ITEM 1. BUSINESS
Corporate History
We were incorporated on August 28, 2000 in the state of Nevada under the name “Quadric Acquisitions”. Following our incorporation we were not actively engaged in any business activities. On April 25, 2001, we were acquired by Zkid Network Company and changed our name to ZKid Network Co. As a result, we became engaged in the business of providing media content for children through the use of our proprietary software.
On February 8, 2006, we announced that we would be unable to raise the necessary funds to continue with our then-existing business model and plan. Accordingly, we decided to seek an active company to acquire.
On May 8, 2006, we closed a share exchange agreement with Star Metro Group Limited, which became our wholly-owned subsidiary. Under the terms of the share exchange agreement we exchanged 60,000,000 shares of our company for 100% of the issued and outstanding shares of Star Metro Group at a ratio of 1 share of our common stock for each 2,000 shares of Star Metro Group Limited’s stock. As a result of the share exchange agreement, we became engaged in the development of a line of biodegradable, single use, food and beverage containers.
On March 20, 2006, we changed our name from ZKid Network Co. to Eatware Corporation.
On November 27, 2006, we changed our name from “Eatware Corporation” to “Star Metro Corp.”. We were required to effect this name change by the terms of an agreement we entered into on November 13, 2006, with Glory Team Industrial Limited and Eddie Chou, an ex-director of our company. We effected this name change by merging
Star Metro Corp., our newly incorporated and wholly-owned subsidiary that was created for this purpose, into our company, with our company carrying on as the surviving corporation under the name “Star Metro Corp.”.
On February 26, 2007, we changed our name from “Star Metro Corp.” to “Biopack Environmental Solutions Inc.”. This name change was effected by merging Biopack Environmental Solutions Inc., our newly incorporated and wholly-owned subsidiary that was created for this purpose, into our company, with our company carrying on as the surviving corporation under the name “Biopack Environmental Solutions Inc.”.
On March 27, 2007, we completed a share exchange with the shareholders of Roots Biopack Group Limited, a company formed under the laws of the British Virgin Islands. Under the terms of the share exchange agreement we acquired all of the issued and outstanding common shares of Roots Biopack Group in exchange for the issuance by our company of 90,000,000 common shares to the former shareholders of Roots Biopack Group. As of the closing date of the share exchange agreement, the former shareholders of Roots Biopack Group held approximately 62.13% of the issued and outstanding common shares of our company.
Prior to our acquisition of the common shares of Roots Biopack Group, we had one wholly owned subsidiary, Starmetro Group Limited, which is incorporated in the British Virgin Islands. Starmetro Group Limited, in its turn, had two wholly owned subsidiaries: Biopack Environmental Ltd. (formerly named as E-ware Corporation Limited), a Hong Kong corporation, and Bioplanet Distribution Sdn Bhd, a Malaysian corporation.
Effective July 25, 2007, we filed a certificate of designation with the Secretary of State of Nevada, designating 1,000,000 Series B Preferred Shares. Each Series B Preferred Share has the right to thirty (30) votes at any meeting of our shareholders and the right to convert, at any time at the holder’s option, into five (5) common shares in the capital stock of our company. On February 25, 2008, we filed a certificate of designation with the Secretary of State of Nevada designating 2,000,000 Series C Preferred Shares. The rights and restrictions of these Series C Preferred Shares are identical to the rights and restrictions for our Series B Preferred Shares.
Effective June 11, 2008, the Secretary of State of Nevada accepted for filing a Certificate of Change with respect to a consolidation of our authorized and issued and outstanding shares of common stock on a one new for ten old basis, as approved by our board of directors on May 31, 2008. As a result, our authorized common share capital decreased from 500,000,000 shares of common stock to 50,000,000 shares of common stock and correspondingly our issued and outstanding common share capital decreased from 167,569,367 shares of common stock to approximately 16,756,937 shares of common stock. Fractional shares were rounded-up. Preferred shares and convertible securities were not consolidated. Except as otherwise expressly stated to the contrary, the disclosure of share data in this Form 10-K has been adjusted to reflect this consolidation.
When we acquired Roots Biopack Group Limited, we also acquired its subsidiaries. The following tables show our current corporate structure:
BIOPACK ENVIRONMENTAL SOLUTIONS INC.
Organization Structure
Subsidiaries
The following is a list of our subsidiaries:
Our Business
We develop, manufacture, distribute and market bio-degradable food containers and disposable industrial packaging for consumer products. We supply our biodegradable food containers and industrial packaging products to multinational corporations, supermarket chains and restaurants located across North America, Europe and Asia.
We manufacture our products in our own factory, known as Biopark, which is located in Jiangmen City in the Peoples Republic of China (“PRC”).
Factory Development:
On August 19, 2007, our wholly-owned subsidiary, Roots Biopack Group Limited, entered into a comprehensive agreement with Tayna Environmental Technology Co. Limited, an unrelated third party, to set up the first phase of our Biopark factory. Under this agreement, our subsidiary agreed to develop and sell to Tayna 20 production machines, to help Tayna set up and manage the factory, and to assist in sales after the commencement of production. Tayna was unable to complete development of the factory because the local government would only grant an operating license to the factory owner or lessee and, on March 30, 2008, we agreed to cancel the August 19, 2007 agreement. To March 30, 2008, Tayna had spent $1,146,102.56 in performance of its obligations under the comprehensive agreement. In a cancellation agreement and a related loan agreement dated March 30, 2008, Tayna agreed to loan that amount to our subsidiary to be repaid over a three-year term expiring March 30, 2011. Our subsidiary has an option to extend this three-year initial term for an additional two calendar years by sending written notice to Tayna no later than three months prior to the original maturity date (i.e., no later than December 30, 2010). Although the loan agreement originally provided that outstanding principal would earn interest at a rate of 12 percent, on December 1, 2008, we amended the loan agreement, effective from March 30, 2008, to reduce the rate of interest to three percent per annum.
Our original plan contemplated that Tayna would complete our Biopark facility in a three phase program, with the commencement of unit production keyed to completion of phase one. Originally, phase one consisted of two production lines with ten machines on each line, while each of phase two and three consisted of one production line (consisting of ten machines in each production line). In late 2007 and early 2008, we reconsidered our original plan in light of our dispute with Patrick Oung (one of the former directors of our subsidiary Roots Biopack Group Limited and other subsidiaries of our company) over ownership of four of our machines (see discussion at page 17) and the licensing difficulties that were then being encountered by Tayna. We decided to scale our production lines down to five machines rather than ten and, with one production line in place, we began limited production, primarily of product samples. Although we have continued to outsource some production of customer orders to third party factories as we ramped-up our own production capabilities during 2008, the percentage of orders that we have outsourced has steadily decreased as our own production capacity has increased. We currently outsource less than 10% of our production.
We currently have 14 production machines, together with the boiler, transformer and compressor units necessary for their operation, installed and fully operational at our Biopark facility. Each production machine is fitted with a set of customer/product specific molds. These molds are designed by our customers to suit their specific product specifications (e.g., shape and size). All of the currently installed production machines have been fitted with molds and are fully operational and we are now capable of producing approximately 6,000,000 units per month.
In December of 2008 we completed installation of a new wastewater treatment system at our Biopark facility. This system uses a seven stage process to treat up to 23,800 gallons per day of waste water, which permits us to reduce fresh water consumption while increasing efficiency and our production capacity for colored product.
Over the next year, we plan to add an additional six production machines (two of which are already on order). We have four production machines stored at our Biopark facility pending resolution of a dispute with Patrick Oung, one of the former directors of Roots Biopack Group Limited and other subsidiaries of our company (see discussion beginning at page 4). The two on order, together with the four machines that are stored subject to our dispute with Mr. Oung, would give us a total of 20 machines, or four production lines of five machines each.
Industry Overview
Currently, the majority of disposable packaging products are made from plastic, paper or polystyrene, which are typically non-recyclable and non-biodegradable. Consequently, millions of tons of plastic, paper, or polystyrene disposable packaging products are discarded in landfills across the world each year. In the last decade there has been increasing public concern over the harmful impact that plastic, paper, or polystyrene disposable packaging products have on the environment. Because of this public concern, governments have begun to adopt regulations intended to restrict and in some cases even ban the use of plastic, paper, or polystyrene disposable packaging products and multi-national corporations, acknowledging the need for environmentally sound solutions, have begun to seek alternatives to plastic, paper, or polystyrene disposable packaging products that are less harmful to the environment. As these trends continue, we believe that market for biodegradable food containers and industrial packaging products will face rapid growth.
Principal Products
Our current product line-up of food containers and industrial packaging products include: plates, bowls, boxes, trays, shoe supporters and cases for electronic devices. We can fabricate any of these or other items to meet customer-specific requirements, including shape, size, color, density and the degree to which they are impervious to oil and water.
Each of our products is:
biodegradable.
made from natural materials (primarily sugarcane fiber, or bagasse, which is a renewable resource that is a by-product of the sugar refining process).
refrigerator, freezer, microwave and oven friendly in temperatures ranging from -25°C to 220°C.
sterilized by an ultraviolet light process.
Competitive Advantages
We believe that we have the following competitive advantages:
We employ our own research and development, sales and marketing, quality control team and customer service team.
Successful cultivation of long-term supplier relationships with our key distributors and consistent quality gives us a “first mover” advantage, which helps us maintain brand loyalty.
We have our own in-house production facilities and we manufacture our own proprietary product using fully automated machinery. This gives us versatility and permits us to react quickly to market demands for product design and development.
We have received a number of internationally recognized certifications and awards for our biodegradable food container and industrial packaging products, including: the “Good Manufacturing Practises” awarded by SGS Hong Kong Ltd. for compliance with international practices pertaining to quality and management systems; the “HACCP” awarded by the World Health Organization for compliance with the standards for food safety management systems set by World Health Organization & World Food and Agricultural Organization; the “BRC/Iop” awarded by the British Retail Consortium / Institute of Packaging for food packaging products (food contact items); the “ISO 9001/14001” awarded by the International Organization for Standardization for compliance with the standards for quality management systems and environmental management systems.
Sales and Marketing
Our sales and marketing efforts currently consist primarily of direct marketing, agents, legacy clients and attendance at trade shows and expositions. To enhance our corporate image and brand awareness we actively participate in various events. Our biodegradable food container and industrial packaging products were selected for use in the following events: 2006 Winter Olympics, 2005 World Youth Day, 2005 Winterfest, 2003 World Alpine Ski Championship, 2003 World Expo, 2002 World Expo.
Through our distributors we supply our biodegradable food containers and industrial packaging products to multinational corporations, supermarket chains and restaurants, located across North America, Europe and Asia. We have distributors in The Netherlands, Switzerland, Hong Kong, Sweden, South Africa, the United States, Japan, Taiwan and Israel. Although we have historically concentrated the bulk of our marketing efforts on the European market, we have recently decided to increase our efforts in North America during the next 12 months.
Manufacturing Process
We currently manufacture our products in our factory in Jiangmen City, PRC (see discussion, above). The manufacturing process at our Biopark facility consists of the following stages: Raw Material Preparation
Crunching/Shredding
Fine mixing (set correct concentration)
Dosing (adding additives)
These first 3 stages prepare the mixture for the pulp forming stage.
Pulp Formation
Forming
Cold press
Hot press
During these three phases the product is shaped. The mixture (fibers in water suspension) is poured into the forming mold. Wire mesh filters the water away leaving the fiber in the form of the product. The formed product is transferred through automation to the cold press, where additional water is squeezed out. The pressed product is then transferred through automation to the final drying stage where it is heat dried.
Trimming & Packing
Trimming
Ultra violet Sterilization/Sanitization
Packing
During the trimming stage, rough edges are trimmed from the finished product - the material that is removed will be re-used for other product (returned to stage 1). Exposure to ultra violet ensures that all coliform, germs and bacteria that may have survived the prior processing is killed. Trimming and packaging are currently not automated (these tasks are currently performed manually by laborers in our factory) but we are currently developing an automatic trimming machine.
Competition
The market for disposable packaging products is competitive and subject to frequent product introductions with improved price and or performance characteristics. We face competition from companies who provide disposable
packaging products which are made from plastic, paper or polystyrene. Many of these companies have greater financial, research and development, marketing and sales resources, offer a broader product line, have better brand recognition and have a larger customer base than we do. Examples of these companies include: Eastman Chemical Company, BASF Corporation - Apack AG, SK Chemicals, Showa and Highpolymer. We also face competition from companies who provide disposable packaging products which are made from bioplastics and other types of natural materials. Example of these companies include: Earthshell Corp, Starch Tech Incorporated, Biocorp NA, KTM Industries Incorporated, Eco-Products Incorporated, Insulair, Incorporated, Novamont SPA, Green Shell Company Limited, Far East Green World Corporation, Sanshi Green Packaging Company and Green Eternity Company Limited.
Availability of Raw Materials
Our raw materials are sourced from the following regions:
Intellectual Property
We have not registered any patent or proprietary technology.
Trademarks
Our “Roots Biodegradable” trademark is currently registered in Switzerland, Hong Kong, India and the United States and it is also registered through the Community Trademark Registration, giving us rights in all 25 member states of the enlarged European single market, including Austria, Belgium, Cyprus, Czech Republic, Denmark, Estonia, Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania, Luxembourg, Malta, Netherlands, Poland, Portugal, Slovakia, Slovenia, Spain, Sweden, and the United Kingdom. We are currently applying for trademark registration in Canada, Japan, India and China. We plan to apply for trademark registrations in; Australia, New Zealand, Malaysia, Israel, Saudi Arabia, Turkey. Details of our registered trademarks are below:
Our trademark registration applications in Switzerland and Japan have been opposed by Roots Canada Limited. We believe that this opposition is not warranted because we are not involved in the same or a similar industry as Roots Canada Limited. We are currently engaged in discussions with Roots Canada Limited in an effort to negotiate an amicable resolution to its opposition.
Domain Names
We own and operate the following two registered internet domain names:
www.rootsbiopack.com.
www.biopackenvironmental.com
The information contained on our website does not form part of this annual report.
Dependence on one or more main customers
Until August of 2007, we relied on our five largest customers for approximately 80% of our sales in 2007. In August of 2007, these five customers were effectively consolidated when they made the decision to rely on one importer to source all of their needs. The loss of any or all of these customers would adversely affect revenues and results of operations, and the loss of any other significant customers could adversely affect revenues and results of operations unless and until the lost business is replaced.
Pension Plan
We participate in a defined contribution pension plan under the Mandatory Provident Fund Schemes Ordinance for all our eligible employees in Hong Kong. The Mandatory Provident Fund Scheme is available to all employees aged 18 to 64 with at least 80 days of service in the employment in Hong Kong. Contributions are made at 5% of the participants’ relevant income with a ceiling of HK$20,000. The participants are entitled to 100% of our contributions together with accrued returns irrespective of their length of service with our company, but the benefits are required by law to be preserved until retirement age of 65. Our only obligation is to make the required contributions under the plan. The assets and the schemes are controlled by trustees and held separately from those of our company. Our total pension cost was $5,848 for the year ended December 31, 2008 and $12,495 for the year ended December 31, 2007.
Until January 31, 2008, we also participated in a compulsory savings scheme in Malaysia. All employees in Malaysia who have reached the age of 16 and employed under a contract of service whether express or implied, and whether oral or in writing must be registered as a member of the Employees Provident Fund. As an employer, we contributed 12% of the employee’s wages and the employee contributed 11% of the monthly wages towards the employee’s account. The total cost for this plan through our Malaysian subsidiary was $Nil in 2008 and $3,983 in 2007. On January 31, 2008, we closed our office in Malaysia and no longer participate in this plan.
Independent Testing
To ensure that our products meet health and safety and performance standards, we have them put through the tests described in the following table.
Criteria Objectives / Purpose Independent Testing Laboratories
Physical Performance Test
- Temperature resistance, steamer, microwave
and oven tests
- Water and oil proof tests
- Acid Resistance tests
Hong Kong Standards and Testing Centre
Hong Kong Standards and Testing Centre
Hong Kong Standards and Testing Centre
Food Safety Tests
- Microbiological Tests, Coliform Bacteria,
Pesticides Residues, Moulds and Yeasts Tests
- Overall Migration Test
- Heavy Metals Analysis,
- Hong Kong Q-Mark Product Award SGS Hong Kong Limited
SGS Hong Kong Limited
SGS Hong Kong Limited
Hong Kong Q-Mark Council
Biodegradability
- ASTM D6400 (USA), DIN V 54900 and DIN
EN 13432 (European Countries)
- OK Compost and OK Compost Home
Conformity Marks
- Hong Kong Green Label Scheme DIN CERTCO, Belgium
AIB-Vincotte, Belgium
Hong Kong Green Council
Governmental Regulation
With the emergence of alternatives to disposable packaging products, which are made from plastic, paper and polystyrene, various standards and guidelines have been developed by government organizations to assess the performance of these substitutes. Through our quality assurance tests, we attempt to ensure that our biodegradable food containers and industrial packaging products meet or exceed the applicable government standards and guidelines.
Our products comply with the following international regulations:
- German Regulation to the protection from dangerous materials - Gefhstoff-Verordnung (Oct 26, 1993);
- U.S. CFR Title 21 (FDA Regulation);
- Taiwan Hygienic Standard for Food Utensil, Container and Packaging (Revised 82.7.7); and,
- Biodegradability and Food Standards of Hong Kong Environmental Protection Department (HKEPD).
Research and Development
Our research and development team consists of five employees, all of whom work from our Biopark factory in Jiangmen City, PRC. Three of the team members are engineers who focus on machine design and efficiency. The other two focus on ecological studies. The research and development expenses are mainly staff cost and product testing fees which are minimal at this stage.
Employees
We currently have 155 full time and no part time employees. Of these, four work in our Hong Kong administrative offices and 151 work in our Biopark factory in Jiangmen City, PRC.
ITEM 1A.
ITEM 1A. RISK FACTORS
Our audited annual consolidated financial statements have been prepared assuming that we will continue as a going concern
We incurred a net loss of $1,587,330 for the fiscal year ended December 31, 2008 and a net loss since inception of $5,497,480. At December 31, 2008, we had a working capital deficit of $2,415,819. We anticipate that we will continue to incur operating expenses that will only partially be offset by operating revenues unless and until we increase our production capabilities and begin producing enough product to become profitable. On December 31, 2008, we had cash of $128,039. We estimate that our operating expenses over the next 12 months will be approximately $75,000 per month and we plan to spend approximately $750,000 to add additional production capacity to our Biopark facility. Therefore, we estimate that we will need approximately $1,650,000 over the next 12 months in order to continue our operations and complete construction of the Biopark facility. Although we believe that we will be able to pay some of these expenses from our sales revenue, we believe that we will need to raise additional funds to meet all of our currently budgeted operating requirements for the next 12 months. As we cannot assure a lender that we will be able to successfully increase our production capabilities and begin profitable operations, we will probably find it difficult to raise debt financing from traditional lending sources. We have traditionally raised our operating capital from sales of equity and, more recently, convertible debt securities but there can be no assurance that we will be able to continue to do so. If we cannot raise the money that we need in order to continue to operate and improve our production capabilities, we may be forced to delay, scale back or even eliminate some or all of our activities. If any of these were to occur, our business could fail. These circumstances raise substantial doubt about our ability to continue as a going concern, as described in the explanatory paragraph to our independent auditor’s report on our consolidated financial statements for the year ended December 31, 2008, which are included in this annual report on Form 10-K. Although our consolidated financial statements raise substantial doubt about our ability to continue as a going concern, they do not include any adjustments relating to recoverability and classification of recorded assets, or the amounts or classifications of liabilities that might be necessary in the event our company cannot continue in existence.
We operate in a competitive industry and our failure to compete effectively may adversely affect our ability to generate revenue.
The disposable packaging industry is competitive and subject to frequent product introductions with improved price and or performance characteristics. Many companies, including those who manufacture their disposable packaging products out of plastic, paper or polystyrene, have greater financial, research and development, marketing and sales resources, offer a broader product line, have better brand recognition and have a larger customer base than we do. Increased competition in the disposable packaging industry could result in significant price competition, reduced profit margins or loss of market share, any one of which could have a material adverse effect on our ability to generate revenues and successfully operate our business.
Our competitors may reduce their prices or engage in advertising or marketing campaigns designed to protect their respective market shares and impede market acceptance of our disposable packaging products. We expect that many of our competitors may actively seek competitive alternatives to our disposable packaging products. The development of competitive disposable packaging products could render our disposable packaging products obsolete and could impair our ability to compete, which would have an adverse effect on our business, financial condition and results of operations.
We may suffer significant losses resulting from general product liability, which may harm our financial condition and result of operations.
As a manufacturer of disposable packaging products we are at risk for potentially significant product liability and associated losses. We cannot predict or protect against all potential losses or liabilities that may arise relating to our disposable food container and industrial packaging products. We maintain insurance against many, but not all, potential losses and liabilities, in accordance with customary industry practice and in amounts we believe to be necessary. If any losses or liabilities are not covered by insurance, or if the insurance is insufficient, we would be required to satisfy these losses and liabilities and our financial condition and results of operations may be adversely affected.
We rely on a number of different suppliers to supply us with the materials that we require to manufacture our disposable packaging products. We could be adversely affected by an increase in our suppliers prices or a significant decline in our suppliers financial condition. As a result, our business may fail and investors may lose their entire investment.
We rely on a number of different suppliers to supply our company with the materials that we require to manufacture our disposable packaging products. We could be adversely affected by an increase in any one of our suppliers prices or a significant decline in any one of our suppliers financial condition. If the relationship with any of our suppliers is terminated and we are unsuccessful in establishing a relationship with an alternative supplier who offers similar products at similar prices, our results of operations could be adversely affected. As a result, our business may fail and investors may lose their entire investment.
We rely on certain strategic raw materials for our operations. If the raw materials we use to manufacture our disposable packaging products increase substantially in price or for whatever reason becomes unavailable to us our business could fail and investors could lose their entire investment.
Although we believe that there are sufficient quantities of the raw materials we use to manufacture our disposable packaging products, the continuous existence and availability and price of these raw materials may be affected by natural disasters, domestic and world markets, political conditions, changes in government regulation and war or other outbreak of hostilities. If the raw materials we use to manufacture our disposable packaging products increase substantially in price or for any reason become unavailable to us our business could fail and investors could lose their entire investment.
Substantially all of our assets, all of our directors and all of our executive officers reside outside the United States. As a result it may be difficult for investors to enforce within the United States any judgments obtained against us or any of our directors or executive officers.
Substantially all of our assets are located outside the United States and we do not currently maintain a permanent place of business within the United States. In addition, all of our directors and executive officers are nationals and residents of countries other than the United States, and all or a substantial portion of such persons’ assets are located outside the United States. As a result, it may be difficult for investors to enforce within the United States any judgments obtained against us or our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. Consequently, investors may be effectively prevented from pursuing remedies under United States federal securities laws against us or any of our directors or executive officers.
Our ability to hire and retain qualified personnel will be an important factor in the success of our business and a failure to hire and retain key personnel may result in our inability to manage and implement our business plan.
Our ability to hire and retain qualified personnel will be an important factor in the success of our business. The competition for qualified personnel in the disposable packaging industry in which we operate is high. In addition, in order to manage growth effectively, we must implement management systems and continue to recruit and train new employees. We may not be able to attract and retain the necessary qualified personnel. If we are unable to retain or to hire qualified personnel as required, we may not be able to adequately manage and implement our business plan.
Our international operations subject us to a number of risks, including unfavorable political, regulatory, labor and tax conditions in foreign countries. We may not be able to develop and implement policies and strategies that will be effective in each location where we do business and as a result our business could fail and investors could lose their entire investment.
Our international operations subject us to the legal, political, social and regulatory requirements and economic conditions of many jurisdictions. Risks inherent to international operations include the following:
- difficulty in enforcing agreements in foreign legal systems;
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foreign countries may impose additional withholding taxes or otherwise tax our foreign income, impose tariffs or adopt other restrictions on foreign trade and investment, including currency exchange controls;
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fluctuations in exchange rates may affect product demand and may adversely affect our profitability in United States dollars to the extent the price of our products and cost of raw materials is denominated in a foreign currency;
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Inability to obtain, maintain or enforce intellectual property rights;
Changes in general economic and political conditions in the countries in which we operate;
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unexpected adverse changes in foreign laws or regulatory requirements, including those with respect to export duties and quotas;
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difficulty with staffing and managing widespread operations;
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trade barriers such as export requirements, tariffs, taxes and other restrictions and expenses, which could increase the prices of our products and make us less competitive in some countries; and,
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difficulty of and costs relating to compliance with the different commercial and legal requirements of the overseas markets in which we offer and sell our products.
Our international operations require us to respond to rapid changes in market conditions in these countries. The success of our international operations depends, in part, on our ability to succeed in differing legal, regulatory, economic, social and political conditions. We may not be able to develop and implement policies and strategies that will be effective in each location where we do business and as a result our business could fail and investors could lose their entire investment.
In addition, we source all of our manufacturing in China. China is experiencing very rapid economic growth which could have a negative impact on our business activities there. These include worsening inflation, fluctuations in currency and challenges to the nation’s electric power supply capacity. In addition, developments in China’s financial system and current legislative trends could pose future business risks, including changes to its laws that might prohibit or restrict foreign ownership.
The limitation of our available manufacturing capacity due to significant disruption in our manufacturing operation could have a material adverse effect on sales revenue and results of operations and financial condition.
We manufacture our disposable packaging products using complex processes that require technologically advanced equipment and continuous modification to improve yields and performance. From time to time, we have experienced minor disruptions in our manufacturing process as a result of power outages or equipment failures. If production at our manufacturing plant is disrupted for any number of reasons, manufacturing yields may be adversely affected and we may be unable to meet our customers requirements. Consequently, our customers may purchase disposable food packaging products from our competitors. This could result in a significant loss of revenues and damage to our customer relationships, which could materially adversely effect our business, results of operations or financial condition.
Our disposable packaging products may be perceived poorly by environmental groups, customers and government regulators, which could have an adverse effect on our business, causing us to cease operations.
Our success depends substantially on our ability to manufacture disposable packaging products that are less harmful to the environment than disposable packaging products made from plastic, paper or polystyrene. Although we
believe that our disposable packaging products are less harmful to the environment than other disposable packaging products, which are made from paper, plastic and polystyrene, our disposable packaging products may also possess characteristics that environmental groups could perceive as negative for the environment. When biodegradable waste is disposed of in landfills, it breaks down under uncontrolled anaerobic conditions. This produces landfill gas which, if not harnessed, escapes into the atmosphere. Landfill gas contains methane, a more harmful greenhouse gas than carbon dioxide. The European Union Landfill Directive puts key requirements on member states for the management of biodegradable waste in order to stop global warming. Whether, on balance, our disposable packaging products are better for the environment than other disposable packaging products, which are made from either plastic, paper or polystyrene is a somewhat subjective judgment. Environmental groups, customers, and governmental regulators may not agree that our disposable packaging products have an advantage over other disposable packaging products, which are made from plastic, paper or polystyrene. If our disposable packaging products are perceived as being harmful to the environment, our revenues will likely suffer and as a result we could go out of business.
We have a stable customer base; however, loss of, or material financial weakness of, our largest distributor could adversely affect our financial condition and results of operations until such business is replaced and no assurances can be made that we would be able to regain or replace any lost customers. This could cause us to go out of business and investors could lose their entire investment.
We rely on one distributor for approximately 80% of our sales. The loss of this distributor would adversely affect revenues and results of operations, and the loss of any other significant customers could adversely affect revenues and results of operations unless and until the lost business is replaced. We believe that it is unlikely that we could replace this one distributor. If we were to lose this distributor and we did not replace it, we could be forced to cease operations and investors in our company could lose their entire investment.
Our business is subject to complex health, safety and environmental laws and industry regulations, which require and will continue to require significant expenditures to remain in compliance with such laws and regulations currently and in the future. Costs of such compliance will likely reduce our probability.
Our business is subject to complex health, safety and environmental laws and industry regulations, which require and will continue to require significant expenditures to remain in compliance with such laws and regulations currently and in the future. Unanticipated government enforcement action, or changes in health, safety and environmental laws and industrial regulations could result in higher costs which may negatively affect our profitability.
Because our executive officers, directors control a high percentage of our common stock, such insiders may have the ability to influence matters affecting our shareholders.
Our executive officers and directors, in the aggregate, beneficially own 42.13% of the issued and outstanding shares of our common stock. As a result, they have the ability to influence matters affecting our shareholders, including the election of our directors, the acquisition or disposition of our assets, and the future issuance of our shares. Because our executive officers, directors and principal shareholders control such shares, investors may find it difficult to replace our management if they disagree with the way our business is being operated. Because the influence by these insiders could result in management making decisions that are in the best interest of those insiders and not in the best interest of the investors, you may lose some or all of the value of your investment in our common stock.
RISKS RELATED TO OUR COMMON STOCK
A decline in the price of our common stock could affect our ability to raise further working capital and adversely impact our ability to continue operations.
A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because a portion of our continued operations will be financed through the sale of equity securities, a decline in the price of our common stock could be especially detrimental to
our liquidity and our operations. Such reductions may force us to reallocate funds from other planned uses and may have a significant negative effect on our business plan and operations, including our ability to develop new products and continue our current operations. If our stock price declines, we can offer no assurance that we will be able to raise additional capital or generate funds from operations sufficient to meet our obligations. If we are unable to raise sufficient capital in the future, we may not be able to have the resources to continue our normal operations.
The market price for our common stock may also be affected by our ability to meet or exceed expectations of analysts or investors. Any failure to meet these expectations, even if minor, may have a material adverse effect on the market price of our common stock.
If we issue additional shares in the future, it will result in the dilution of our existing shareholders.
Our certificate of incorporation, as amended, authorizes the issuance of up to 50,000,000 shares of common stock with a par value of $0.0001 and 10,000,000 shares of preferred stock with a par value of $0.001. Our board of directors may choose to issue some or all of such shares to provide additional financing in the future. The issuance of any such shares will result in a reduction of the book value and market price of the outstanding shares of our common stock. If we issue any such additional shares, such issuance will cause a reduction in the proportionate ownership and voting power of all current shareholders. Further, such issuance may result in a change of control of our company.
Trading of our stock may be restricted by the Securities Exchange Commission’s penny stock regulations, which may limit a stockholder’s ability to buy and sell our stock.
The Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
The Financial Industry Regulatory Authority, or FINRA, has adopted sales practice requirements which may also limit a stockholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
Our common stock is illiquid and the price of our common stock may be negatively impacted by factors which are unrelated to our operations.
Our common stock currently trades on a limited basis on the OTC Bulletin Board. Trading of our stock through the OTC Bulletin Board is frequently thin and highly volatile. There is no assurance that a sufficient market will develop in our stock, in which case it could be difficult for shareholders to sell their stock. The market price of our common stock could fluctuate substantially due to a variety of factors, including market perception of our ability to achieve our planned growth, quarterly operating results of our competitors, trading volume in our common stock, changes in general conditions in the economy and the financial markets or other developments affecting our competitors or us. In addition, the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same effect on our common stock.
ITEM 2.
ITEM 2. PROPERTIES.
Offices
Our head office is located at Room 905, 9/F, Two Chinachem Exchange Square, 338 King’s Road, North Point, Hong Kong. Our telephone number is (852) 3586-1383. Our facsimile number is (852) 3586-2366. We lease this space, which consists of approximately 994 square feet, from an unrelated third party for the sum of approximately $1,788 per month ( HK$ 13,916) for a term of two years expiring March 19, 2010.
Our Malaysia subsidiary, Bioplanet Distribution Sdn Bhd, maintained an office located at Suite E-09-07, Level 9, Block E, Plaza Mont Kiara, No. 2, Jalan Kiara, Mont’ Kiara, 50480 Kuala Lumpur, Wilayah Persekutuan, Malaysia. We closed this office (and discontinued our operations in Malaysia) effective January 31, 2008. We do not have any continuing lease obligations in connection with this action.
Our subsidiary, Roots Biopack Limited, leased office space at Unit 2009, Hopewell Centre, 183 Queen’s Road East, Wan Chai, Hong Kong. Management of this subsidiary moved into our principal executive office on May 21, 2007, leaving the office space at Hopewell Centre vacant. The lease for this office expired on November 14, 2008.
Factory
Our Peoples Republic of China (PRC) subsidiary, Jiangmen Roots Biopack Limited, leases 4 adjacent properties situated at No.3, Yangjiaokeng Industrial District, Tingyuan Village, Duruan Town, Jiangmen City, PRC. We call this area “Roots Biopark”.
Roots Biopark includes a factory, dormitories, a shop on the first floor, an office on the second floor, toilets, a garage, a storage shelter and land, a substation and an electricity transformer (315kW). The premises are equipped with kitchen appliances, water, electricity and fire prevention and fire fighting equipment. Roots Biopark has a total area of 10,440 square meters, including a 2,700 square meter dormitory.
The lease term is 15 years from March 1, 2007, with one option to renew the term. A copy of the lease agreement and the translation of the lease agreement were attached as exhibits to our annual report filed on April 17, 2007. We have a right of first refusal to purchase the premises in the event that the landlord desires to sell.
We paid the sum of approximately $56,448 (RMB 390,000.00) as a rental deposit. Pursuant to the terms of our rental agreement, the rental deposit is to be refunded to us without interest upon the expiration of the lease.
From the first to the fifth year, our monthly rent is RMB 103,000 (approximately $13,720), or RMB 1,236,000 (approximately $164,646 per annum. From the sixth year onward, our rent will increase by 5% every 3 years.
The table reproduced below provides a summary of our lease commitments:
Name of Landlord
Property location
Rental Charges
Monthly Duration Lease Contract Under
Roco Investment
and Exact
Development Limited. Limited Room 905, 9/F, Two Chinachem Exchange
Grow Square, 338 King’s Road, North Point, Hong
Kong $1,788
20/3/2008 -
19/3/2010
Biopack Environmental Ltd.
(HK)
CHENG, Jin Yao
No.3, Yangjiaokeng Industrial District,
Tingyuan Village, Duruan Town, Jiangmen
City, PRC $14,908
01/03/2007 -
28/2/2022
Jiangmen Roots Biopack Ltd.
(China)
We believe our facilities are suitable to our current needs and for our needs in the foreseeable future.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Other than as disclosed below, we know of no material, active or pending legal proceedings against us, nor are we involved as a plaintiff in any material proceedings or pending litigation. There are no proceedings in which any of our directors, officers or affiliates, or any registered beneficial shareholder are an adverse party or has a material interest adverse to us.
By letter dated April 12, 2007 an attorney claiming to represent Good Value Galaxy Limited, a British Virgin Islands corporation that is a significant shareholder of our company, advised us that all of the issued shares of Good Value Galaxy Limited had been transferred. This attorney advised that the shares of Good Value Galaxy Limited, which had previously been beneficially owned by Gerald Lau, our President and Chairman of our board of directors, had been transferred to Oung Cheng Hai effective April 11, 2007. In addition, this attorney advised that Gerald Lau, who had previously been the sole director of Good Value Galaxy Limited, had resigned as a director of that company and Mr. Albert Oung had been appointed as the sole director of Good Value Galaxy Limited.
In a second letter, also dated April 12, 2007, this same attorney advised that he represented both Good Value Galaxy Limited and Joyful Services Limited and that these two companies owned in excess of 10% of our company’s issued and outstanding common shares. This attorney, allegedly on behalf of Good Value Galaxy Limited and Joyful Services Limited, demanded that our company convene a special meeting of our shareholders to consider and pass resolutions to remove Gerald Lau (our President and a director) and Edwin Chan (a director of our company), appointing Albert Oung and Patrick Oung to serve as directors from that date forward.
Upon our receipt of this correspondence, our attorneys asked Gerald Lau for confirmation of the alleged transfer of shares of Good Value Galaxy Limited and they asked the attorney making the allegations to provide us with credible evidence to support his allegations. Mr. Lau’s attorneys informed us that no such transfer had taken place and that Mr. Lau continued to be the sole shareholder of both Good Value Galaxy Limited and Joyful Services Limited. The attorney making the allegation that the shares of Good Value Galaxy Limited were transferred to Oung Cheng Hai has not yet provided us with any credible evidence that this alleged transfer took place. In light of the absence of credible evidence of a transfer and the assertion from Gerald Lau, through his attorneys, that there has been no such transfer, we do not currently intend to comply with the requests of April 12, 2007.
On May 8, 2007, we received a letter from a different law firm asserting that it represented Good Value Galaxy Limited and Joyful Services Limited and enclosing a document alleged to be the written consent of Good Value Galaxy Limited and Joyful Services Limited. Albert Oung signed this alleged written consent on behalf of each of Good Value Galaxy Limited and Joyful Services Limited. The alleged written consent purports to appoint Albert
Oung and Patrick Oung to our board of directors effective immediately and to amend and restate our Bylaws. Our attorneys replied to this letter of May 8, 2007, stating that we cannot accept the claim that ownership of the shares of Good Value Galaxy Limited and Joyful Services Limited has been transferred absent receipt of a persuasive explanation of the circumstances of the transfer and credible evidence showing how and why the alleged transfer took place. We have not yet received any such explanation or credible evidence. Until we do, we cannot accept the alleged written consent as the act of Good Value Galaxy Limited and Joyful Services Limited.
On May 31, 2007, our President and Chairman of our board of directors, Gerald Lau, filed a statement of claim in the High Court of the Hong Kong Special Administrative Region - Court of First Instance against Albert Oung, Oung Cheng Hai, Good Value Galaxy Limited and Joyful Services Limited regarding ownership of approximately 54.06% shares of our common stock.
In his statement of claim, Mr. Lau alleges that in or about January 2007, upon him learning of a severe medical condition that he developed, he agreed to execute a declaration of trust in favour of Mr. Oung Cheng Hai which was to take effect upon the completion of a number of conditions. Mr. Lau alleges that he signed a declaration of trust, an instrument of transfer in respect of the one (1) issued share in Good Value Galaxy Limited, a notice of resignation of Good Value Galaxy Limited, a written resolution of the sole director of Good Value Galaxy Limited approving the transfer of the share, the resignation of the sole director and the appointment of Mr. Oung Cheng Hai. Mr. Lau further alleges that all the executed documents were to remain undated and were not to take effect until the following conditions were met:
the declaration of trust was to give effect to Mr. Lau’s intentions that the shares in Good Value Galaxy Limited and any funds and benefits derived therefrom were to be utilized for charitable purposes;
the declaration of trust should not take effect or become operative until 12 to 18 months after the completion of the share exchange with the shareholders of Roots Biopack Group Limited and our company;
the declaration of trust should not take effect or become operative until after the approval and or clearance from the United State Securities and Exchange Commission is obtained for the transfer of the share in Good Value Galaxy Limited and for the resignation of Mr. Lau from our company; and
the declaration of trust was subject to Mr. Lau’s agreement and consent as to the date on which the documents shall take effect or become operative.
Mr. Lau further alleges that while the documents were held in escrow by Mr. Oung Cheng Hai and Mr. Albert Oung, the documents were dated and materially altered in breach of the agreement and the conditions referred to above without the agreement, knowledge or consent of Mr. Lau. In particular, Mr. Lau alleges that the declaration of trust was back-dated to the 17th of September 2003 and the instrument of transfer, notice of resignation and corporate resolution were dated the 11th of April 2007. Mr. Lau seeks redress from the court to declare such documents as ineffective and/or void and/or of no effect. No hearing in this matter has yet been scheduled.
On July 13, 2007, Foshan City Shunde District Ka Fook Recycle Products Ltd. with its legal representative Mr. Patrick Oung instituted civil proceedings against our wholly owned subsidiary Jiangmen Roots Biopack Limited. Foshan City Shunde District Ka Fook Recycle Products Ltd. and its legal representative Mr. Patrick Oung allege that we and our subsidiary authorized them to handle and establish early stage inspections, assessments, negotiations and all matters which were in the set-up process and to provide consultation services for setting up the factory. Foshan City Shunde District Ka Fook Recycle Products Ltd. and its legal representative Mr. Patrick Oung further allege that during this period our subsidiary had transferred a total of RMB 5,110,000 to Foshan City Shunde District Ka Fook Recycle Products Ltd. but because of conflicts arising during the course of the set-up processes between directors of our subsidiary, our subsidiary had not checked or reconciled the transactions with Foshan City Shunde District Ka Fook Recycle Products Ltd. Foshan City Shunde District Ka Fook Recycle Products Ltd. and its legal representative Mr. Patrick Oung have asked the court to confirm that RMB 5,110,000 has been paid to Foshan City Shunde District Ka Fook Recycle Products Ltd. and to order our subsidiary to check and reconcile these transactions.
On May 31, 2007, Foshan City Shunde District Ka Fook Recycle Products Ltd. with its legal representative Mr. Patrick Oung instituted civil proceedings against our wholly owned subsidiary Jiangmen Roots Biopack Limited. Foshan City Shunde District Ka Fook Recycle Products Ltd. and its legal representative Mr. Patrick Oung allege that in February 2007 they signed a rental agreement with our wholly owned subsidiary for the sublease of approximately 5,000 m2 in a factory located in Yangjiaokeng Industrial District, Tingyuan Village, Duran Town at a rate of 50,000 yans per month.
Foshan City Shunde District Ka Fook Recycle Products Ltd. and its legal representative Mr. Patrick Oung further allege that they had moved a number of machines inside the factory and established production of machines for environmentally friendly products. They further allege that on May 4, 2007 a dispute arose amongst the directors of our company, and that our subsidiary prohibited them from entering the factory, seized their assets and deliberately used and damaged these properties. Foshan City Shunde District Ka Fook Recycle Products Ltd. and its legal representative Mr. Patrick Oung have asked the court to order our subsidiary to return all machinery, production facilities, materials, products, tools, business data and information and any related property belonging to Foshan City Shunde District Ka Fook Recycle Products Ltd.
On June 4, 2007, pending the hearing of the case, the court ordered that the properties in dispute and RMB 2,800,000 be seized.
Also on June 4, 2007, the court ordered that all materials, including all business information such as accounting records, information registered under the name of Foshan City Green Machine Factory and placed at the factory area of our wholly owned subsidiary plus our subsidiary’s production equipment, products and business records seized, detained, photographed, video-taped, copied, investigated, and listed, in order to preserve the evidence. Included among this property placed for safekeeping at our Biopark factory facility are four new production machines that we cannot use in our production line until this dispute has been resolved.
On May 10, 2007, our wholly owned subsidiary, Jiangmen Roots Biopack Limited, and Gerald Lau as our subsidiary’s legal representative filed a report of crime with the Public Security Bureau of Jiangmen City. In the report of crime we alleged that Patrick Oung, a former director of our subsidiary, was given the authority to handle the early stages of the establishment of our factory in Jiangmen due to a serious illness to our president, Gerald Lau. We further alleged that in April 2007 we discovered that Patrick Oung had paid a total of RMB 1,000,000 for a factory lease guarantee through our subsidiary’s bank account by affixing our subsidiary’s company seal without proper authorization from its board of directors or legal representative, where the actual factory lease guarantee required was only RMB 309,000. Moreover, we discovered that a total of RMB 610,000 was transferred to Patrick Oung’s personal account on March 6, 7, and 8, 2007. For these reasons, we decided to file a criminal complaint and seek assistance from the Public Security Bureau of Jiangmen City. On August 1, 2007, the Public Security Bureau of Jiangmen City decided to prosecute Patrick Oung for embezzlement of our subsidiary’s funds. Mr. Oung was arrested on August 8, 2007, while entering the People’s Republic of China at Zhong Shan Port, and he was detained in the Jiangmen Detention Center. While under detention, Mr. Oung was examined at the hospital and found to be in serious physical condition. In view of his poor health and his promise to return all of the money he had embezzled from our company within three months of his release, Mr. Oung was released from detention on bail and for humanitarian grounds. Part of Mr. Oung’s bail consisted of 450,000 RMB and a condition that he return 750,000 RMB to our company’s subsidiary. Mr. Oung’s release includes a condition that he not be allowed to leave the People’s Republic of China. This criminal proceeding was to be adjudicated early in 2009 but, in contravention of the terms of his release from custody, Mr. Oung has fled the People’s Republic of China and the case cannot be tried in his absence. A warrant has been issued for his arrest if and when he re-enters the Peoples Republic of China.
On September 1, 2007 our Hong Kong subsidiary Roots Biopack Industry Limited filed suit against Patrick Oung in the High Court of the Hong Kong Special Administrative Region Court of First Instance (Action No. 1860) alleging that Mr. Oung acted as a shadow director of the plaintiff and that he breached fiduciary duties owed to the plaintiff by causing the plaintiff to engage in wrongful transactions that enriched the defendant. The plaintiff has demanded an accounting and return of all money misapplied and/or misappropriated by Mr. Oung.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
Market for Securities
Our common shares are quoted for trading on the OTC Bulletin Board under the symbol “BPAC”.
The following quotations obtained from www.finance.yahoo.com reflect the highs and low bids for our common stock based on inter-dealer prices, without retail mark-up, mark-down or commission an may not represent actual transactions. The high and low bid prices of our common stock for the periods indicated below are as follows:
The above share price has been adjusted for the 10 to 1 share consolidation effective on June 11, 2008.
On March 25, 2009, the closing price for the common stock as reported by the quotation service operated by the OTC Bulletin Board was $0.08.
Our transfer agent and registrar for our common stock is Madison Stock Transfer Inc. Their address is PO Box 145, Brooklyn, New York, USA 11229-0145. Their telephone number is 718.627.4453. Their fax number is 718.627.6341.
Holders of our Common Stock
As of March 25, 2009, there were 1,403 registered holders of record of our common stock. As of such date, 24,825,300 common shares were issued and outstanding.
Dividends
We have not paid dividends on our common stock in the past and do not anticipate paying dividends in the near future. We intend to retain earnings, if any, for use in our business and do not anticipate paying any cash dividends. Our board of directors will determine if and when dividends should be declared and paid in the future based on our financial position at the relevant time. All of our shares of common stock are entitled to an equal share in any dividends declared and paid.
Recent Sales of Unregistered Securities
On January 31, 2008, we sold one convertible debenture with a face amount of $150,000 to one investor for gross proceeds of $150,000. This convertible debenture is for a two year term and is convertible at any time at the option of the holder after giving 60 days prior notice to our company, into shares of our common stock at a price of six and two-thirds cents per share. This investor is not a U.S. person, the transaction did not occur in the United States and, in selling this debenture we relied on the registration exemption provided by Regulation S, promulgated under the Securities Act of 1933, as amended.
On February 4, 2008, we sold one convertible debenture with a face amount of $100,000 to one investor for gross proceeds of $100,000. This convertible debenture is for a three year term and is convertible, at any time at the option of the holder after giving 60 days prior notice to our company, into shares of our common stock at a price of six and two-thirds cents per share. This investor is not a U.S. person, the transaction did not occur in the United States and, in selling this debenture we relied on the registration exemption provided by Regulation S, promulgated under the Securities Act of 1933, as amended.
On March 3, 2008, we sold one convertible debenture with a face amount of $400,000 to one investor for gross proceeds of $400,000. This convertible debenture is for a three year term and is convertible, at any time at the option of the holder after giving 60 days prior notice to our company, into shares of our common stock at a price of six and two-thirds cents per share. This investor is not a U.S. person, the transaction did not occur in the United States and, in selling this debenture we relied on the registration exemption provided by Regulation S, promulgated under the Securities Act of 1933, as amended.
On May 14, 2008, we sold an aggregate of 4,758,212 shares of our common stock to four investors at a price of $0.14 per share (after adjustment for our share consolidation, 474,821 shares for a price of $1.40 per share). Two of these investors are ex-directors of our company, one of these investors is a director of two of our subsidiaries and the fourth investor is our President and Chairman of our Board of Directors. In each case the purchase price for the shares was paid by way of satisfaction of debt owed by our company in the aggregate amount of $666,140. All four of these investors are not U.S. persons, none of these transactions occurred in the United States and, in selling these shares of our common stock we relied on the registration exemption provided by Regulation S, promulgated under the Securities Act of 1933, as amended.
On July 4, 2008, we issued 1,900,000 shares of our common stock to Begonia Participation Corp. pursuant to the conversion of 380,000 Series A Preferred Shares. Begonia Participation Corp. is not a U.S. person, this transaction did not occur in the United States and in issuing these shares of our common stock we relied on the registration exemption provided by Regulation S, promulgated under the Securities Act of 1933, as amended.
On September 5, 2008, we issued 1,492,537 shares of our common stock to Gaofeng Holding Co. Limited pursuant to the conversion of a convertible debenture in the amount of $100,000. Gaofeng Holding Co. Limited is not a U.S. person, this transaction did not occur in the United States and in issuing these shares of our common stock we relied on the registration exemption provided by Regulation S, promulgated under the Securities Act of 1933, as amended.
On September 19, 2008, we issued 1,800,000 shares of our common stock to CAT Brokerage AG pursuant to the conversion of a convertible debenture in the amount of $400,000. CAT Brokerage AG is not a U.S. person, this transaction did not occur in the United States and in issuing these shares of our common stock we relied on the registration exemption provided by Regulation S, promulgated under the Securities Act of 1933, as amended.
On October 9, 2008, we issued 125,000 shares of our common stock to San Diego Torrey Hills Capital, Inc. pursuant to a consulting agreement. San Diego Torrey Hills Capital, Inc. is a U.S. person and in issuing these shares of our common stock we relied on Rule 506 of Regulation D and/or Section 4(2) of the Securities Act of 1933.
On October 15, 2008, we issued 500,000 shares of our common stock to Ma Cheng Ji, a director of our company, pursuant to the conversion of a convertible debenture in the amount of $250,000. Ma Cheng Ji is not a U.S. person,
this transaction did not occur in the United States and in issuing these shares of our common stock we relied on the registration exemption provided by Regulation S, promulgated under the Securities Act of 1933, as amended.
On October 15, 2008, we issued 2,250,000 shares of our common stock to Ladix Properties Inc. pursuant to the conversion of a convertible debenture in the amount of $150,000. Ladix Properties Inc. is not a U.S. person, this transaction did not occur in the United States and in issuing these shares of our common stock we relied on the registration exemption provided by Regulation S, promulgated under the Securities Act of 1933, as amended.
Securities Authorized for Issuance Under Equity Compensation Plans
The following table summarizes our equity compensation plan information for the fiscal year end December 31, 2008;
(1)
On July 8, 2005, we filed a registration statement on Form S-8 registering 6,000,000 shares at a proposed offering price of $0.013 per share or $78,000. Under this plan we issued 6,000,000 shares to five individuals in consideration for consulting services.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We did not purchase any of our shares of common stock or other securities during our fiscal year ended December 31, 2008.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
Not Applicable.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Our financial statements are stated in United States dollars and are prepared in conformity with generally accepted accounting principles in the United States of America for interim financial statements. The following discussion should be read in conjunction with our financial statements and the related notes that appear elsewhere in this quarterly report.
As used in this quarterly report and unless otherwise indicated, the terms “we”, “us” and “our” refer to Biopack Environmental Solutions Inc. and our subsidiaries, unless otherwise indicated. Unless otherwise specified, all dollar
amounts are expressed in United States dollars and all references to “common shares” refer to shares of our common stock.
Note Regarding Forward-Looking Statements
This annual report on Form 10-K includes forward-looking statements. Forward-looking statements are statements that relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors, including the risks in the section of this quarterly report entitled “Risk Factors” beginning at page 11 above, any of which may cause our or our industry’s actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein.
We caution the reader that important factors in some cases have affected and, in the future, could materially affect our actual results and could cause our actual results in the future to differ materially from the results expressed in any estimates, projections or other “forward-looking statements” contained in this annual report on Form 10-K. Except as may otherwise be required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform them to actual results.
Our Business
We develop, manufacture, distribute and market bio-degradable food containers and disposable industrial packaging for consumer products. We currently manufacture most of our products in our own factory, located in Jiangmen City, in the Peoples Republic of China. We are in the process of increasing the production capacity of our Biopark factory. For a more detailed discussion of our business and our factory, please refer to the discussions under the headings “Business”, beginning at page 5, above, and “Properties”, beginning at page 16, above.
Over the next year, we plan to add 10 more production machines to the existing 14 machines currently installed at our factory. Six of these new machines will be fully automated and four will be semi-automated. When the new machines have been installed, we would have a total of 24 production machines, 20 of which will be fully automated and four of which will be semi-automated. We plan to set up four production lines of five fully automated machines each, with the four semi-automated machines operating separately. We have found that the semi-automated machines provide greater flexibility when using different mixes of product molds.
We have already ordered two of the new semi-automated machines and we expect delivery in May, 2009.
To accommodate the additional production capacity that these new machines will add to our factory, we also intend to add two additional mixing and pulping pools.
Because our research and development team is still refining the design of these machines in an effort to increase efficiency, it is too early to price them but we anticipate that each will cost approximately $20,000. We estimate the cost of these improvements, including the new machines and the additional mixing and pulping pools, to be approximately $750,000 over the next 12 months. In addition, we believe that once all of the new machines are installed and in operation, we will need to add additional trimming machines but we cannot estimate the number needed until our expansion is complete. In the short term, we plan to handle any additional trimming needs by adding extra work shifts.
Over the next 12 months, we plan to increase sales of our existing products and add new products, including additional industrial packaging products and complementary products. Now that we have stabilized our production
capabilities at our Biopark facility, we believe that the pace of our expansion will begin to increase. Our plan over the coming year is to focus on increasing European orders and expansion into the North American market.
We have noticed a dramatic difference in the environmental packaging market. Although the European market has shown a preference for environmentally sensitive products for some time now, we believe that the current U.S. administration’s focus on green technology for both economic and environmental reasons is already influencing a shift away from more traditional packaging products such as those made from Styrofoam, which has actually been banned in a number of U.S. cities, towards environmentally friendly products like ours. We believe that our products and our company can benefit from this trend.
Our sales and marketing team is located in Hong Kong. Through our sales and marketing team and our distributors, we supply our biodegradable food containers and industrial packaging products to multi-national corporations, supermarket chains and restaurants located across North America, Europe and Asia. During calendar year 2008 we were focused primarily on establishing and expanding our production capabilities and servicing existing accounts, primarily located in Europe. During calendar year 2009 we intend to continue to expand our production capabilities and we hope to expand our marketing efforts, focusing on an expansion of our sales, primarily in North America.
Result of Operations for the year ended December 31, 2008 as compared to the year ended December 31, 2007.
During the year ended December 31, 2008 we had a net operating loss of $1,587,330, as compared to net operating loss of $5,011,576 for the year ended December 31, 2007. The decrease in the amount of our operating loss was due primarily to the cut backs in non-essential spending as well as reductions of salaries and administrative personnel.
Net Sales and Cost of Sales
Net sales for the year ended December 31, 2008 were $793,474, compared to net sales of $1,075,902 for the year ended December 31, 2007. This decrease in sales is primarily attributable to the global economic contraction, coupled with a re-tooling of machines and modifications to our factory to allow for production increases. Certain changes to Chinese labour laws also contributed to higher end prices, which led to some reductions in sales. As well, with our increased production capacity we were able to decrease our need for OEM suppliers, and fill our order backlogs with our own product that is in higher demand. We expect that future production from our new factory will increase dramatically, as the current facility’s infrastructure and design can support up to 40 machines. Most of the up front costs have already been spent to set up the necessary electrical, piping, water filtration, building requirements, etc. We anticipate we will generate new orders with our corresponding increase in production capacity.
Cost of sales for the year ended December 31, 2008 was $793,474, compared to $1,075,902 for the same period in 2007, which provided a gross margin of 2.3%, as compared to 20.9% during the same period of 2007. The difference in the margin is primarily due to the fact that the margins we realized on OEM supplied product was much lower than that our product supplied by our former Shunde City factory (both their product quality and their production costs are lower than ours). Certain changes to Chinese labour laws also contributed to higher cost of our product. Systematically, many manufacturers in the Guang Dong province in PRC saw their cost of labour rise as much as 30% due to the implementation of poorly timed new labour laws that were introduced at a time that the economy was growing at an exorbitant pace.
Operating Expenses
Operating expenses for the year ended December 31, 2008 were $1,106,011, compared to $5,115,689 during the same period in 2007. The decline in operating expenses was due primarily to the absence of marketing and other costs associated with the business combination that had been incurred in the prior year. Many of these costs were non-recurring. In addition, significant costs were reduced due to reductions in staff in our Hong Kong administration offices.
The high operating expenses for the year ended December 31, 2007 were due primarily to the write-off of construction work in Malaysia in the amount of $154,506, provision for doubtful debts in the amount of $243,625, a
write-off of amounts due from related parties of $2,876,402 and an increase in administration expenses resulting from the development of phase one of our production capacity at our Biopark facility.
Our legal and professional expenses for the year ended December 31, 2008 were $88,691, compared to $163,707 for the year ended December 31, 2007. The decrease in legal and professional expense was primarily due to the lack of activity in the litigation proceedings commenced during the year ended December 31, 2007 and described in the “Legal Proceedings” section of this annual report on Form 10-K, beginning above at page 17. Most of the legal expenses incurred this year are related to U.S. regulatory compliance and raising capital.
Our rent for the year ended December 31, 2008 was $155,565 compare to rent for the year ended December 31, 2007 of $228,159. The decrease in rent of $72,594 for the year ended December 31, 2008 was primarily due to the downsizing of our Hong Kong offices.
Other Income and Expenses
We had other income of $14,278 during the year ended December 31, 2008, compared to $12,249 during the year ended December 31, 2007. This is primarily due to exchange rate gain on the Hong Kong dollar against the China RMB.
We incurred interest expense of $513,483 during the year ended December 31, 2008, compared to $60,143 during the year ended December 31, 2007. Interest expense was incurred primarily due to the recognition of the conversion feature embedded in the convertible debentures issued by our company. Each convertible debenture is valued separately at issuance and recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. That amount is calculated as the difference in the conversion price and the fair value of the common stock into which the debenture is convertible, multiplied by the number of shares. The intrinsic value cannot exceed the proceeds.
Liquidity and Capital Resources
Our principal cash requirements are for daily working capital, manufacturing and installation of plant and machinery and the cost of infrastructure at our leased factory in Jiangmen City, PRC. On December 31, 2008 we had cash and equivalents of $128,039, compared to $4,729 at December 31, 2007. We estimate that our operating expenses over the next 12 months will be approximately $75,000 per month and we plan to spend approximately $750,000 to add additional production capacity to our Biopark facility. Therefore, we estimate that our cash outflow would be approximately $1,650,000 over the next 12 months attributable to continue our operations and complete construction of the Biopark facility. We look to construct an equity and/or debt financing plan in the amount of approximately $1,000,000 over the next 12 months. There is currently no definitive offering of financing in place.
As at December 31, 2008 we had a working capital deficit of $2,415,819, compared to a deficiency of $1,717,380 at December 31, 2007. The increase in working capital for the period was primarily financed by the issuance of debentures and demand promissory notes.
Cash Flow Used in Operating Activities
For the year ended December 31, 2008 our operating activities used net cash of $1,263,699, compared to $2,797,650 for the year ended December 31, 2007. The decrease in cash outflow was primarily due to a reduction in trade deposits, decreases in receivables and increases in payables and accrual expense which were primarily due to better credit terms negotiated with suppliers.
Cash Flow Used in Investing Activities
For the year ended December 31, 2008 investing activities used net cash of $851,674 compared to $1,450,246 for the year ended December 31, 2007. The decrease in net cash used in investing activities this year was primarily due to the slower pace of construction progress in our new Biopark production facility compared to the pace of construction during the year ended December 31, 2007.
Cash Flow Provided by Financing Activities
For the year ended December 31, 2008 financing activities provided cash of $2,416,952 compared to cash outflow of $3,542,392 in the year ended December 31, 2007. The cash flow provided by financing activities was primarily from issuance of convertible debentures and promissory notes.
During the year ended December 31, 2008, we engaged in the following financing transactions:
On January 31, 2008, we sold a convertible debenture with a face value of $150,000. This convertible debenture has a two year term and was convertible, at the option of the holder upon 90 days prior notice, into shares of our common stock at a price of six and two-thirds cents per share. On October 15, 2008, we issued 2,250,000 shares of common stock pursuant to the conversion of this convertible debenture.
On February 4, 2008, we sold a convertible debenture for gross proceeds of $100,000. This convertible debenture has a three year term and was convertible, at the option of the holder upon 90 days prior notice, into shares of our common stock at a price of six and two-thirds cents per share. On September 5, 2008, we issued 1,492,537 shares of common stock pursuant to the conversion of this convertible debenture.
On March 3, 2008, we sold a convertible debenture for gross proceeds of $400,000. This convertible debenture has a three year term and is convertible, at the option of the holder with 90 days prior notice, into common stock at a price of six and two-thirds cents per share. On September 19, 2008, we issued 1,800,000 shares of common stock pursuant to a partial conversion of this convertible debenture. The balance due on this convertible debenture as at the date of this annual report on Form 10-K is $280,000, plus accrued interest.
On March 30, 2008, our subsidiary, Roots Biopack Group Limited, entered into a loan agreement with Tayna Environmental Technology Co. Limited, whereby Tayna Environmental agreed to advance to Roots Biopack the sum of $1,144,538 for a three-year initial term expiring March 30, 2011. Our subsidiary has an option to extend this three-year initial term for an additional two calendar years by sending written notice to Tayna Environmental no later than three months prior to the original maturity date (i.e., no later than December 30, 2010). Principal due under the loan bears interest at the rate of 3% per annum.
On May 14, 2008, we issued 4,758,212 shares of our common stock at a price of $0.14 per share (after adjusting for our 10:1 share consolidation, 475,821 shares at a price of $1.40 per share) to four investors pursuant to subscription agreements dated May 14, 2008. The consideration for these shares was paid by applying the debt owed by our company to these four investors in the aggregate amount of $666,140. Two of these investors are ex-directors of our company, one of these investors is a director of two of our subsidiaries and the fourth investor is our President and Chairman of our Board of Directors.
On June 30, 2008, we sold two promissory notes for an aggregate amount of $245,000. These promissory notes are payable on demand and bear interest at a rate of 6% per annum. Interest is payable on the first day of each and every month.
On July 20, 2008, we sold one promissory note for $90,500. This promissory note is payable on demand and bears interest at a rate of 6% per annum. Interest is payable on the first day of each and every month.
On September 15, 2008, we sold one promissory note for $80,000. This promissory note is payable on demand and bears interest at the rate of 6% per annum. Interest is payable on the first day of each and every month.
On December 29, 2008, we sold one convertible debenture for gross proceeds of $150,000. This convertible debenture has a three year term and is convertible, at the option of the holder upon 90 days prior notice, into shares of our common stock at a price of six and two-thirds cents per share.
On December 31, 2008, we sold two promissory notes for an aggregate amount of $582,000. These promissory notes are payable on demand and bear interest at a rate of 6% per annum. Interest is payable on the first day of each and every month.
Capital Expenditures
During the year ended December 31, 2008, the bulk of our capital expenditure was focused on the development of our Roots Biopark production facility. As of December 31, 2008, we do not have any material commitments for capital expenditures. Over the next twelve months, we plan to spend approximately $500,000 on the completion of the third production phases at our Roots Biopark production facility.
Going Concern
The accompanying consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”), which contemplate the continuation of our company as a going concern. We incurred a net loss for the year ended December 31, 2008 of $1,587,330, had an accumulated deficit of $5,479,480 and a working capital deficit of $2,415,819. These conditions raise substantial doubt as to our company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classifications of recorded asset amounts, or amounts and classifications of liabilities that might be necessary should our company be unable to continue as a going concern.
The future of our company is dependent upon its attaining profitable operations and raising the capital it will require in order to achieve profitable operations through the issuance of equity securities, borrowings or a combination thereof.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Biopack Environmental Solutions Inc. and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated from the consolidated financial statements.
Use of Estimates
In preparing consolidated financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported periods. Significant estimates include depreciation. Actual results could differ from those estimates.
Cash and Cash Equivalents
Our company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. As of December 31, 2008, we had cash and equivalents of $128,039.
Short-term Investment
Our company classifies its short-term investment as held-to-maturity debt securities and is measured at amortized cost (which approximates fair value) with interest and realized gains and losses, if any, reported in non-operating income in the income statement.
Accounts Receivable
Accounts receivable are stated at original amounts less an allowance made for doubtful receivables, if any, based on a review of all outstanding amounts at the end of the period. Full allowance for doubtful receivables are made when the receivables are overdue for one year and an allowance is made when there is objective evidence that our ompany will not be able to collect all amounts due according to the original terms of a receivable. Bad debts are written against the allowance when identified. We extend credit to customers on an unsecured basis in the normal course of business and believes that all accounts receivable in excess of the allowance for doubtful accounts are fully collectible. We do not accrue interest on trade accounts receivable. The normal credit terms range from 15 to 60 days.
Allowance for Doubtful Accounts
Our company recognizes an allowance for doubtful accounts to ensure accounts receivable are not overstated due to uncollectibility. An allowance for doubtful accounts is maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. An additional reserve for individual accounts is recorded when our company becomes aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to a customer change, estimates of the recoverability of receivables would be further adjusted.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided principally by use of the straight-line method over the useful lives of the related assets, except for leasehold properties, which are depreciated over the terms of their related leases or their estimated useful lives, whichever is less. Expenditures for maintenance and repairs, which do not improve or extend the expected useful life of the assets, are expensed to operations while major repairs are capitalized.
The estimated useful lives are as follows:
Impairment of Assets
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”, our company evaluates its long-lived assets to determine whether later events and circumstances warrant revised estimates of useful lives or a reduction in carrying value due to impairment. If indicators of impairment exist and if the value of the assets is impaired, an impairment loss would be recognized. There was no impairment loss made for property and equipment as of December 31, 2008.
Income Taxes
Our company accounts for income taxes under SFAS No. 109, “Accounting for Income Taxes”. Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Foreign Currency Transactions
Our company’s functional currency is Hong Kong Dollars (“HKD”), Renminbi (“RMB”) and Malaysia Ringatt (“MYR”) and its reporting currency is U.S. dollars. Our company’s consolidated balance sheet accounts are translated into U.S. dollars at the year-end exchange rates and all revenue and expenses are translated into U.S. dollars at the average exchange rates prevailing during the periods in which these items arise. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred.
Fair Value of Financial Instruments
SFAS No. 107, “Disclosures about Fair Values of Financial Instruments”, requires disclosing fair value to the extent practicable for financial instruments that are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.
For certain financial instruments, including cash, accounts and other receivables, accounts payable, accruals and other payables, it was assumed that the carrying amounts approximate fair value because of the near term maturities of such obligations. The carrying amounts of long-term loans approximate fair value as the interest on these loans is minimal.
Earnings Per Share
Our company computes earnings per share (“EPS’) in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”), and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
Accumulated Other Comprehensive Income
Accumulated other comprehensive income represents the change in equity of our company during the periods presented from foreign currency translation adjustments.
Stock-Based Compensation
In March 2004, the FASB issued a proposed statement, Share-Based Payment, which addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for equity instruments of the enterprise or liabilities that are based on the grant-date fair value of the enterprise’s equity instruments or that may be settled by the issuance of such equity instruments. The proposed statement would eliminate the ability to account for share-based compensation transactions using Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and generally would require instead that such transactions be accounted for using a fair-value-based method. In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which is a revision of SFAS No. 123. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their grant-date fair values. Pro forma disclosure is no longer an alternative.
As permitted by SFAS No. 123, for 2005, we accounted for share-based payments to employees using APB Opinion No. 25’s intrinsic value method and, as such, generally recognized no compensation cost for employee stock options.
Effective January 1, 2006, our company adopted SFAS No. 123(R)’s fair value method of accounting for share based payments. Accordingly, the adoption of SFAS No. 123(R)’s fair value method may have a significant impact on our company’s results of operations as it is required to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. SFAS No. 123(R) permits public companies to adopt its requirements using either the “modified prospective” method or the “modified retrospective” method.
Our company adopted SFAS No. 123(R) using the modified prospective method. In April 2005, the SEC delayed the effective date of SFAS No. 123(R), which is now effective for public companies for annual rather than interim periods that begin after Sept 15, 2005. The impact of the adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future.
Revenue Recognition
Revenue is recognized in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”. Our company recognizes revenue when the significant risks and rewards of ownership have been transferred to the customer pursuant to applicable laws and regulations, including factors such as when there has been evidence of a sales arrangement, the performance has occurred, or service have been rendered, the price to the buyer is fixed or determinable, and collectability is reasonably assured.
In November 2004, the FASB issued SFAS No. 151 “Inventory Costs, an amendment of ARB No. 43, Chapter 4”, (“SFAS No. 151”). The amendments made by SFAS 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after Sept 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. WE have evaluated the impact of the adoption of SFAS 151, and do not believe the impact will be significant to our overall results of operations or financial position.
In December 2004, the FASB issued SFAS No.152, “Accounting for Real Estate Time-Sharing Transactions-an amendment of FASB Statements No. 66 and 67” (“SFAS 152”) SFAS 152 amends SFAS No. 66, “Accounting for Sales of Real Estate”, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, “Accounting for Real Estate TimeSharing Transactions”. SFAS 152 also amends SFAS No. 67, “Accounting for Costs and Initial Rental Operations of Real Estate Projects”, to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. SFAS 152 is effective for financial statements for fiscal years beginning after Sept 15, 2005, with earlier application encouraged. Our company has evaluated the impact of the adoption of SFAS 152, and does not believe the impact will be significant if any, to our company’s overall results of operations or financial position since our company does not enter into such transactions.
In December 2004, the FASB issued SFAS No.153, “Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions.” The amendments made by SFAS 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, Opinion 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. Opinion 29 provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. That exception required that some nonmonetary exchanges, although commercially substantive, be recorded on a carryover basis. By focusing the exception on exchanges that lack commercial substance, the FASB believes SFAS No.153 produces financial reporting that more faithfully represents the
economics of the transactions. SFAS No.153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after Sept 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of SFAS No.153 shall be applied prospectively. Our company has evaluated the impact of the adoption of SFAS 153, and does not believe the impact will be significant to our company’s overall results of operations or financial position.
In December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based Payment” (“SFAS 123(R)”). SFAS 123(R) will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS 123(R) replaces SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees”. SFAS 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) were required to apply SFAS 123(R) as of the first interim or annual reporting period that began after September 15, 2005. This pronouncement was effective for our company, a small business issuer, as of the first interior annual reporting period that began after December 15, 2005. Our company has evaluated the impact of the adoption of SFAS 123(R), and does not believe the impact will be significant to our company’s overall results of operations or financial position.
In May, 2005, The FASB issued SFAS No. 154, entitled Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3. This Statement replaces APB Opinion No. 20, Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principles. It also applies to changes required by an accounting pronouncement in the unusual instance where the pronouncement does not include specific transition provisions. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This Statement defines as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. This statement also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. The adoption of SFAS 154 did not impact the financial statements.
In February, 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Statements”. SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. SFAS No. 155, permits fair value measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial statements that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on the qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement was effective for all financial instruments acquired or issued after the beginning of our company’s first fiscal year that began after September 15, 2006. We believe that this statement did not have a significant impact on the financial statements.
In March, 2006 FASB issued SFAS 156 “Accounting For Servicing of Financial Assets”. This Statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement:
Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract.
Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable.
Permits an entity to choose “amortization method” or “fair value measurement method” for each class of separately recognized servicing assets and servicing liabilities.
At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value.
Requires separate presentation of servicing assets and liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities.
Our company believes that this statement will not have a significant impact on its financial statements.
In September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Our company is currently evaluating the effect of this pronouncement on financial statements.
In September 2006, FASB issued SFAS 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and 132(R).
This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after Sept 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before Sept 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. Our company is currently evaluating the effect of this pronouncement on its financial statements.
In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” and is effective for fiscal years beginning after November 15, 2007. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. Our company is currently assessing the impact the adoption of this pronouncement will have on its financial statements.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Biopack Environmental Solutions Inc.
Consolidated Financial Statements
For the Years Ended December 31, 2008 and 2007
(Stated in US Dollars)
Biopack Environmental Solutions Inc.
CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Biopack Environmental Solutions Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheet of Biopack Environmental Solutions Inc. and Subsidiaries as of December 31, 2008, and the related consolidated statements of operations, stockholders’ equity, and cash flows for the each of the two years ended December 31, 2008. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Biopack Environmental Solutions Inc. and Subsidiaries as of December 31, 2008 and the results of its consolidated operations and its consolidated cash flows for each of the two years ended December 31, 2008 in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 1 to the financial statements conditions exist which raise substantial doubt about the company’s ability to continue as a going concern unless it is able to generate sufficient cash flows to meet its obligations and sustain its operations. Those conditions raise substantial doubt about its ability to continue as a going concern. Managements’ plans regarding those matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Gruber & Company, LLC
Lake Saint Louis, Missouri
March 31, 2009
Biopack Environmental Solutions, Inc. and Subsidiaries
Consolidated Balance Sheets
Biopack Environmental Solutions, Inc. and Subsidiaries
Consolidated Statement of Operations
December 31, 2008 and 2007
Biopack Environmental Solutions, Inc. and Subsidiaries
Statements of Cash flow
Biopack Environmental Solutions, Inc. and Subsidiaries
Consolidated Statements of Shareholders' Equity
BIOPACK ENVIRONMENTAL SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company
Biopack Environmental Solutions Inc. (formerly Star Metro Corp.) and its subsidiaries develop, manufacture, distribute and market bio-degradable food containers and disposable industrial packaging for consumer products made from natural materials.
2. Summary of Significant Accounting Policies
(a) Basis of Presentation
The consolidated financial statements include the accounts of Biopack Environmental Solutions Inc. and its wholly owned subsidiaries. All material intercompany balances and transactions have been eliminated from the consolidated financial statements.
(b) Use of Estimates
In preparing consolidated financial statements in conformity with US GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported periods. Significant estimates include depreciation. Actual results could differ from those estimates.
(c) Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents. As of December 31, 2008, the Company had cash and equivalents of $128,039.
(d) Short-term Investment
The Company classifies its short-term investment as held-to-maturity debt securities and is measured at amortized cost (which approximates fair value) with interest and realized gains and losses, if any, reported in non-operating income in the income statement.
(e) Accounts Receivable
Accounts receivable are stated at original amounts less an allowance made for doubtful receivables, if any, based on a review of all outstanding amounts at the end of the period. Full allowance for doubtful receivables are made when the receivables are overdue for one year and an allowance is made when there is objective evidence that the Company will not be able to collect all amounts due according to the original terms of a receivable. Bad debts are written against the allowance when identified. The Company extends credit to customers on an unsecured basis in the normal course of business and believes that all accounts receivable in excess of the allowance for doubtful accounts are fully collectible. The Company does not accrue interest on trade accounts receivable. The normal credit terms range from 15 to 60 days.
BIOPACK ENVIRONMENTAL SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUE)
(f) Allowance for Doubtful Accounts
The Company recognizes an allowance for doubtful accounts to ensure accounts receivable are not overstated due to uncollectibility. An allowance for doubtful accounts is maintained for all customers based on a variety of factors, including the length of time the receivables are past due, significant one-time events and historical experience. An additional reserve for individual accounts is recorded when the Company becomes aware of a customer’s inability to meet its financial obligations, such as in the case of bankruptcy filings or deterioration in the customer’s operating results or financial position. If circumstances related to a customer change, estimates of the recoverability of receivables would be further adjusted.
(g) Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation is provided principally by use of the straight-line method over the useful lives of the related assets, except for leasehold properties, which are depreciated over the terms of their related leases or their estimated useful lives, whichever is less. Expenditures for maintenance and repairs, which do not improve or extend the expected useful life of the assets, are expensed to operations while major repairs are capitalized.
The estimated useful lives are as follows:
(h) Impairment of Assets
In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets", the Company evaluates its long-lived assets to determine whether later events and circumstances warrant revised estimates of useful lives or a reduction in carrying value due to impairment. If indicators of impairment exist and if the value of the assets is impaired, an impairment loss would be recognized. There was no impairment loss made for property and equipment as of Sept 30, 2008.
(i) Income Taxes
The Company accounts for income taxes under SFAS No. 109, "Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under SFAS No. 109, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
BIOPACK ENVIRONMENTAL SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUE)
(j) Foreign Currency Transactions
The Company’s functional currency is Hong Kong Dollars (“HKD”), Renminbi (“RMB”) and Malaysia Ringatt (“MYR”) and its reporting currency is U.S. dollars. The Company’s consolidated balance sheet accounts are translated into U.S. dollars at the year-end exchange rates and all revenue and expenses are translated into U.S. dollars at the average exchange rates prevailing during the periods in which these items arise. Translation gains and losses are deferred and accumulated as a component of other comprehensive income in stockholders’ equity. Transaction gains and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency are included in the statement of operations as incurred.
(k) Fair Value of Financial Instruments
SFAS No. 107, “Disclosures about Fair Values of Financial Instruments”, requires disclosing fair value to the extent practicable for financial instruments that are recognized or unrecognized in the balance sheet. The fair value of the financial instruments disclosed herein is not necessarily representative of the amount that could be realized or settled, nor does the fair value amount consider the tax consequences of realization or settlement.
For certain financial instruments, including cash, accounts and other receivables, accounts payable, accruals and other payables, it was assumed that the carrying amounts approximate fair value because of the near term maturities of such obligations. The carrying amounts of long-term loans approximate fair value as the interest on these loans is minimal.
(l) Earnings Per Share
The Company computes earnings per share (“EPS’) in accordance with Statement of Financial Accounting Standards No. 128, “Earnings per Share” (“SFAS No. 128”), and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). SFAS No. 128 requires companies with complex capital structures to present basic and diluted EPS. Basic EPS is measured as the income or loss available to common shareholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., convertible securities, options, and warrants) as if they had been converted at the beginning of the periods presented, or issuance date, if later. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
(m) Accumulated Other Comprehensive Income
Accumulated other comprehensive income represents the change in equity of the Company during the periods presented from foreign currency translation adjustments.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUE)
(n) Stock-Based Compensation
In March 2004, the FASB issued a proposed statement, Share-Based Payment, which addresses the accounting for share-based payment transactions in which an enterprise receives employee services in exchange for equity instruments of the enterprise or liabilities that are based on the grant-date fair value of the enterprise's equity instruments or that may be settled by the issuance of such equity instruments. The proposed statement would eliminate the ability to account for share-based compensation transactions using Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and generally would require instead that such transactions be accounted for using a fair-value-based method. In December 2004, the FASB issued SFAS No. 123(R), Share-Based Payment, which is a revision of SFAS No. 123. Generally, the approach in SFAS No. 123(R) is similar to the approach described in SFAS No. 123. However, SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their grant-date fair values. Pro forma disclosure is no longer an alternative.
As permitted by SFAS No. 123, for 2005, the Company accounted for share-based payments to employees using APB Opinion No. 25's intrinsic value method and, as such, generally recognized no compensation cost for employee stock options.
Effective January 1, 2006, the Company adopted SFAS No. 123(R)'s fair value method of accounting for share based payments. Accordingly, the adoption of SFAS No. 123(R)'s fair value method may have a significant impact on the Company's results of operations as it is required to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. SFAS No. 123(R) permits public companies to adopt its requirements using either the "modified prospective" method or the "modified retrospective" method.
The Company adopted SFAS No. 123(R) using the modified prospective method. In April 2005, the SEC delayed the effective date of SFAS No. 123(R), which is now effective for public companies for annual rather than interim periods that begin after Sept 15, 2005. The impact of the adoption of SFAS No. 123(R) cannot be predicted at this time because it will depend on levels of share-based payments granted in the future.
(o) Revenue Recognition
Revenue is recognized in accordance with SEC Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial Statements”. The Company recognizes revenue when the significant risks and rewards of ownership have been transferred to the customer pursuant to applicable laws and regulations, including factors such as when there has been evidence of a sales arrangement, the performance has occurred, or service have been rendered, the price to the buyer is fixed or determinable, and collectability is reasonably assured.
In November 2004, the FASB issued SFAS No. 151 "Inventory Costs, an amendment of ARB No. 43, Chapter 4”, (" SFAS No. 151"). The amendments made by SFAS 151 clarify that abnormal amounts of idle facility expense, freight, handling costs, and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after Sept 15, 2005. Earlier application is permitted for inventory costs incurred during fiscal years beginning after November 23, 2004. The Company has evaluated the impact of the adoption of SFAS 151, and does not believe the impact will be significant to the Company's overall results of operations or financial position.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUE)
In December 2004, the FASB issued SFAS No.152, "Accounting for Real Estate Time-Sharing Transactions-an amendment of FASB Statements No. 66 and 67" ("SFAS 152") SFAS 152 amends SFAS No. 66, "Accounting for Sales of Real Estate", to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, "Accounting for Real Estate Time-Sharing Transactions". SFAS 152 also amends SFAS No. 67, "Accounting for Costs and Initial Rental Operations of Real Estate Projects", to state that the guidance for (a) incidental operations and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. SFAS 152 is effective for financial statements for fiscal years beginning after Sept 15, 2005, with earlier application encouraged. The Company has evaluated the impact of the adoption of SFAS 152, and does not believe the impact will be significant if any, to the Company's overall results of operations or financial position since the Company does not enter into such transactions.
In December 2004, the FASB issued SFAS No.153, "Exchanges of Nonmonetary Assets, an amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions." The amendments made by SFAS 153 are based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. Further, the amendments eliminate the narrow exception for nonmonetary exchanges of similar productive assets and replace it with a broader exception for exchanges of nonmonetary assets that do not have commercial substance. Previously, Opinion 29 required that the accounting for an exchange of a productive asset for a similar productive asset or an equivalent interest in the same or similar productive asset should be based on the recorded amount of the asset relinquished. Opinion 29 provided an exception to its basic measurement principle (fair value) for exchanges of similar productive assets. That exception required that some nonmonetary exchanges, although commercially substantive, be recorded on a carryover basis. By focusing the exception on exchanges that lack commercial substance, the FASB believes SFAS No.153 produces financial reporting that more faithfully represents the economics of the transactions. SFAS No.153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after Sept 15, 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in fiscal periods beginning after the date of issuance. The provisions of SFAS No.153 shall be applied prospectively. The Company has evaluated the impact of the adoption of SFAS 153, and does not believe the impact will be significant to the Company's overall results of operations or financial position.
In December 2004, the FASB issued SFAS No.123 (revised 2004), "Share-Based Payment" ("SFAS 123(R)"). SFAS 123(R) will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS 123(R) replaces SFAS No. 123, "Accounting for Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) were required to apply SFAS 123(R) as of the first interim or annual reporting period that began after Sept 15, 2005. This pronouncement was effective for the Company, a small business issuer, as of the first interior annual reporting period that began after December 15, 2005. The Company has evaluated the impact of the adoption of SFAS 123(R), and does not believe the impact will be significant to the Company's overall results of operations or financial position.
BIOPACK ENVIRONMENTAL SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUE)
In May, 2005, The FASB issued SFAS No. 154, entitled Accounting Changes and Error Corrections - a replacement of APB Opinion No. 20 and FASB Statement No. 3. This Statement replaces APB Opinion No. 20, Accounting Changes and FASB Statement No. 3, Reporting Accounting Changes in Interim Financial Statements, and changes the requirements for the accounting for and reporting of a change in accounting principle. This statement applies to all voluntary changes in accounting principles. It also applies to changes required by an accounting pronouncement in the unusual instance where the pronouncement does not include specific transition provisions. Opinion 20 previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This Statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. This Statement defines as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. This statement also redefines restatement as the revising of previously issued financial statements to reflect the correction of an error. The adoption of SFAS 154 did not impact the financial statements.
In February, 2006, FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Statements”. SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities”. SFAS No. 155, permits fair value measurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation, clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, establishes a requirement to evaluate interest in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial statements that contain an embedded derivative requiring bifurcation, clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives, and amends SFAS No. 140 to eliminate the prohibition on the qualifying special-purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. This statement was effective for all financial instruments acquired or issued after the beginning of the Company’s first fiscal year that began after September 15, 2006. The Company believes that this statement did not have a significant impact on the financial statements.
In March, 2006 FASB issued SFAS 156 “Accounting For Servicing of Financial Assets”. This Statement amends FASB Statement No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities”, with respect to the accounting for separately recognized servicing assets and servicing liabilities. This Statement:
Requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract.
Requires all separately recognized servicing assets and servicing liabilities to be initially measured at fair value, if practicable.
BIOPACK ENVIRONMENTAL SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUE)
Permits an entity to choose “amortization method” or “fair value measurement method” for each class of separately recognized servicing assets and servicing liabilities.
At its initial adoption, permits a one-time reclassification of available-for-sale securities to trading securities by entities with recognized servicing rights, without calling into question the treatment of other available-for-sale securities under Statement 115, provided that the available-for-sale securities are identified in some manner as offsetting the entity’s exposure to changes in fair value of servicing assets or servicing liabilities that a servicer elects to subsequently measure at fair value.
Requires separate presentation of servicing assets and liabilities subsequently measured at fair value in the statement of financial position and additional disclosures for all separately recognized servicing assets and servicing liabilities.
The Company believes that this statement will not have a significant impact on its financial statements.
In September 2006, FASB issued SFAS 157 ‘Fair Value Measurements’. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement applies under other accounting pronouncements that require or permit fair value measurements, the Board having previously concluded in those accounting pronouncements that fair value is the relevant measurement attribute. Accordingly, this Statement does not require any new fair value measurements. However, for some entities, the application of this Statement will change current practice. This Statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The Company is currently evaluating the effect of this pronouncement on financial statements.
In September 2006, FASB issued SFAS 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans-an amendment of FASB Statements No. 87, 88, 106, and 132(R).
This Statement improves financial reporting by requiring an employer to recognize the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted net assets of a not-for-profit organization. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. An employer with publicly traded equity securities is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after December 15, 2006. An employer without publicly traded equity securities is required to recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures as of the end of the fiscal year ending after Sept 15, 2007. However, an employer without publicly traded equity securities is required to disclose the following information in the notes to financial statements for a fiscal year ending after December 15, 2006, but before Sept 16, 2007, unless it has applied the recognition provisions of this Statement in preparing those financial statements. The requirement to measure plan assets and benefit obligations as of the date of the employer’s fiscal year-end statement of financial position is effective for fiscal years ending after December 15, 2008. The Company is currently evaluating the effect of this pronouncement on its financial statements.
BIOPACK ENVIRONMENTAL SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUE)
In February 2007, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” and is effective for fiscal years beginning after November 15, 2007. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company is currently assessing the impact the adoption of this pronouncement will have on its financial statements.
3. Property, Plant and Equipment, net
Depreciation expense for the year ended December 31, 2008 was $65,305.
(b) Construction in progress
Construction in progress represents the expenditure incurred in the development project of a manufacturing plant by a subsidiary in Jiangmen, PRC. As of December 31, 2008, the Company had a balance of $174,426 on the construction. These costs are included on the balance sheet as property, plant and equipment costs. No depreciation will be provided until the plant is completed and operating. No interest has been capitalized in construction in progress for the year.
The Company believes that the carrying amount of construction in progress is approximate to its fair value.
4. Inventories
The Company’s inventory consists of raw materials held for production. As of December 31, 2008, the Company’s subsidiary in Jiangmen, PRC held inventory of $376,773.
BIOPACK ENVIRONMENTAL SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUE)
5. Accounts receivable
Accounts receivable consists of receivables on trade as follows:
As of December 31, 2008, the Company’s subsidiaries had receivables totaling $69,777. The Company believes that there is no issue of recoverability and the balances receivable are indicative of fair value.
6. Deposits and prepayment and other receivable
7. Accrued and payables
8. Amount due to Shareholders & Directors
The amount due to shareholder, Good Value Galaxy Limited in the amount of $625,589 is unsecured, interest free and has no fixed terms of repayment.
Directors of the Company have advanced $59,752 in the form of unsecured, non-interest bearing advances with no due date.
BIOPACK ENVIRONMENTAL SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUE)
9. Loans payable
Long Term Loan
On March 30, 2008, our subsidiary, Roots Biopack Group Limited, entered into a loan agreement with Tayna Environmental Technology Co. Limited, whereby Tayna Environmental agreed to advance to Roots Biopack Group Limited the sum of $1,146,103 for a three-year initial term expiring March 30, 2011. Our subsidiary has an option to extend this three-year initial term for an additional two calendar years by sending written notice to Tayna Environmental no later than three months prior to the original maturity date (i.e., no later than December 30, 2010). Principal due under the loan bears interest at the rate of 3% per annum.
Convertible Debts
In December, 2007, the Company sold a convertible debenture for gross proceeds of $300,000. The convertible debentures have a term of three years and are convertible, at the option of the holder with 60 days prior notice, into Series C Preferred Stock at a price of $0.50 per preferred share.
In December, 2007, the Company sold a convertible debenture to a director for gross proceeds of $300,000. The convertible debentures have a term of three years and are convertible, at the option of the holder with 60 days prior notice, into Series C Preferred Stock at a price of $0.50 per preferred share. On October 15, 2008, the Company issued 500,000 shares of common stock pursuant to the conversion of $250,000 of the convertible debenture.
On January 31, 2008, the Company sold a convertible debenture with a face value of $150,000. This convertible debenture has a two year term and is convertible, at the option of the holder with 90 days prior notice, into common stock at a price of six and two-thirds cents per share. On October 15, 2008, the Company issued 2,250,000 shares of common stock pursuant to the conversion of the convertible debenture.
On February 4, 2008, the Company sold a convertible debenture for gross proceeds of $100,000. This convertible debenture has a three year term and is convertible, at the option of the holder with 90 days prior notice, into common stock at a price of six and two-thirds cents per share. On September 5, 2008, the Company issued 1,492,537 shares of common stock pursuant to the conversion of the convertible debenture.
BIOPACK ENVIRONMENTAL SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUE)
On March 3, 2008, the Company sold a convertible debenture for gross proceeds of $400,000. This convertible debenture has a three year term and is convertible, at the option of the holder with 90 days prior notice, into common stock at a price of six and two-thirds cents per share. On September 19, 2008, the Company issued 1,800,000 shares of common stock pursuant to the conversion of $120,000 of the convertible debenture.
On March 3, 2008, the Company sold a convertible debenture for gross proceeds of $10,000. This convertible debenture has a three year term and is convertible, at the option of the holder with 90 days prior notice, into common stock at a price of six and two-thirds cents per share.
On December 29, 2008, the Company sold a convertible debenture for gross proceeds of $150,000. This convertible debenture has a three year term and is convertible, at the option of the holder with 90 days prior notice, into common stock at a price of six and two-thirds cents per share.
The embedded beneficial conversion features present in the convertible debenture is valued separately at issuance and recognized and measured by allocating a portion of the proceeds equal to the intrinsic value of that feature to additional paid-in capital. That amount is calculated as the difference the conversion price and the fair value of the common stock into which the debenture is convertible, multiplied by the no. of shares. The intrinsic value cannot exceed the proceeds.
Short Term Loan
On 30 June 08, the Company issued two demand promissory notes with aggregate amount of $245,000. The demand promissory notes bear an interest rate of 6% annually, payable on the first day of each and every month.
On 20 July 08, the Company issued a demand promissory notes with amount of $90,500. The demand promissory notes bear an interest rate of 6% annually, payable on the first day of each and every month.
On 15 Sept 08, the Company issued a demand promissory notes with amount of $80,000. The demand promissory notes bear an interest rate of 6% annually, payable on the first day of each and every month.
On 31 Dec 08, the Company issued two demand promissory notes with aggregate amount of $582,000. The demand promissory notes bear an interest rate of 6% annually, payable on the first day of each and every month.
BIOPACK ENVIRONMENTAL SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUE)
10. Going Concern
The accompanying consolidated financial statements have been prepared in accordance with the accounting principles generally accepted in the United States of America (“US GAAP”), which contemplate the continuation of the Company as a going concern. The Company incurred a net loss for year ended December 31, 2008 of $1,867,330 had an accumulated deficit of $5,759,480 and a working capital deficit of $2,415,819. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classifications of recorded asset amounts, or amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
The future of the Company is dependent upon its attaining profitable operations and raising the capital it will require in order to achieve profitable operations through the issuance of equity securities, borrowings or a combination thereof.
11. Concentrations and Credit Risk
Concentration of credit risk is limited to accounts receivable and is subject to the financial conditions of major customers. The Company does not require collateral or other security to support accounts receivable. The Company conducts periodic reviews of its clients’ financial condition and customers payment practices to minimize collection risk on accounts receivable.
12. Commitments and Contingencies
(a) Operating Lease Arrangements
Minimum lease payments recognized as an expense under operating leases in respect of the premises and land use right in PRC in PRC during the year ended December 31 2008:
At December 31 2008, the Company had outstanding commitments for future minimum lease payments under non-cancelable operating leases in respect of premises and land use rights in PRC, which fall due as follows:
Operating leases relate to manufacturing premise in PRC with lease terms of 15 years from 1 March 2007, with an option to extend for renew. The Company does not have an option to purchase the leased asset at the expiry of the lease period.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUE)
(b) Capital Commitments
13. Related Party Transactions
Amount due to related parties
The advances are unsecured, interest free and have no fixed terms of repayment. The respective parties are or were directors of the company.
On May 14, 2008, the Company entered into a subscription agreement with four investors, whereby the company agreed to issue 4,758,212 shares of our common stock at a price of $0.14 per share to the four investors in consideration of the debt owned by our company to them in the aggregate amount of $666,140. Two of these investors are ex-directors of our company, one of these investors is a director of two of the Company’s subsidiaries and the fourth investor is our President and Chairman of the Company’s Board of Directors.
BIOPACK ENVIRONMENTAL SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUE)
14. INCOME TAXES
No provision for HK Profits tax has been made in consolidated financial statements as the subsidiaries sustained loss for the year. The current year amount represented under provision of taxation in previous years.
No provision for PRC income tax has been made in the consolidated financial statements as the PRC subsidiary sustained loss during the year. No provision for deferred taxation has been recognized in the financial statements as the amount involved is insignificant.
No deferred tax is recognized in the consolidated balance sheets as of 31 December 2008.
15. Preferred Stock Issued to Convert Debt
On August 17, 2007 the Company repaid the principal and accrued interest on a promissory note in the amount of $ 1,133,668 through the issuance of 1,000,000 shares of Series A preferred stock and 1,000,000 shares of newly authorized Series B preferred stock. Each of these preferred shares have thirty votes, and are convertible into five common shares.
16. Share Capital
On February 17, 2008, pursuant to a Share Cancellation Agreement with Eddie Chou, one of the Company’s directors and its Chief Technical Officer, 1,200,000 shares of the Company’s common stock held by Mr. Chou were cancelled and returned to treasury.
On February 17, 2008, pursuant to a Share Cancellation Agreement with Ricky Chiu, an ex-director of the Company, 1,800,000 shares of the Company’s common stock held by Mr. Chiu were cancelled and returned to treasury.
On February 17, 2008, pursuant to a Share Cancellation Agreement with Legend View Limited, 8,000,000 shares of the Company’s common stock were cancelled and returned to treasury. The Company’s President and the chairman of its Board of Directors, Mr. Gerald Lau, owns a controlling interest in Legend View Limited.
BIOPACK ENVIRONMENTAL SOLUTIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUE)
On May 14, 2008, the Company entered into a subscription agreement with four investors, whereby we agreed to issue 4,758,212 shares of our common stock at a price of $0.14 per share to the four investors in consideration of the debt owned by our company to them in the aggregate amount of $666,140. Two of these investors are ex-directors of our company, one of these investors is a director of two of our subsidiaries and the fourth investor is our President and Chairman of our Board of Directors.
On July 4, 2008, the Company issued 1,900,000 shares of common stock to Begonia Participation Corp. pursuant to the conversion of 380,000 Series A Preferred Shares.
On September 5, 2008, the Company issued 1,492,537 shares of common stock pursuant to the conversion of a convertible debenture in the amount of $100,000.
On September 19, 2008, the Company issued 1,800,000 shares of common stock pursuant to the conversion of a convertible debenture in the amount of $120,000.
On October 1, 2008, we entered into a consulting agreement with San Diego Torrey Hills Capital, Inc., whereby San Diego Torrey Hills has agreed to provide consulting services to our company in consideration for, among other things: (i) a monthly cash fee of US$10,000, the first payment of which is due on October 1, 2008, with subsequent monthly payments due on the monthly anniversary dates of the consulting agreement; and (ii) the issuance of 125,000 shares of restricted common stock of the company. 125,000 shares of which are issued on October 1, 2008.
17. Subsequent Events
There are no material subsequent events after the fiscal year ended December 31, 2008 before the issue of the audit report.
18. Legal proceedings
The Company is involved in various unresolved legal actions, administrative proceedings and claims in the ordinary course of business. Although it is not possible to predict with certainty the outcome of these unresolved actions, the Company believes these unresolved legal actions will not have a material effect on its financial position or results of operation.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
Disclosure Controls and Procedures
As required by paragraph (b) of Rules 13a-15 or 15d-15 under the Exchange Act, our principal executive officer and principal financial officer evaluated our company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this annual report on Form 10-K. We discovered that on a number of occasions during the year ended December 31, 2008, certain members of our company’s management had failed to recognize that certain transactions entered into by our company constituted material definitive agreements of our company and, in the result, we were unable to make timely decisions concerning the disclosure of these agreements. Based on this evaluation, these officers concluded that as of the end of the period covered by this Annual Report on Form 10-K, these disclosure controls and procedures were not adequate to ensure that the information required to be disclosed by our company in reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission and that they did not include controls and procedures designed to ensure that such information is accumulated and communicated to our company’s management, including our company’s principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. We have recently initiated a program of education intended to remediate this failure of our disclosure controls and procedures.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended. Our system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, however, internal control over financial reporting may not prevent or detect misstatements.
In order to evaluate the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act, our management was required to conduct an assessment, including testing, using the criteria in Internal Control - Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Our management failed to conduct the required evaluation, under the framework in Internal Control-Integrated Framework, of our internal control over financial reporting and we are therefore unable to report that our internal control over financial reporting was effective as of December 31, 2008. Our management is currently conducting the required evaluation.
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our internal control over financial reporting was not subject to attestation by our independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission.
Changes in Internal Control Over Financial Reporting.
There were no changes in our company’s internal control over financial reporting during the quarter ended December 31, 2008 that have materially affected, or are reasonably likely to materially affect, our company’s internal control over financial reporting.
ITEM 9B.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive Officers
As at March 25, 2009, our directors and executive officers, their ages, positions held, and duration of such, are as follows:
Business Experience
The following is a brief account of the education and business experience of each director and executive officer during at least the past five years, indicating each person’s principal occupation during the period, and the name and principal business of the organization by which he was employed.
Gerald Lau - Chief Executive Officer and Director of our company and Director of our subsidiary Jiangmen Roots Biopack Ltd.
Gerald Lau was appointed as our Chief Executive Officer and a director upon the closing of the share exchange agreement with Roots Biopack Group, which occurred on March 27, 2007. He is responsible for accounting functions, as well as overall financial planning and management. During the period of November 2004 to June 2006, Mr. Lau served as a director for Good Value International Limited, Good Value Galaxy Limited and Joint Eagle Investment Limited. From November 2002 to October 2004, he served as an executive director of GIN International Limited, a Hong Kong based company specializing in SMS text messaging services. While with GIN International
Limited, Mr. Lau was responsible for the general administration and accounting matters. Mr. Lau was awarded a bachelors degree in Business Administration majoring in Business Economics & Quantitative Methods at University of Hawaii at Manoa in August 1981.
Sean Webster - Secretary, Treasurer, Chief Financial Officer and Director of our company and Director of our subsidiary Jiangmen Roots Biopack Ltd.
Mr. Webster is currently a director of our company and was appointed as our Secretary, Treasurer and Chief Financial Officer on October 6, 2008. Mr. Webster had been in the financial services industry beginning with Yorkton Securities Inc. in January 1999 and finishing with the same company under the name Blackmont Capital Inc. in October of 2007. In his work there, he was a fully licensed Investment Advisor with the Investment Dealers Association of Canada, focusing on the raising of funds for small cap public companies and managing client portfolios. He was the lead broker for Grand Power Logistics Group Inc.’s (TSX-V:GPW) initial public offering in November 2004 on the TSX Venture Exchange, and is currently their Senior Vice President, Finance and Business Development. Grand Power is an air-freight forwarding and sea-freight services, customs brokerage, logistics, warehousing and distribution company with its main operations in Hong Kong and throughout Greater China. In addition, Mr. Webster is the President and Chief Financial Officer of Boashinn Corporation (OTCBB:BHNN.OB), a listed company which is based in Hong Kong and offers extended travel services primarily focused on wholesale business and corporate clients. In 1996, he received a B.A. in Economics and Management from the University of Calgary
James Yiu Yeung Loong - Director of our company and our subsidiary Biopack Environmental Limited
Mr. Yiu was appointed a director of our subsidiaries Biopack Environmental Limited and Starmetro Group Limited on March 25, 2008 and a director of our company on April 1, 2008. Mr. Yiu is the Managing Director of a consulting company in Hong Kong providing consultancy services to both the private and public company sectors. Mr. Yiu specializes in raising capital, corporate and financial restructuring, mergers and acquisitions. Mr. Yiu is an experienced entrepreneur and is familiar with business practices in the Greater China region. Mr. Yiu graduated from the College of Education in Hong Kong in 1973.
Ma Cheng Ji - Director of our company and our subsidiary Biopack Environmental Limited
Mr. Ma was appointed a director of our subsidiaries Biopack Environmental Limited and Starmetro Group Limited on April 8, 2008. Mr. Ma is the Director of Jiujiang Gaofeng Mining Industry, a production and exploration mining company focused in the Greater China region. Mr. Ma is also the President of Shanghai Trust Investment Consultant Co., Ltd, where he specializes in research and analysis of Asian public equity markets; he also provides management consultation to both public and private enterprises. Mr. Ma graduated in 1961 with a Bachelor’s degree in publishing from Shanghai Publishing College, and he received a postgraduate degree in comparative literature from Japan University in Tokyo in 1989.
Michael Joseph Forster - Director
Mr. Forster is the CEO/President/Chairman of Power-Save Energy Company (Symbol PWSV) whose shares of common stock are listed Over the Counter on the Bulletin Board (“OTCBB”). Mr. Forster is an experienced entrepreneur in all facets of business. He has organized and executed the start-up of companies. He has worked under contract in both the private and public company sectors to affect corporate and financial restructuring. As well, Mr. Forster has held senior management level positions at a Fortune 500 company. Mr. Forster holds a Bachelor of Science Degree in Aeronautical Engineering from California Polytechnic State University.
Cheng Kin-hung - Director of Jiangmen Roots Biopack Limited
Mr. Cheng King-hung has been an executive with the government and a few major public organizations in Hong Kong, including the Kowloon-Canton Railway Corporation and the University of Science and Technology for over 25 years, before focusing on his own investment in environmental industry and financial services since 2005. Mr.
Cheng received a B.Sc from Southern Illinois University, USA in 1980, a M.Phil from the Chinese University of Hong Kong in 1986. and a Ph.D from Zhu Hai College of Hong Kong in 1991. He has been serving the community in various positions, such as Chairman of Writers Fellowship and Board Member of Tang Siu Tong Secondary School. He also serves as an independent non-executive director of Innotech Holdings Limited (Stock Code 8202), a Hong Kong company listed on the GEM Board of The Stock Exchange of Hong Kong.
Faith Lam - Director of Jiangmen Roots Biopack Limited
Mr. Lam Koon Fai Faith started his career in Auditing in 1990. Mr. Lam later joined Deloitte Touche Tohmatsu in 1994. He has served clients as auditor in various industries including telecommunication, airline, truck manufacturing and the rail industry. Prior to joining our group, Mr. Lam was the qualified accountant in a company listed on the main board of the Stock Exchange of Hong Kong. He is a Certified Public Accountant of the Hong Kong Institute of Certified Public Accountants and a fellow member of The Association of Chartered Certified Accountants.
Edwin Chan - Director of Jiangmen Roots Biopack Limited
Edwin Chan was appointed as a director of Jianmen Roots Biopack Limited on May 10, 2007. Mr. Chan was a director of our company from March 27, 2007 to April 1, 2008 and the Chief Financial Officer from July 24, 2007 to October 2, 2007. Mr. Chan served as a Director of Roots Biopack Group Limited since May 4, 2007. From July 2004 to June 2006, Mr. Chan was the Senior Manager at China Everbright Securities (HK) Limited (Hong Kong), an investment banking firm. While with China Everbright Securities (HK) Limited, Mr. Chan was responsible for sales and brokerage of securities to institutional investors in China and Hong Kong. During the period April 2002 to June 2004, he was the Senior Manager (Business Valuation) of Vigers Appraisal & Consulting Ltd. (Hong Kong). From January 2000 to March 2002, Mr. Chan was the Research Manager for Asia Financial Securities Ltd. (Hong Kong).
Mr. Chan was awarded an MBA degree from the Schulich School of Business, York University, Canada, with a specialization in Corporate Finance, Investment and Financial Management in 1999. He also graduated with an LLB degree from Tsinghua University in the Peoples Republic of China in 2005, a Bachelors of Science degree (Environmental Science Stream) from the Chinese University of Hong Kong in 1987 and a postgraduate certificate in Education from the University of Hong Kong in 1988.
Family Relationships
There are no family relationships between our directors and executive officers.
Significant Employees
We have no significant employees other than the officers of our company.
Family Relationships
There are no family relationships among our directors or officers.
Involvement in Certain Legal Proceedings
Our directors, executive officers and control persons have not been involved in any of the following events during the past five years:
1.
any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
2.
any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
3.
being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
4.
being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
Committees
All proceedings of the board of directors for the year ended December 31, 2008 were conducted by resolutions consented to in writing by the board of directors and filed with the minutes of the proceedings of our board of directors. Our company currently does not have nominating, compensation or audit committees or committees performing similar functions nor does our company have a written nominating, compensation or audit committee charter. Our board of directors does not believe that it is necessary to have such committees because it believes that the functions of such committees can be adequately performed by the board of directors.
Our company does not have any defined policy or procedural requirements for shareholders to submit recommendations or nominations for directors. The board of directors believes that, given the stage of our development, a specific nominating policy would be premature and of little assistance until our business operations develop to a more advanced level. Our company does not currently have any specific or minimum criteria for the election of nominees to the board of directors and we do not have any specific process or procedure for evaluating such nominees. The board of directors will assess all candidates, whether submitted by management or shareholders, and make recommendations for election or appointment.
A shareholder who wishes to communicate with our board of directors may do so by directing a written request addressed to our president at the address appearing on the first page of this annual report.
Audit Committee Financial Expert
Our board of directors has determined that it does not have an audit committee member that qualifies as an “audit committee financial expert” as defined in Item 407(d)(5)(ii) of Regulation S-K. We believe that the audit committee members are collectively capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. In addition, we believe that retaining an independent director who would qualify as an “audit committee financial expert” would be overly costly and burdensome and is not warranted in our circumstances given the early stages of our development and the fact that we have not generated revenues to date.
Nomination Procedures For Appointment of Directors
As of March 25, 2009, we did not effect any material changes to the procedures by which our stockholders may recommend nominees to our board of directors.
Code of Ethics
Effective March 26, 2003, our company’s board of directors adopted a Code of Business Conduct and Ethics that applies to, among other persons, members of our board of directors, our company’s officers, contractors, consultants and advisors. As adopted, our Code of Business Conduct and Ethics sets forth written standards that are designed to deter wrongdoing and to promote:
(1)
honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
(2)
full, fair, accurate, timely, and understandable disclosure in reports and documents that we file with, or submit to, the Securities and Exchange Commission and in other public communications made by us;
(3)
compliance with applicable governmental laws, rules and regulations;
(4)
the prompt internal reporting of violations of the Code of Business Conduct and Ethics to an appropriate person or persons identified in the Code of Business Conduct and Ethics; and
(5)
accountability for adherence to the Code of Business Conduct and Ethics.
Our Code of Business Conduct and Ethics requires, among other things, that all of our company's senior officers commit to timely, accurate and consistent disclosure of information; that they maintain confidential information; and that they act with honesty and integrity.
In addition, our Code of Business Conduct and Ethics emphasizes that all employees, and particularly senior officers, have a responsibility for maintaining financial integrity within our company, consistent with generally accepted accounting principles, and federal and state securities laws. Any senior officer who becomes aware of any incidents involving financial or accounting manipulation or other irregularities, whether by witnessing the incident or being told of it, must report it to our company. Any failure to report such inappropriate or irregular conduct of others is to be treated as a severe disciplinary matter. It is against our company policy to retaliate against any individual who reports in good faith the violation or potential violation of our company's Code of Business Conduct and Ethics by another.
Our Code of Business Conduct and Ethics was filed with the Securities and Exchange Commission on April 15, 2003 as Exhibit 20.1 to our annual report. We will provide a copy of the Code of Business Conduct and Ethics to any person without charge, upon request. Requests can be sent to: Biopack Environmental Solutions Inc., Room 905, Two Chinachem Exchange Square, 338 King’s Road, North Point, Hong Kong, Att: President.
Section 16(a) Beneficial Ownership Compliance
Section 16(a) of the Securities Exchange Act requires our executive officers and directors, and persons who own more than 10% of our common stock, to file reports regarding ownership of, and transactions in, our securities with the Securities and Exchange Commission and to provide us with copies of those filings. Based solely on our review of the copies of such forms received by us, or written representations from certain reporting persons, we believe that during fiscal year ended December 31, 2008, all filing requirements applicable to our officers, directors and greater than 10% percent beneficial owners were complied with, with the exception of the following:
(1)
The named officer, director or greater than 10% stockholder, as applicable, filed a late Form 3 - Initial Statement of Beneficial Ownership of Securities.
(2)
The named officer, director or greater than 10% stockholder, as applicable, filed a late Form 4 - Statement in Changes of Beneficial Ownership.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
The following table sets forth all compensation received during the two years ended December 31, 2008 by our Chief Executive Officer, Chief Financial Officer and each of the other most highly compensated executive officers whose total compensation exceeded $100,000 in such fiscal year. These officers are referred to as the Named Executive Officers in this Report.
Summary Compensation
The following table provides a summary of the compensation received by the persons set out therein for each of our last two fiscal years:
(1) Gerald Lau was appointed our President and Chief Executive Officer on March 27, 2007.
(2) Eddie Chou was appointed as our Secretary, Treasurer and Chief Financial Officer on February 6, 2006 and as our Chief Technology Officer on March 27, 2007. On July 24, 2007, Eddie Chou resigned as our Chief Financial Officer and was then reappointed as our Chief Financial Officer on October 2, 2007. Mr. Chou resigned as our Chief Financial Officer on October 1, 2008.
(3) This amount reflects compensation paid to Eddie Chou for his services as both director of our company and as Chief Executive Officer and director of our wholly owned subsidiary, E-Ware Corporation Limited. Mr. Chou’s compensation is provided pursuant to an oral arrangement with our company.
(4) Sean Webster was appointed as a director of our company on August 6, 2008 and as our Secretary, Treasurer and Chief Financial Officer on October 6, 2008.
(5) Ricky Chiu resigned as our President and Chief Executive Officer on March 27, 2007. He resigned from our Board of Directors on February 4, 2008.
(6) Edwin Chan was our Chief Financial Officer from July 24, 2007 to October 2, 2007. He resigned from our Board of Directors effective April 1, 2008.
Compensation Discussion and Analysis
Although we have no formal plan for compensating our directors for their service in their capacity as directors, some of our directors are currently being compensation with minimum salaries. Our directors are expected in the future to receive stock options to purchase common shares as awarded by our board of directors or (as to future stock options) a compensation committee which may be established. Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our board of directors. Our board of directors may award special remuneration to any director undertaking any special services on our behalf other than services ordinarily required of a director. No director received and/or accrued any compensation for their services as a director, including committee participation and/or special assignments.
Outstanding Equity Awards at Fiscal Year-End
There were no grants of stock options or stock appreciation rights to our executive officers and directors made during the fiscal years ended December 31, 2008 and December 31, 2007.
Aggregated Option Exercises
There were no options exercised by any officer or director of our company during our twelve month period ended December 31, 2008.
Long-Term Incentive Plan
Currently, our company does not have a long-term incentive plan in favor of any director, officer, consultant or employee of our company.
Directors Compensation
Except those mentioned in the above Summary Compensation Table, no director received compensation for the fiscal years December 31, 2008, December 31, 2007 and December 31, 2006. We have no formal plan for compensating our directors for their service in their capacity as directors, although such directors are expected in the future to receive stock options to purchase common shares as awarded by our board of directors or (as to future stock options) a compensation committee which may be established. Directors are entitled to reimbursement for reasonable travel and other out-of-pocket expenses incurred in connection with attendance at meetings of our board of directors. Our board of directors may award special remuneration to any director undertaking any special services on our behalf other than services ordinarily required of a director.
Pension and Retirement Plans
Currently, we do not offer any annuity, pension or retirement benefits to be paid to any of our officers, directors or employees, in the event of retirement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
As of March 25, 2009, there were 24,825,300 shares of our common stock outstanding. The following table sets forth certain information known to us with respect to the beneficial ownership of our common stock as of that date by (i) each of our directors, (ii) each of our executive officers, and (iii) all of our directors and executive officers as a group. Except as set forth in the table below, there is no person known to us who beneficially owns more than 5% of our common stock.
Common Shares Ladix Properties Inc.
Swiss Tower
16th Floor, World Trade
Centre
Panama City, Republic of
Panama 2,250,000 9.06%
Common Shares Ricky Chiu
18/F Metroplaza Tower II,
23 Hing
Fong Road, Kwai Chung,
New
Territories, Hong Kong 1,668,777 6.72%
Common Shares
Directors and Executive
Officers as a
Group 11,262,288
45.37%
(1)
Regulation S-K promulgated under the Exchange Act, defines a beneficial owner of a security as any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise, has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of shares of common stock actually outstanding on March 25, 2009, and the date of this annual report.
(2)
Calculated based on the basis of 24,825,500 issued and outstanding shares of common stock as of March 25, 2009 plus, for each person or group, any securities that person or group has the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights.
(3)
Gerald Lau, our President, Chief Executive Officer and Director, is 50% owner and controller of Legend View Holdings Ltd., which owns 280,000 common shares of our company.
(4)
Gerald Lau, our President, Chief Executive Officer and Director, owns and controls Good Value Galaxy Limited, which owns 7,560,000 common shares of our company.
(5)
Gerald Lau, our President, Chief Executive Officer and Director, owns and controls Joyful Services Ltd, which owns 1,836,000 common shares of our company.
(7)
Begonia Participation Corp. owns 1,000,000 shares of our Series A Preferred Stock and 1,000,000 shares of our Series B Preferred Stock. Each share of Series A Preferred Stock and each share of Series B Preferred Stock is entitled to 30 votes at any meeting of our security holders and is convertible, at any time at the option of the holder, into 5 shares of our common stock. Therefore, Begonia Participation Corp. beneficially owns 10,000,000 shares of our common stock but, unless and until it elects to convert any of the Series A Preferred Stock or any of the Series B Preferred Stock it controls 30,000,000 votes at any meeting of our security holders.
(8)
Cat Brokerage AG owns 1,800,000 common shares, and holding a convertible debenture of $280,000 which can be converted into 4,200,000 shares of common share any time before March 3, 2010. This amount doesn’t include the 4,200,000 shares of common stock that could be issued upon conversion of the Convertible Debenture
Changes in Control
We are unaware of any contract or other arrangement the operation of which may at a subsequent date result in a change of control of our company.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
Other than set out below, we have not been a party to any transaction, proposed transaction, or series of transactions during the last two years in which the amount involved exceeded the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years, and in which, to our knowledge, any of the following persons had, or is to have, a direct or indirect material interest: a director or executive officer of our company; a nominee for election as a director of our company; a beneficial owner of more than five percent of the outstanding shares of our common stock; or any member of the immediate family of any such person.
As of December 31, 2008, the sum of $45,385 was due to Eddie Chou, who was then our Chief Financial Officer, Secretary, Treasurer and a director. This amount represents money advanced to our company which has not been repaid to Mr. Chou. The amount is unsecured and bears no interest.
During the period from November 22, 2007 to December 27, 2007, Mr Chiu Wan Kee, father of Ricky Chiu, loaned an aggregate of $338,525 to our subsidiary, Starmetro Group Limited. The proceeds of this loan were used to fund some of the cost of phase one of our Biopark facility. The amount is still outstanding as of December 31, 2008. The amount is unsecured and bears no interest.
During the period April 26, 2007 to December 31, 2007, Gerald Lau, our President and Chief Executive Officer, loaned an aggregate of $319,182 to our subsidiary, Roots Biopark Ltd, for use as working capital. During the period April 26, 2007 to December 31, 2007, Mr Lau advanced to our company the amount of $20,862 by way of expenses paid on behalf of our subsidiary, Roots Biopark Ltd.; this amount has not yet been reimbursed. On May 14, 2008, we entered into a subscription agreement with Mr. Lau pursuant to which we agreed to issue 2,837,884 shares of our common stock at a purchase price of $0.14 per share. Payment of the purchase price was made by way of applying $397,303.81 of debt owed by our company to Mr. Lau. As of December 31, 2008, the sum of $8,602 was due to Mr. Lau, which represents the amounts have been advanced to our company temporarily. The amount is unsecured and bears no interest.
As of December 31, 2008, the sum of $5,765 was due to Sean Webster, who is our Chief Financial Officer, Secretary, Treasurer and a director. The amount represents money advanced to our company which has not been repaid to him. The amount is unsecured and bears no interest.
On May 14, 2007, Edwin Chan, our former Chief Financial Officer and a former director, loaned $63,837. to our subsidiary, Roots Biopark Ltd, for use as working capital. $8,682 was due to Mr Chan from our subsidiary, Roots Biopark Ltd, for remuneration during the period June 1, 2007 to August 31, 2007. This amount was repaid on May 14, 2008, when Mr. Chan applied our company’s debt to him, in the then total balance of $72,820.51, as the purchase price for 520,146 shares of our common stock purchased at a price of $0.14 per share pursuant to a subscription agreement dated May 14, 2008. Mr. Chan resigned from our board of directors on April 1, 2008. As of December 31, 2008, there are no outstanding amount between Edwin Chan and our company.
On June 22, 2007, Hilary Chu, a former director, loaned $63,836 to our subsidiary, Roots Biopark Ltd, for use as working capital. This amount was repaid on May 14, 2008, when Ms. Chu applied our company’s debt to her, in the then total balance of $64,102.56, as the purchase price for 457,875 shares of our common stock purchased at a price of $0.14 per share pursuant to a subscription agreement dated May 14, 2008. As of December 31, 2008, there are no outstanding amount between Hilaru Chu and our company.
During the period from May 11, 2007 to June 15, 2007, Cheng King Hung, a director of our subsidiaries, loaned $127,673 to our subsidiary, Roots Biopark Ltd, for use as working capital. $3,703 was due to Mr Cheng from our subsidiary, Roots Biopark Ltd, for remuneration during the period June 1, 2007 to August 31, 2007; these amounts were re-paid on May 14, 2008, when Mr. Cheng applied our company’s debt to him, in the total amount of $131,923.08, as the purchase price for 942,307 shares of our common stock purchased at a price of $0.14 per share pursuant to a subscription agreement dated May 14, 2008. As of December 31, 2008, there are no outstanding amount between Cheng King Hung and our company.
During the period from January 1, 2006 to December 31, 2007, our subsidiary, Roots Biopark Ltd. borrowed from Good Value Galaxy Ltd the amount of $686,956, of which it has repaid $65,560. The balance due is $621,396. As of December 31, 2008, the amount is still outstanding with our company. The amount is unsecured and bears no interest.
On February 17, 2008, pursuant to a Share Cancellation Agreement with Eddie Chou, one of our directors and our Chief Technical Officer, 1,200,000 shares of our common stock held by Mr. Chou were cancelled and returned to treasury.
On February 17, 2008, pursuant to a Share Cancellation Agreement with Ricky Chiu, an ex-director of our company, 1,800,000 shares of our common stock held by Mr. Chiu were cancelled and returned to treasury.
On February 17, 2008, pursuant to a Share Cancellation Agreement with Legend View Limited, 8,000,000 shares of our common stock were cancelled and returned to treasury. Our President and the chairman of our Board of Directors, Mr. Gerald Lau owns a controlling interest in Legend View Limited.
On July 4, 2008, we issued 1,900,000 shares of our common stock to Begonia Participation Corp. upon the conversion of 380,000 shares of our Series A Preferred Stock. Begonia Participation Corp. is an affiliate of our company solely as a result of its beneficial ownership of equity in our company. After adjusting for this transaction, Begonia Participation Corp. was the registered owner of 1,900,000 shares of our common stock, 620,000 shares of our Series A Preferred Stock and 1,000,000 shares of our Series B Preferred Stock. Each share of our Series A Preferred Stock and each share of our Series B Preferred Stock carries 30 votes and is convertible into five shares of our common stock.
On October 15, 2008, we issued 500,000 shares of our common stock to Ma Cheng Ji, one of our directors, upon the conversion of a convertible debenture in the principal amount of $250,000.
On October 15, 2008, we issued 2,250,000 shares of our common stock to Ladix Properties Inc. upon the conversion of a convertible debenture in the principal amount of $150,000. Ladix Properties Inc. is an affiliate of our company solely as a result of its beneficial ownership of equity in our company.
During the year ended December 31, 2007 we have become involved in a number of disputes with Patrick Oung, an ex-director of Roots Biopack Group Limited and other subsidiaries of our company. These disputes are discussed in some detail in the section of this Annual Report on Form 10-K titled “Legal Proceedings” beginning at page 17, above. Mr. Oung resigned from the Board of Directors of our company at the completion of the transaction whereby we acquired our subsidiary Roots Biopack Group Limited and he has subsequently been removed from the Board of Directors of all of our subsidiary companies.
Corporate Governance
Our Board of Directors currently consists of: Gerald Lau, Sean Webster, Ma Cheng Ji, Michael Forster and James Yiu Yeung Loong.
Committees of the Board
All proceedings of the board of directors for the year ended December 31, 2008 were conducted by resolutions consented to in writing by the board of directors and filed with the minutes of the proceedings of our board of directors. Our company currently does not have nominating, compensation or audit committees or committees performing similar functions nor does our company have a written nominating, compensation or audit committee charter. Our board of directors does not believe that it is necessary to have such committees because it believes that the functions of such committees can be adequately performed by the board of directors.
Our company does not have any defined policy or procedural requirements for shareholders to submit recommendations or nominations for directors. The board of directors believes that, given the stage of our development, a specific nominating policy would be premature and of little assistance until our business operations develop to a more advanced level. Our company does not currently have any specific or minimum criteria for the election of nominees to the board of directors and we do not have any specific process or procedure for evaluating such nominees. The board of directors will assess all candidates, whether submitted by management or shareholders, and make recommendations for election or appointment.
A shareholder who wishes to communicate with our board of directors may do so by directing a written request addressed to our president at the address appearing on the first page of this annual report.
Audit Committee Financial Expert
Our board of directors has determined that we do not have a board member that qualifies as an “audit committee financial expert” as defined in Item 401(e) of Regulation S-B, nor do we have a board member that qualifies as “independent” as the term is used in Rule 4200(a)(15) of the NASDAQ Marketplace Rules.
We believe that our board of directors is capable of analyzing and evaluating our financial statements and understanding internal controls and procedures for financial reporting. The board of directors of our company does not believe that it is necessary to have an audit committee because management believes that the functions of an audit committee can be adequately performed by the board of directors. In addition, we believe that retaining an independent director who would qualify as an “audit committee financial expert” would be overly costly and burdensome and is not warranted in our circumstances given the stage of our development and the fact we have not generated any positive cash flows from operations to date.
Transactions with Independent Directors
Other than as set out below or disclosed under the heading “Certain Relationships and Related Transactions, and Director Independence”, none of our independent directors entered into any transaction, relationship or arrangement during the year ended December 31, 2008 that was considered by our board of directors in determining whether the director maintained his or her independence in accordance with Nasdaq Marketplace Rule 4200(a)(15).
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit fees
The aggregate fees billed for the two most recently completed fiscal periods ended December 31, 2008 and December 31, 2007 for professional services rendered by Gruber & Company, LLC for the audit of our annual consolidated financial statements, quarterly reviews of our interim consolidated financial statements and services normally provided by the independent accountant in connection with statutory and regulatory filings or engagements for these fiscal periods were as follows:
Year Ended
December 31,
Year Ended
December 31,
Audit Fees and Audit Related Fees $69,953 $20,250
Tax Fees $6,424
Nil
All Other Fees Nil
Nil
Total $76,377 $20,250
In the above table, “audit fees” are fees billed by our company’s external auditor for services provided in auditing our company’s annual financial statements for the subject year. “Audit-related fees” are fees not included in audit fees that are billed by the auditor for assurance and related services that are reasonably related to the performance of the audit review of our company’s financial statements. “Tax fees” are fees billed by the auditor for professional services rendered for tax compliance, tax advice and tax planning. “All other fees” are fees billed by the auditor for products and services not included in the foregoing categories.
Policy on Pre-Approval by Audit Committee of Services Performed by Independent Auditors
The board of directors pre-approves all services provided by our independent auditors. All of the above services and fees were reviewed and approved by the board of directors either before or after the respective services were rendered.
The board of directors has considered the nature and amount of fees billed by Gruber & Company, LLC and believes that the provision of services for activities unrelated to the audit is compatible with maintaining Gruber & Company, LLC.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
* Filed herewith
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
BIOPACK ENVIRONMENTAL SOLUTIONS INC.
By: /s/ Gerald Lau
Gerald Lau
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: March 31, 2009
By: /s/ Sean Webster
Sean Webster
Chief Financial Officer, Chief Technology Officer,
Secretary, Treasurer and Director
(Principal Financial Officer and Principal Accounting Officer)
Date: March 31, 2009
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/ Gerald Lau
Gerald Lau
President, Chief Executive Officer and Director
(Principal Executive Officer)
Date: March 31, 2009
By: /s/ Sean Webster
Sean Webster
Chief Financial Officer, Chief Technology Officer,
Secretary, Treasurer and Director
(Principal Financial Officer and Principal Accounting Officer)
Date: March 31, 2009
By: /s/ James Yiu Yeung Leung
James Yiu Yeung Leung
Director
Date: March 31, 2009
By: /s Ma Cheng Ji
Ma Cheng Ji
Director
Date: March 31, 2009
By: /s/ Michael Forster
Michael Forster
Director
Date: March 31, 2009