HGYN 10-Q Quarterly Report March 31, 2010 | Alphaminr
ALPHAMINR

HGYN 10-Q Quarter ended March 31, 2010

Balance Sheet
Cash Flow
Income Statement
10-Q 1 c00788e10vq.htm FORM 10-Q Form 10-Q
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 March 31, 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. Continental Avenue Suite 100
El Segundo, California 90245
(Address of Principal Executive Office) (Zip Code)
(310) 676-5000
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 or Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o Accelerated filer o Non-accelerated filer o Smaller reporting company þ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
The number of shares of common stock outstanding as of May 6, 2010 is 10,721,057.

CEREPLAST, INC.
FORM 10-Q
TABLE OF CONTENTS
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Exhibit 31.1
Exhibit 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.

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PART I – FINANCIAL INFORMATION
ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS
CEREPLAST, INC.
CONSOLIDATED BALANCE SHEETS
3/31/2010 12/31/2009
(Unaudited) (Audited)
ASSETS
Current Assets
Cash
$ 1,165,263 $ 1,305,771
Accounts Receivable, Net
261,877 325,270
Inventory, Net
957,616 847,527
Prepaid Expenses
34,557 215,356
Total Current Assets
2,419,313 2,693,924
Property and Equipment
Property and Equipment
5,438,179 5,416,436
Accumulated Depreciation and Amortization
(1,652,517 ) (1,519,714 )
Net Property and Equipment
3,785,662 3,896,722
Other Assets
Restricted Cash
42,934 —
Intangibles, Net
181,696 184,039
Deposits
47,252 89,286
Total Other Assets
271,882 273,325
Total Assets
$ 6,476,857 $ 6,863,971
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts Payable
$ 767,192 $ 989,927
Other Payables
1,329 1,413
Accrued Expenses
684,618 604,015
Capital Leases, Current Portion
15,900 25,341
Loan Payable, Current Portion
3,203 53,487
Total Current Liabilities
1,472,242 1,674,183
Long-Term Liabilities
Loan Payable
16,875 —
Capital Leases
8,897 8,897
Total Long-Term Liabilities
25,772 8,897
Total Liabilities
1,498,014 1,683,080
Shareholders’ Equity
Preferred Stock, $0.001 par value;
5,000,000 authorized preferred shares, 0 outstanding
— —
Common Stock, $0.001 par value;
495,000,000 authorized shares; 10,576,726 shares & 9,825,476 shares issued and outstanding, respectively
10,577 9,825
Additional Paid in Capital
42,042,729 40,578,981
Retained Earnings/(Deficit)
(37,129,562 ) (35,444,968 )
Other Comprehensive Income
55,099 37,053
Total Shareholders’ Equity
4,978,843 5,180,891
Total Liabilities and Shareholders’ Equity
$ 6,476,857 $ 6,863,971
See accompanying notes to consolidated financial statements.

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CEREPLAST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
FOR THE THREE MONTHS ENDED
(UNAUDITED)
3/31/2010 3/31/2009
GROSS SALES
$ 319,217 $ 564,383
Sales Discounts, Returns & Allowances
(29,389 ) (3,806 )
NET SALES
289,828 560,577
COST OF SALES
198,262 462,807
GROSS PROFIT
91,566 97,770
OPERATING EXPENSES
Depreciation and Amortization
155,112 135,910
Marketing Expense
274,094 158,805
Professional Fees
142,551 148,299
Rent Expense
84,064 241,693
Research and Development
60,238 141,210
Salaries & Wages
388,197 748,320
Salaries & Wages — Stock Based Compensation
116,308 349,255
Other Operating Expenses
336,153 338,852
TOTAL OPERATING EXPENSES
1,556,717 2,262,344
LOSS FROM OPERATIONS BEFORE OTHER INCOME(EXPENSES)
(1,465,151 ) (2,164,574 )
OTHER INCOME (EXPENSES)
Loss on Sale of Equipment
— (25,449 )
Restructuring Costs
(218,435 ) —
Interest Income
117 8,279
Interest Expense
(1,125 ) (11,811 )
TOTAL OTHER INCOME (EXPENSES)
(219,443 ) (28,981 )
LOSS BEFORE PROVISIONS FOR TAXES
(1,684,594 ) (2,193,555 )
Provision for Taxes
— —
NET LOSS
(1,684,594 ) (2,193,555 )
OTHER COMPREHENSIVE INCOME
Gain on Foreign Currency Translation
18,046 261
TOTAL COMPREHENSIVE LOSS
$ (1,666,548 ) $ (2,193,294 )
BASIC AND DILUTED LOSS PER SHARE
$ (0.17 ) $ (0.30 )
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED
9,868,143 7,277,295
See accompanying notes to consolidated financial statements.

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CEREPLAST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED
(UNAUDITED)
3/31/2010 3/31/2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss
$ (1,684,594 ) $ (2,193,555 )
Adjustment to reconcile net loss to net cash used in operating activities
Depreciation and amortization
155,112 135,910
Reserve for Inventory Obsolescence
— 46,000
Allowance for Doubtful Accounts
(385 ) (1,325 )
Loss on sale of equipment
— 25,449
Loss on disposal of leasehold improvements
11,584 —
Common Stock Issued for Services, Salaries & Wages
175,000 406,754
(Increase) Decrease in:
Accounts Receivable
63,778 108,791
Inventory
(110,089 ) 115,448
Deposits
42,034 (3,084 )
Prepaid Expenses
180,779 44,203
Restricted Cash
(42,934 ) —
Intangibles
(249 ) (6,557 )
Increase (Decrease) in:
Accounts Payable
(223,156 ) 500,491
Accrued Expenses
80,603 (68,909 )
Other Payables
(84 ) (1,323 )
NET CASH USED IN OPERATING ACTIVITIES
(1,352,601 ) (891,707 )
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, and intangibles
(52,603 ) (6,869 )
Proceeds from sale of equipment
— 1,154
NET CASH USED IN INVESTING ACTIVITIES
(52,603 ) (5,715 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on Capital Leases
(9,441 ) (14,811 )
Proceeds on Notes Payable
20,524 —
Payments on Notes Payable
(53,933 ) (2,903 )
Proceeds from issuance of common stock and subscriptions
1,289,500 467,341
NET CASH PROVIDED BY FINANCING ACTIVITIES
1,246,650 449,627
FOREIGN CURRENCY TRANSLATION
18,046 261
NET DECREASE IN CASH
(140,508 ) (447,534 )
CASH, BEGINNING OF PERIOD
1,305,771 501,699
CASH, END OF PERIOD
$ 1,165,263 $ 54,165
SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
During the three months ended March 31, 2010, the Company issued 705,000 shares in exchange for net proceeds of $1,289,500 under a private placement. During the three ended March 31, 2009, the Company issued 233,670 shares in exchange for gross proceeds of $467,341 under a private placement and 125,000 shares in fulfillment of subscriptions payable of $250,000. During the three months ended March 31, 2010, and March 31, 2009, the company paid $1,125 and $6,571 for interest, respectively. No taxes were paid during the three month periods ended March 31, 2010, or March 31,2009.
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS
During the three months ended March 31, 2010, the Company issued 31,250 shares valued at $125,000 for fees associated with an early lease termination and 12,500 shares valued at $50,000 for board member services. During the three months ended March 31, 2009, the Company issued 73,414 shares valued at $264,607 for services to directors and employees and 200,313 shares valued at $693,313 for prepaid services and debt repayment to third parties. The Company also recognized $142,147 of expense related to vesting of employee stock options for the same period.
See accompanying notes to consolidated financial statements.

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NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2010
(Unaudited)
1. ORGANIZATION AND LINE OF BUSINESS
Organization
We were incorporated on September 29, 2001 in the State of Nevada under the name Biocorp North America Inc. On March 18, 2005, we filed an amendment to our certificate of incorporation to change our name to Cereplast, Inc.
Line of Business
We have developed and are commercializing proprietary bio-based resins through three complementary product families: (i) Cereplast Compostables ® Resins which are renewable, ecologically sound substitute for petroleum-based plastics and (ii) Cereplast Hybrid ® Resins, which replace up to 50% of the petroleum-based content of traditional plastics with materials from renewable resources. Our resins aim to be competitively priced compared to petroleum-based plastic resins and can be converted into finished products using conventional manufacturing equipment without significant additional capital investment by downstream converters and (iii) 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
The demand for non-petroleum based, clean and renewable sources for materials, such as bioplastics, and the demand for compostable/biodegradable products are being driven globally by a variety of factors, including fossil fuel price volatility, energy security and environmental concerns. These factors have led to increased spending on clean and renewable products by corporations and individuals as well as legislative initiatives at the local and state level.
We are a full-service resin solution provider uniquely positioned to capitalize on the rapidly increasing demand for sustainable and environmentally friendly alternatives to traditional plastic products.
We primarily conduct our operations through three product families:
•
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.

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•
Cereplast Algae Plastics™. In October 2009, we announced that we have been developing a new technology to transform algae into bioplastics and intend to launch a new family of algae-based resins that will complement the company’s existing line of Compostables & Hybrid resins. Although we do not expect this new technology to become commercial before the end of 2010 or early 2011, it remains an important development as we believe that the potential open by algae is quite substantial. Cereplast algae-based resins could replace in a first step 50% or more of the petroleum content used in traditional plastic resins. Currently, Cereplast is using renewable material such as starches from corn, tapioca, wheat and potatoes and Ingeo ® PLA. The Company believes 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.
As of March 31, 2010, over 240 companies have requested and been provided with samples of our bioplastic resin and 150 customers have purchased resin for trials and testing. Of these, 80 customers have advanced to prototype testing and qualification of more than 135 different product applications. Thirty customers, including Dorel Industries, WNA, Alcoa, Genpak, Innoware, Penley, Solo, Cadaco, Jatco, Dentek, CSI-Cosmolab, Warner Tools, Handgards and Pace Industries, have commercialized and introduced 95 different bioplastic products using our resin. As a result of successful testing and commercial product launches, some of our customers have signed multi-year supply contracts with increasing volume.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States. (“GAAP”) The consolidated financial statements include the financial condition and results of operations of our wholly-owned subsidiary, Cereplast International, S.A., a Luxembourg company organized during the year ended December 31, 2009, for the purpose of conducting sales operations in Europe. Intercompany balances and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the accompanying financial statements. Significant estimates made in preparing these financial statements include the estimate of useful lives of property and equipment, the deferred tax valuation allowance and the fair value of stock options. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At various times throughout the year, the Company may have exceeded federally insured limits.
Concentration of Credit Risk
We had unrestricted cash, cash equivalents, and short-term investment, totaling $1,165,263 and $1,305,771 at March 31, 2010, and December 31, 2009, respectively. The unrestricted cash and cash equivalents are held for working capital purposes. We do not enter into investments for trading or speculative purposes. Some of the securities in which we invest, however, may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. To minimize this risk, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, debt securities and certificates of deposit. Due to the short-term nature of these investments, we believe that we do not have any material exposure to changes in the fair value of our investment portfolio as a result of changes in interest rates. As of March 31, 2010, all of our investments were held in money market accounts and short-term instruments. We actively monitor changes in interest rates.

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Other Concentration
During the three months ended months ended March 31, 2010, we had four significant suppliers that accounted for 20.1%, 16.3%, 12.9%, and 12.1%, respectively, of total cost of goods sold and we had two customers, Dorel Juvenile Group and A. Schulman GMBH, which accounted for 37.3% and 41.3%, respectively, of total sales. No other supplier or customer accounted for more than 10% of cost of sales or sales during this period.
Restricted Cash
We had restricted cash in the amount of $42,934 and $0 March 31, 2010, and December 31, 2009. The restricted cash amount consists of a “Certificate of Deposit” which supports a “Letter of Credit” for a leased facility.
Fair Value of Financial Instruments
The carrying amounts of our financial instruments as of March 31, 2010, and December 31, 2009, which include cash equivalents, accounts receivable, unbilled receivable, accounts payable, accrued expenses, and advances on financing from investors, approximate their fair values due to the short-term nature of these instruments.
Accounts Receivable
We maintain an allowance for doubtful accounts for estimated losses that may arise if any of our customers are unable to make required payments. Management performs a review of the receivables past due from customers on a monthly basis and reserves against uncollectible items for each customer after all reasonable means of collection have been exhausted, and the potential for recovery is considered remote. The allowance for doubtful accounts was $33,116 and $34,337 as of March 31, 2010, and December 31, 2009, respectively.
Inventories
Inventories are stated at the lower of cost (first-in, first-out basis) or market, and consist primarily of raw materials used in the manufacturing of bioplastic resins, finished bioplastic resins and finished goods. Inventories are reviewed for excess and obsolescence and a reserve is established accordingly. As of March 31, 2010, and December 31, 2009, the inventories are as follows:
2010 2009
Raw Materials
$ 468,969 $ 344,489
Bioplastic Resins
384,129 355,082
Finished Goods
71,485 76,458
Packaging Materials
33,033 14,978
WIP
— 56,250
Total Inventories
$ 957,616 $ 847,527
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed on the straight-line method over the estimated useful lives of the assets. The estimated useful lives of the assets are between five and seven years. Repairs and maintenance expenditures are charged to expense as incurred. Property and Equipment consist of:
March 31, December 31,
2010 2009
Equipment
$ 5,132,030 $ 2,518,132
Construction in Progress
— 2,588,904
Furniture & Fixtures
277,305 275,055
Automobile
25,359 —
Leasehold Improvements
3,485 34,345
5,438,179 5,416,436
Less Accumulated Depreciation
(1,652,517 ) (1,519,714 )
Net Property and Equipment
$ 3,785,662 $ 3,896,722

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Intangibles
Intangibles are stated at cost and consist primarily of patents and trademarks. Amortization is computed on the straight-line method over the estimated life of these assets, estimated to be between five and fifteen years.
March 31, December 31,
2010 2009
Intangibles
$ 208,104 $ 208,304
Less Accumulated Amortization
(26,408 ) (24,265 )
Net Intangibles
$ 181,696 $ 184,039
Deferred Income Taxes
Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Interest and penalties associated with unrecognized tax benefits are classified as additional income taxes in the statement of income.
Revenue Recognition
We recognize revenue at the time of shipment of products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured.
Marketing and Advertising
We expense marketing and advertising costs as incurred. Marketing and advertising costs for the three months ended March 31, 2010, and 2009 were $274,094 and $158,805, respectively.
Research and Development Costs
Research and development costs are charged to expense as incurred. These costs consist primarily of research with respect to new grades of bioplastic resins, testing of both the bioplastic resins as well as testing of finished products made from the bio-based resins. The costs for the three months ended March 31, 2010, and 2009 were $60,238 and $141,210, respectively.

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Stock-Based Compensation
Compensation cost for all stock-based awards is measured at fair value on the date of grant and recognized over the service period for awards expected to vest. The fair value of stock options is determined using the Black-Scholes valuation model. Such value is recognized as expense over the service period, net of estimated forfeitures, using the straight-line method. Adjustments to this expense are made periodically to recognize actual rates of forfeiture which vary significantly from estimates. As of December 31, 2009, and March 31 ,2010, all awards were fully vested.
Loss per Share Calculations
Basic earnings per share is computed by dividing income available to common shareholders by the weighted-average number of common shares available. Diluted earnings per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Our diluted loss per share is the same as the basic loss per share for the three months ended March 31, 2010, and 2009 as inclusion of any potential shares would have had and anti-dilutive effect due to us generating a loss.
Legal Proceedings
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.
3. CAPITAL STOCK
Reverse Stock Split
On March 15,2010, we implemented a reverse spit of our common stock in ratio of one-for-forty. The reverse split was effective at 6:00 a.m. on March 15, 2010. All historical and per share amounts have been adjusted to reflect the reverse stock split.
Capital Stock Issued
During the three months ended March 31, 2010, we issued shares of common stock as follows:
•
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 $1,289,500.
•
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.

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Valuation Assumptions for Stock Options
During the year ended December 31, 2007, total stock options granted to employees were 290,625 with estimated total grant-date fair values of $4,481,665. We estimate that stock-based compensation for awards not expected to be exercised is $864,688. We did not issue any stock options to employees during the three months ended March 31, 2010 or the year ended December 31, 2009. During the three months ended March 31, 2010, and the year ended December 31, 2009, we recorded stock-based compensation related to stock options of $0 and $273,919, respectively relating to the vesting of the 2007 grants. The fair value for each stock option granted during the twelve months ended December 31, 2007 was estimated at the date of grant using the Black-Scholes option-pricing model, assuming no dividends and the following assumptions. All stock options granted were fully vested as of March 31, 2010 and December 31, 2009.
Year ended
December 31,
2009
Average risk-free interest rate
3.84 %
Average expected life (in years)
5.1
Volatility
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
Our board of directors adopted the 2004 Employee Stock Option Plan. Under this Plan, the Board of Directors may issue incentive and non-qualified stock options to our employees. Options granted under these Plans generally expire at the end of five or ten years and vest in accordance with a vesting schedule determined by our Board of Directors, usually over three years from the grant date. As of December 31, 2009, 2004 Employee Stock Option Plan, 334,375 shares are available for future grants under the 2004 Employee Stock Option Plan. We settle stock option exercises with newly issued common shares. The following is a summary of stock option activity (in thousands, except per share data): All stock options were full vested as of December 31, 2009 and no shares have been issued during the three months ended March, 31, 2010.

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The following tables summarize information about stock options as of March 31, 2010 and December 31, 2009, (in thousands, except per share data):
2010 2009
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
Outstanding—beginning of year
73 $ 0.56 249 $ 0.56
Granted at fair value
— — — —
Exercised
— — — —
Canceled/forfeited
— — (176 ) 0.56
Outstanding—end of year
73 0.56 73 0.56
Options exercisable at year-end
73 $ 0.56 0 $ 0.56
Options Outstanding Options Exercisable
Weighted Weighted
Weighted Average Weighted Average
Average Remaining Aggregate Average Remaining Aggregate
Exercise Contract Intrinsic Exercise Contract Intrinsic
Range of Exercise Prices Shares Price Life Value Shares Price Life Value
$0.0-$0.56
73 $ 0.56 4 — 73 $ 0.56 4 —
All awards were fully vested as of December 31, 2009.
The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our average stock price of $1.30 and $0.37 during the three months ended March 31, 2010 and the year ended December 31, 2009, which would have been received by the option holders had all option holders exercised their options as of that date. Based on the average stock price during the three months ended March 31, 2010 and the year ended December 31, 2009, there were no in-the-money options exercisable as of March 31, 2010 and March 31, 2009.
No options were granted and no shares vested during the three months ended March 31, 2010. Additionally, no options were exercised during the three months ended March 31, 2010, and as such no cash was received from employees as a result of any such exercise of stock options.
4. REVOLVING LINE OF CREDIT
The Company has one revolving line of credit guaranteed by our Chief Executive Officer with total availability of $25,000. As of March 31, 2010 and December 31, 2009, the Company did not have any borrowings under the line of credit.
5. LEASES
We currently operate out of two locations in El Segundo, California and Seymour, Indiana. The leases underlying these two facilities are summarized below:
California Facilities — The El Segundo facility consists of 3,634 square feet of corporate office space. The lease commenced on March 1, 2010, for a period of five years at $9,118 per month.
Indiana Facility — The 105,000 square foot Seymour facility is currently used as a distribution facility for our products; construction and installation of our first production line is mechanically completed. The Seymour facility is subject to a lease with monthly rents of $25,000 expiring in January 2018, however the rent agreement has been amended with a substantial rent reduction for a period of several months ending at the end of 2010.
6. LOANS PAYABLE
Notes Payable
During the year ended December 31, 2008, the Company issued a promissory note to a vendor for services provided in the amount of $152,648 which bears interest at the rate of 1.5% per month due in full on February 6, 2009. A payment of $65,000 and stock valued at $62,400 was issued to the vendor in December 2009. The remaining balance at December 31, 2009, of $53,487 was paid in January 2010,
On February 11, 2010, the Company signed a promissory note in the amount of $20,359 for the purchase on an automobile. The note bears interest at 7.44% per years and is to be repaid in 60 monthly payment of $410.67.

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7. INCOME TAX
We are subject to U.S. and California income tax. Subject to limited statutory exceptions, we are no longer subject to federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2006. We are not presently liable for any income taxes nor are we undergoing any tax examinations by the Internal Revenue Service. No Deferred Tax Assets and Deferred Tax Liabilities are included in the balance sheets at March 31, 2010, or December 31, 2009.
Our policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.
10. RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2010, we had no related party transactions.
11. SUBSEQUENT EVENTS
On April 8, 2010, our application to list our common stock on NASDAQ’s Capital Market was approved. Trading on NASDAQ’s Capital Market commenced on April 13,2010.
On Mary 17, 2010, 20,867 shares of common stock were issued for services to be rendered during the period of April 2010 to December 2010.
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
CAUTIONARY STATEMENTS
This Form 10-Q may contain forward-looking statements, as that term is used in federal securities laws, about our financial condition, results of operations and business. These statements include, among others, statements concerning the potential benefits that we may experience from our business activities and certain transactions the Company contemplates or has completed; and statements of our expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts. These statements may be made expressly in this Form 10-Q. You can find many of these statements by looking for words such as believes, expects, anticipates, estimates, “opines, or similar expressions used in this Form 10-Q. These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied by us in those statements. The most important facts that could prevent the Company from achieving its stated goals include, but are not limited to, the following:
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inability to raise sufficient additional capital to finance operations;
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potential fluctuation in quarterly results;
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our failure to earn profits;
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inadequate capital to expand our business, inability to raise additional capital or financing to implement our business plans;
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decline in demand for our products and services;
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rapid and significant changes in markets and other factors that encourage use of bioplastics;

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•
failure to successfully commence operations at our new Seymour facility and relocate manufacturing activities from California to Indiana;
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failure to commercialize new grades of resin being pursued in our technical / market development “pipeline”;
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competitor actions that curtail our market share, negatively affect pricing or limit sales growth;
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inability to retain employees as a result of deferral of payment of salaries to preserve cash;
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litigation with or legal claims and allegations by outside parties;
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insufficient revenues to cover operating costs;
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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.
There is no assurance that we will be profitable. We may not be able to successfully manage or market our products and services, attract or retain qualified executives and technology personnel or obtain additional customers for our products or services. Our products and services may become obsolete, government regulation may hinder our business, additional dilution in outstanding stock ownership may be incurred due to the issuance of more shares, warrants and stock options, or the exercise of outstanding warrants and stock options, and other risks inherent in our businesses.
Because forward-looking statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. We caution you not to place undue reliance on these statements, which speak only as of the date of this Form 10-Q. The cautionary statements contained or referred to in this section should be considered in connection with any subsequent written or oral forward-looking statements that our company or persons acting on our behalf may issue. We do not undertake any obligation to review or confirm analysts expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this Form 10-Q, or to reflect the occurrence of unanticipated events.
OVERVIEW
General .
We primarily conduct our operations through three product families:
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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.
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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.

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Cereplast Algae Plastics™. In October 2009 we announced that we have been developing a new technology to transform algae into bioplastics and intend to launch a new family of algae-based resins that will complement the company’s existing line of Compostables & Hybrid resins. Although we do not expect this new technology to become commercial before the end of 2010 or early 2011, it remains an important development as we believe that the potential open by algae is quite substantial. Cereplast algae-based resins could replace in a first step 50% or more of the petroleum content used in traditional plastic resins. Currently, Cereplast is using renewable material such as starches from corn, tapioca, wheat and potatoes and Ingeo ® PLA. Recently the algae production business has attracted a lot of attention when Exxon announced a $600 million investment in Synthetic Genomics and BP’s $10 million investment in Martek Biosciences. The Company retains that algae is a very attractive feedstock as it does offer a low carbon footprint alternative and at the same time could be accessible in very large quantity. We also have a future plan to create algae plastic made of 100% algae component abandoning any reliance on fossils fuels.
The lead time for customer testing (which, for compostable products, includes the full product lifecycle necessary to receive compostable certifications) of our resins generally ranges from one to three years or more depending upon the industry, the customer and the specific application. As of March 31, 2010, over 230 companies have requested and been provided with samples of our bioplastic resin and 150 customers have purchased resin for trials and testing. Of these, 80 customers have advanced to prototype testing and qualification of more than 135 different product applications. Thirty customers, including Dorel Industries, WNA, Alcoa, Genpak, Innoware, Penley, Solo, Cadaco, Jatco, Dentek, CSI-Cosmolab, Warner Tools, Handgards and Pace Industries, have commercialized and introduced 95 different bioplastic products using our resin. As a result of successful testing and commercial product launches, some of our customers have signed multi-year supply contracts with increasing volume.
Trends and Uncertainties that May Impact Future Results of Operations
Global Market and Economic Conditions. Recent global market and economic conditions have been unprecedented and challenging with tighter credit conditions and slower growth through the first half of 2009. For the nine-month period ended March 31, 2010, continued concerns about the systemic impact of inflation, energy costs, geopolitical issues, the availability and cost of credit, the U.S. mortgage market and a declining real estate market in the U.S. have contributed to increased market volatility and diminished expectations for the U.S. economy. In the last half of 2008, concerns fueled by the federal government conservatorship of the Federal Home Loan Mortgage Corporation and the Federal National Mortgage Association, the declared bankruptcy of Lehman Brothers Holdings Inc., the U.S. government provided loan to American International Group Inc. and other federal government interventions in the US credit markets lead to increased market uncertainty and instability in both US and international capital and credit markets. These conditions, combined with volatile oil prices, declining business and consumer confidence and increased unemployment have contributed to continued volatility of unprecedented levels.
As a result of these market conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Concern about the stability of the markets generally and the strength of counterparties specifically has lead many lenders and institutional investors to reduce, and in some cases, cease to provide funding to borrowers. Continued turbulence in the U.S. and international markets and economies may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our customers. If these market conditions continue, they may limit our ability, and the ability of our customers, to timely replace maturing liabilities, and access the capital markets to meet liquidity needs, resulting in an adverse effect on our financial condition and results of operations.

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Sales. We record sales at the time that we ship our products, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured. We record sales net of sales discounts and allowances. For the three-month period ended March 31, 2010, we provided price incentives to several customers that entered into multi-year supply contracts for their initial purchase commitments to assist in testing and sample production. In the future, we may offer these incentives on a selected basis as we continue to grow our customer base. The amount of these incentives in the future periods will be a function of the growth of our customer base and the particular commercialization. During the three-month period ended March 31, 2010 we signed supply contracts with Dorel Juvenile Group, USA, a division of Dorel Industries, Inc. as well as Georgia Pacific’s Dixie Cups and Tableware division. While we have started shipping to Dorel and expect to start shipping to Georgia Pacific in the fourth quarter, sales under these agreements will be dependent on retail market acceptance of the new Dorel and DIXIE products.
Operating Expenses. Operating expenses consist principally of salaries (both cash and non-cash equity-based compensation), professional fees (including legal, accounting, patent-related, government compliance), marketing, rent, research and development and restructuring costs. Salaries include all cash and non-cash compensation and related costs for all principal functions including executive, finance, accounting, production, and human resources. We have incurred certain one-time costs associated with the implementation of our Strategic Restructuring Program, which occurred primarily in the 4 th quarter of 2009, however we have also realized reductions in operating expenses across most other operating areas including salaries and wages, rent, research and development and professional fees.
CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our unaudited financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We monitor our estimates on an ongoing basis for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2010 COMPARED TO THE THREE MONTHS ENDED MARCH 31, 2010.
S ales
Gross sales decreased by $245,166 or 43.4% to $319,217 for the three months ended March 31, 2010, compared to the three months ended March 31, 2009. Net sales decreased by $270,749 or 48.3% to $289,828 for the three months ended March 31, 2010, compared to the three months ended March 31, 2009. The sales decrease for the period is attributable primarily to the fact that our manufacturing operations were moving from California to Indiana from January 17, 2010, to March 15, 2010. During the course of our moving, our manufacturing operations were temporarily suspended.

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Gross Profit
Gross profit decreased by $6,204 from $97,770 to $91,566 for the three months ended March 31, 2010, compared to the three months ended March 31, 2009. As a percentage of net sales, gross profit margin increased from 17.44% for the three months ended March 31, 2009, to 31.59% for the three months ended March 31, 2010. The increase in gross profit is primarily due to cost savings in our Seymour facility as compared to the California facility.
Operating Expenses
Overall, total operating expenses decreased by $705,627 or 31,2%, to $1,556,717 for the three months ended March 31, 2010, compared to the three months ended March 31, 2009. The decrease for the period is largely attributable to the adoption of our Strategic Restructuring Program that calls for a focus on product development and marketing and contracting for production. The related reduction of in-house manufacturing capacity and the related workforce resulted in a reduction in salaries and wages for the three months ended March 31, 2010, as compared to the three months ended March 31, 2009.
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Salaries and wages, including stock based compensation, decreased by $593,070 or 54.0%, to $504,505 for the three months ended March 31, 2010 as compared to the three months ended March 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.
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Marketing expense increased $115,289, or 72.6%, to $274,094 for the three months ended March 31, 2010, compared to the three months ended March 31, 2009. The increase is due primarily to costs associated with stock issued for the termination of an existing marketing agreement on March 23, 2010.
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Research and Development costs decreased by $80,972, or 57.3% to $60,238 for the three months ended March 31, 2010, compared to the three months ended March 31, 2009 also as a result of an improved focus of our “pipeline process” for technical development and expansion of our resin families and other cost cutting measures.
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Rent expense decreased by $157,629, or 65.2%, to $84,064 for the three months ended March 31, 2010 compared to the three months ended March 31, 2009. The decrease for the period resulted for the termination of two leases for 30,000 sq. ft & 25,000 sq. ft. of office and warehouse space during the prior year and the renegotiation of the lease of the Indiana facility.
Net Loss
Net loss decreased by $508,961 to $1,684,594 for the three months ended March 31, 2010 compared to the three months ended March 31, 2009. This decrease in net loss was a result of reduced operating expenses associated with the downsizing or our workforce related to manufacturing operations, leveraging of our staff resources and, improved processes and cost control and rigorous market and customer selection as well as enhanced gross profit margins.

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LIQUIDITY AND CAPITAL RESOURCES
We require working capital to fund our operations, including funds to finance our research and development and expand sales and marketing, to purchase equipment, service indebtedness, satisfy lease obligations and execute on our business plan and growth strategy. Based on our current cash position and to complete the development of our Seymour facility, we will be required to raise additional working capital, either through commercial debt financing or through the issuance of debt or equity securities. There is no assurance that we will be able to obtain additional sources of working capital on commercially reasonable terms when needed, or at all.
We had net unrestricted cash of $1,165,263 at March 31, 2010, compared to net unrestricted cash of $1,305,771 at December 31, 2009. The net decrease in unrestricted cash is attributed principally to the funding of operating activities offset by funds received through successful private placements.
We had positive working capital (the difference between current assets and current liabilities) of $947,071 at March 31,2010, compared to positive working capital of $1,019,741 at December 31, 2009. The decrease of $72,670 in working capital is primarily due to a reduction in accounts receivable and prepaid expenses offset by a reduction in account payable.
During the three months ended March 31, 2010, we used $1,352,601 of cash for operating activities compared to $891,707 used for operating activities during the three months ended March 31,2009. The increase in the use of cash for operating activities was primarily a result of inventory purchases and payment of accounts payable.
Cash used in investing activities during the three months ended March 31, 2010, was $52,603 compared to cash used in investing activities of $5,715 during the three months ended March 31, 2009. The increase is due to costs association with the Indiana facility start-up in 2010.
Cash provided by financing activities during the three months ended March 31, 2010, was $1,246,650 compared to cash provided by financing activities of $449,627, during the three months ended March 31, 2009. These funds are provided by proceeds from private placements of shares of our common stock.
We have incurred a net loss of $1,684,594 for the three months ended March 31, 2010, and $6,072,948 for the year ended December 31, 2008, and have an accumulated deficit of $37,129,562 as of March 31, 2010. Based on our operating plan, our existing working capital will not be sufficient to meet the cash requirements to fund our planned operating expenses, capital expenditures and working capital requirements through December 31, 2010 without additional sources of cash.
CONTRACTUAL OBLIGATIONS
The following table summarizes our contractual obligations at March 31, 2010, and the effects such obligations are expected to have on our liquidity and cash flows in our future periods:
Payments Due by Period
Less Than 2-3 4-5 More Than
Total 1 year Years Years 5 years
Capitalized lease obligations
$ 24,797 $ 15,900 $ 8,897 $ — $ —
Purchase obligations
214,452 214,452 — — —
Rental lease obligations
3,241,975 409,737 409,737 409,737 2,012,764
Term loan obligations
20,078 3,203 4,023 4,086 8,766
$ 3,501,302 $ 643,292 $ 422,657 $ 413,823 $ 2,021,530

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OFF-BALANCE SHEET ARRANGEMENTS
We do not have any relationships with unconsolidated entities or financial partnerships such as entities often referred to as structured finance or special purpose entities that would have been established for the purpose of facilitating off-balance-sheet arrangements or for other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a number of market risks in the ordinary course of business. These risks, which include interest rate risk, foreign currency exchange risk and commodity price risk, arise in the normal course of business rather than from trading. We have examined our exposures to these risks and concluded that none of our exposures in these areas is material to fair values, cash flows or earnings. We regularly review these risks to determine if we should enter into active strategies, such as hedging, to help manage the risks. At the present time, we do not have any hedging programs in place and we are not trading in any financial or derivative instruments.
We currently do not have any material debt, so we do not have interest rate risk from a liability perspective. We do have a significant amount of cash and short-term investments with maturities less than three months. This cash portfolio exposes us to interest rate risk as short-term investment rates can be volatile. Given the short-term maturity structure of our investment portfolio, and the high-grade investment quality of our portfolio, we believe that we are not subject to principal fluctuations and the effective interest rate of our portfolio tracks closely to various short-term money market interest rate benchmarks.
ITEM 4T.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is: (i) recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, and (ii) accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
During the quarter ended March 31, 2010, there have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II – OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in matters that may harm our business may arise from time to time. We are currently not aware of nor have any knowledge of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
ITEM 1A.
RISK FACTORS
There are no material changes from the risk factors previously disclosed in the Registrant’s Form 10-K filed on March 31, 2010.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We have issued the following unregistered securities during the three months ended March 31, 2010:
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We sold 705,000 shares of common stock for net cash proceeds of $1,289,500.
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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.
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On January 6, 2010, we issued 12,500 shares of common stock valued at $50,000 to a board member for services provided.
All of the offerings and sales above were deemed to be exempt under rule 506 of Regulation D and/or Section 4(2) of the Securities Act, No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, our business associates or our executive officers, and transfers of the securities were restricted by us in accordance with the requirements of the Securities Act. In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced persons were accredited or sophisticated investors, were capable of analyzing the merits and risks of their investment, and understood the speculative nature of their investment. Furthermore, all of the above-referenced persons were provided with access to our SEC filings.
ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4.
RESERVED
ITEM 5.
OTHER INFORMATION
Not applicable.
ITEM 6.
EXHIBITS

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Exhibit
Number Description
31.1
Certification of the Chief Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1
Certification of the Chief Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. ***
(1)
Filed as an exhibit to the Form SB-2 Registration Statement declared effective on July 5, 2005 and incorporated herein by reference.
***
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.

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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: May 12, 2010 CEREPLAST, INC.
By: /s/ Frederic Scheer
Frederic Scheer
Chairman, Chief Executive Officer, Principal Financial Officer and Director

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