##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2010
 OR
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 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 N. El Segundo Boulevard, Suite 100 El Segundo, California
    
    90245(Address of Principal Executive Office)
    
    (Zip Code)
 (310) 676-5000
(Registrants Telephone Number, Including Area Code)
 þ o
 o o
  Large accelerated filer o
Accelerated filer o
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company þ o þ




---



##### 



CEREPLAST, INC.
FORM 10-Q
TABLE OF CONTENTS
 PagePART IFINANCIAL INFORMATIONItem 1. FINANCIAL STATEMENTS
    
    
    3Consolidated Balance Sheets at June 30, 2010 and December 31, 2009
    
    
    3Consolidated Statements of Operations and Other Comprehensive Income for the Three AND SIX months ended June 30, 2010 and 2009
    
    
    4Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009
    
    
    5Notes to the Consolidated Financial Statements
    
    
    6Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
    
    
    14Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
    
    
    21Item 4T CONTROLS AND PROCEDURES
    
    
    21PART IIOTHER INFORMATIONItem 1. LEGAL PROCEEDINGS
    
    
    21Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
    
    
    22Item 3. DEFAULTS UPON SENIOR SECURITIES
    
    
    22Item 4. RESERVED
    
    
    22SIGNATURES
    
    
    24Exhibit 10.3Exhibit 31.1Exhibit 32.1
  Unless otherwise indicated or unless the context requires otherwise, all references in this report
to we, us, our, Cereplast or the Company shall refer to Cereplast, Inc.
  2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
 
 
 6/30/2010
    
    
    12/31/2009(Unaudited)
    
    
    (Audited)ASSETSCurrent AssetsCash and Cash Equivalents
    
    $
    5,866,283
    
    
    $
    1,305,771Accounts Receivable, Net
    
    
    549,751
    
    
    
    325,270Inventory, Net
    
    
    948,695
    
    
    
    847,527Prepaid Expenses
    
    
    452,191
    
    
    
    215,356Total Current Assets
    
    
    7,816,920
    
    
    
    2,693,924Property and EquipmentProperty and Equipment
    
    
    5,471,950
    
    
    
    5,416,436Accumulated Depreciation and Amortization
    
    
    (1,865,536
    )
    
    
    (1,519,714
    )Net Property and Equipment
    
    
    3,606,414
    
    
    
    3,896,722Other AssetsRestricted Cash
    
    
    42,934
    
    
    
    Intangibles, Net
    
    
    179,278
    
    
    
    184,039Deposits
    
    
    59,222
    
    
    
    89,286Total Other Assets
    
    
    281,434
    
    
    
    273,325Total Assets
    
    $
    11,704,768
    
    
    $
    6,863,971LIABILITIES AND SHAREHOLDERS EQUITYCurrent LiabilitiesAccounts Payable
    
    $
    633,844
    
    
    $
    989,927Other Payables
    
    
    1,204
    
    
    
    1,413Accrued Expenses
    
    
    476,065
    
    
    
    604,015Capital Leases, Current Portion
    
    
    17,594
    
    
    
    25,341Loan Payable, Current Portion
    
    
    2,758
    
    
    
    53,487Total Current Liabilities
    
    
    1,131,465
    
    
    
    1,674,183Long-Term LiabilitiesLoan Payable
    
    
    16,875
    
    
    
    Capital Leases
    
    
    3,696
    
    
    
    8,897Total Long-Term Liabilities
    
    
    20,571
    
    
    
    8,897Total Liabilities
    
    
    1,152,036
    
    
    
    1,683,080Shareholders EquityPreferred
Stock, $0.001 par value; 
5,000,000 authorized preferred shares, 0 outstanding
    
    
    
    
    
    
    Common Stock, $0.001 par value; 
495,000,000 authorized shares; 12,849,724 shares &
9,825,476 shares issued and outstanding, respectively
    
    
    12,850
    
    
    
    9,825Additional Paid in Capital
    
    
    49,364,351
    
    
    
    40,578,981Retained Earnings/(Deficit)
    
    
    (38,860,821
    )
    
    
    (35,444,968
    )Other Comprehensive Income
    
    
    36,352
    
    
    
    37,053Total Shareholders Equity
    
    
    10,552,732
    
    
    
    5,180,891Total Liabilities and Shareholders Equity
    
    $
    11,704,768
    
    
    $
    6,863,971
   3




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##### Table of Contents



Three Months Ended
    
    
    Six Months Ended6/30/2010
    
    
    6/30/2009
    
    
    6/30/2010
    
    
    6/30/2009GROSS SALES
    
    $
    684,431
    
    
    $
    900,598
    
    
    $
    1,003,648
    
    
    $
    1,464,981Sales Discounts, Returns & Allowances
    
    
    (37,983
    )
    
    
    (4,331
    )
    
    
    (67,372
    )
    
    
    (8,137
    )NET SALES
    
    
    646,448
    
    
    
    896,267
    
    
    
    936,276
    
    
    
    1,456,844COST OF SALES
    
    
    447,237
    
    
    
    818,846
    
    
    
    645,499
    
    
    
    1,281,653GROSS PROFIT
    
    
    199,211
    
    
    
    77,421
    
    
    
    290,777
    
    
    
    175,191OPERATING EXPENSESDepreciation and Amortization
    
    
    215,284
    
    
    
    136,179
    
    
    
    370,396
    
    
    
    272,089Marketing Expense
    
    
    410,005
    
    
    
    92,111
    
    
    
    684,099
    
    
    
    250,916Professional Fees
    
    
    219,779
    
    
    
    189,585
    
    
    
    362,330
    
    
    
    337,884Rent Expense
    
    
    112,897
    
    
    
    217,247
    
    
    
    196,961
    
    
    
    458,940Research and Development
    
    
    150,929
    
    
    
    62,579
    
    
    
    211,167
    
    
    
    203,789Salaries & Wages
    
    
    288,240
    
    
    
    387,527
    
    
    
    676,437
    
    
    
    1,135,847Salaries & Wages  Stock Based Compensation
    
    
    108,442
    
    
    
    (166,738
    )
    
    
    224,750
    
    
    
    182,517Other Operating Expenses
    
    
    332,059
    
    
    
    217,805
    
    
    
    668,212
    
    
    
    548,639TOTAL OPERATING EXPENSES
    
    
    1,837,635
    
    
    
    1,136,295
    
    
    
    3,394,352
    
    
    
    3,390,621LOSS FROM OPERATIONS BEFORE OTHER
INCOME(EXPENSES)
    
    
    (1,638,424
    )
    
    
    (1,058,874
    )
    
    
    (3,103,575
    )
    
    
    (3,215,430
    )OTHER INCOME (EXPENSES)Gain on Settlement of Shareholder Loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    81,982Waiver Fee on Settlement of Shareholder Loan
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (90,000
    )Loss on Sale of Equipment
    
    
    
    
    
    
    410
    
    
    
    
    
    
    
    (25,039
    )Restructuring Costs
    
    
    (92,682
    )
    
    
    
    
    
    
    (311,117
    )
    
    
    Interest Income
    
    
    459
    
    
    
    11,995
    
    
    
    576
    
    
    
    20,274Interest Expense
    
    
    (612
    )
    
    
    (2,768
    )
    
    
    (1,737
    )
    
    
    (14,579
    )TOTAL OTHER INCOME (EXPENSES)
    
    
    (92,835
    )
    
    
    9,637
    
    
    
    (312,278
    )
    
    
    (27,362
    )LOSS BEFORE PROVISIONS FOR TAXES
    
    
    (1,731,259
    )
    
    
    (1,049,237
    )
    
    
    (3,415,853
    )
    
    
    (3,242,792
    )Provision for Taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NET LOSS
    
    
    (1,731,259
    )
    
    
    (1,049,237
    )
    
    
    (3,415,853
    )
    
    
    (3,242,792
    )OTHER COMPREHENSIVE INCOMEGain (Loss) on Foreign Currency Translation
    
    
    (18,747
    )
    
    
    8,387
    
    
    
    (701
    )
    
    
    8,648TOTAL COMPREHENSIVE LOSS
    
    $
    (1,750,006
    )
    
    $
    (1,040,850
    )
    
    $
    (3,416,554
    )
    
    $
    (3,234,144
    )BASIC AND DILUTED LOSS PER SHARE
    
    $
    (0.15
    )
    
    $
    (0.14
    )
    
    $
    (0.32
    )
    
    $
    (0.43
    )WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED
    
    
    11,264,347
    
    
    
    7,727,289
    
    
    
    10,570,103
    
    
    
    7,503,535
   4




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##### Table of Contents



6/30/2010
    
    
    6/30/2009CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (3,415,853
    )
    
    $
    (3,242,792
    )Adjustment to Reconcile Net Loss to Net Cash
Used in Operating ActivitiesDepreciation and Amortization
    
    
    370,396
    
    
    
    272,089Reserve for Inventory Obsolescence
    
    
    
    
    
    
    (54,544
    )Allowance for Doubtful Accounts
    
    
    (6,988
    )
    
    
    (1,900
    )Loss on Sale of Equipment
    
    
    
    
    
    
    25,039Loss on Disposal of Leasehold Improvements Due to Restructuring
    
    
    11,584
    
    
    
    Common Stock Issued for Services, Salaries & Wages
    
    
    871,898
    
    
    
    132,677Gain on Settlement of Shareholder Loan
    
    
    
    
    
    
    (81,982
    )Waiver Fee on Settlement of Shareholder Loan
    
    
    
    
    
    
    90,000(Increase) Decrease in:Accounts Receivable
    
    
    (217,493
    )
    
    
    10,611Inventory
    
    
    (101,168
    )
    
    
    606,070Deposits
    
    
    30,064
    
    
    
    3,632Prepaid Expenses
    
    
    (236,835
    )
    
    
    89,804Restricted Cash
    
    
    (42,934
    )
    
    
    (380
    )Intangibles
    
    
    
    
    
    
    (19,306
    )Increase (Decrease) in:Accounts Payable
    
    
    (354,879
    )
    
    
    660,167Accrued Expenses
    
    
    (129,362
    )
    
    
    365,147Other Payables
    
    
    
    
    
    
    (23,696
    )NET CASH USED IN OPERATING ACTIVITIES
    
    
    (3,221,570
    )
    
    
    (1,169,364
    )CASH FLOWS FROM INVESTING ACTIVITIES:Purchase of Property and Equipment, and Intangibles
    
    
    (86,911
    )
    
    
    (6,869
    )Proceeds from Sale of Equipment
    
    
    
    
    
    
    1,558NET CASH USED IN INVESTING ACTIVITIES
    
    
    (86,911
    )
    
    
    (5,311
    )CASH FLOWS FROM FINANCING ACTIVITIES:Payments on Capital Leases
    
    
    (12,948
    )
    
    
    (27,901
    )Proceeds on Notes Payable
    
    
    20,524
    
    
    
    Payments on Term Loan Payable
    
    
    (54,378
    )
    
    
    (3,874
    )Proceeds from Issuance of Common Stock and Subscription Receivable,
Net of Offering Costs
    
    
    7,916,496
    
    
    
    1,081,001NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    7,869,694
    
    
    
    1,049,226FOREIGN CURRENCY TRANSLATION
    
    
    (701
    )
    
    
    8,648NET INCREASE (DECREASE) IN CASH
    
    
    4,560,512
    
    
    
    (116,801
    )CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    



1,305,771

    
    
    501,699CASH AND CASH EQUIVALENTS, END OF PERIOD
    


    $
    5,866,283

    


    
    $
    384,898
       5




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##### Table of Contents



NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2010
(Unaudited)
  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. We believe that our algae-based resins could
replace, in a first step, 50% or more of the petroleum content used in traditional plastic
resins. Currently, we are using renewable material such as starches from corn, tapioca,
wheat and potatoes and Ingeo® PLA. We believe 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.
  6




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##### Table of Contents



Basis of Presentation and Consolidation
  Use of Estimates
  Cash and Cash Equivalents
  Concentration of Credit Risk
   7




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##### Table of Contents



Other Concentration
  Restricted Cash
  Fair Value of Financial Instruments
  Accounts Receivable
  Inventories
  June 30, 2010
    
        December 31, 2009(Unaudited)Raw Materials
    
    $
    492,094
    
    
    $
    344,489Bioplastic Resins
    
    
    385,708
    
    
    
    355,082Finished Goods
    
    
    52,741
    
    
    
    76,458Packaging Materials
    
    
    15,508
    
    
    
    14,978WIP
    
    
    2,644
    
    
    
    56,250Total Inventories
    
    $
    948,695
    
    
    $
    847,527
  8




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##### Table of Contents



Property and Equipment
  June 30, 2010
    
    
    December 31, 2009(Unaudited)Equipment
    
    $
    5,164,410
    
    
    $
    2,518,132Construction in Progress
    
    
    
    
    
    
    2,588,904Furniture & Fixtures
    
    
    278,696
    
    
    
    275,055Automobile
    
    
    25,359
    
    
    
    Leasehold Improvements
    
    
    3,485
    
    
    
    34,3455,471,950
    
    
    
    5,416,436Less Accumulated Depreciation
    
    
    (1,865,536
    )
    
    
    (1,519,714
    )Net Property and Equipment
    
    $
    3,606,414
    
    
    $
    3,896,722
 Intangibles
  June 30, 2010
    
    
    December 31, 2009(Unaudited)Intangibles
    
    $
    207,820
    
    
    $
    208,304Less Accumulated Amortization
    
    
    (28,542
    )
    
    
    (24,265
    )Net Intangibles
    
    $
    179,278
    
    
    $
    184,039
 Deferred Income Taxes
     9




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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
   10




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##### Table of Contents




    
    We issued 2,137,642 shares of common stock for net cash proceeds of $6,733,677, The
offer and sale of the Shares were made 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.
    
    On January 4, 2010, we issued 31,250 shares of common stock valued at $125,000 for fees
associated with the early termination of a lease in California.
    
    On January 6, 2010, we issued 12,500 shares of common stock valued at $50,000 to a board
member for services provided.
    
    On March 31, 2010, we issued 705,000 shares of common stock for gross proceeds of
$1,410,000 in a private placement.
    
    On April 27, 2010, we issued 91,695 shares of common stock valued at $472,229 for prepaid
professional services and rent.
    
    On May 7, 2010, we issued 20,857 shares of common stock valued at $96,359 for prepaid
public relations and other professional services.
    
    On June 30, 2010, we issued 22,804 shares common stock valued at $116,310 for employee
services.
  11




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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
  2010
    
    
    2009Weighted Average
    
    
    
    
    
    
    Weighted AverageShares
    
    
    Exercise Price
    
    
    Shares
    
    
    Exercise PriceOutstandingbeginning of year
    
    
    73
    
    
    $
    0.56
    
    
    
    249
    
    
    $
    0.56Granted at fair value
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Exercised
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Canceled/forfeited
    
    
    
    
    
    
    
    
    
    
    (176
    )
    
    
    0.56Outstandingend of year
    
    
    73
    
    
    
    0.56
    
    
    
    73
    
    
    
    0.56Options exercisable at
year-end
    
    
    73
    
    
    $
    0.56
    
    
    
    73
    
    
    $
    0.56
  12




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##### Table of Contents



Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    WeightedWeighted
    
    
    Average
    
    
    
    
    
    
    
    
    
    
    Weighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    Aggregate
    
    
    
    
    
    
    Average
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Contract
    
    
    Intrinsic
    
    
    
    
    
    
    Exercise
    
    
    Contract
    
    
    IntrinsicRange of Exercise Prices
    
    Shares
    
    
    Price
    
    
    Life
    
    
    Value
    
    
    Shares
    
    
    Price
    
    
    Life
    
    
    Value$0.0-$0.56
    
    
    73
    
    
    $
    0.56
    
    
    
    4
    
    
    
    
    
    
    
    
    
    
    $
    0.56
    
    
    
    4
    
    
    
    
        California Facilities
 Indiana Facility 
  Notes Payable
    13




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##### Table of Contents



ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
   
    
    inability to raise sufficient additional capital to finance operations;
    
    potential fluctuation in quarterly results;
    
    our 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 that encourage use of
bioplastics;
    
    failure to commercialize new grades of resin being pursued in our technical / market
development pipeline;
  14




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##### Table of Contents




    
    competitor actions that curtail our market share, negatively affect pricing or limit
sales growth;
    
    inability to retain employees as a result of deferral of payment of salaries to preserve
cash;
    
    litigation with or legal claims and allegations by outside parties;
    
    insufficient revenues to cover operating costs;
    
    inability to successfully implement our Strategic Restructuring Program, including the
successful negotiation of a strategic partnership to outsource our manufacturing
activities, consolidation of product lines and the sale of our commercial production
equipment at attractive prices.
    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.
  15




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##### Table of Contents




    
    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 our 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.
We believe our algae-based resins could replace, in a first step, 50% or more of the
petroleum content used in traditional plastic resins. Currently, we are 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. We believe 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.
  Trends and Uncertainties that May Impact Future Results of Operations
 Global Market and Economic Conditions.
   16




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##### Table of Contents



Sales & Operating Expenses
  Operating Expenses. th
    Sales
   17




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##### Table of Contents



Gross Profit
  Operating Expenses
  
    
    Salaries and wages, including stock based compensation increased by
$175,893, or 79.7%, to $396,682 for the three months ended June 30,
2010 compared to the three months ended June 30, 2009, largely as a
result of the significant reductions in our workforce in 2009 and
associated reductions in compensation expense related to the vesting
of employee stock options to reflect actual stock option forfeiture
rates.
    
    Marketing expense increased by $317,984, or 345.1%, to $410,005 for
the three months ended June 30, 2010, compared to the three months
ended June 30, 2009. The increase for the period is due primarily to
an increase in sales and marketing staff in expectation of future
growth and costs associated with prepaid marketing agreements.
    
    Research and Development costs increased in by $88,350, or 141.2% to
$150,929 for the three months ended June 30, 2010, compared to the
three months ended June 30, 2009, due primarily to an increase in
research and development activities and the cost associated with
inventory used for testing purposes at the facilities of potential
customers.
    
    Rent expense decreased by $104,350, or 48.0%, to $112,897 for the
three months ended June 30, 2010, compared to the three months ended
June 30, 2009. The decrease for the period was primarily due to the
termination of two leases for 30,000 sq. ft and 25,000 sq. ft. of
office and warehouse space during the prior year and the renegotiation
of the lease of our Indiana facility offset by the new lease for
office space in El Segundo, California.
 Net Loss
   Sales
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##### Table of Contents



Gross Profit
  Operating Expenses
  
    
    Salaries and wages, including stock based compensation, decreased by $417,177 or 31.6%,
to $901,187 for the six months ended June 30, 2010 as compared to the six
months ended June 30, 2009, largely as a result of the significant reductions in our
workforce in 2009 and associated reductions in compensation expense related to the vesting
of employee stock options. All stock options were fully vested as of December 31, 2009.
    
    Marketing expense increased
$433,183, or 172.6%, to $684,099 for the six months ended
June 30, 2010, compared to the six months ended June 30, 2009. The increase is due
primarily to costs associated with prepaid marketing agreements and the addition of new
sales and marketing employees.
    
    Research and Development costs increased slightly by $7,378, or 3.6% to $211,167 for the
six months ended June 30, 2010, compared to the six months ended June 30, 2009 as a result
of a continued focus of our pipeline process for technical development and expansion of
our resin families and other cost cutting measures.
    
    Rent expense decreased by
$261,979 or 57.19%, to $196,961 for the six months ended June
30, 2010 compared to the six months ended June 30, 2009. The decrease for the period
resulted for the termination of two leases for 30,000 sq. ft and 25,000 sq. ft. of office
and warehouse space during the prior year and the renegotiation of the lease of our Indiana
facility.
 Net Loss
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Payments Due by PeriodLess Than
    
    
    2-3
    
    
    4-5
    
    
    More ThanTotal
    
    
    1 year
    
    
    Years
    
    
    Years
    
    
    5 yearsCapitalized lease obligations
    
    $
    21,290
    
    
    $
    17,594
    
    
    $
    3,696
    
    
    $
    
    
    
    $
    Purchase obligations
    
    
    212,192
    
    
    
    212,192
    
    
    
    
    
    
    
    
    
    
    
    Rental lease obligations
    
    
    3,126,966
    
    
    
    409,898
    
    
    
    409,898
    
    
    
    409,898
    
    
    
    1,897,272Term loan obligations
    
    
    19,633
    
    
    
    2,758
    
    
    
    4,023
    
    
    
    4,086
    
    
    
    8,766$
    3,380,081
    
    
    $
    642,442
    
    
    $
    417,617
    
    
    $
    413,984
    
    
    $
    1,906,038
    20




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##### Table of Contents



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4. CONTROLS AND PROCEDURES
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control Over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 ITEM 1. LEGAL PROCEEDINGS
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##### Table of Contents



ITEM 1A. RISK FACTORS
  
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
    
    On January 4, 2010, we issued 31,250 shares of common stock valued at $125,000 for fees
associated with the early termination of a lease in California.
 
    
    On January 6, 2010, we issued 12,500 shares of common stock valued at $50,000 to a board
member for services provided.
    
    On March 31, 2010, we issued 705,000 shares of common stock for gross proceeds of $1,410,000
in a private placement.
    
    On April 27, 2010, we issued 91,695 shares of common stock valued at $472,229 for prepaid
professional services and rent.
    
    On May 7, 2010, we issued 20,857 shares of common stock valued at $96,359 for prepaid
public relations and other professional services.
    
    On June 30,2010, we issued 22,804 shares common stock valued at $116,310 for employee
services.
  
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. RESERVED
  22




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##### Table of Contents



ITEM 5. OTHER INFORMATION
   
 ITEM 6. EXHIBITS
 ExhibitNumber
    
    Description4.1
    
    Form of Warrant issued in connection with the Securities Purchase
Agreement dated June 9, 2010 entered into between Cereplast, Inc. and
each investor in the offering. (Incorporated by reference to the
Companys Form 8-K filed on June 15, 2010)4.2
    
    Form of Placement Agent Warrant (Incorporated by reference to the
Companys Form 8-K filed on June 15, 2010)10.1
    
    Form of Securities Purchase Agreement, dated June 9, 2010, entered into
between Cereplast, Inc. and each investor in the offering. (Incorporated
by reference to the Companys Form 8-K filed on June 15, 2010)10.2
    
    Placement Agent Agreement between Cereplast, Inc. and Ladenburg Thalmann
& Co. Inc. (Incorporated by reference to the Companys Form 8-K filed on
June 15, 2010)10.3
    
    Employment agreement between Heather
Sheehan and Cereplast, Inc. dated August 16, 2010. (filed herewith)31.1
    
    Certification of the Chief Executive Officer and Principal Financial
Officer pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. (filed herewith)32.1
    
    Certification of the Chief Executive Officer and Principal Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. (filed herewith) ***
 
 ***
    
    In accordance with Item 601(b)(32)(ii) of Regulation S-K, this exhibit shall not be deemed
filed for the purposes of Section 18 of the Exchange Act or otherwise subject to the
liability of that section, nor shall it be deemed incorporated by reference in any filing
under the Securities Act of 1933, as amended, or the Exchange Act.  23




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##### Table of Contents



SIGNATURES
  Date: August 16, 2010
    CEREPLAST, INC.By:
    /S/ Frederic ScheerFrederic ScheerChairman, Chief Executive Officer and Director
(Principal Executive Officer/ Principal
Financial Officer)  24