporated by reference to the Form SB-2
Registration Statement filed with the Securities and Exchange Commission dated
August 26, 2005)4.3
    
    
    Form of Subscription Agreement used in connection with
private offering of 21,800 shares of common stock (Incorporated by
reference to the Form SB-2 Registration Statement filed with the Securities and
Exchange Commission dated August 26, 2005)4.4
    
    
    Periodic Equity Investment Agreement dated February 13, 2006
between the Company and Cumorah Capital, Inc. (Incorporated by reference to
the Form SB-2 Registration Statement filed with the Securities and Exchange
Commission dated February 14, 2006)4.5
    
    
    Registration Rights Agreement dated February 13, 2006 between the
Company and Cumorah Capital, Inc. (Incorporated by reference to the Form
SB-2 Registration Statement filed with the Securities and Exchange Commission
dated February 14, 2006)4.6
    
    
    Letter Agreement dated March 31, 2006 by and between the Company
and Cumorah Capital, Inc. (Incorporated by reference to the Form 8-K
Current Report filed with the Securities and Exchange Commission dated December
21, 2006)4.7
    
    
    Periodic Equity Investment Agreement dated December 8, 2008 between
the Company and Cumorah Capital, Inc. (Incorporated by reference to the
Form 8-K Current Report filed with the Securities and Exchange Commission dated
December 8, 2008)10.1
    
    
    Sale and Purchase Agreement entered between the Company and
Cargill Dow LLC (Incorporated by reference to the Form SB-2 Registration
Statement filed with the Securities and Exchange Commission dated August 26,
2005)
  35




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##### Table of Contents



ExhibitNumber
    
    Description10.6
    
    
    Promissory Note in the amount of $100,000 in the name of Wings
Fund Inc. (Incorporated by reference to the Form SB-2 Registration
Statement filed with the Securities and Exchange Commission dated September 21,
2005.)10.7
    
    
    Promissory Note in the amount of $50,000 in the name of
Yanosan Group (Incorporated by reference to the Form SB-2 Registration
Statement filed with the Securities and Exchange Commission dated September 21,
2005.)10.8
    
    
    Form of Subscription Agreement used in connection with
private offering of 958,526 shares of common stock (Incorporated by
reference to the Form SB-2 Registration Statement filed with the Securities and
Exchange Commission dated July 6, 2007)10.9
    
    
    Letter re Termination of Periodic Equity Investment Agreement dated
December 8, 2008 (Incorporated by reference to the Registrants current report
on Form 8-K filed with the SEC on February 19, 2010)10.10
    
    
    Lease between Continental Grand I, L.P. and Cereplast, Inc. dated
December 31, 2009 (Incorporated by reference to the Registrants current report
on Form 8-K filed with the SEC on January 6, 2010)14.1
    
    
    Code of Ethics (Incorporated by reference to the Form SB-2
Registration Statement filed with the Securities and Exchange
Commission dated July 5, 2005.)31.1
    
    
    Certification of the Chief Executive Officer and the
Principal Accounting and Financial Officer pursuant to Section 302 of the Sarbanes
Oxley Act of 200232.1
    
    
    Certification of the Chief Executive Officer and the Principal Accounting and Financial Officer
pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
  36




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##### Table of Contents



SIGNATURES
  CEREPLAST, INC.Dated: March 31, 2010
    By:
    /s/  Frederic ScheerFrederic Scheer, Chairman,Chief Executive Officer, Director and Principal Accounting and Financial Officer  Dated: March 31, 2010
    By:
    /s/ Frederic ScheerFrederic  Scheer,Chairman, Chief Executive Officer, Director and Principal Accounting and Financial OfficerDated: March 31, 2010
    By:
    /s/ Jacques VincentJacques Vincent, DirectorDated: March 31, 2010
    By:
    /s/ Petros KitsosPetros Kitsos, DirectorDated: March 31, 2010
    By:
    /s/ Steve HanniSteve Hanni, Director  37




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##### Table of Contents



Item 15.
    
    Exhibits and Financial Statement Schedules
  Report of the Independent Registered Public Accounting Firm
    
    
    36Consolidated Balances Sheets
    
    
    37Consolidated Statements of Operations
    
    
    38Consolidated
Statements of Shareholders Equity and Comprehensive Loss
    
    
    39Consolidated Statements of Cash Flows
    
    
    40Notes to Consolidated Financial Statements
    
    
    41
 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
      By:
    
    /s/ HJ Associates & Consultants, LLPHJ Associates & Consultants, LLPSalt Lake City, UtahMarch 31, 2010
  F-1




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##### Table of Contents



CEREPLAST, INC.
 
 CONSOLIDATED BALANCE SHEETS
 12/31/2009
    
    
    12/31/2008ASSETSCurrent AssetsCash
    
    $
    1,305,771
    
    
    $
    501,699Accounts Receivable, Net
    
    
    325,270
    
    
    
    280,102Inventory, Net
    
    
    847,527
    
    
    
    1,838,775Prepaid Expenses
    
    
    215,356
    
    
    
    160,863Total Current Assets
    
    
    2,693,924
    
    
    
    2,781,439Property and EquipmentProperty and Equipment
    
    
    5,416,436
    
    
    
    5,729,051Accumulated Depreciation
    
    
    (1,519,714
    )
    
    
    (1,132,337
    )Net Property and Equipment
    
    
    3,896,722
    
    
    
    4,596,714Other AssetsRestricted Cash
    
    
    
    
    
    
    48,628Intangibles, Net
    
    
    184,039
    
    
    
    173,285Deposits
    
    
    89,286
    
    
    
    44,943Total Other Assets
    
    
    273,325
    
    
    
    266,856Total Assets
    
    $
    6,863,971
    
    
    $
    7,645,009LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts Payable
    
    $
    989,927
    
    
    $
    962,096Other Payables
    
    
    1,413
    
    
    
    33,634Accrued Expenses
    
    
    604,015
    
    
    
    829,933Capital Leases, Current Portion
    
    
    25,341
    
    
    
    47,440Convertible Shareholder Loan
    
    
    
    
    
    
    212,482Loan Payable, Current Portion
    
    
    53,487
    
    
    
    156,522Total Current Liabilities
    
    
    1,674,183
    
    
    
    2,242,107Long-Term LiabilitiesCapital Leases
    
    
    8,897
    
    
    
    40,045Total Long-Term Liabilities
    
    
    8,897
    
    
    
    40,045Total Liabilities
    
    
    1,683,080
    
    
    
    2,282,152Shareholders EquityPreferred Stock, $0.001 Par Value;
5,000,0000 Authorized Preferred Shares , Zero Outstanding
    
    
    
    
    
    
    Common Stock, $0.001 Par Value;
495,000,000 Authorized Shares; 9,825,476 Shares &
7,028,359 Shares Issued and Outstanding, Respectively
    
    
    9,825
    
    
    
    7,028Common Stock
Subscribed, Not Issued
    
    
    
    
    
    
    250,000Additional Paid in Capital
    
    
    40,578,981
    
    
    
    34,449,129Retained Earnings/(Deficit)
    
    
    (35,444,968
    )
    
    
    (29,372,020
    )Other Comprehensive Income
    
    
    37,053
    
    
    
    28,720Total Shareholders Equity
    
    
    5,180,891
    
    
    
    5,362,857Total Liabilities and Shareholders Equity
    
    $
    6,863,971
    
    
    $
    7,645,009
   F-2




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##### Table of Contents



CEREPLAST, INC.
 
 CONSOLIDATED
STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
 Year Ended
    
    
    Year Ended12/31/2009
    
    
    12/31/2008GROSS SALES
    
    $
    2,751,445
    
    
    $
    4,599,303Sales Discounts, Returns & Allowances
    
    
    (12,437
    )
    
    
    (87,147
    )NET SALES
    
    
    2,739,008
    
    
    
    4,512,156COST OF SALES
    
    
    2,401,424
    
    
    
    4,431,976GROSS PROFIT
    
    
    337,584
    
    
    
    80,180OPERATING EXPENSESDepreciation and Amortization
    
    
    538,098
    
    
    
    545,832Financing Costs
    
    
    
    
    
    
    100,027Marketing Expense
    
    
    371,237
    
    
    
    1,547,547Professional Fees
    
    
    728,454
    
    
    
    996,322Rent Expense
    
    
    549,955
    
    
    
    1,064,765Research and Development
    
    
    313,078
    
    
    
    1,071,814Salaries & Wages
    
    
    1,708,537
    
    
    
    3,263,518Salaries & Wages  Stock Based Compensation
    
    
    273,919
    
    
    
    2,859,680Other Operating Expenses
    
    
    1,230,979
    
    
    
    1,829,864TOTAL OPERATING EXPENSES
    
    
    5,714,257
    
    
    
    13,279,369LOSS FROM OPERATIONS BEFORE OTHER
INCOME(EXPENSES)
    
    
    (5,376,673
    )
    
    
    (13,199,189
    )OTHER INCOME (EXPENSES)Gain on Marketable Securities
    
    
    
    
    
    
    346,280Restructuring Costs
    
    
    (448,846
    )
    
    
    Loss on Settlement of Litigation
    
    
    (67,200
    )
    
    
    Loss on Sale of Equipment
    
    
    (172,366
    )
    
    
    (4,588
    )Interest Income
    
    
    20,935
    
    
    
    117,628Interest Expense
    
    
    (28,798
    )
    
    
    (8,832
    )TOTAL OTHER INCOME (EXPENSES)
    
    
    (696,275
    )
    
    
    450,488LOSS BEFORE PROVISIONS FOR TAXES
    
    
    (6,072,948
    )
    
    
    (12,748,701
    )Provision for Taxes
    
    
    
    
    
    
    NET LOSS
    
    
    (6,072,948
    )
    
    
    (12,748,701
    )OTHER COMPREHENSIVE INCOMEGain on Foreign Currency Translation
    
    
    8,333
    
    
    
    28,720TOTAL COMPREHENSIVE LOSS
    
    $
    (6,064,615
    )
    
    $
    (12,719,981
    )BASIC AND DILUTED LOSS PER SHARE
    
    $
    (0.75
    )
    
    $
    (1.92
    )WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED
    
    
    8,044,487
    
    
    
    6,644,184
   F-3




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##### Table of Contents



CEREPLAST, INC.
 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY AND COMPREHENSIVE LOSS
 OtherCommon Stock
    
    
    Preferred Stock
    
    
    Additional
    
    
    Accumulated
    
    
    Comprehensive
    
    
    SubscribedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Paid-In Capital
    
    
    Deficit
    
    
    Income
    
    
    Stock
    
    
    TotalBalance, December 31, 2007
    
    
    6,482,560
    
    
    $
    6,482
    
    
    
    
    
    
    $
    
    
    
    $
    28,983,367
    
    
    $
    (16,623,319
    )
    
    $
    
    
    
    $
    
    
    
    $
    12,366,530Issuance of common stock as compensation. Stock price ranging from $4.40 per share to $25.60
per share
    
    
    169,431
    
    
    
    169
    
    
    
    
    
    
    
    
    
    
    
    1,688,644
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,688,813Issuance of common stock to 3rd parties and directors for services. Stock price ranging from
$4.40 per share to $25.60 per share
    
    
    51,652
    
    
    
    52
    
    
    
    
    
    
    
    
    
    
    
    749,061
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    749,113Expense relating to stock options under employee stock option plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    578,066
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    578,066Issuance of common stock for cash. Stock price ranging from $8.80 per share to $15.20 per share
    
    
    299,716
    
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    2,637,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,637,500Issuance of common stock to Cumorah for commitment fee on equity line of financing
    
    
    25,000
    
    
    
    25
    
    
    
    
    
    
    
    
    
    
    
    99,975
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    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
    
    
    7,028,359
    
    
    
    7,028
    
    
    
    
    
    
    
    
    
    
    
    34,449,129
    
    
    
    (29,372,020
    )
    
    
    28,720
    
    
    
    250,000
    
    
    
    5,362,857Stock issued in fulfillment of subscriptions at $2.00 per share
    
    
    125,000
    
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    249,875
    
    
    
    
    
    
    
    
    
    
    
    (250,000
    )
    
    
    Issuance of
common stock in repayment of a convertible shareholder loan at $3.47 per share.
    
    
    61,250
    
    
    
    61
    
    
    
    
    
    
    
    
    
    
    
    212,421
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    212,482Issuance of common stock for the services of directors and employees. Stock at prices ranging
from $3.60 per share to $6.00 per share
    
    
    212,400
    
    
    
    212
    
    
    
    
    
    
    
    
    
    
    
    860,597
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    860,809Issuance of common stock to 3rd parties for prepaid services and debt repayment. Stock price
ranging from $3.60 per share to $5.20 per share
    
    
    318,590
    
    
    
    319
    
    
    
    
    
    
    
    
    
    
    
    1,300,961
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,301,280Expense relating to cancellation of stock options under employee stock option plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (259,056
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (259,056
    )Issuance of common stock for cash. Stock price ranging from $1.60 per share to $2.00 per share
    
    
    1,948,170
    
    
    
    1,948
    
    
    
    
    
    
    
    
    
    
    
    3,894,393
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,896,341Issuance of common stock to Cumorah for commitment fee on equity line of financing
    
    
    114,207
    
    
    
    114
    
    
    
    
    
    
    
    
    
    
    
    299,886
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300,000Issuance of common stock for litigation settlement.
    
    
    17,500
    
    
    
    18
    
    
    
    
    
    
    
    
    
    
    
    67,182
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67,200Stock Offering Costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (496,407
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (496,407
    )Net loss for the year ended December 31, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,072,948
    )
    
    
    
    
    
    
    
    
    
    
    (6,072,948
    )Gain on foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,333
    
    
    
    
    
    
    
    8,333Balance, December 31, 2009
    
    
    9,825,476
    
    
    $
    9,825
    
    
    
    
    
    
    $
    
    
    
    $
    40,578,981
    
    
    $
    (35,444,968
    )
    
    $
    37,053
    
    
    $
    
    
    
    $
    5,180,891
 
  F-4




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##### Table of Contents



CEREPLAST, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Year Ended
    
    
    Year Ended12/31/2009
    
    
    12/31/2008CASH FLOWS FROM OPERATING ACTIVITIES:Net Loss
    
    $
    (6,072,948
    )
    
    $
    (12,748,701
    )Adjustment to Reconcile Net Loss to Net Cash
Used in Operating ActivitiesDepreciation
and Amortization
    
    
    538,098
    
    
    
    545,832Reserve for Inventory Obsolescence
    
    
    (132,000
    )
    
    
    132,000Allowance for Doubtful Accounts
    
    
    4,987
    
    
    
    18,051Loss on Sale of Equipment
    
    
    172,366
    
    
    
    4,588Gain on Sale
of Securities
    
    
    
    
    
    
    (346,280
    )Common Stock and Common Stock Equivalents Issued for Services,
Salaries & Wages
    
    
    712,153
    
    
    
    3,115,992Loss on Settlement of Litigation
    
    
    67,200
    
    
    
    (Increase) Decrease in:Accounts Receivable
    
    
    (50,155
    )
    
    
    132,867Inventory
    
    
    1,123,248
    
    
    
    (143,108
    )Deposits
    
    
    (44,343
    )
    
    
    (14,465
    )Prepaid Expenses
    
    
    1,026,173
    
    
    
    (93,273
    )Restricted Cash
    
    
    48,628
    
    
    
    24,264Intangibles
    
    
    (19,377
    )
    
    
    (161,122
    )Increase (Decrease) in:Accounts Payable
    
    
    88,497
    
    
    
    514,455Accrued Expenses
    
    
    (255,918
    )
    
    
    676,986Other Payables
    
    
    (32,220
    )
    
    
    33,488NET CASH USED IN OPERATING ACTIVITIES
    
    
    (2,795,611
    )
    
    
    (8,308,426
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of Property and Equipment
    
    
    (18,319
    )
    
    
    (2,891,918
    )Proceeds from Sale of Equipment
    
    
    3,617
    
    
    
    2,936Proceeds from Sale of Securities
    
    
    
    
    
    
    346,780NET CASH USED IN INVESTING ACTIVITIES
    
    
    (14,702
    )
    
    
    (2,542,202
    )CASH FLOWS FROM FINANCING ACTIVITIES:Advances/(Payments) on Shareholder Loans
    
    
    
    
    
    
    212,482Payments on Capital Leases
    
    
    (53,247
    )
    
    
    (71,767
    )Payments on Term Loan Payable
    
    
    (3,874
    )
    
    
    (11,138
    )Payments on Notes Payable
    
    
    (36,761
    )
    
    
    Proceeds from Issuance of Common Stock and Subscription Receivable
    
    
    4,196,341
    
    
    
    2,877,500Stock Offering Costs
    
    
    (496,407)
    
    
    
    (287,184)NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    3,606,052
    
    
    
    2,729,893FOREIGN CURRENCY TRANSLATION
    
    
    8,333
    
    
    
    28,720NET DECREASE IN CASH
    
    
    804,072
    
    
    
    (8,092,015
    )CASH, BEGINNING OF PERIOD
    
    
    501,699
    
    
    
    8,593,714CASH, END OF PERIOD
    
    $
    1,305,771
    
    
    $
    501,699
       F-5




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##### Table of Contents



CEREPLAST, INC.
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
 FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
  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 17 commercial grades of Compostables Resins in this product line.
These resins are compatible with existing manufacturing processes and equipment making them
a ready substitute for traditional petroleum-based resins. 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.
    
    Cereplast Algae Plastics. In October 2009 we announced that we have been developing a
new technology to transform algae into bioplastics and intend to launch a new family of
algae-based resins that will complement the companys existing line of Compostables &
Hybrid resins. Although we do not expect this new technology to become commercial before
the end of 2010 or early 2011, it remains an important development as we believe that the
potential open by algae is quite substantial. Cereplast algae-based resins could replace in
a first step 50% or more of the petroleum content used in traditional plastic resins.
Currently, Cereplast is using renewable material such as starches from corn, tapioca, wheat
and potatoes and Ingeo® PLA. Recently the algae production business has attracted a lot of
attention when Exxon announced a $600 million investment in Synthetic Genomics and BPs $10
million investment in Martek Biosciences. The Company retains that algae is a very
attractive feedstock as it does offer a low carbon footprint alternative and at the same
time could be accessible in very large quantity. We also have a future plan to create algae
plastic made of 100% algae component abandoning any reliance on fossils fuels.
   F-6




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##### Table of Contents



Basis of Presentation and Consolidation
  Use of Estimates
  Reclassifications
  Cash and Cash Equivalents
  Concentration of Credit Risk
  Accounts Receivable
 The Company extends unsecured credit to its customers in the normal course of business.
Periodically, the Company performs credit and valuations of its customers financial
condition for determination of allowance for doubtful accounts. Liquidity and Capital Resources
 We have incurred a net loss of $6,072,948 for the year ended December 31, 2009, and $12,748,701 for the year ended
December 31, 2008, and have an accumulated deficit of $35,444,968 as of December 31, 2009. Based on our operating
plan, our existing working capital will not be sufficient to meet the cash requirements to fund our planned operating
expenses, capital expenditures and working capital requirements through December 31, 2010 without additional sources of
cash. Our plan to address the shortfall of working capital is to generate additional financing through a combination of
financing of assets, incremental product sales and the sale of equity securities. There are no assurances that we will
be able to obtain any sources of financing on acceptable terms, or at all. If we cannot obtain sufficient additional financing in the short-term, we may be forced to file for bankruptcy or cease
operations. The consolidated financial statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we
be forced to take such actions. Other Concentration
 During the year ended December 31, 2009, we had two significant suppliers that
accounted for 27.9% and 18.7%, respectively, of total cost of goods
sold and had three customers,
Dorel Juvenile Group, which accounted for 32.7% of total sales. Innoware Plastics Inc. which accounted for 10.3% of total sales, and Solo Cup Company which accounted for 11.3% of total sales. No other supplier or customer
accounted for more than 10% of cost of sales or sales during this
period. Restricted Cash
 We had restricted cash in the amount of $0 and $48,628 at December 31, 2009 and 2008, respectively.
The restricted cash amount consists of a Certificate of Deposit which supports a Letter of
Credit for a leased facility. Fair Value of Financial Instruments
 The carrying amounts of our financial instruments as of December 31, 2009 and 2008, which include
cash equivalents, accounts receivable, unbilled receivable, accounts payable, accrued expenses, and
advances on financing from investors, approximate their fair values due to the short-term nature of
these instruments. Accounts Receivable
   F-7




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##### Table of Contents



Inventories
  2009
    
    
    2008Raw Materials
    
    $
    344,489
    
    
    $
    608,984Bioplastic Resins
    
    
    355,082
    
    
    
    1,040,255Finished Goods
    
    
    76,458
    
    
    
    291,890Packaging Materials
    
    
    14,978
    
    
    
    29,646WIP
    
    
    56,520
    
    
    
    Reserve for Obsolescence
    
    
    
    
    
    
    (132,000
    )Inventories, Net
    
    $
    847,527
    
    
    $
    1,838,775
 Property and Equipment
  2009
    
    
    2008Equipment
    
    $
    2,518,132
    
    
    $
    2,582,204Construction in Progress
    
    
    2,588,904
    
    
    
    2,593,937Furniture & Fixtures
    
    
    275,055
    
    
    
    325,738Leasehold Improvements
    
    
    34,345
    
    
    
    227,1725,416,436
    
    
    
    5,729,051Less Accumulated Depreciation
    
    
    (1,519,714
    )
    
    
    (1,132,337
    )Net Property and Equipment
    
    $
    3,896,722
    
    
    $
    4,596,714
 Intangibles
  2009
    
    
    2008Intangibles
    
    $
    208,304
    
    
    $
    188,927Less Accumulated Amortization
    
    
    (24,265
    )
    
    
    (15,642
    )Net Intangibles
    
    $
    184,039
    
    
    $
    173,285
 Deferred Income Taxes
   F-8




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##### Table of Contents



Revenue Recognition
  Marketing and Advertising
  Research and Development Costs
  Stock-Based Compensation
 
 Loss per Share Calculations
  Legal Proceedings
   Reverse Stock Split
   F-9




---



##### Table of Contents




    
    In private placement transactions, which were 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 1,948,170 restricted
shares of common stock for gross cash proceeds of $3,896,341, and 125,000 restricted
shares of common stock in fulfillment of subscriptions received prior to December 31, 2008
of $250,000.
    
    Also on February 18, 2009 we also issued 61,250 shares of restricted common stock
valued at $212,482 to one of our shareholders, a party related to our Chief Executive
Officer, in repayment of a convertible shareholder loan. The stock issuance includes
36,250 shares related to the original principal amount of $212,482 and 25,000 additional
shares related to an agreement to waive default penalties.
    
    We issued 318,590 shares of restricted common stock valued at $1,301,280 for debt repayment and services from third parties rendered during the year.
    
    We issued 212,400 shares of restricted common stock valued at $860,809 to directors and various
employees during the period.
    
    We issued 114,207 shares of restricted common stock for net cash proceeds of $300,000
pursuant to the Periodic Equity Investment Agreement with Cumorah Capital, Inc. dated
December 8, 2008.
    
    We issued 17,500 shares of restricted common stock valued at $67,200 under the terms of
a litigation settlement.
  
    
    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 299,716 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 25,000 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 221,083 shares of common stock valued at $2,437,926 to various
employees, directors, and third parties for services rendered.
  F-10




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##### Table of Contents



Valuation Assumptions for Stock Options
  Year endedDecember 31,2009Average 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 do 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
  2009
    
    
    2008Weighted Average
    
    
    
    
    
    
    Weighted AverageShares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise PriceOutstandingbeginning of year
    
    
    249
    
    
    $
    22.40
    
    
    
    290
    
    
    $
    22.40Granted at fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Canceled/forfeited
    
    
    (178
    )
    
    
    22.40
    
    
    
    (41
    )
    
    
    22.40Outstandingend of year
    
    
    71
    
    
    
    18.40
    
    
    
    249
    
    
    
    22.40Options exercisable at
year-end
    
    
    71
    
    
    $
    18.40
    
    
    
    171
    
    
    $
    22.40
  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-$22.40
    
    
    71
    
    
    $
    18.40
    
    
    
    4.3
    
    
    
    
    
    
    
    71
    
    
    $
    18.40
    
    
    
    4.3
    
    
    
    
  F-11




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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 has been vacated and terminated prior to expiration; and
   Indiana Facility 
  2010
    
    $
    120,0002011
    
    
    300,0002012
    
    
    300,0002013
    
    
    300,0002014
    
    
    300,000Thereafter
    
    
    1,200,0002,520,000
  Term Loan
  Notes Payable
  Shareholder Loan
      F-12




---



##### Table of Contents



2009
    
    
    2008Income tax benefit computed at U.S. Federal
statutory rate (34%)
    

$
    (1,442,434
    )


    $
    (4,231,111
    )State income taxes, net of benefit federal taxes
    
    
(211,810
    )

    
    
    (622,222
    )Meals & Entertainment
    
    
    490
    
    
    
    3,225Stock for services
    
    
    723,536
    
    
    
    1,201,189Depreciation
    
    
    37,611
    
    
    
    (80,980
    )Accruals
    
    
    25,143
    
    
    
    153,850Disposal of Assets
    
    
     (23,040
    )
    
    

1,593Bad Debt Expense
    
    
    1,945
    
    
    
    Inventory Reserve
    
    
    (51,480
    )
    
    
    Less Valuation Allowance
    
    
    940,039
    
    
    
    3,574,456Income tax expense
    
    $
    
    
    
    $
    
  2009
    
    
    2008Deferred Tax Assets:NOL Carryover
    

     $
    9,146,078
    

    $
    7,572,160R&D Carryover
    
    
    83,948
    
    
    
    48,630Contribution
Carryover
    
    
    1,349
    
    
    
    Allowance for Doubtful Accounts
    
    
    13,391
    
    
    
    11,125Inventory Reserve
    
    
    
    
    
    
    51,480RP Accruals
    
    

    120,799
    
    
    
    95,655Deferred tax Liabilities:Depreciation
    
    

    (210,813
    )
    
    
    (290,900
    )Less Valuation Allowance
    
    
    (9,154,752
    )
    
    
    (7,488,150
    )Income Tax Expense
    
    $
    
    
    
    $
    
  F-13




---



##### Table of Contents



2009
    
    
    2008Capital 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.
    
    $
    506
    
    
    $
    6,125Capital 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.
    
    
    7,843
    
    
    
    30,249Capital 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 was $1.00.
    
    
    
    
    
    
    4,389Capital 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.
    
    
    7,558
    
    
    
    19,757Capital 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.
    
    
    10,467
    
    
    
    15,662Capital 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.
    
    
    7,864
    
    
    
    11,30334,238
    
    
    
    87,485Less Current Portion
    
    
    (25,341
    )
    
    
    (47,440
    )$
    8,897
    
    
    $
    40,045
  Years ending December 31,2010
    
    $
    27,3902011
    
    
    9,280Total Payments
    
    
    36,670Less Interest Portion
    
    
    (2,432
    )Present Value of Future Payments
    
    $
    34,238
  2009
    
    
    2008Assets Under Capital Leases
    
    $
    318,122
    
    
    $
    318,122Less Accumulated Depreciation
    
    
    (217,190
    )
    
    
    (172,236
    )$
    100,932
    
    
    $
    145,886
  F-14




---



##### Table of Contents




    
    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 was
secured by the Companys assets up to the value of the loan, bears no interest, and was
repayable on or before January 15, 2009 at the Companys discretion in cash or 36,250
shares of Cereplast common stock. In February, 2009 this loan was repaid in full through
the issue of 61,250 shares of Cereplast common stock, including the 36,250 shares related
to the original principal conversion and 25,000 additional shares related to the agreement
to waive default penalties.
  Lease
  Reverse Stock Split
  Issuance of Capital Stock
  Stock Subscriptions
   F-15