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, 2010
 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: 001-34689
 Cereplast, Inc.
 (Exact name of registrant as specified in its charter)
 
 Nevada
(State or other jurisdiction of 
incorporation or organization)
    
    91-2154289
(I.R.S. Employer
Identification No.)300 Continental Blvd., Suite 100
El Segundo, California
    
    90245(Address of principal executive office)
    
    (Zip Code)
 (310) 615-1900
 (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:
 o þ
 o 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. 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
    
    
    23Item 9 Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
    
    
    24Item 9A Controls and Procedures
    
    
    24Item 9B Other Information
    
    
    24PART IIIItem 10. Directors, Executive Officers, and Corporate Governance
    
    
    25Item 11. Executive Compensation
    
    
    28Item 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholders Matters
    
    
    29Item 13. Certain Relationships and Related Transactions, and Director Independence
    
    
    30Item 14. Principal Accountant Fees and Services
    
    
    30PART IVItem 15. Exhibits and Financial Statement Schedules
    
    
    31SIGNATURES
    
    
    33
  2




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STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
   3




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##### 



PART I
 
 Item 1.
    
    Business
 Overview
 ®
    
    
    Cereplast Compostables® resinsare renewable, ecologically-sound
substitutes for petroleum-based plastics targeting primarily single-use disposables and
packaging applications. We offer 12 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 Sustainables resinsare renewable, ecologically-sound substitutes
for petroleum-based plastics targeting primarily single-use disposables and packaging
applications. We offer eight commercial grades of Sustainables 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 Sustainables line in late 2007 under the name Cereplast Hybrid Resins®.
 
    
    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 resins 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. Cereplast 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 three 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 and Sustainable resins. Although we do not expect this new
technology to become commercial before mid 2011, it remains an important development
as we believe that the potential for algae-based resins 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, potatoes and
Ingeo® PLA, which are considered food related crops. Cereplast believes
that it is important to enhance research on non-food crops as the Company is
expecting a surge in demand in bioplastics in the years to come thus potentially
creating pressure on food crops. Algae is the first non-food crop project the
company will introduce and our R&D department is contemplating the development of
additional non-food crop polymers in future years. Recently the algae production
business has attracted considerable attention when Exxon announced a $600 million
investment in Synthetic Genomics and BP invested $10 million in Martek Biosciences.
We maintain that algae is a very attractive feedstock as it offers a low carbon
footprint alternative and at the same time could be accessible in very large
quantities. We also have a long-term future plan to create algae plastic made of
100% algae component, abandoning any reliance on fossil fuels. However the
availability of algae production in large quantities is several years away.
  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. SPI Bioplastic Guide)
 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
  ®
 Market Opportunity
 Greater Environmental Concerns.
  6




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New Regulatory environment in Europe
 National Security Concerns.
 Health and Safety Concerns.
 Our Resin Products
 ® 
 
    
    Injection molding
 
    
    Sheet extrusion
 
    
    Thermoforming
 
    
    Blown film
 
    
    Blow molding
 
    
    Profile extrusion
 
    
    Extrusion coating
 
    
    Extruded foam
 Cereplast
Compostables ®
     7




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Cereplast Sustainables 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
 
    
    Selective extension of our global sales reaches through our own resources and exclusive
distributors. In 2010 the Company entered into several distributorship agreements in the
United States and overseas. Among the most noticeable names are Ashland Inc. distributing
Cereplast resins in the United States and A. Schulman GmbH distributing Cereplast resins in
Europe.
 
    
    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
    
    
    
    
    
    
    50,000,000Total
    
    
    38,400,000
    
    
    
    50,000,000
  Competition
    Government Regulation
  Research and Development
   9




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
    
    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
 ® ®
  History
  Employees
  
 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.
   10




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In the current economic environment we will be required to raise additional capital to fund
our growth, research and development efforts, marketing programs, enhancement of our production
capacity, 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;
 
    
    the level of research and development and market commercialization spending; and
 
    
    the necessity to acquire additional manufacturing capacity
  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.
   12




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Many potential competitors who have greater resources and experience than we do may develop
products and technologies that compete with ours.
  As the bioplastic industry grows, the demand for biopolymers grows as well, creating more
uncertainty with respect to access to critical components of our process.
 ® ®
  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, 2010, we had two significant customers that accounted for
62.9% of total sales. The loss of these customers could adversely affect our short-term sales and
profitability.
  We are subject to risks generally associated with companies that operate in a global
environment, which could affect our growth and financial performance.
  
    
    compliance with U.S. laws affecting operations outside of the U.S., such as the Foreign
Corrupt Practices Act,
 
    
    compliance with a variety of local regulations and laws,
 
    
    changes in tax laws and the interpretation of those laws,
 
    
    disruptions in ocean container shipping routes,
 
    
    fluctuations in currency values,
 
    
    sudden changes in foreign currency exchange controls,
 
    
    discriminatory or conflicting fiscal policies,
 
    
    difficulties enforcing intellectual property and contractual rights in certain
jurisdictions,
 
    
    greater risk of uncollectible accounts and longer collection cycles,
 
    
    imposition of more or new tariff, quotas, trade barriers, and similar restrictions on
our sales outside the U.S.
  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.
   13




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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.
  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 common stock
 We may fail to qualify for continued listing on the NASDAQ Capital Market which could make it
more difficult for investors to sell their shares.
  Our common stock may be affected by limited trading volume and price fluctuations which could
adversely impact the value of our common stock.
   14




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We have not and do not anticipate paying any dividends on our common stock.
  Our Board of Directors has the authority, without stockholder approval, to issue preferred
stock with terms that may not be beneficial to common stock holders.
   
 Item 1B.
    
    Unresolved Staff Comments
  
 Item 2.
    
    Properties
  California Facilities:
 Indiana Facility:
 
 Item 3.
    
    Legal Proceedings
  
 Item 4.
    
    Removed and 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
   2010
    
    
    2009High
    
    
    Low
    
    
    High
    
    
    LowFirst Quarter ended March 31
    
    $
    6.73
    
    
    $
    3.90
    
    
    $
    6.80
    
    
    $
    2.80Second Quarter ended June 30
    
    $
    5.36
    
    
    $
    3.02
    
    
    $
    6.40
    
    
    $
    2.80Third Quarter ended September 30
    
    $
    3.99
    
    
    $
    3.14
    
    
    $
    6.00
    
    
    $
    3.60Fourth Quarter ended December 31
    
    $
    4.15
    
    
    $
    2.82
    
    
    $
    6.00
    
    
    $
    3.20
 Holders
  Dividend Policy
  Recent Sale of Unregistered Securities
  
    
    On November 4 2010, we issued 26,180 shares of common stock valued at $73,828 for
employee services.
 Section 4(2) of the Act.
 Equity Compensation Plan Information
 As of December 31, 2010:
 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
    
    
    $
    22.40
    
    
    
    334,375Total
    
    
    71,250
    
    
    $
    22.40
    
    
    
    334,375
  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
 
    
    failure to earn profits
 
    
    inadequate capital to expand our business, inability to raise additional capital or
financing to implement our business plans;
 
    
    decline in demand for our products and services;
 
    
    rapid and significant changes in markets and other factors which encourage use of
bioplastics;
 
    
    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.
  18




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##### 



OVERVIEW
 General
 ®
    
    
    Cereplast Compostables® resinsare renewable, ecologically-sound
substitutes for petroleum-based plastics targeting primarily single-use disposables and
packaging applications. We offer 12 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 Sustainables resinsare renewable, ecologically-sound substitutes
for petroleum-based plastics targeting primarily single-use disposables and packaging
applications. We offer eight commercial grades of Sustainables 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 Sustainables line in late 2007 under the name Cereplast Hybrid Resins®.
 
    
    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 resins 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. Cereplast 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 three 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 and Sustainable resins. Although we do not expect this new
technology to become commercial before mid 2011, it remains an important development
as we believe that the potential for algae-based resins 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, potatoes and
Ingeo® PLA, which are considered food related crops. Cereplast believes
that it is important to enhance research on non-food crops as the Company is
expecting a surge in demand in bioplastics in the years to come thus potentially
creating pressure on food crops. Algae is the first non-food crop project the company will introduce and our R&D department is contemplating the
development of additional non-food crop polymers in future years. Recently the algae
production business has attracted considerable attention when Exxon announced a $600
million investment in Synthetic Genomics and BP invested $10 million in Martek
Biosciences. We maintain that algae is a very attractive feedstock as it offers a low
carbon footprint alternative and at the same time could be accessible in very large
quantities. We also have a long-term future plan to create algae plastic made of 100%
algae component, abandoning any reliance on fossil fuels. However the availability of
Algae production in large quantities is several years away.
  19




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Trends and Uncertainties that May Impact Future Results of Operations
 Global Market and Economic Conditions.
  Sales.
 Operating Expenses.
  20




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CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
  Revenue Recognition
  Research and Development Costs
  Stock-Based Compensation
  Accounts Receivable
  Inventories
  Intangibles
  Property and Equipment
  Deferred Income Taxes
   21




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RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2010 COMPARED TO THE YEAR ENDED DECEMBER 31,
2009
 Sales
  Gross Profit
  Operating Expenses
  
    
    Marketing and sales expenses increased by $1.4 million or 382% for the year ended
December 31, 2010, compared to the year ended December 31, 2009. The increase in expense is
due primarily to increased sales commissions and sales and marketing staff and activities
designed to increase product and market exposure in the US and international markets. During
the year we more than doubled our sales and marketing force worldwide to both drive and
capture market demand.
 
    
    Research and Development costs increased by $0.1 million or 43%, to $0.4 million for the
year ended December 31, 2010, compared to the year ended December 31, 2009. The increase is
primarily a result of an increase in research and development activities and the cost
associated with inventory used for testing purposes at the facilities of potential
customers.
 
    
    Professional fees increased by $0.1 million, or 19%, to $0.9 million for the year ended
December 31, 2010 compared to the year ended December 31, 2009. The increase is primarily
driven by fees paid to search firms for recruitment services as well as increased legal fees
relating to increase in general business activities.
 
    
    Salaries and wages, including non-cash stock based compensation of $0.5 million,
increased by $0.2 million for the year ended December 31, 2010 compared to the year ended
December 31, 2009. The increase is attributable to head count increases due necessitated by
the growth in sales demand. Non-cash compensation for the year included the issuance of
81,345 restricted common shares, valued at $0.3 million to employees for services rendered.
 
    
    Rent expense decreased by $0.1 million or 23%, to $0.4 million for the year ended
December 31, 2010, compared to the year ended December 31, 2009. The decrease in rent is
due primarily to lower lease costs associated with the move of the corporate offices from
Hawthorne, California to El Segundo, California and of the manufacturing facilities from
Hawthorne to Seymour, Indiana.
 
    
    Depreciation and Amortization expense increased by $0.3 million, or 49% to $0.8 million
for the year ended December 31, 2010 compared to the year ended December 31, 2009. The
increase is due to additional depreciation related to the Seymour manufacturing facility
which was placed in service on March 1, 2010.
  22




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Net Loss
  LIQUIDITY AND CAPITAL RESOURCES
        OFF-BALANCE SHEET ARRANGEMENTS
  
 Item 7A.
    
    Quantitative and Qualitative Disclosures about Market Risk
  
 Item 8.
    
    Financial Statements and Supplementary Data
   23




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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
    Changes in Internal Control over Financial Reporting .
 
 Item 9B.
    
    Other Information
   24




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PART III
 
 Item 10.
    
    Directors, Executive Officers, and Corporate Governance
  Name
    
    
    Age
    
    
    PositionFrederic Scheer
    
    
    56
    
    
    CEO, Founder and Chairman of the Board of DirectorsHeather Sheehan
    
    
    48
    
    
    Senior Vice President and Chief Financial OfficerWilliam Kelly
    
    
    65
    
    
    Senior Vice President, TechnologyMark Barton
    
    
    52
    
    
    Senior Vice President, OperationsKelvin Okamoto
    
    
    51
    
    
    Senior Vice President, Research & DevelopmentJacques Vincent
    
    
    64
    
    
    DirectorPetros Kitsos
    
    
    45
    
    
    DirectorCraig Peus
    
    
    38
    
    
    DirectorFranklin Hunt
    
    
    61
    
    
    Director
 FREDERIC SCHEER
  HEATHER SHEEHAN
 WILLIAM KELLY
 MARK BARTON
  25




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##### 



KELVIN OKAMOTO
 INDEPENDENT DIRECTORS
 PETROS KITSOS
  JACQUES VINCENT
  CRAIG PEUS,
  FRANKLIN HUNT,
  Family Relationships
   26




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##### 



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
 
    
    Establishes and reviews general policies relating to compensation and employee benefits.
   NOMINATING AND CORPORATE GOVERNANCE COMMITTEE
  DIRECTOR COMPENSATION
  Compliance with Section 16(a) of the Exchange Act
  Changes in Nominating Procedures
  CODE OF ETHICS
   27




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##### 



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.
 
 Item 11.
    
    Executive Compensation
  ChangeinPensionValueNon-
    
    
    and Non-Equity
    
    
    QualifiedIncenti
    
    
    Deferredve Plan
    
    
    Compens
    
    
    All OtherStock
    
    
    Option
    
    
    Compe
    
    
    ation
    
    
    CompensName & Principal
    
    
    
    
    
    
    
    
    
    Bonus
    
    
    Awards
    
    
    Awards
    
    
    nsation
    
    
    Earnings
    
    
    ation ($)Position
    
    Year
    
    
    Salary ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    (1)
    
    
    Total ($)Frederic Scheer
    
    
    2010
    
    
    $
    269,778
    
    
    
    
    
    
    $
    106,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    133,687
    
    
    $
    404,124Chief Executive Officer
    
    
    2009
    
    
    $
    112,201
    
    
    
    
    
    
    $
    83,836
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    74,400
    
    
    $
    270,437Heather Sheehan (2)
    
    
    2010
    
    
    $
    73,571
    
    
    
    
    
    
    $
    75,002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    77,225
    
    
    $
    225,796Chief Financial Officer
    
    
    2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    William Kelly
    
    
    2010
    
    
    $
    141,315
    
    
    
    
    
    
    $
    61,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    202,565SVP, Technology
    
    
    2009
    
    
    $
    135,247
    
    
    
    
    
    
    $
    106,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    241,492
 (1)
    
    Other compensation comprises payments made of salary amounts voluntarily deferred
from a prior year.(2)
    
    Ms. Sheehan joined the Company on August 16th, 2010.  28




---



##### 



DIRECTOR COMPENSATION (in thousands)
  Non-Equity
    
    
    Change in PensionFees Earned
    
    
    
    
    
    
    Option
    
    
    Incentive Plan
    
    
    Value and Nonqualified
    
    
    All Otheror Paid in
    
    
    Stock Awards
    
    
    Awards
    
    
    Compensation
    
    
    Deferred Compensation
    
    
    CompensationName
    
    Cash ($)
    
    
    ($)
    
    
    ($)
    
    
    ($)
    
    
    Earnings ($)
    
    
    ($)
    
    
    Total ($)Petros Kitsos
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Jacques Vincent
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Steve Hanni
    
    $
    12,500
    
    
    $
    50,000
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    62,500Craig Peus
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Franklin Hunt
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
 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 with annual increases of 7% but has agreed to substitute part of his cash
compensation for restricted stock until the cash flow of the company will permit. During
the year, Mr. Scheer agreed to defer a portion of his annual cash base salary and to
substitute a portion of the cash based salary for stock until the cash flow of the company
permitted payment of earned amounts.
 
    
    Effective August 16, 2010, we entered into an Employment Agreement with
Heather Sheehan pursuant to which Ms. Sheehan will serve as our Senior Vice President
and Chief Financial Officer. The agreement is for a term of 2 years, unless earlier
terminated, as provided in the Agreement. The agreement provides for an initial base salary
of $180,000, which shall increase to $215,000 upon the Company reaching operating cash flow
breakeven and further increased to $250,000 when the Company declares a profit of more than
$100,000 for a single quarter. Ms. Sheehan will also be eligible for an annual bonus upon
the achievement of certain goals and performance as established by the Companys CEO.
However, a bonus shall be payable only when the Company reaches cash flow breakeven.
Pursuant to the terms of the agreement, Ms. Sheehan shall be paid 12 months base salary and
the cash portion of the bonus if her employment is terminated without good cause (as
defined in the Agreement) or if Ms. Sheehan is forced to resign for good reason, (as
defined in the Agreement). The agreement provides for the grant of $75,000 in restricted
stock, which shall become vested simultaneously with the commencement of Ms. Sheehans
employment with the Company and an additional grant of $20,000 in Stock, 50% of which shall
become vested immediately and 50% shall become vested on the sixth month anniversary of Ms.
Sheehans employment with the Company.
 
 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.
  29




---



##### 



Name and Address of Beneficial Owner
    
    Number of Shares Beneficially Owned
    
    
    Percent of ClassFrederic Scheer (1)
    
    
    2,895,605
    
    
    
    18.3
    %William Kelly
    
    
    136,241
    
    
    
    *Heather Sheehan
    
    
    66,073
    
    
    
    *Mark Barton
    
    
    45,960
    
    
    
    *Petros Kitsos
    
    
    113,637
    
    
    
    *Jacques Vincent
    
    
    38,500
    
    
    
    *Craig Peus
    
    
    12,500
    
    
    
    *Franklin Hunt
    
    
    12,500
    
    
    
    *All officers and directors as a group
    
    
    3,424,759
    
    
    
    20.9
    %
 *
    
    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. 
 Item 13.
    
    Certain Relationships, Related Transactions, and Director Independence
  Director Independence
  
 Item 14.
    
    Principal Accountant Fees and Services
 in
thousands
 Fee Type
    
    2010
    
    
    2009Audit Fees
    
    $
    73
    
    
    $
    67Tax Fees
    
    
    2
    
    
    
    2All Other Fees(1)
    
    
    7
    
    
    
    1$
    82
    
    
    $
    70
 (1)
    
    All Other Fees include fees related to reviews and issuance of documents
related to Registration Statements that we filed during the year.    30




---



##### 



Item 15.
    
    Exhibits and Financial Statement Schedules
  Report of the Independent Registered Public Accounting Firm
    
    
    34Consolidated Balances Sheets
    
    
    35Consolidated Statements of Operations
    
    
    36Consolidated Statements of Shareholders Equity and Comprehensive Loss
    
    
    37Consolidated Statements of Cash Flows
    
    
    38Notes to Consolidated Financial Statements
    
    
    39
  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)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)4.8
    
    
    Form of Warrant issued in connection with the Securities Purchase Agreement, dated June 9, 2010 entered into between the Company and each investor,
party thereto (Incorporated by reference to the Registrants current
report on Form 8-K filed with the SEC on June 15, 2010)
  31




---



##### 



ExhibitNumber
    
    Description4.9
    
    
    Form of Placement Agent Warrant issued in connection with the Securities Purchase Agreement, dated June 9, 2010 entered into between the Company and
each investor, party thereto (Incorporated by reference to the Registrants current report on Form 8-K filed with the SEC on June 15, 2010)4.10
    
    
    Form of Warrant issued in connection with the Venture Loan and Security Agreement by and between Compass Horizon Funding Company, LLC and the Company
dated as December 21, 2010 (Incorporated by reference to the Registrants current report on Form 8-K filed with the SEC on December 22, 2010)4.11
    
    
    Form of Warrant issued in connection with the Securities Purchase Agreement dated as January 26, 2011 entered into between the Company and each
investor, party thereto (Incorporated by reference to the Registrants current report on Form 8-K filed with the SEC on February 1, 2011)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)10.6
    
    
    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)10.11
    
    
    Form of Securities Purchase Agreement, dated June 9, 2010 entered into between the Company and each investor, party thereto (Incorporated by reference
to the Registrants current report on Form 8-K filed with the SEC on June 15, 2010)10.12
    
    
    Placement Agent Agreement between Cereplast, Inc and Ladenburg Thalmann & Co., Inc.(Incorporated by reference to the Registrants current report on Form
8-K filed with the SEC on June 15, 2010)10.13
    
    
    Employment agreement between Heather Sheehan and Cereplast, Inc. dated August 16, 2010. (Incorporated by reference to the Registrants quarterly report
on Form 10-Q filed with the SEC on August 16, 2010)10.14
    
    
    Venture Loan and Security Agreement by and between Compass Horizon Funding Company, LLC and Cereplast, Inc. dated as December 21,
2010(Incorporated by reference to the Registrants current report on Form 8-K filed with the SEC on December 22, 2010)10.15
    
    
    Securities Purchase Agreement dated as January 26, 2011 entered into between the Company and each investor, party thereto (Incorporated by reference to
the Registrants current report on Form 8-K filed with the SEC on February 1, 2011)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 pursuant to Section 302 of the Sarbanes Oxley Act of 200231.2
    
    
    Certification of the Principal and Financial Officer pursuant to Section 302 of the Sarbanes Oxley Act of 200232.1
    
    
    Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    Certification of the Principal Financial Officer pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes  Oxley Act of 2002
  32




---



##### 



SIGNATURES
  CEREPLAST, INC.Dated: March 31, 2011
    By:
    /s/    Frederic ScheerFrederic Scheer,Chairman, Chief Executive Officer, and Director (Principal
Executive Officer)Dated: March 31, 2011
    By:
    /s/    Heather E. SheehanHeather E.SheehanSenior Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)  Dated: March 31, 2011
    
    By:
    
    /s/ Frederic Scheer

Frederic Scheer, 
Chairman, Chief Executive Officer, and Director
(Principal Executive Officer)Dated: March 31, 2011
    
    By:
    
    /s/ Heather E. SheehanHeather E. Sheehan 
Senior Vice President & Chief Financial Officer
(Principal Financial and Accounting Officer)Dated: March 31, 2011
    
    By:
    
    /s/ Jacques VincentJacques Vincent, DirectorDated: March 31, 2011
    
    By:
    
    /s/ Petros KitsosPetros Kitsos, DirectorDated: March 31, 2011
    
    By:
    
    /s/ Craig PeusCraig Peus, DirectorDated: March 31, 2011
    
    By:
    
    /s/ Franklin HuntFranklin Hunt, Director
  33




---



##### 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
 
    By:
    
    /s/ HJ Associates & Consultants, LLP

HJ Associates & Consultants, LLPSalt Lake City, UtahMarch 31, 2011
  34




---



##### 



12/31/2010
    
    
    12/31/2009ASSETSCurrent AssetsCash
    
    $
    2,391
    
    
    $
    1,306Accounts Receivable, Net
    
    
    5,289
    
    
    
    325Inventory, Net
    
    
    1,392
    
    
    
    847Prepaid Expenses
    
    
    65
    
    
    
    215Total Current Assets
    
    
    9,137
    
    
    
    2,693Property and EquipmentProperty and Equipment
    
    
    5,564
    
    
    
    5,416Accumulated Depreciation and Amortization
    
    
    (2,213
    )
    
    
    (1,520
    )Net Property and Equipment
    
    
    3,351
    
    
    
    3,896Other AssetsRestricted Cash
    
    
    43
    
    
    
    Deferred Loan Costs
    
    
    266
    
    
    
    Intangibles, Net
    
    
    173
    
    
    
    184Deposits
    
    
    14
    
    
    
    89Total Other Assets
    
    
    496
    
    
    
    273Total Assets
    
    $
    12,984
    
    
    $
    6,862LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts Payable
    
    $
    2,566
    
    
    $
    989Other Payables
    
    
    1
    
    
    
    1Accrued Expenses
    
    
    1,251
    
    
    
    604Capital Leases, Current Portion
    
    
    9
    
    
    
    25Loan Payable, Current Portion
    
    
    149
    
    
    
    53Total Current Liabilities
    
    
    3,976
    
    
    
    1,672Long-Term LiabilitiesLoan Payable
    
    
    2,119
    
    
    
    9Total Long-Term Liabilities
    
    
    2,119
    
    
    
    9Total Liabilities
    
    
    6,095
    
    
    
    1,681Shareholders 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; 12,992,195 Shares & 9,825,476 Shares Issued and Outstanding, Respectively
    
    
    13
    
    
    
    10Additional Paid in Capital
    
    
    49,737
    
    
    
    40,578Retained Earnings/(Deficit)
    
    
    (42,933
    )
    
    
    (35,444
    )Other Comprehensive Income
    
    
    72
    
    
    
    37Total Shareholders Equity
    
    
    6,889
    
    
    
    5,181Total Liabilities and Shareholders Equity
    
    $
    12,984
    
    
    $
    6,862
   35




---



##### 



Year Ended
    
    
    Year Ended12/31/2010
    
    
    12/31/2009GROSS SALES
    
    $
    6,416
    
    
    $
    2,751Sales Discounts, Returns & Allowances
    
    
    (72
    )
    
    
    (12
    )NET SALES
    
    
    6,344
    
    
    
    2,739COST OF SALES
    
    
    5,247
    
    
    
    2,401GROSS PROFIT
    
    
    1,097
    
    
    
    338OPERATING EXPENSESDepreciation and Amortization
    
    
    803
    
    
    
    538Marketing Expense
    
    
    1,789
    
    
    
    371Professional Fees
    
    
    867
    
    
    
    728Rent Expense
    
    
    425
    
    
    
    550Research and Development
    
    
    447
    
    
    
    313Salaries & Wages
    
    
    1,721
    
    
    
    1,709Salaries & Wages  Stock Based Compensation
    
    
    490
    
    
    
    274Other Operating Expenses
    
    
    1,443
    
    
    
    1,231TOTAL OPERATING EXPENSES
    
    
    7,985
    
    
    
    5,714LOSS FROM OPERATIONS BEFORE OTHER INCOME(EXPENSES)
    
    
    (6,888
    )
    
    
    (5,376
    )OTHER INCOME (EXPENSES)Restructuring Costs
    
    
    (586
    )
    
    
    (449
    )Loss on Settlement of Litigation
    
    
    
    
    
    
    (67
    )Loss on Sale of Equipment
    
    
    
    
    
    
    (172
    )Interest Income
    
    
    2
    
    
    
    21Interest Expense
    
    
    (17
    )
    
    
    (29
    )TOTAL OTHER INCOME (EXPENSES)
    
    
    (601
    )
    
    
    (696
    )LOSS BEFORE PROVISIONS FOR TAXES
    
    
    (7,489
    )
    
    
    (6,072
    )Provision for Taxes
    
    
    
    
    
    
    NET LOSS
    
    
    (7,489
    )
    
    
    (6,072
    )OTHER COMPREHENSIVE INCOMEGain on Foreign Currency Translation
    
    
    35
    
    
    
    8TOTAL COMPREHENSIVE LOSS
    
    $
    (7,454
    )
    
    $
    (6,064
    )BASIC AND DILUTED LOSS PER SHARE
    
    $
    (0.63
    )
    
    $
    (0.75
    )WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING BASIC AND DILUTED
    
    
    11,779,087
    
    
    
    8,044,487
   36




---



##### 



OtherCommon Stock
    
    
    Preferred Stock
    
    
    Additional
    
    
    Accumulated
    
    
    Comprehensive
    
    
    SubscribedShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Paid-In Capital
    
    
    Deficit
    
    
    Income
    
    
    Stock
    
    
    TotalBalance, December 31, 2008
    
    
    7,028,359
    
    
    $
    7
    
    
    
    
    
    
    $
    
    
    
    $
    34,449
    
    
    $
    (29,372
    )
    
    $
    29
    
    
    $
    250
    
    
    $
    5,363Stock issued in fulfillment of subscriptions at $2.00 per share
    
    
    125,000
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    
    
    
    
    
    
    
    
    (250
    )
    
    
    Issuance of common stock in repayment of a convertible shareholder loan at $3,47
per share
    
    
    61,250
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    213
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    213Issuance of common stock as compensation. Stock at prices ranging from $3.60 per
share to $6.00 per share
    
    
    212,400
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    860
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    860Issuance of common stock to 3rd parties and directors for services. Stock price
ranging from $3.60 per share to $5.20 per share
    
    
    318,590
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    1,301
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,301Expense relating to cancellation of stock options under employee stock option plan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (259
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (259
    )Issuance of common stock for cash. Stock price ranging from $1.60 per share to
$2.00 per share
    
    
    1,948,170
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    3,894
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,896Issuance of common stock to Cumorah for commitment fee on equity line of financing
    
    
    114,207
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    300Issuance of common stock for litigation settlement
    
    
    17,500
    
    
    
    0
    
    
    
    
    
    
    
    
    
    
    
    67
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67Stock Offering Costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (496
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (496
    )Net loss for the year ended December 31, 2009
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,072
    )
    
    
    
    
    
    
    
    
    
    
    (6,072
    )Gain on foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8
    
    
    
    
    
    
    
    8Balance, December 31, 2009
    
    
    9,825,476
    
    
    
    10
    
    
    
    
    
    
    
    
    
    
    
    40,578
    
    
    
    (35,444
    )
    
    
    37
    
    
    
    
    
    
    
    5,181Issuance of common stock as compensation. Stock at prices ranging from $2.82 per
share to $5.10 per share
    
    
    104,785
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    375
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    375Issuance of common shares under a private placement at a net price of $2.00 per
share
    
    
    705,000
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1,288
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,289Sales of shares made pursuant to an effective to a Registration Statemetn on Form
S-3 (Registration No. 333-166307) at a net price of $2.91 per share
    
    
    2,137,642
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    6,216
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    6,218Fees association with an early lease termination
    
    
    31,250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125Issuance of stock in for board member services
    
    
    12,500
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50Shares issued pursuant to settlement agreement
    
    
    20,162
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    75Issuance of common stock for vendor services
    
    
    153,802
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    782
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    782Rounding due to Stock Spilt
    
    
    1,578
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Warrants
issued in connection with debt financing arrangements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    248
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    248Net loss for the year ended December 31, 2010
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,489
    )
    
    
    
    
    
    
    
    
    
    
    (7,489
    )Gain on foreign currency translation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    35
    
    
    
    
    
    
    
    35Balance, December 31, 2010
    
    
    12,992,195
    
    
    $
    13
    
    
    
    
    
    
    $
    
    
    
    $
    49,737
    
    
    $
    (42,933
    )
    
    $
    72
    
    
    $
    
    
    
    $
    6,889
   37




---



##### 



Year Ended
    
    
    Year Ended12/31/2010
    
    
    12/31/2009CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (7,489
    )
    
    $
    (6,072
    )Adjustment to Reconcile Net Loss to Net Cash
Used in Operating ActivitiesDepreciation and Amortization
    
    
    803
    
    
    
    538Reserve for Inventory Obsolescence
    
    
    
    
    
    
    (132
    )Allowance for Doubtful Accounts
    
    
    32
    
    
    
    5Loss on Sale of Equipment
    
    
    
    
    
    
    172Loss on Disposal of Leasehold Improvements Due to Restructuring
    
    
    14
    
    
    
    Common Stock Issued for Services, Salaries & Wages
    
    
    1,407
    
    
    
    712Amortization of Debt Discount
    
    
    2
    
    
    
    Loss on Settlement of Litigation
    
    
    
    
    
    
    67(Increase) Decrease in:Accounts Receivable
    
    
    (4,992
    )
    
    
    (50
    )Deferred Loan Costs
    
    
    (130
    )
    
    
    Inventory
    
    
    (543
    )
    
    
    1,123Deposits
    
    
    75
    
    
    
    (44
    )Prepaid Expenses
    
    
    149
    
    
    
    1,026Restricted Cash
    
    
    (43
    )
    
    
    49Intangibles
    
    
    (2
    )
    
    
    (19
    )Increase (Decrease) in:Accounts Payable
    
    
    1,578
    
    
    
    88Accrued Expenses
    
    
    511
    
    
    
    (226
    )Other Payables
    
    
    
    
    
    
    (32
    )NET CASH USED IN OPERATING ACTIVITIES
    
    
    (8,628
    )
    
    
    (2,795
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of Property and Equipment, and Intangibles
    
    
    (263
    )
    
    
    (18
    )Proceeds from Sale of Equipment
    
    
    
    
    
    
    4NET CASH USED IN INVESTING ACTIVITIES
    
    
    (263
    )
    
    
    (14
    )CASH FLOWS FROM FINANCING ACTIVITIES:Payments on Capital Leases
    
    
    (25
    )
    
    
    (53
    )Payments from Notes Payable
    
    
    (59
    )
    
    
    (4
    )Proceeds on Loan Payable, Net of Loan Costs
    
    
    2,520
    
    
    
    (37
    )Proceeds from Issuance of Common Stock and Subscription Receivable
    
    
    7,505
    
    
    
    4,196Stock Offering Costs
    
    
    
    
    
    
    (496
    )NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    9,941
    
    
    
    3,606FOREIGN CURRENCY TRANSLATION
    
    
    35
    
    
    
    8NET INCREASE (DECREASE) IN CASH
    
    
    1,085
    
    
    
    805CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    1,306
    
    
    
    501CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    2,391
    
    
    $
    1,306
     38




---



##### 



CEREPLAST, INC.
 
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
  Organization
  Line of Business
 ®
    
    
    Cereplast Compostables® resinsare renewable, ecologically-sound
substitutes for petroleum-based plastics targeting primarily single-use disposables and
packaging applications. We offer 12 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 Sustainables resinsare renewable, ecologically-sound substitutes
for petroleum-based plastics targeting primarily single-use disposables and packaging
applications. We offer eight commercial grades of Sustainables 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 Sustainables line in late 2007 under the name Cereplast Hybrid Resins®.
 
    
    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 resins 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. Cereplast 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 three 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 & Sustainable resins. Although we do not expect this new technology
to become commercial before mid 2011, it remains an important development as we
believe that the potential open by algae is quite substantial.
  39




---



##### 



Basis of Presentation and Consolidation
  Use of Estimates
  Cash and Cash Equivalents
  Concentration of Credit Risk
  ther Concentration
  Restricted Cash
  Fair Value of Financial Instruments
  Accounts Receivable
   40




---



##### 



Inventories
 in
thousands
 2010
    
    
    2009Raw Materials
    
    $
    936
    
    
    $
    344Bioplastic Resins
    
    
    318
    
    
    
    355Finished Goods
    
    
    44
    
    
    
    76Packaging Materials
    
    
    53
    
    
    
    15WIP
    
    
    41
    
    
    
    57Obsolescence Reserve
    
    
    
    
    
    
    Inventories, Net
    
    $
    1,392
    
    
    $
    847
 Property and Equipment
 in thousands
 2010
    
    
    2009Equipment
    
    $
    5,074
    
    
    $
    2,518Automobile
    
    
    25
    
    
    
    Construction in Progress
    
    
    135
    
    
    
    2,589Furniture & Fixtures
    
    
    279
    
    
    
    275Leasehold Improvements
    
    
    51
    
    
    
    345,564
    
    
    
    5,416Less Accumulated Depreciation
    
    
    (2,213
    )
    
    
    (1,520
    )Net Property and Equipment
    
    $
    3,351
    
    
    $
    3,896
 Intangibles
 in thousands
 2010
    
    
    2090Intangibles
    
    $
    206
    
    
    $
    208Less Accumulated Amortization
    
    
    (33
    )
    
    
    (24
    )Net Intangibles
    
    $
    173
    
    
    $
    184
 Deferred Income Taxes
    41




---



##### 



Revenue Recognition
  Marketing and Advertising
  Research and Development Costs
  Stock-Based Compensation
  Loss per Share Calculations
  Legal Proceedings
   Reverse Stock Split
   
    
    We issued 2,137,642 shares of common stock for net cash proceeds of $6.2 million
pursuant to an effective Registration Statement on Form S-3 (Registration No. 333- 166307)
initially filed with the Securities and Exchange Commission on April 26, 2010, and amended
on May 21, 2010. The Registration Statement was declared effective on May 26, 2010.
 
    
    In a private placement transactions 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 705,000 shares of common stock for net
cash proceeds of $1.3 million.
  42




---



##### 




    
    We issued 268,587 shares of common stock valued at $1.2 million to various employees,
directors, and third parties for services rendered during the period.
 
    
    We issued 31,250 shares of common stock valued at $125,000 for fees associated with the
early termination of a lease in California.
 
    
    We issued 20,162 shares of common stock valued at $75,000 pursuant to a settlement
agreement.
 
    
    We issued 2,500 shares of common stock valued at $12,000 as a termination fee related to
the Periodic Equity Investment Agreement with Cumorah Capital, Inc. dated December 8, 2008
  
    
    In a 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 833,170 restricted
 shares of common stock for gross cash proceeds of $1.7 million, and 125,000 restricted
 shares of common stock in fulfillment of subscriptions received prior to December 31, 2008
of $0.25 million.
 
    
    We issued 61,250 shares of restricted common stock valued at $0.2 million 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 $0.2 million and 25,000 additional shares related to an
agreement to waive default penalties.
 
    
    We issued 259,525 shares of restricted common stock valued at $1.1 million to third
parties for services to be rendered over twelve-month terms beginning in March 2009, May
2009 and July 2009.
 
    
    We issued 226,462 shares of restricted common stock valued at $0.9 million to various
employees, directors, and third parties for services rendered during the period.
 
    
    We issued 114,207 shares of restricted common stock for net cash proceeds of $0.3
million 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 $0.07 million under the
terms of a litigation settlement.
 
    
    We issued 1,115,000 shares of restricted common stock at $2.00 per share for total
gross proceeds of $2.2 million under the terms of a private placement.
 
    
    We issued 45,000 shares of common stock valued at $0.2 million in settlement of
outstanding obligations.
  43




---



##### 



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
 in thousands, except per share data):
 2010
    
    
    2009Weighted Average
    
    
    
    
    
    
    Weighted AverageShares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise PriceOutstandingbeginning of year
    
    
    73
    
    
    $
    22.40
    
    
    
    249
    
    
    $
    22.40Granted at fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Canceled/forfeited
    
    
    
    
    
    
    
    
    
    
    (176
    )
    
    
    22.40Outstandingend of year
    
    
    73
    
    
    
    22.40
    
    
    
    73
    
    
    
    22.40Options exercisable at year-end
    
    
    73
    
    
    $
    22.40
    
    
    
    73
    
    
    $
    22.40
 in
thousands, except per share data
 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
    
    
    73
    
    
    $
    22.40
    
    
    
    3.90
    
    
    
    
    
    
    
    73
    
    
    $
    22.40
    
    
    
    3.90
    
    
    
    
    44




---



##### 



Venture Loan Payable
   Assumptions:
    
    Dec 22, 2010Expected Life
    
    
    7 yearsExpected volatility
    
    
    39.9
    %Dividends
    
    
    NoneRisk-free interest rate
    
    
    2.74
    %
 in thousands
 Principal Repayment2011
    
    $
    1442012
    
    
    9302013
    
    
    1,0482014
    
    
    378$
    2,500
  Promissory Note
    California Facilities
 Indiana Facility 
 (in thousands)
 2011
    
    $
    4092012
    
    
    4092013
    
    
    4092014
    
    
    4092015
    
    
    318Thereafter
    
    
    600$
    2,556
  45




---



##### 



in
thousands)
 2010
    
    
    2009North America
    
    $
    1,455
    
    
    
    22.9
    %
    
    $
    2,444
    
    
    
    88.8
    %InternationalItaly
    
    
    3,091
    
    
    
    48.8
    %
    
    
    Germany
    
    
    1,074
    
    
    
    16.9
    %
    
    
    Other
    
    
    796
    
    
    
    11.4
    %
    
    
    307
    
    
    
    11.2
    %Gross sales
    
    $
    6,416
    
    
    
    100.0
    %
    
    $
    2,751
    
    
    
    100.0
    %
       in
thousands
 2010
    
    
    2009Income tax benefit computed at U.S. Federal statutory rate (34%)
    
    $
    (2,546
    )
    
    $
    (1,442
    )State income taxes, net of benefit federal taxes
    
    
    (374
    )
    
    
    (211
    )Meals & Entertainment
    
    
    39
    
    
    
    1Stock for services
    
    
    589
    
    
    
    723Allowance for Doubtful Accounts
    
    
    12
    
    
    
    1Inventory Reserve
    
    
    
    
    
    
    (51
    )Depreciation
    
    
    (456
    )
    
    
    (37
    )Deferred Loan Costs
    
    
    (50
    )
    
    
    Accruals
    
    
    (66
    )
    
    
    25Disposal of Assets
    
    
    3
    
    
    
    (23
    )Less Valuation Allowance
    
    
    2,849
    
    
    
    940Income tax expense
    
    $
    
    
    
    $
    
  46




---



##### 



in thousands)
 2010
    
    
    2009Deferred Tax Assets:NOL Carryover
    
    $
    11,973
    
    
    $
    9,146R&D Carryover
    
    
    104
    
    
    
    84Contribution Carryover
    
    
    1
    
    
    
    1Allowance for Doubtful Accounts
    
    
    26
    
    
    
    93RP Accruals
    
    
    54
    
    
    
    121Deferred tax Liabilities:Depreciation
    
    
    (689
    )
    
    
    (210
    )Deferred Loan Costs
    
    
    (50
    )
    
    
    13Less Valuation Allowance
    
    
    (11,419
    )
    
    
    (9,155
    )Income Tax Expense
    
    $
    
    
    
    $
    
    in thousands except per share data)
 2010
    
    
    2009Number of
    
    
    Weighted Average
    
    
    Number of
    
    
    Weighted AverageWarrants
    
    
    Exercise Price
    
    
    Warrants
    
    
    Exercise PriceOutstandingbeginning of year
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    Issued
    
    
    1,140
    
    
    $
    4.44
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstandingend of year
    
    
    
    
    
    
    4.44
    
    
    
    
    
    
    
    Warrants exercisable at year-end
    
    
    1,140
    
    
    $
    4.44
    
    
    
    
    
    
    $
    
  Issuance of Capital Stock
    47




---



##### 



Notes Payable
  Stock Options
  Other Items
   48