HONG YUAN HOLDING GROUP - Quarter Report: 2010 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 001-34689

CEREPLAST, INC.

Nevada (State or Other Jurisdiction of Incorporation or Organization)		91-2154289 (I.R.S. Employer Identification No.)

300 N. El Segundo Boulevard, Suite 100 El Segundo, California		90245
(Address of Principal Executive Office)		(Zip Code)

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.

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 13, 2010 is 12,882,581.

 

 

CEREPLAST, INC.
FORM 10-Q
TABLE OF CONTENTS

		Page
PART I—FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS			3
Consolidated Balance Sheets at June 30, 2010 and December 31, 2009			3
Consolidated Statements of Operations and Other Comprehensive Income for the Three AND SIX months ended June 30, 2010 and 2009			4
Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009			5
Notes to the Consolidated Financial Statements			6
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			14
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			21
Item 4T CONTROLS AND PROCEDURES			21
PART II—OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS			21
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS			22
Item 3. DEFAULTS UPON SENIOR SECURITIES			22
Item 4. RESERVED			22
SIGNATURES			24
Exhibit 10.3
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

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

See accompanying notes to consolidated financial statements.

CEREPLAST, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND OTHER COMPREHENSIVE INCOME
(UNAUDITED)

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

See accompanying notes to consolidated financial statements.

CEREPLAST, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED
(UNAUDITED)

		6/30/2010				6/30/2009
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(3,415,853	)		$	(3,242,792	)
Adjustment to Reconcile Net Loss to Net Cash Used in Operating Activities
Depreciation and Amortization			370,396				272,089
Reserve for Inventory Obsolescence			—				(54,544	)
Allowance for Doubtful Accounts			(6,988	)			(1,900	)
Loss on Sale of Equipment			—				25,039
Loss on Disposal of Leasehold Improvements Due to Restructuring			11,584				—
Common Stock Issued for Services, Salaries & Wages			871,898				132,677
Gain on Settlement of Shareholder Loan			—				(81,982	)
Waiver Fee on Settlement of Shareholder Loan			—				90,000
(Increase) Decrease in:
Accounts Receivable			(217,493	)			10,611
Inventory			(101,168	)			606,070
Deposits			30,064				3,632
Prepaid Expenses			(236,835	)			89,804
Restricted Cash			(42,934	)			(380	)
Intangibles			—				(19,306	)
Increase (Decrease) in:
Accounts Payable			(354,879	)			660,167
Accrued Expenses			(129,362	)			365,147
Other Payables			—				(23,696	)
NET CASH USED IN OPERATING ACTIVITIES			(3,221,570	)			(1,169,364	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of Property and Equipment, and Intangibles			(86,911	)			(6,869	)
Proceeds from Sale of Equipment			—				1,558
NET CASH USED IN INVESTING ACTIVITIES			(86,911	)			(5,311	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on Capital Leases			(12,948	)			(27,901	)
Proceeds on Notes Payable			20,524				—
Payments on Term Loan Payable			(54,378	)			(3,874	)
Proceeds from Issuance of Common Stock and Subscription Receivable, Net of Offering Costs			7,916,496				1,081,001
NET CASH PROVIDED BY FINANCING ACTIVITIES			7,869,694				1,049,226
FOREIGN CURRENCY TRANSLATION			(701	)			8,648
NET INCREASE (DECREASE) IN CASH			4,560,512				(116,801	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD			1,305,771				501,699
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	5,866,283			$	384,898

SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION

During the six months ended June 30, 2010, the Company issued 2,842,642 shares in exchange for net proceeds of $8,025,137 under private placements and sales of shares made pursuant to an effective Registration Statement on Form S-3 (Registration No. 333-166307). During the six months ended June 30, 2009, the Company issued 266,995 shares in exchange for net proceeds of $531,001 under a private placement, 114,207 shares in exchange for net proceeds of $ 300,000 pursuant to a Periodic Equity Investment Agreement, and 125,000 shares in fulfillment of subscription payable of $250,000. During the six months ended June 30, 2010, and June 30, 2009, the company paid $1,125 and $11,712 for interest respectively. No taxes were paid during the six month period ended June 30, 2010 or June 30, 2009.

SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS

During the six months ended June 30, 2010, the Company issued 31,250 shares valued at $125,000 for fees associated with an early lease termination, 12,500 shares valued at $50,000 for board member services, 112,552 shares valued at $568,588 for prepaid services and rent , and 22,804 shares valued at $116,310 for employee services. During the six months ended June 30, 2009, the Company issued 73,413 shares valued at $264,607 for services to directors and employees and 237,813 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.

See accompanying notes to consolidated financial statements.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 two 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.

We are also developing a new technology to transform algae into bioplastics, which we announced in October 2009. We intend to launch Cereplast Algae Plastics™, a new family of algae-based resins that will complement our 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 and believe we are 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.
	•		Cereplast Algae Plastics™. In October 2009 we announced that we have been developing a new technology to transform algae into bioplastics and intend to launch a new family of algae-based resins that will complement the company’s existing line of Compostables & Hybrid resins. Although we do not expect this new technology to become commercial before the end of 2010 or early 2011, it remains an important development as we believe that the potential open by algae is quite substantial. We believe that our algae-based resins could replace, in a first step, 50% or more of the petroleum content used in traditional plastic resins. Currently, we are using renewable material such as starches from corn, tapioca, wheat and potatoes and Ingeo® PLA. We believe that algae is a very attractive feedstock as it does offer a low carbon footprint alternative and at the same time could be accessible in very large quantity. We also have a future plan to create algae plastic made of 100% algae component abandoning any reliance on fossils fuels.

As of June 30, 2010, over 300 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 consolidated condensed financial statements include the accounts of the Company and its wholly owned subsidiaries, Cereplast International, S.A. and Cereplast Europe, S.A.S. All significant inter-company accounts and transactions have been eliminated in consolidation. The interim financial information of the Company as of June 30, 2010 and for the three and six-month periods ended June 30, 2010 and 2009 is unaudited, and the balance sheet as of December 31, 2009 is derived from audited financial statements. The accompanying consolidated condensed financial statements have been prepared in accordance with U. S. generally accepted accounting principles for interim financial statements. Accordingly, they omit or condense footnotes and certain other information normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles. The accounting policies followed for quarterly financial reporting conform with the accounting policies disclosed in Note 1 to the Notes to Consolidated Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009. In the opinion of management, all adjustments that are necessary for a fair presentation of the financial information for the interim periods reported have been made. All such adjustments are of a normal recurring nature. The results of operations for the three and six months ended June 30, 2010 are not necessarily indicative of the results that can be expected for the entire year ending December 31, 2010. The unaudited consolidated condensed financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

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 $5,866,283 and $1,305,771 at June 30, 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 June 30, 2010, 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 six months ended months ended June 30, 2010, we had two significant suppliers that accounted for 24.7% and 25.7%, respectively, of total cost of goods sold and two customers, Dorel Juvenile Group and A. Schulman GMBH, which accounted for 34.8% and 20.5%, 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 on June 30, 2010, and $0 on 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 June 30, 2010, 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 $30,158 and $34,337 as of June 30, 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 June 30, 2010, and December 31, 2009, the inventories are as follows:

		June 30, 2010				December 31, 2009
		(Unaudited)
Raw Materials		$	492,094			$	344,489
Bioplastic Resins			385,708				355,082
Finished Goods			52,741				76,458
Packaging Materials			15,508				14,978
WIP			2,644				56,250
Total Inventories		$	948,695			$	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:

		June 30, 2010				December 31, 2009
		(Unaudited)
Equipment		$	5,164,410			$	2,518,132
Construction in Progress			—				2,588,904
Furniture & Fixtures			278,696				275,055
Automobile			25,359				—
Leasehold Improvements			3,485				34,345
			5,471,950				5,416,436
Less Accumulated Depreciation			(1,865,536	)			(1,519,714	)
Net Property and Equipment		$	3,606,414			$	3,896,722

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.

		June 30, 2010				December 31, 2009
		(Unaudited)
Intangibles		$	207,820			$	208,304
Less Accumulated Amortization			(28,542	)			(24,265	)
Net Intangibles		$	179,278			$	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 six months ended June 30, 2010, and 2009 were $684,099 and $250,916, 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 six months ended June 30, 2010, and 2009 were $211,167 and $203,789, respectively.

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, 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 and six months and ended June 30, 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.

During the six months ended June 30, 2010, we issued shares of common stock as follows:

•		We issued 2,137,642 shares of common stock for net cash proceeds of $6,733,677, The offer and sale of the Shares were made pursuant to an effective Registration Statement on Form S-3 (Registration No. 333- 166307) initially filed with the Securities and Exchange Commission on April 26, 2010, and amended on May 21, 2010. The Registration Statement was declared effective on May 26, 2010.
•		On January 4, 2010, we issued 31,250 shares of common stock valued at $125,000 for fees associated with the early termination of a lease in California.
•		On January 6, 2010, we issued 12,500 shares of common stock valued at $50,000 to a board member for services provided.
•		On March 31, 2010, we issued 705,000 shares of common stock for gross proceeds of $1,410,000 in a private placement.
•		On April 27, 2010, we issued 91,695 shares of common stock valued at $472,229 for prepaid professional services and rent.
•		On May 7, 2010, we issued 20,857 shares of common stock valued at $96,359 for prepaid public relations and other professional services.
•		On June 30, 2010, we issued 22,804 shares common stock valued at $116,310 for employee services.

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 2009. During the year ended December 31, 2009, we recorded stock-based compensation related to stock options of $273,919. All stock options granted were fully vested as of 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 the Plangenerally 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, 334,375 shares are available for future grants under our 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 are fully vested as of December 31, 2009 and noshares have been issued during the six months ended June 30, 2010.

		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				73			$	0.56

The following tables summarizes information about stock options as of June 30, 2010 and December 31, 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

73

$

0.56

4

—

—

$

0.56

4

—

All awards are 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 $4.22 during the three months ended June 30, 2010 and the year ended December 31, 2009, and 2008, 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, 2010 and the year ended December 31, 2009, there were no in-the-money options exercisable as of June 30, 2010 and December 31, 2009..

No options were granted and 0 and 42,351 shares vested during the six months ended June 30, 2010, and the year ended December 31, 2009, respectively. Additionally, no options were exercised during the six months ended June 30, 2010, and the year ended December 31, 2009, 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 June 30, 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 to $10,000 for the months of January 2010, through December 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 of an automobile. The note bears interest at 7.44% per years and is to be repaid in 60 monthly payment of $411.

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 our balance sheets at June, 30, 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.

8. RELATED PARTY TRANSACTIONS

During the three months ended June 30, 2010, we had no related party transactions.

9. SUBSEQUENT EVENTS

The company has evaluated subsequent events pursuant to ASC 853 and has determined the following event should be disclosed:

On July 7, 2010, 32,857 shares of common stock valued at $108,410 were issued for services rendered and to be rendered for 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 we contemplate or have 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 us from achieving our 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 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 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.

•

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

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 June 30, 2010, over 230 companies have requested and have 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 since the first half of 2009. For the period ended June 30, 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. These conditions have continued to impair the growth of the Economy in the first six months of 2010.

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.

Sales & Operating Expenses

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 June 30, 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 June 30, 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 expect to incur certain one-time costs associated with the implementation of our Strategic Restructuring Program. These expenses have been incurred primarily in the 4^th quarter of 2009 however some of these Restructuring expenses were carried over during the first six months of 2010. The implementation have 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, 2010 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2009

Sales

Gross sales decreased by $216,167 or 24.0% to $684,431 for the three months ended June 30, 2010, compared to the three months ended June 30, 2009. Net sales decreased by $249,819 or 27.9% to $646,448 for the three months ended June 30, 2010, compared to the three months ended June 30, 2009. The sales decrease for the period is due primarily to the start up operations and technical qualification by clients of the new Seymour plant and the general economic downturn. The reduction in orders from existing customers was partially offset by sales to new and significant customers under long-term contracts, including Dorel Juvenile Group and Georgia-Pacific. Management believes that the full benefit of these new sales contracts will be reflected in the second half of 2010.

Gross Profit

Gross profit increased by $121,790 or 157.3% from $77,421 to $199,211 for the three months ended June 30, 2010, compared to the three months ended June 30, 2009. As a percentage of net sales, gross profit margin increased from 8.6% for the three months ended June 30, 2009, to 30.8% for the three months ended June 30, 2010. The increase in gross margin is attributable primarily to operating efficiencies at our new Seymour, Indian facility and the lower cost of doing business in Indiana as compared to California.

Operating Expenses

Overall, total operating expenses increased by $701,340, or 61.7%, to $1,837,635 for the three months ended June 30, 2010, compared to the three months ended June 30, 2009. The increase for the period is largely attributable an increase of $79,105 in depreciation expense due primarily to our new facility in Seymour, Indiana, an increase of marketing expense of $317,894 due primarily to an increase in costs related to Nasdaq listing, increase in marketing staff, an increase in prepaid marketing agreements, and an increase of $175,893 in salaries and wages 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.

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

Net Loss

Net loss increased by $682,022, or 65.0%, to $1,731,259 for the three months ended June 30, 2010, compared to the three months ended June 30, 2009. This increase is due primarily to the increase in operating expense as discussed above and $92,682 for restructuring costs associated with the move of the manufacturing facility to Indiana, offset by a $121,790, or 22.2% increase in the gross profit margin.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2010 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2009

Sales

Gross sales decreased by $461,333 or 31.49% to $1,003,648 for the six months ended June 30, 2010, compared to the six months ended June 30, 2009. Net sales decreased by $520,568 or 35.73% to $936,276 for the six months ended June 30, 2010, compared to the six months ended June 30, 2009. The sales decrease for the period is attributable primarily to the fact that our manufacturing operations were relocated from California to Indiana from January 17, 2010, to March 15, 2010. During the course of our moving, our manufacturing operations were temporarily suspended.

Gross Profit

Gross profit increased by $115,586 from $175,191 to $290,777 for the six months ended June 30, 2010, compared to the six months ended June 31, 2009. As a percentage of net sales, gross profit margin increased from 12.03% for the six months ended June 30, 2009, to 31.1% for the six months ended June 30, 2010. The increase in gross profit is primarily due to cost savings achieved as a result of our relocation of our manufacturing operations to Indiana compared to the California facility and increased production efficiencies.

Operating Expenses

Overall, total operating expenses increased by $3,731 or 0.1% , to $3,394,352 for the six months ended June 30, 2010, compared to the six months ended June 30, 2009. The increase for the period is largely attributable to the decrease in rent expense and salaries and wages offset by an increase in depreciation expense due to the new Seymour facility, and an increase in other expenses.

	•		Salaries and wages, including stock based compensation, decreased by $417,177 or 31.6%, to $901,187 for the six months ended June 30, 2010 as compared to the six months ended June 30, 2009, largely as a result of the significant reductions in our workforce in 2009 and associated reductions in compensation expense related to the vesting of employee stock options. All stock options were fully vested as of December 31, 2009.
	•		Marketing expense increased $433,183, or 172.6%, to $684,099 for the six months ended June 30, 2010, compared to the six months ended June 30, 2009. The increase is due primarily to costs associated with prepaid marketing agreements and the addition of new sales and marketing employees.
	•		Research and Development costs increased slightly by $7,378, or 3.6% to $211,167 for the six months ended June 30, 2010, compared to the six months ended June 30, 2009 as a result of a continued focus of our “pipeline process” for technical development and expansion of our resin families and other cost cutting measures.
	•		Rent expense decreased by $261,979 or 57.19%, to $196,961 for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. The decrease for the period resulted for the termination of two leases for 30,000 sq. ft and 25,000 sq. ft. of office and warehouse space during the prior year and the renegotiation of the lease of our Indiana facility.

Net Loss

Net loss increased by $173,061 to $3,415,853 for the six months ended June 30, 2010 compared to the six months ended June 30, 2009. This increase in net loss is primarily the result of restructuring costs of $311,117 associated with the moved of the manufacturing operation for California to Indiana.

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, we believe we have sufficient resources to last at least until the end of the 2010.

We had net unrestricted cash of $5,866,283 at June 30, 2010, compared to net unrestricted cash of $1,305,771 at December 31, 2009. The net increase in unrestricted cash is attributed principally to funds received through the issuance and sale of shares of our common stock.

We had positive working capital (the difference between current assets and current liabilities) of $6,685,455 at June 30, 2010, compared to positive working capital of $1,019,741 at December 31, 2009. The increase of $5,665,914 in working capital is primarily due funds raised through stock sales.

During the six months ended June 30, 2010, we used $3,221,570 of cash for operating activities compared to $1,169,364 used for operating activities during the six months ended June 30, 2009. The increase in the use of cash for operating activities was primarily a result of and increase in accounts receivable, inventory purchases and payment of accounts payable and accrued expenses.

Cash used in investing activities during the six months ended June 30, 2010, was $86,911 compared to cash used in investing activities of $5,311 during the six months ended June 30, 2009. The increase is due to costs associated with the start-up of our Indiana facility in 2010.

Cash provided by financing activities during the six months ended June 30, 2010, was $7,869,694 compared to cash provided by financing activities of $1,049,226, during the six months ended June 30, 2009. These funds are provided primarily by proceeds from the sale of shares of our common stock. .

We have incurred a net loss of $3,415,853 for the six months ended June 30, 2010, and $6,072,948 for the year ended December 31, 2009, and have an accumulated deficit of $38,860,821 as of June 30, 2010.

CONTRACTUAL OBLIGATIONS

The following table summarizes our contractual obligations at June 30, 2010, and the effects such obligations are expected to have on our liquidity and cash flows in future periods:

		Payments Due by Period
						Less Than				2-3				4-5				More Than
		Total				1 year				Years				Years				5 years
Capitalized lease obligations		$	21,290			$	17,594			$	3,696			$	—			$	—
Purchase obligations			212,192				212,192				—				—				—
Rental lease obligations			3,126,966				409,898				409,898				409,898				1,897,272
Term loan obligations			19,633				2,758				4,023				4,086				8,766
		$	3,380,081			$	642,442			$	417,617			$	413,984			$	1,906,038

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

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 June 30, 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.

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 six months ended June 30, 2010:

•

On January 4, 2010, we issued 31,250 shares of common stock valued at $125,000 for fees associated with the early termination of a lease in California.

•		On January 6, 2010, we issued 12,500 shares of common stock valued at $50,000 to a board member for services provided.
•		On March 31, 2010, we issued 705,000 shares of common stock for gross proceeds of $1,410,000 in a private placement.
•		On April 27, 2010, we issued 91,695 shares of common stock valued at $472,229 for prepaid professional services and rent.
•		On May 7, 2010, we issued 20,857 shares of common stock valued at $96,359 for prepaid public relations and other professional services.
•		On June 30,2010, we issued 22,804 shares common stock valued at $116,310 for employee services.

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

Effective August 16, 2010, Mrs. Heather Sheehan, CPA, was appointed as Senior Vice-President and Chief Financial Officer of the Company. Mrs. Sheehan has over 20 years experience in leading finance teams in international markets over a broad range of industries. Before joining Cereplast in 2008 as Chief Accounting Officer through mid-2009, Mrs. Sheehan served as Chief Financial Officer at Exemplis Corporation, a privately held manufacturer of office seating products, from 2005 through 2007. From 2003 through 2005, Mrs. Sheehan served as Controller of International Rectifier Corp., a publicly traded global manufacturer of high technology power management products. Mrs. Sheehan has held various senior international treasury, financial planning and accounting roles at ConAgra Inc. (NYSE), and Trans Mountain Pipe Line Co. Previously, Mrs. Sheehan spent 7 years with the audit practice of PriceWaterhouseCoopers in Canada and the United Kingdom. Mrs. Sheehan is a Certified Public Accountant (USA), a Chartered Accountant (Canada), and holds a Bachelor of Business Administration degree from Simon Fraser University (Vancouver, Canada).

Also effective August 16, 2010, we entered into an employment agreement with Heather Sheehan pursuant to which Mrs. Sheehan will serve as our Senior Vice-President and Chief Financial Officer. The agreement is for a term of 2 years, unless earlier terminated, as provided in the Agreement. The agreement provides for an initial base salary of $180,000, which shall increase to $215,000 upon the Company reaching operating cash flow breakeven point and further increased to $250,000 when the Company declares a profit of more than $100,000 for a single quarter. Mrs. Sheehan will also be eligible for an annual bonus upon the achievement of certain goals and performance as established by the Company’s CEO. However, a bonus shall be payable only when the Company reaches cash flow breakeven point. Pursuant to the terms of the agreement, Mrs. Sheehan shall be paid 12 months base salary and the cash portion of the bonus, if her employment is terminated without “good cause” (as defined in the Agreement) or if Mrs. Sheehan’s employment is forced to resign for “good reason”, (as defined in the Agreement). The agreement provides for the grant of $75,000 in restricted stock, which shall become vested simultaneously with the commencement of Mrs. Sheehan’s employment with the Company and an additional grant of $20,000 in Stock, 50% of which shall become vested immediately and 50% shall become vested on the sixth month anniversary of Mrs. Sheehan’s employment with the Company.

ITEM 6. EXHIBITS

Exhibit
Number		Description
4.1		Form of Warrant issued in connection with the Securities Purchase Agreement dated June 9, 2010 entered into between Cereplast, Inc. and each investor in the offering. (Incorporated by reference to the Company’s Form 8-K filed on June 15, 2010)
4.2		Form of Placement Agent Warrant (Incorporated by reference to the Company’s Form 8-K filed on June 15, 2010)
10.1		Form of Securities Purchase Agreement, dated June 9, 2010, entered into between Cereplast, Inc. and each investor in the offering. (Incorporated by reference to the Company’s Form 8-K filed on June 15, 2010)
10.2		Placement Agent Agreement between Cereplast, Inc. and Ladenburg Thalmann & Co. Inc. (Incorporated by reference to the Company’s Form 8-K filed on June 15, 2010)
10.3		Employment agreement between Heather Sheehan and Cereplast, Inc. dated August 16, 2010. (filed herewith)
31.1		Certification of the Chief Executive Officer and Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. (filed herewith)
32.1		Certification of the Chief Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (filed herewith) ***

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.