HONG YUAN HOLDING GROUP - Quarter Report: 2009 June (Form 10-Q)

 

 

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

o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

Commission File Number 333-126378

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.)
3421-3433 West El Segundo Boulevard Hawthorne, California (Address of Principal Executive Office)		90250 (Zip 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 August 10, 2009: 337,885,300

 

 

CEREPLAST, INC.

		Page
PART I—FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS			3
Consolidated Balance Sheets at June 30, 2009 and December 31, 2008			3
Consolidated Statements of Operations and Other Comprehensive Income for the Three and Six months ended June 30, 2009 and 2008			4
Consolidated Statements of Cash Flows for the Six months ended June 30, 2009 and 2008			5
Notes to the Consolidated Financial Statements			6
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			15
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			22
Item 4T. CONTROLS AND PROCEDURES			23
PART II—OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS			23
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			23
Item 3. DEFAULTS UPON SENIOR SECURITIES			24
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS			24
Item 5. OTHER INFORMATION			24
Item 6. EXHIBITS			24
SIGNATURES			25
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.

PART I – FINANCIAL INFORMATION

ITEM 1.		CONSOLIDATED FINANCIAL STATEMENTS

CEREPLAST, INC.

CONSOLIDATED BALANCE SHEETS

		6/30/09				12/31/08
		(Unaudited)				(Audited)
ASSETS
Current Assets
Cash		$	384,898			$	501,699
Accounts Receivable, Net			271,391				280,102
Inventory, Net			1,287,249				1,838,775
Prepaid Expenses			700,058				160,863
Total Current Assets			2,643,596				2,781,439
Property and Equipment
Property and Equipment			5,672,543				5,729,051
Accumulated Depreciation and Amortization			(1,371,262	)			(1,132,337	)
Net Property and Equipment			4,301,281				4,596,714
Other Assets
Restricted Cash			49,008				48,628
Intangibles, Net			188,337				173,285
Deposits			41,311				44,943
Total Other Assets			278,656				266,856
Total Assets		$	7,223,533			$	7,645,009
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current Liabilities
Accounts Payable		$	1,719,227			$	1,114,744
Other Payables			9,938				33,634
Accrued Expenses			1,195,080				829,933
Capital Leases, Current Portion			45,866				47,440
Convertible Shareholder Loan			—				212,482
Loan Payable, Current Portion			—				3,874
Total Current Liabilities			2,970,111				2,242,107
Long-Term Liabilities
Capital Leases			13,718				40,045
Total Long-Term Liabilities			13,718				40,045
Total Liabilities			2,983,829				2,282,152
Shareholders’ Equity
Preferred Stock, $0.001 par value; 5,000,0000 authorized preferred shares			—				—
Common Stock, $0.001 par value; 495,000,000 authorized shares; 313,831,513 shares & 281,134,359 shares issued and outstanding, respectively			313,831				281,134
Common Stock subscribed, not issued			252,350				250,000
Additional Paid in Capital			36,250,967				34,175,023
Retained Earnings/(Deficit)			(32,614,812	)			(29,372,020	)
Other Comprehensive Income			37,368				28,720
Total Shareholders’ Equity			4,239,704				5,362,857
Total Liabilities and Shareholders’ Equity		$	7,223,533			$	7,645,009

See accompanying notes to consolidated financial statements.

CEREPLAST, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME

(UNAUDITED)

		Three Months Ended								Six Months Ended
		6/30/2009				6/30/2008				6/30/2009				6/30/2008
GROSS SALES		$	900,598			$	1,059,957			$	1,464,981			$	1,973,109
Sales Discounts, Returns & Allowances			(4,331	)			(5,559	)			(8,137	)			(27,481	)
NET SALES			896,267				1,054,398				1,456,844				1,945,628
COST OF SALES			818,846				1,127,621				1,281,653				1,906,410
GROSS PROFIT/(LOSS)			77,421				(73,223	)			175,191				39,218
OPERATING EXPENSES
Depreciation and Amortization			136,179				136,283				272,089				265,747
Marketing Expense			92,111				284,788				250,916				680,360
Professional Fees			189,585				210,274				337,884				556,314
Rent Expense			217,247				263,343				458,940				527,985
Research and Development			62,579				389,202				203,789				546,300
Salaries & Wages			387,527				833,712				1,135,847				1,563,486
Salaries & Wages — Stock Based Compensation			(166,738	)			364,190				182,517				1,876,971
Other Operating Expenses			217,805				649,960				548,639				1,151,244
TOTAL OPERATING EXPENSES			1,136,295				3,131,752				3,390,621				7,168,407
LOSS FROM OPERATIONS BEFORE OTHER INCOME(EXPENSES)			(1,058,874	)			(3,204,975	)			(3,215,430	)			(7,129,189	)
OTHER INCOME (EXPENSES)
Gain on Settlement of Shareholder Loan			—				—				81,982				—
Waiver fee on Settlement of Shareholder Loan			—				—				(90,000	)			—
Gain/(loss) on Sale of Equipment			410				—				(25,039	)			—
Interest Income			11,995				28,674				20,274				115,049
Interest Expense			(2,768	)			(5,065	)			(14,579	)			(11,635	)
TOTAL OTHER INCOME (EXPENSES)			9,637				23,609				(27,362	)			103,414
LOSS BEFORE PROVISIONS FOR TAXES			(1,049,237	)			(3,181,366	)			(3,242,792	)			(7,025,775	)
Provision for Taxes			—				—				—				—
NET LOSS			(1,049,237	)			(3,181,366	)			(3,242,792	)			(7,025,775	)
OTHER COMPREHENSIVE INCOME
Gain (loss) on Foreign Currency Translation			8,387				(541	)			8,648				(541	)
TOTAL COMPREHENSIVE LOSS		$	(1,040,850	)		$	(3,181,907	)		$	(3,234,144	)		$	(7,026,316	)
BASIC AND DILUTED LOSS PER SHARE		$	(0.00	)		$	(0.01	)		$	(0.01	)		$	(0.03	)
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING BASIC AND DILUTED			309,091,565				261,717,949				300,141,404				260,642,902

See accompanying notes to consolidated financial statements.

CEREPLAST, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE SIX MONTHS ENDED

(UNAUDITED)

		6/30/2009				6/30/2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(3,242,792	)		$	(7,025,775	)
Adjustment to reconcile net loss to net cash used in operating activities
Depreciation and amortization			272,089				265,747
Reserve for Inventory Obsolescence			(54,544	)			—
Allowance for Doubtful Accounts			(1,900	)			—
Loss on sale of equipment			25,039				—
Common Stock Issued for Services, Salaries & Wages			132,677				1,876,971
Common Stock Issued for Waiver Fee			90,000				—
Gain on Settlement of Shareholder Loan			(81,982	)			—
(Increase) Decrease in:
Accounts Receivable			10,611				(217,450	)
Inventory			606,070				(963,472	)
Deposits			3,632				(10,771	)
Prepaid Expenses			89,804				(74,129	)
Restricted Cash			(380	)			(1,703	)
Intangibles			(19,306	)			(84,872	)
Increase (Decrease) in:
Accounts Payable			660,167				334,044
Accrued Expenses			365,147				63,032
Other Payables			(23,696	)			35,696
NET CASH USED IN OPERATING ACTIVITIES			(1,169,364	)			(5,802,682	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment, and intangibles			(6,869	)			(2,081,470	)
Proceeds from sale of equipment			1,558				—
NET CASH USED IN INVESTING ACTIVITIES			(5,311	)			(2,081,470	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on Capital Leases			(27,901	)			(35,561	)
Payments on Term Loan Payable			(3,874	)			(5,475	)
Proceeds from issuance of common stock and subscription receivable			1,081,001				—
NET CASH PROVIDED BY FINANCING ACTIVITIES			1,049,226				(41,036	)
FOREIGN CURRENCY TRANSLATION			8,648				(541	)
NET DECREASE IN CASH			(116,801	)			(7,925,729	)
CASH, BEGINNING OF PERIOD			501,699				8,593,714
CASH, END OF PERIOD		$	384,898			$	667,985

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION

During the six months ended June 30, 2009, the Company issued 10,679,819 shares in exchange for gross proceeds of $533,991 under private placements, 4,568,283 shares in exchange for net proceeds of $300,000 pursuant to a Periodic Equity Investment Agreement, and 5,000,000 shares in fulfillment of subscriptions payable of $250,000. During the six months ended months ended June 30, 2008, the Company did not issue any shares pursuant to private placement transactions. For the six months ended June 30, 2009 and 2008, the Company paid $11,712 and $11,635, respectively, in cash for interest and $0 for taxes.

SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS

During the six months ended June 30, 2009, the Company issued 2,936,552 shares valued at $264,607 for services to directors and employees and 9,512,500 shares valued at $897,313 for prepaid services and debt repayment to third parties. The Company also recognized $(131,930) of expense related to vesting of employee stock options for the same period. During the six months ended June 30, 2008, the Company issued 2,935,186 shares, valued at $1,566,717 for services to directors and employees and 40,000 shares valued at $22,800 for services to third parties. The Company also recognized $287,454 of expense related to the vesting of employee stock options for the six months ended June 30, 2008.

See accompanying notes to consolidated financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. ORGANIZATION AND LINE OF BUSINESS

Organization

We were incorporated on September 29, 2001 in the State of Nevada under the name of 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 two complementary product families: Cereplast Compostables^® Resins which are renewable, ecologically sound substitute for petroleum-based plastics and 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.

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 two 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.

As of June 30, 2009, over 200 companies have requested and been provided with samples of our bioplastic resin and 124 customers have purchased resin for trials and testing. Of these, 73 customers have advanced to prototype testing and qualification of more than 115 different product applications. Twenty-five customers, including Dorel Industries, WNA, Alcoa, Genpak, Innoware, Penley, Solo, Cadaco, Jatco, Dentek, CSI-Cosmolab, Warner Tools and Pace Industries, have commercialized and introduced 90 different bioplastic products using our resin.

On May 19, 2009, we announced a new strategic plan (“Strategic Restructuring Program”) to accelerate growth, and reduce costs by outsourcing manufacturing and concentrating our activities on core strengths in design and development, and sale and distribution of our resins. (Refer to Exhibit 99.1 of our Form 8-K filed on May 19, 2009 for the complete announcement.) Although we continue to operate our Hawthorne manufacturing facility to supply our current customers, we are in advanced negotiation with several resin compounders to enter into a strategic partnership to manufacture our proprietary resins. We expect that such a partnership arrangement will be completed and commercial production equipment sold before year end.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation and Consolidation

The accompanying interim unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the U.S. (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. 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, 2008 for the purpose of conducting sales operations in Europe. Intercompany balances and transactions have been eliminated in consolidation. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six-month period ended June 30, 2009 are not necessarily indicative of the results that may be expected for year ending December 31, 2009. For further information, refer to the financial statements for the year ended December 31, 2008 and notes thereto included in our Annual Report on Form 10-K, filed on March 30, 2009.

This summary of our significant accounting policies is presented to assist in understanding our financial statements. The financial statements and notes are representations by our management, which is responsible for their integrity and objectivity. These accounting policies conform to GAAP and have been consistently applied in the preparation of the financial statements.

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.

Recently Issued Accounting Pronouncements

In May 2009, the Financial Accounting Standards Board issued Statement No. 165, “Subsequent Events”, to incorporate the accounting and disclosure requirements for subsequent events into U.S. generally accepted accounting principles. Statement No. 165 introduces new terminology, defines a date through which management must evaluate subsequent events, and lists the circumstances under which an entity must recognize and disclose events or transactions occurring after the balance sheet date. We adopted Statement No. 165 as of the required effective date of June 30, 2009.

Basis of Presentation and Going Concern

We have incurred net losses of $3,242,792 for the six months ended June 30, 2009 and $12,748,701 for the year ended December 31, 2008, and have an accumulated deficit of $32,614,812 as of June 30, 2009. Based on our operating plan, our existing working capital will not be sufficient to meet the cash requirements to fund our planned operating expenses, capital expenditures and working capital requirements through December 31, 2009 without additional sources of cash.

These factors raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business.

Our plan to address the shortfall of working capital is to generate additional financing through a combination of sales of assets, incremental product sales and the sale of equity securities. There are no assurances that we will be able to obtain any sources of financing on acceptable terms, or at all.

If we cannot obtain sufficient additional financing in the short-term, we may be forced to file for bankruptcy or cease operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be forced to take such actions.

Cash and Cash Equivalents

We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. At various times throughout the year, we may have exceeded federally insured limits.

Concentration of Credit Risk

We had unrestricted cash, cash equivalents, and short-term investments, totaling $384,898 at June 30, 2009 and $501,699 at December 31, 2008. 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 June 30, 2009 all of our investments were held in money market accounts and short-term instruments. We actively monitor changes in interest rates.

Other Concentration

During the quarter ended June 30, 2009, we had two significant suppliers that accounted for 25.1% and 16.5%, respectively, of total cost of goods sold and had one customer, Dorel Juvenile Group, which accounted for 55.3% of total sales. No other supplier or customer accounted for more than 10% of cost of sales or sales during this period.

Restricted Cash

We had restricted cash in the amount of $49,008 at June 30, 2009 and $48,628 at December 31, 2008. 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 June 30, 2009 and December 31, 2008, which include cash equivalents, accounts receivable, unbilled receivables, 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 the 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 $27,450 as of June 30, 2009 and $29,350 as of December 31, 2008.

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 June 30, 2009 and December 31, 2008, the inventories are as follows:

		6/30/09				12/31/08
Raw Materials		$	399,591			$	608,984
Bioplastic Resins			757,923				1,040,255
Finished Goods			133,839				291,890
Work in Process			39,795				—
Packaging Materials			33,557				29,646
Promo & Misc.			—				—
Reserve for Obsolescence			(77,456	)			(132,000	)
Inventories, Net		$	1,287,249			$	1,838,775

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:

		6/30/09				12/31/08
Equipment		$	2,526,775			$	2,582,204
Construction in Progress			2,592,866				2,593,937
Furniture & Fixtures			325,738				325,738
Leasehold Improvements			227,164				227,172
			5,672,543				5,729,051
Less Accumulated Depreciation			(1,371,262	)			(1,132,337	)
Net Property and Equipment		$	4,301,281			$	4,596,714

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 15 years.

		6/30/09				12/31/08
Intangibles		$	208,232			$	188,927
Less Accumulated Amortization			(19,895	)			(15,642	)
Net Intangibles		$	188,337			$	173,285

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 carryforwards 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 as of the date of enactment.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. 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 June 30, 2009 and 2008 were $92,111 and $284,788, respectively, and for the six months ended June 30, 2009 and 2008 were $250,916 and $680,360, 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 June 30, 2009 and 2008 were $62,579 and $389,202, respectively and for the six months ended June 30, 2009 and 2008 were $203,789 and $546,300, respectively.

Stock-Based Compensation

As of January 1, 2007, we adopted SFAS No. 123(R), which requires measurement of compensation cost for all stock-based awards at fair value on date of grant and recognition of compensation 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 under SFAS 123(R). Adjustments to this expense are made periodically to recognize actual rates of forfeiture which vary significantly from estimates. During the three months ended June 30, 2009, such adjustments resulted in a net credit to stock based compensation of $166,738.

Loss per Share Calculations

We adopted SFAS No. 128 for the calculation of “Loss per Share.” SFAS No. 128 dictates the calculation of basic earnings per share and diluted earnings per share. 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 and six months ended June 30, 2009 and 2008, as the inclusion of any potential shares would have had an 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

During the six months ended June 30, 2009, we issued shares of common stock as follows:

•

In a private placement transactions, which was made in reliance upon an exemption from registration under rule 506 of Regulation D promulgated under Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), we issued 10,679,819 restricted shares of common stock for gross cash proceeds of $533,991, and 5,000,000 restricted shares of common stock in fulfillment of subscriptions received prior to December 31, 2008 of $250,000.

•

Also on February 18, 2009 we also issued 2,450,000 shares of restricted common stock valued at $220,500 to one of our shareholders, a party related to our Chief Executive Officer, in repayment of a convertible shareholder loan. The stock issuance includes 1,450,000 shares related to the original principal amount of $212,500 and 1,000,000 additional shares related to an agreement to waive default penalties.

•

We issued 6,500,000 shares of restricted common stock valued at $629,000 to third parties for services to be rendered over twelve-month terms beginning in March 2009 and May 2009.

•

We issued 3,499,052 shares of restricted common stock valued at $312,419 to various employees, directors, and third parties for services rendered during the period.

•

We issued 4,568,283 shares of restricted common stock for net cash proceeds of $300,000 pursuant to the Periodic Equity Investment Agreement with Cumorah Capital, Inc. dated December 8, 2008.

Stock Option Activity

Under this 2004 Employee Stock Option 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 5 or 10 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 June 30, 2009, 13,375,000 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):

		Six months ended
		June 30, 2009
						Weighted Average
		Shares				Exercise Price
Outstanding—beginning of year			9,975			$	0.56
Granted at fair value			—				—
Exercised			—				—
Canceled/forfeited			(3,200	)			(0.56	)
Outstanding—end of quarter			6,775				0.56
Options exercisable at quarter-end			6,040			$	0.56

The following table summarizes information about stock options as of June 30, 2009 (in thousands, except per share data):

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

6,775

$

0.56

4.47

—

6,040

$

0.56

4.11

—

Total unrecognized compensation costs related to non-vested awards was approximately $1,302,413 as of June 30, 2009. These non-vested awards are expected to be exercised over the weighted average period of 4.47 years.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on our average stock price of $0.11 during the three months ended June 30, 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 June 30, 2009, there were no in-the-money options exercisable as of June 30, 2009.

No options were granted and no shares vested during the three months ended June 30, 2009. Additionally, no options were exercised during the three months ended June 30, 2009, and as such no cash was received from employees as a result of any such exercise of stock options.

4. LEASES

We currently operate out of two main locations in Hawthorne, California and Seymour, Indiana. The various leases underlying these two facilities are summarized below:

California Facilities – The Hawthorne facility is comprised of two contiguous building spaces covering an aggregate of 55,000 square feet that serve as our main corporate office, research and development lab, production facility and logistic center. The Hawthorne facility is subject to two operating leases:

•

a lease for office, industrial and warehouse space with monthly rents of $15,405 expiring in January 2010;

•

a lease for office and warehouse space with monthly rents of $20,644 expiring in April 2012; and

An additional lease for a 30,000 square foot facility for office and warehouse space was terminated during the three months ended June 30, 2009 as part of our facilities consolidation and cost reduction efforts under our Strategic Restructuring Program.

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 and now undergoing final stages of preparation for operation on a continuous basis. The Seymour facility is subject to a lease with monthly rents of $25,000 expiring in January 2018. As part of our Strategic Restructuring Program, we are currently in negotiations with several resin compounders to outsource manufacturing of our resins. Implementation of this plan may include the sale of the manufacturing equipment currently located on this premises and /or further consolidation of facilities.

5. LOANS PAYABLE

Term Loan

During the year ended December 31, 2004, the Company obtained a term loan payable in the amount of $50,000, bearing interest at 6.75% per annum. The loan matured and was fully repaid during the period ended June 30, 2009.

Shareholder Loan

During the year ended December 31, 2008, we received a loan of $212,482 from one of our shareholders, a party related to our Chief Executive Officer. The loan bore no interest and was repayable on or before January 15, 2009 at our discretion in cash or in shares of Cereplast common stock. On February 18, 2009, the loan was repaid with the issue of 1,450,000 shares of Cereplast common stock valued at $130,500 resulting in a gain on repayment of debt of $81,982. An additional 1,000,000 shares valued at $90,000 were issued to this same shareholder as payment for waiving any default penalties on the loan.

6. 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 2004. We are not presently liable for any income taxes nor are we undergoing any tax examinations by the Internal Revenue Service. We adopted the provision of FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes on January 1, 2007. No Deferred Tax Assets and Deferred Tax Liabilities are included in the balance at June 30, 2009 or December 31, 2008.

Our policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.

7. CONTINGENCIES AND COMMITMENTS

Payment of Salaries & Employment Contracts

During the period ended June 30. 2009, we took additional measures to preserve working capital to continue to focus on financing operations and suspended or significantly reduced payment of salaries to certain employees. In July, 2009, we began repaying a portion of these suspended salaries.

In addition, as part of our workforce reduction efforts under our Strategic Restructuring Program, we furloughed certain senior management employees with whom we have employment contracts and are in default of some terms of these contracts. While we expect to incur some severance related costs associated with these reductions we cannot currently estimate the likelihood or amount of these restructuring costs.

8. SUBSEQUENT EVENTS

We evaluated our financial statements for subsequent events through August 13, 2009, the date the financial statements were available to be issued. Other than the items noted below, we are not aware of any other subsequent events that would require recognition or disclosure in the financial statements.

Issuance of Capital Stock

Subsequent to June 30, 2009, we issued 21,147,000 shares of restricted common stock in a private placement transaction that was made in reliance upon an exemption from registration under rule 506 of Regulation D promulgated under Section 4(2) of the Securities Act of 1933, for gross proceeds of $1,057,350.

Also subsequent to June 30, 2009 we issued 2,081,100 shares of restricted common stock valued at $104,055 to third parties and 825,687 shares of restricted common stock valued at $107,339 to employees for services rendered.

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:

•

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 successfully commence operations at our new Seymour facility and relocate manufacturing activities from California to Indiana;

•

failure to commercialize new grades of resin being pursued in our technical / market development “pipeline”

•

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.

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 two 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.

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, 2009, over 200 companies have requested and been provided with samples of our bioplastic resin and 124 customers have purchased resin for trials and testing. Of these, 73 customers have advanced to prototype testing and qualification of more than 115 different product applications. Twenty-five customers, including Dorel Industries, WNA, Alcoa, Genpak, Innoware, Penley, Solo, Cadaco, Jatco, Dentek, CSI-Cosmolab, Warner Tools and Pace Industries, have commercialized and introduced 90 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 six-month period ended June 30, 2009, 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.

Strategic Restructuring Program. In May 2009, we announced a new strategic plan (“Strategic Restructuring Program”) to accelerate growth and reduce costs by outsourcing manufacturing and concentrating our activities on core strengths in design and development, and sale and distribution of our resins. This plan includes reductions in workforce, consolidation of products, inventory and facilities, as well as the sale of certain commercial production equipment, including the newly constructed production line in Indiana. We expect to incur certain one-time restructuring costs associated with implementation of this plan primarily related to employment compensation, inventory consolidation and lease breakage costs however as it is early in our implementation stage, we are not currently able to estimate the total amount of these costs.

We are currently continuing to operate our Hawthorne manufacturing facility to supply our current customers, however we are in advanced negotiations with several resin compounders to enter into a strategic partnership to manufacture our proprietary resins. We expect that such a partnership arrangement will be completed and commercial production equipment sold before year end.

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 six-month period ended June 30, 2009, 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 six-month period ended June 30, 2009 we signed supply contracts with Dorel Juvenile Group, USA, a division of Dorel Industries, Inc. as well as DIXIE Consumer Products, LLC., a wholly owned subsidiary of Georgia-Pacific. While we have started shipping to Dorel and expect to start shipping to Georgia Pacific in the third 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 expect to incur certain one-time costs associated with the implementation of our Strategic Restructuring Program, primarily in the 3^rd and 4^th quarter of 2009, however we expect that implementation will also lead to reduction in operating expenses across all 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 JUNE 30, 2009 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2008

Sales

Gross sales decreased by $159,359 or 15.0% to $900,598 for the three months ended June 30, 2009 compared to the three months ended June 30, 2008. Net sales decreased by $158,131 or 15.0% to $896,267 for the three months ended June 30, 2009 compared to the three months ended June 30, 2008. The sales decrease for the period is attributable to decreases in sales volume of our bioplastic resins experienced as existing customers have delayed orders and/or launches of their own commercial applications with our resins due to the general economic downturn and global drop in demand. The reduction in orders from existing customers was partially offset by sales to new and significant customers under long-term contracts finalized during the first and second quarters, including Dorel Juvenile Group and Georgia-Pacific. The full benefit of these new sales contracts should be reflected in the second half of 2009.

Gross Profit

Gross profit increased by $150,644 from $(73,223) to $77,421 for the three months ended June 30, 2009 compared to the three months ended June 30, 2008. As a percentage of net sales, gross profit margin increased from (6.9)% for the three months ended June 30, 2008 to 8.6% for the three months ended June 30, 2009. The increase in gross margin is attributable to price increases across most of our resin grades. These price increases have been partially offset by increases in raw material costs and freight costs year over year as well as by one time restructuring related charges associated with consolidation of product and inventory lines of $39,922. Gross profit margin before accounting for this restructuring related write down was 13.1% for the three months ended June 30, 2009 compared to (6.9)% for the three months ended June 30, 2008. While gross margins and capacity utilization in the Hawthorne facility continue to increase, we are still operating at a low capacity utilization rate. As such, management does not believe that the current gross margins are reflective of the target gross margins we should be able to achieve upon outsourcing of manufacturing activities planned under our Strategic Restructuring Program and sales volumes with a higher percentage of commercially mature customers and applications.

Operating Expenses

Overall, total operating expenses decreased by $1,995,457 , or 63.7%, to $1,136,295 for the three months ended June 30, 2009 compared to the three months ended June 30, 2008. 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 awarded to employees during the three months ended June 30, 2009 as compared to the three months ended June 30, 2008. In addition, reduced spending on marketing, research and development and professional fees was enabled by focusing our “pipeline process” for technical development and expansion of our resin families.

•

Salaries and wages, including stock based compensation, decreased by $977,113, or 81.6%, to $220,789 for the three months ended June 30, 2009 compared to the three months ended June 30, 2008, 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 decreased by $192,677, or 67.7%, to $92,111 for the three months ended June 30, 2009 compared to the three months ended June 30, 2008. The decrease for the period is directly attributable to focusing our “pipeline process” and implementing more rigorous market and customer selection processes.

•

Research and Development costs decreased by $326,623, or 83.9% to $62,579 for the three months ended June 30, 2009 compared to the three months ended June 30, 2008 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.

•

Rent expense decreased by $46,096, or 17.5%, to $217,247 for the three months ended June 30, 2009 compared to the three months ended June 30, 2008. The decrease for the period was primarily the result of rental income from the sublease of one of our office and warehouse premises in Hawthorne offsetting rent expense during the three months ended June 30, 2009. No rental income was earned on any of our leased premises for the three months ended June 30, 2008.

Net Loss

Net loss decreased by $2,132,129 or 67%, to $1,049,237 for the three months ended June 30, 2009 compared to the three months ended June 30, 2008. This decrease in net loss was a result of reduced operating expenses associated with the downsizing 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. Currently operating costs exceed revenue as we have only recently introduced Cereplast Hybrid Resins^®. We cannot make assurances regarding when or if revenue will exceed operating results.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2009 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2008

Sales

Gross sales decreased by $508,128 or 25.8% to $1,464,981 for the six months ended June 30, 2009 compared to the six months ended June 30, 2008. Net sales decreased by $488,784 or 25.1% to $1,456,844 for the six months ended June 30, 2009 compared to the six months ended June 30, 2008. The sales decrease for the period is attributable to decreases in sales volume of our bioplastic resins experienced primarily during the first quarter 2009 as existing customers have delayed orders and/or launches of their own commercial applications with our resins due to the general economic downturn and global drop in demand. The reduction in orders from existing customers was partially offset by sales to new and significant customers under long-term contracts finalized during the first half of the year, including Dorel Juvenile Group and DIXIE Products, Inc. The full benefit of these new sales contracts should be reflected in the second half of 2009.

Gross Profit

Gross profit increased by $135,973, or 346.7%, from $39,218 to $175,191 for the six months ended June 30, 2009 compared to the six months ended June 30, 2008. As a percentage of net sales, gross profit margin increased by 600% to 12% for the six months ended June 30, 2008 from 2.0% for the same period in the prior year. The increase in gross margin is attributable to price increases across most of our resin grades. These price increases have been partially offset by increases in raw material costs and freight costs year over year as well as by one-time restructuring related charges associated with consolidation of product and inventory lines of $39,922. Gross profit margin before accounting for this restructuring related write-down was 14.8% for the six months ended June 30, 2009 compared to 2.0% for the six months ended June 30, 2008. While gross margins and capacity utilization in the Hawthorne facility continue to increase, we are still operating at a low capacity utilization rate. As such, management does not believe that the current gross margins are reflective of the target gross margins we should be able to achieve upon outsourcing of manufacturing activities planned under our Strategic Restructuring Program and sales volumes with a higher percentage of commercially mature customers and applications.

Operating Expenses

Overall, total operating expenses decreased by $3,777,786, or 52.7%, to $3,390,621 for the six months ended June 30, 2009 compared to the six months ended June 30, 2008. The decrease for the period is largely attributable to the impact of restructuring of our operations to focus on product development and marketing and contract for production. The related focus on reducing in-house manufacturing capacity and the related workforce reductions resulted in a significant decrease in salaries and wages during the six months ended June 30, 2009 as compared to the three months ended June 30, 2008. In addition, reduced spending on marketing, research and development and professional fees was enabled by focusing our “pipeline process” for technical development and expansion of our resin families.

•

Salaries and wages, including non-cash compensation decreased by $2,122,093, or 61.7%, to $1,318,364 for the six months ended June 30, 2009 compared to the six months ended June 30, 2008, largely as a result of the restructuring activities and the significant reductions in our workforce made during the six months ended June 30, 2009 compared to June 30, 2008 and associated reductions in compensation expense related to the vesting of employee stock options to reflect actual, vs. estimated, stock option forfeiture rates.

•

Marketing expense decreased by $429,444, or 63.1%, to $250,916 for the six months ended June 30, 2009 compared to the six months ended June 30, 2008. The decrease for the period is directly attributable to focusing our “pipeline process” and implementing more rigorous market and customer selection processes.

•

Research and Development costs decreased by $342,511, or 62.7%, to $203,789 for the six months ended June 30, 2009 compared to the six months ended June 30, 2008 also as a result of an improved focus of our “pipeline process” for technical development and expansion of our resin families.

•

Rent expense decreased by $69,045, or 13.1%, to $458,940 for the six months ended June 30, 2009 compared to the six months ended June 30, 2008. The decrease for the period was the result of rental income from the sublease of one of our office and warehouse premises in Hawthorne offsetting rent expense during the six months ended June 30, 2009. No rental income was earned on any of our leased premises for the six months ended June 30, 2008.

Net Loss

Net loss decreased by $3,782,983 or 53.8%, to $3,242,792 for the six months ended June 30, 2009 compared to the six months ended June 30, 2008. This decrease in net loss was a result of reduced operating expenses associated with the downsizing our 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. Currently, operating costs exceed revenue as we have only recently introduced Cereplast Hybrid Resins^®. We cannot make any assurances regarding when or if revenue will exceed operating results.

LIQUIDITY AND CAPITAL RESOURCES

We require working capital to fund our operations, including payments 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 $384,898 at June 30, 2009 compared to net unrestricted cash of $501,699 at December 31, 2008. The net decrease in unrestricted cash is attributed principally to the funding of operating activities offset by funds received through successful private placements and through our Periodic Equity Investment Agreement with Cumorah Capital, Inc.

We had negative working capital (the difference between current assets and current liabilities) of $326,515 at June 30, 2009 compared to positive working capital of $539,332 at December 31, 2008. The decrease in working capital is primarily attributable to a reduction in inventory of $551,526 and an increase in Accounts Payable and Accrued Expenses of $969,630.

During the six months ended June 30, 2009, we used $1,169,3644 of cash for operating activities compared to $5,802,682 used for operating activities during the six months ended June 30, 2008. The decrease in the use of cash for operating activities was a result of a decrease in operating expenses, particularly as a result of restructuring activities, as well as a focus on working capital management, which resulted in a reduction in inventory and accounts receivable and an increase in accounts payable.

Cash used in investing activities during the six months ended June 30, 2009 was $5,311 compared to cash used in investing activities of $2,081,470 during the six months ended June 30, 2008. No spending related to construction of equipment for the Indiana facility was required during the six months ended June 30, 2008.

Cash provided by financing activities during the six months ended June 30, 2009 was $1,049,226 and was largely provided by proceeds of subscriptions for and private placements of shares of our common stock as well as proceeds from issuances of shares pursuant to a Periodic Equity Investment Agreement .

We have incurred net losses of $3,242,792 for the six months ended June 30, 2009 and $12,748,701 for the year ended December 31, 2008, and have an accumulated deficit of $32,614,812 as of June 30, 2009. Based on our operating plan, our existing working capital will not be sufficient to meet the cash requirements to fund our planned operating expenses, capital expenditures and working capital requirements through December 31, 2009 without additional sources of cash.

These factors raise substantial doubt about our ability to continue as a going concern. The accompanying consolidated financial statements have been prepared assuming that we will continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business.

Our plan to address the shortfall of working capital is to generate additional financing through a combination of financing of assets, incremental product sales and the sale of equity securities. There are no assurances that we will be able to obtain any sources of financing on acceptable terms, or at all.

If we cannot obtain sufficient additional financing in the short-term, we may be forced to file for bankruptcy or cease operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should we be forced to take such actions.

CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations at June 30, 2009 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		$	59,584			$	45,866			$	13,718			$	—			$	—
Rental lease obligations			3,332,554				665,318				992,236				600,000				1,075,000
Purchase obligations			397,623				397,623				—				—				—
Indebtedness			—				—				—				—				—
		$	3,789,761			$	1,108,807			$	1,005,954			$	600,000			$	1,075,000

The above table does not reflect anticipated rental lease reductions as a result of anticipated facilities consolidations that are currently being assessed as part of our Strategic Restructuring Program.

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 4.		CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Principal Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of June 30, 2009. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of June 30, 2009, our Chief Executive Officer and Principal Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Internal Control Over Financial Reporting

During the quarter ended June 30, 2009, 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. At the end of the fiscal year 2009, our management will be required to provide an assessment of the effectiveness of our internal control over financial reporting under Section 404 of the Sarbanes-Oxley Act.

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 2.		UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

We have issued the following unregistered securities during the six months ended June 30, 2009:

•

2,936,552 shares of our common stock valued at $264,607 to our directors and employees as part of their compensation.

•

2,450,000 shares of our common stock valued at $220,500 to a current shareholder, a party related to our Chief Executive Officer, in repayment of a convertible shareholder loan.

•

562,500 shares of our common stock valued at $47,813 to third parties for services rendered in the period.

•

6,500,000 shares of our common stock valued at $629,000 to third parties for prepaid services to be rendered over future periods.

•

10,679,819 shares of our common stock to accredited investors for gross proceeds of $533,991.

•

5,000,000 shares of our common stock to accredited investors to accredited investors in fulfillment of subscriptions received prior to December 31, 2008 of $250,000.

•

4,568,283 shares of our common stock for net cash proceeds of $300,000 pursuant to the Periodic Equity Investment Agreement with Cumorah Capital, Inc.

All of the offerings and sales above were deemed to be exempt under rule 506 of Regulation D and 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.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

Not applicable.

ITEM 5.		OTHER INFORMATION

Not applicable.

ITEM 6.		EXHIBITS

Exhibit
Number				Description
	3.1			Articles of Incorporation(1)
	3.2			Certificate of Amendment to the Articles of Incorporation dated February 26, 2003(1)
	3.3			Certificate of Amendment to the Articles of Incorporation dated July 19, 2004(1)
	3.4			Certificate of Amendment to the Articles of Incorporation dated March 18, 2005(1)
	3.5			Bylaws(1)
	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. ***

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.

EXHIBIT INDEX

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. ***