ITEM 1. BUSINESS.
CERTAIN STATEMENTS IN THIS ANNUAL REPORT ON FORM 10-K (THIS "FORM 10-K"), CONSTITUTE "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1934, AS AMENDED, AND THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 (COLLECTIVELY, THE "REFORM ACT"). CERTAIN, BUT NOT NECESSARILY ALL, OF SUCH FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY SUCH AS "BELIEVES", "EXPECTS", "MAY", "SHOULD", OR "ANTICIPATES", OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE TERMINOLOGY, OR BY DISCUSSIONS OF STRATEGY THAT INVOLVE RISKS AND UNCERTAINTIES. SUCH FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS WHICH MAY CAUSE THE ACTUAL RESULTS, PERFORMANCE OR ACHIEVEMENTS OF BIOSTEM, INC. ("BIOSTEM", THE "COMPANY", "WE", "US" OR "OUR") TO BE MATERIALLY DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. REFERENCES IN THIS FORM 10-K, UNLESS ANOTHER DATE IS STATED, ARE TO DECEMBER 31, 2006.
BUSINESS DEVELOPMENT
BioStem, Inc., formerly National Parking Systems, Inc. (the "Company," "we," and "us") was originally incorporated under the name Web Views Corporation ("Web Views") in the State of Nevada on November 2, 2001. In June 2003, the Company acquired 100% of Cascade Mountain Mining Corp. ("Cascade Corp.") pursuant to an exchange agreement. As a result of the acquisition of Cascade Corp., and the change in focus of the Company's business, the Company changed its name from Web Views Corporation to Cascade Mountain Mining Company, Inc. on June 17, 2003, in connection with a Certificate of Amendment to the Company's Articles of Incorporation. The Certificate of Amendment also affected a 60:1 forward stock split, which became effective on June 24, 2003.
The Company filed a Certificate of Amendment ("Amendment") to its Articles of Incorporation with the Secretary of State of Nevada, which became effective January 7, 2005 to affect a name change of the Company to "National Parking Systems, Inc.", affect a 1:4,000 reverse stock split, re-authorized 300,000,000 shares of common stock, par value $.001 per share, and re-authorized 10,000,000 shares of preferred stock, par value $.001 per share, in anticipation of the Company's entry into the Exchange, described below.
In October 2005, the Company's board of directors approved a 4:1 forward stock split for shareholders of record as of October 20, 2005. Unless otherwise stated all share amounts disclosed in this Form 10-K retroactively take into affect the June 2003, 60:1 forward stock split, the January 2005, 1:4,000 reverse stock split, and the October 2005, 4:1 forward stock split (the "Stock Splits").
On January 13, 2005, the Company, acquired 100% of the issued and outstanding shares of ABS Holding Company, Inc., a Nevada corporation ("ABS") and BH Holding Company, Inc., a Nevada corporation ("BH") in exchange for 161,400,000 restricted shares (the "Shares") of the Company's common stock, an aggregate of $86,750 in Junior Convertible Debentures ("Junior Debentures"), and the assumption of $335,000 of ABS's and BH's obligations under a Senior Secured Convertible Debenture (the "Senior Debenture") (collectively, the "Exchange"), in connection with a Stock Exchange Agreement, entered into between the Company, ABS, BH, The Morpheus Trust ("Morpheus"), Livingston Investments, Ltd. ("Livingston"), Burton Partners, LLC ("Burton"), Picasso, LLC ("Picasso"), and The Gateway Real Estate Investment Trust ("Gateway") (the "Exchange Agreement").
In connection with the Exchange Agreement, the Company also entered into a Security Agreement providing that the Senior Debenture shall be secured by all of the assets of the Company ("Security Agreement").
Pursuant to the Exchange, the Company's Chief Executive Officer, Marc Ebersole, who was the sole shareholder of the common stock of both ABS and BH prior to the Exchange, received 130,400,000 restricted shares of the Company's common stock in exchange for his common stock shares of ABS and BH. Mr. Ebersole subsequently transferred 4,400,000 of those restricted shares to two individuals, and 4,000,000 restricted shares to his niece, Christine Ebersole, who is also an employee of the Company. Additionally, Morpheus, Livingston, Burton, Picasso and Gateway (the "Preferred Stock Sellers") each exchanged their right to receive 1,000 preferred shares of ABS and 1,000 preferred shares of BH to the Company, for 6,200,000 restricted shares of the Company's common stock and a $17,350 Junior Debenture, for an aggregate of 31,000,000 shares and $86,750 in Junior Debentures.
Effective on November 18, 2005, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of Nevada to affect a name change to "BioStem, Inc.," and affect a change to the Articles of Incorporation regarding the Company's Board of Directors to provide that the number of directors may, pursuant to the Bylaws, be increased or decreased by the Board of Directors at any time, provided there shall be no less than one (1) nor more than nine (9) Directors at any one time.
JUNIOR DEBENTURES
In addition to the 6,200,000 restricted shares of the Company's common stock which each of the Preferred Stock Sellers received, each Preferred Stock Seller received a Junior Debenture in the amount of $17,350, for a total of $86,750. The Junior Debentures do not bear interest and are payable on January 31, 2010. Additionally, the Junior Debentures are convertible at the request of the holder, at the lesser of (i) 30% of the average of the three lowest closing prices in the twenty (20) trading days immediately preceding the date of conversion or (ii) $0.00025. Each Junior Debenture has a provision limiting the Junior Debenture holder to not beneficially own more than 4.99% of the Company's outstanding common stock. However, in the event of an "event of default" under the Junior Debentures, the conversion price will be 50% of the conversion price then in effect, and if an event of default continues for Sixty (60) days, the 4.9% ownership limit will not apply.
The main "events of default" under the Junior Debentures include: if the Company does not make the payment of the principal of the Junior Debenture when it becomes due, the Company does not issue the proper amount of shares, within seven business days of the Company's receipt of a valid notice of conversion, the Company defaults under any indebtedness or obligation where the amount is equal to at least $100,000, the Company's common stock is delisted from any securities exchange, or if the Company commences a voluntary petition under bankruptcy law. If an event of default occurs under the Junior Debenture, the Preferred Stock Seller may declare the remaining principal amount of the Junior Debenture immediately due and payable.
Pursuant to each Junior Debenture, the Preferred Stock Sellers can currently each convert their $17,350 Junior Debenture into 69,400,000 shares of the Company's common stock (347,000,000 total), based on a conversion price of $0.00025, provided however, that under each Junior Debenture, no Preferred Stock Seller may hold more than 4.99% of the Company's outstanding common stock at one time. The total original amount of the Junior Debentures remains outstanding as of the filing of this report as none of the Junior Debenture holders have converted any of their Junior Debentures and no amount of the Junior Debentures has been repaid by us to date.
SENIOR DEBENTURE
In connection with the Exchange, the Company assumed ABS's and BH's obligations under a $1,000,000 Senior Secured Convertible Debenture, entered into between ABS, BH and Hyde Investments, Ltd. ("Hyde") as of October 15, 2004. As of December 31, 2006, $552,500 had been advanced by Hyde pursuant to the Senior Debenture. Under the Senior Debenture, and as of the filing of this report $592,500 has been advanced under the Senior Debenture. The Company is obligated to pay interest on the outstanding amount of the Senior Debenture at the rate of Ten Percent (10%) per year, payable on the first day of each month, until the principal amount is paid in full or the total amount owed is converted. The maturity date of the Senior Debenture was October 15, 2005; however, the due date of the Senior Debenture was extended by Hyde and the Company, pursuant to an "Agreement To Extend Senior Secured Convertible Debenture," (the "Extension") entered into on October 1, 2005, to June 30, 2006, which date has further been extended verbally by Hyde to December 31, 2007. The Company does not currently have cash on hand to repay the Senior Debenture. The Senior Debenture is personally guaranteed by the Company's Chief Executive Officer, Marc Ebersole.
The conversion rate of the Senior Debenture is the lower of (i) 30% of the average of the three lowest closing prices in the twenty (20) trading days immediately preceding the date of conversion or (ii) $0.025. An event of default under the Senior Debenture occurs if, the Company does not make payment of the principal of the Senior Debenture when due and payable at maturity, the Company does not make a payment other than the total owed at maturity within five (5) days of the due date, the Company defaults under any indebtedness or obligation where the amount is equal to at least $100,000, or if the Company commences a voluntary petition under bankruptcy law, among others. Upon an event of default under the Senior Debenture, Hyde may declare the remaining amount of the principal, together with all accrued interest to be due and payable. None of the Senior Debentures have been converted into shares.
Consulting Agreement
On January 5, 2005, the Company entered into a Consulting Agreement with London Finance Group, Ltd., a California corporation ("London"), which Consulting Agreement was amended on November 23, 2005. Under the Consulting Agreement, London agreed to provide the Company management consulting services and to assist the Company in its operations, strategy and in its negotiations with vendors, negotiating and structuring business sales and/or acquisitions, assisting the Company with customers and strategic partners and the implementation of the Company's business plan (the "Consulting Agreement"). The term of the Consulting Agreement will be until January 31, 2009, and after that date, either London or the Company may terminate the Consulting Agreement upon at least 90 days written notice. Pursuant to the Consulting Agreement, we agreed to pay London a non-refundable retainer in the amount of Five Thousand dollars ($5,000) a month between the date of the original Consulting Agreement and the amendment, effective as of November 23, 2005, at which time pursuant to the amendment, we agreed to pay London twenty thousand dollars ($20,000) per month, which amounts have not been paid to London, but which have been accrued as of the date of this filing. Additionally, in connection with our entry into the Consulting Agreement, we issued 12,000,000 shares of the Company's common stock common stock to London and granted London warrants to purchase up to 4,000,000 shares of the Company's common stock at $0.10 per share, which Warrants were later amended by the amendment of the Consulting Agreement to provide for the purchase of up to 1,500,000 shares of the Company's common stock at $1.00 per share ("Warrants") which vested immediately on January 5, 2005.
Additionally, under the Consulting Agreement, London will receive a fee equal to ten percent (10%) of the aggregate consideration paid by the Company for any acquisition or sale of any business, corporation or division ("Consulting Fee"). The Consulting fee shall be paid to London in connection with stock purchase agreements, merger agreements, plans of reorganizations, asset purchase agreements and licensing agreements ("Transactions"), and shall be paid to London when the consideration for these agreements is actually paid by or received by the Company. The aggregate consideration paid by the Company shall include all cash and stock paid to the seller or sellers upon closing of the transaction in addition to any contingent payments to the seller or sellers, for the purposes of determining the Consulting Fee. Additionally, London shall be entitled to share in any fees or commissions payable to third parties in connection with any Transaction, and under the Consulting Agreement, the Company agreed to waive any conflict of interest that may arise due to the dual representation by London. As the Company has entered into the Merger Agreement with Cryobanks, as described below under "Merger Agreement," it is anticipated that London will earn fees of approximately 10% of the aggregate consideration paid by Cryobanks, if the Merger closes, of which there can be no assurance.
Under the Consulting Agreement, the Company, with London's consent, may choose to issue London its Consulting Fee in restricted common stock or freely tradable registered common stock. Restricted common stock shall be issued to London in consideration for the Consulting fee at a rate equal to the lesser of (i) Fifty percent (50%) of the market price of the Company's common stock on the day prior to the closing date of the Transaction, or (ii) $0.10 per share. Registered common stock, without restrictive legend shall be issued to London in consideration for the Consulting Fee at a rate equal to seventy percent (70%) of the market price of the Company's common stock on the day prior to the closing of the Transaction.
Additionally, under the Consulting Agreement, the Company agreed to provide London piggy back registration rights in the event the Company shall file a registration statement with the Securities and Exchange Commission.
The Company may terminate the Consulting Agreement at any time for cause, if London engages in gross and willful misconduct that is materially and significantly injurious to the Company, and, after written notice of such conduct, London fails to cure such conduct within thirty (30) days. After giving notice to London, London will be entitled to a hearing in front of the Company's entire Board of Directors, whereby it will have the opportunity to hear the Board's reason for termination and be given a chance to rebut the charges against it. In the event the Company terminates the Consulting Agreement without cause, the Company shall be obligated to pay London liquidated damages in the amount of (a) $250,000 or (b) the greater of (i) 4,000,000 shares of common stock (subject to adjustment for any stock splits or combinations) which shall be registered with the Securities and Exchange Commission or (ii) the total value of all fees and other compensation paid or payable to London over the 12 months prior to the date given by the Company of its intended intent to terminate the relationship.
In connection with the Consulting Agreement the Company signed an Indemnification Agreement, whereby it agreed to hold London, its affiliates, directors, officers, agents and employees, including any person which provides consulting or other services to the Company, from any losses, claims, damages, judgments, assessments, costs and other liabilities incurred in investigating, preparing, pursuing or defending any claim, action, proceeding or investigation in connection with the Transactions.
In connection with the Consulting Agreement, the Company and London entered into a Warrant Agreement for 4,000,000 Warrants to purchase shares of the Company's common stock ("Warrant Agreement"), which was later amended to provide for 1,500,000 Warrants to purchase shares of the Company's common stock pursuant to the amendment to the Consulting Agreement. The Warrants granted to London vested immediately on January 5, 2005, and shall remain valid until January 5, 2009. Under the Warrant Agreement, London shall only be entitled to exercise its Warrants if after exercised, London will beneficially own shares representing no more than 4.99% of the Company's outstanding common stock, unless waived by the Company in writing. The Warrants are exercisable at a price of $1.00 per share.
Additionally, London has cashless exercise rights pursuant to the Warrants, whereby it can exercise its rights under the Warrant Agreement by accepting less shares and without paying any cash to the Company. Additionally, the Company provided London piggyback registration rights in connection with the Warrants, which means if the Company decides to file a registration statement for its securities in the future, London can provide notice to the Company and have any shares which it was issued pursuant to the Warrants included in any registration statement.
DESCRIPTION OF THE COMPANY'S
CURRENT BUSINESSES FOCUS
The Company's focus is parking and parking related services, including valet parking services which the Company operates through its wholly owned subsidiary BH holding Company, Inc., a Nevada corporation ("BH") and vehicle immobilization services which the Company operates through its wholly owned subsidiary ABS Holding Company, Inc., a Nevada corporation ("ABS"), described in greater detail below. Approximately seventy-six percent (76%) of the Company's revenues come from BH, with the remaining twenty-four percent (24%) coming from ABS.
The Company has a website at www.nationalparkingsystems.com, which website contains information the Company does not wish to be made a part of this filing.
BH HOLDING COMPANY, INC.
BH was incorporated in the State of Nevada on November 4, 2004. BH operates through its wholly owned subsidiary, J & K Parking, d/b/a B&H Parking, Inc., a Georgia corporation ("J&K") that specializes in valet parking services and was purchased by BH in November 2004. At the time J&K was purchased by BH, it was co-owned by the Company's Chief Executive Officer, Marc Ebersole, and Scott Pringle, who is unaffiliated with the Company. BH purchased J&K for a) $175,000 in cash, b) $25,000 in the form of a promissory note payable to Mr. Pringle, in connection with a Covenant Not to Compete, which has been paid in full, c) $30,000 in the form of a promissory note to Mr. Ebersole, which has been paid in full, and d) 10,000 shares of BH common stock which were issued to Mr. Ebersole, and later exchanged with the Company pursuant to the Exchange, for ownership of J&K (throughout this Form 10-K, references to BH include J&K).
Under Mr. Pringle's Covenant Not to Compete, he agreed not to engage in, be employed in, or have any interest in any occupation or business similar to that of BH, within the Southeast United States, including Georgia, Alabama, Louisiana, Tennessee, Florida, South Carolina, North Carolina and any location where BH conducts valet parking, parking management and vehicle immobilization, for three (3) years from the date of the closing of the Covenant Not to Compete, which was November 2, 2004, in return for the $25,000 promissory note, which has been paid in full to date.
BH currently operates in the Atlanta, Georgia area, however, BH may expand its operations to other locations in the future, funding permitting, if our management believes it is in our best interest to do so.
The bulk of BH's clients, are ongoing relationships, however BH routinely gets calls from individuals and entities which are having private parties and need valet parking services on an intermittent basis. Currently, BH operates valet operations in approximately 42 locations. Additionally, for some of BH's ongoing clients, BH not only supplies the valet parking employees, but also has control over the parking lots of these clients. As a result of fluctuations in seasonal need for valet parking services, the Company is busier in the winter and spring and around convention season in Atlanta.
Insurance
Currently, BH employees park between 50,000 and 60,000 cars per week. Because of this, BH carries garage keeper's liability insurance on its parkers and operations, whereby BH is covered if any damage occurs to the cars they are parking or anything is stolen from the cars themselves. BH averages one claim a week for damage done to the cars they park, which is normally just dents or dings. The average claim made to BH is approximately $1,500. BH's current insurance carries a $1,000 deductible per claim. However, it has been BH's policy not to submit claims to its insurance company unless the estimated loss is greater than $5,000 and as a result, BH chooses to pay a significant amount of its claims itself, which currently average approximately $4,500 per month.
Employee Screening
Strangers trust BH employees with their cars and their belongings when they valet park with BH, because of this, BH takes precautions in who they hire to work as valets. BH screens potential employees by looking at their motor vehicle report, and will disqualify job candidates based on things like excessive speeding tickets and reckless driving charges.
ABS HOLDING COMPANY, INC.
ABS, which is in the business of providing vehicle immobilization services to parking lot owners in Atlanta, Georgia, was incorporated in the State of Nevada on November 4, 2004. In November 2004, ABS purchased the assets of Blue Sky Parking, Inc. ("Blue Sky"). Blue Sky had obtained its assets from Advanced Booting Services, Inc., which was originally co-founded by the Company's Chief Executive Officer, Marc Ebersole, in November 1999, and later sold to Blue Sky, in August 2003. The assets of Blue Sky were purchased by ABS for $200,000, of which $100,000 was paid in cash and $100,000 in the form of a promissory note to Blue Sky. The $100,000 note bears no interest and is payable in thirty-six installments of $2,777.78, of which approximately $29,236 remained outstanding as of December 31, 2006.
ABS owns approximately forty (40) vehicle immobilization boots, which are attached to the wheel of a vehicle which is illegally parked, and are intended to prevent vehicles from moving until the owners pay a fine, which is currently $50.00.
ABS currently has contracts to provide booting services to forty (40) parking locations, which lots are owned by four separate entities.
When someone is illegally parked in one of ABS's client's parking lots, the client or another individual in charge of the client's parking lot will call ABS to provide booting services. ABS contracts with approximately six independent booters, who have permits granted by the Atlanta Police Department. When ABS gets a call, they contact one of their booters who will then find the illegally parked vehicle and install a boot on one of the vehicle's tires. The vehicle owner must then pay $50.00 to get the boot removed from his vehicle. ABS receives the majority of that payment, with the independent contractor booters being paid a set amount by the Company, for each boot they attach.
Competitive Business Conditions
The valet parking and vehicle immobilization industries are highly competitive. Currently, BH is well diversified and has many clients, while ABS currently depends on three clients for its revenues. BH has approximately three competitors in the Atlanta, Georgia area.
Copyrights, Patents, Trademarks & Licenses
Neither ABS nor BH has any copyrights, patents, trademarks, or other types of intellectual property. ABS does hold a license for booting services in the Atlanta, Georgia area.
Need For Governmental Approval and The Effects Of Regulations
In connection with ABS's vehicle immobilization services, ABS must be licensed by the city of Atlanta, Georgia, to operate its booting operations. Additionally, the booters which the Company deals with must have permits issued by the Atlanta Police Department. In the past, the Company has not had any trouble obtaining its license to operate its booting services, which are valid for one year from the date of issuance.
Research & Development Over The Past Two Years
The Company has spent no money on research and development over the past two years.
Employees
BH currently employs seven (7) full-time employees and approximately one hundred and twenty (120) independent contractors, as valet parking personnel, although the number of parking personnel employed by BH varies seasonally.
ABS currently employs one (1) individual on a full-time basis, one (1) individual on a part-time basis and approximately six (6) independent contractors who actually attach ABS's vehicle immobilization boots to the illegally parked vehicles.
MERGER AGREEMENT
On November 22, 2005, we entered into an Agreement and Plan of Merger (the "Merger Agreement" and the "Merger") with Cryobanks International, Inc., a Delaware corporation ("Cryobanks"). Pursuant to the Merger Agreement, shares of common stock, warrants and preferred stock of Cryobanks which are issued and outstanding immediately prior to the effective date of the Merger ("Effective Date") will be converted into the right to receive common stock of the Company. Pursuant to the Merger, Cryobanks will be merged with and into BioStem Acquisition Company, Inc., a yet to be formed subsidiary of the Company and a Delaware corporation ("Acquisition Company"), and the separate existence of Cryobanks shall cease. The closing date of the Merger is the business day after satisfaction or waiver of the conditions set forth below ("Closing Date").
Pursuant to the Merger Agreement, the aggregate number of shares of the Company issued and outstanding immediately prior to the Closing shall be no more than 15,650,000 shares of common stock, and there shall be no more than 2,000,000 warrants outstanding which shall have an exercise price of $1.00 per share.
Among other conditions described in the Merger Agreement, a material condition to the effectiveness and Closing of the Merger is the successful completion of a financing by Cryobanks which results in net proceeds to Cryobanks of at least $10,000,000 pursuant to a Private Placement, which attempts to sell 10,000,000 shares of Cryobanks preferred stock to investors at $1.00 per share and warrants to purchase 3,000,000 shares of Cryobanks common stock, exercisable at $1.10 per share, on or before the Closing. The preferred shares issued by Cryobanks in such financing will be convertible into one share of the Company for each share of preferred stock issued to such investors. These Company shares (which are in addition to the 120,000,000 shares issued to the holders of Cryobanks common stock and warrants), and 2,000,000 shares which are issuable upon conversion of $2,000,000 of debt of Cryobanks, will not be subject to any restriction or lock-up, and will be registered for resale by the Company on a registration statement.
Cryobanks has an agreement with the holder of its Series A Preferred Stock, of which there are 7,000,000 shares outstanding, that fifty percent of the proceeds of the above financing will be used to redeem the Series A Preferred Stock at a redemption price of $1.00 per share, up to $10.0 million of gross proceeds, and 100% of gross proceeds in excess of $10.0 million will be used to redeem the balance of such shares of Series A Preferred Stock.
The Board of Directors of both the Company and Cryobanks have approved the merger agreement, and the majority shareholders of both companies have consented to the Merger Agreement.
The Merger Agreement originally was to terminate if the Merger had not been consummated by March 1, 2006, however this date was extended to June 30, 2006, pursuant to the First Amendment to Agreement and Plan of Merger entered into between Cryobanks and the Company as of March 1, 2006, to September 30, 2006, due to the Second Amendment to Agreement and Plan of Merger, entered into between Cryobanks and the Company as of July 1, 2006, to March 31, 2007, pursuant to the Third Amendment to Agreement and Plan of Merger, entered into between Cryobanks and the Company effective as of September 30, 2006, and most recently, to June 30, 2007, pursuant to the Fourth Amendment to Agreement and Plan of Merger, which had an effective date of March 20, 2007.
Assuming the Closing of and pursuant to the terms of the Merger Agreement, the Company will divest itself of its two operating subsidiaries, and will have no more than $25,000 of accrued but unpaid liabilities on the effective date of the merger. On the effective date of the merger, Cryobanks will merge with and into the Acquisition Company, which will become the surviving corporation in the Merger. All of the outstanding shares of Series A Preferred, Series B Preferred Stock and warrants of Cryobanks will be converted into shares of common stock of the Company at an exchange ratio of 0.852578 (meaning that for each share of Cryobanks stock, the holder will be issued 0.852578 shares of the Company, the "Exchange Ratio"), unless such Series A Preferred Stock, Series B Preferred Stock and warrants are issued pursuant to the planned Private Placement (described below). The total amount of shares to be issued in connection with the conversion of the Series A Preferred Stock, Series B Preferred Stock and warrants shall total 120,000,000 shares of the Company's common stock (the "Merger Consideration"), and such Exchange Ratio shall be adjusted if any shares of the Company's common stock are issued prior to the Closing, by dividing 120,000,000 by the sum of the then outstanding shares of the Company's common stock and warrants.
Shareholders of Cryobanks, who dissent to the Merger are able to receive payment for their shares (as calculated in the Merger Agreement) in lieu of shares of the Company.
All warrants to purchase shares of Cryobanks common stock which are outstanding prior to the Merger will be assumed by the Company as provided in the Merger Agreement. Assuming the Closing of the Merger, the Company will issue 120,000,000 shares of its common stock to the shareholders of Cryobanks, and the board of directors of Cryobanks will be appointed to the Company's board, and the current members of the Company's board will resign. On the effective date of the merger, immediately prior to the merger, the Company will have 15,650,000 shares of common stock outstanding, and warrants to purchase 2,000,000 shares of common stock with an exercise price of $1.00 per share. All other shares then outstanding will be cancelled in exchange for the transfer by the Company of all of the common stock of its two current operating subsidiaries, BH Holdings, Inc. and ABS Holdings, Inc., to those shareholders canceling shares (as described below under "Agreement to Purchase Subsidiaries and Cancel Shares").
Assuming the Closing of the Merger, it is anticipated that the Company and Cryobanks will cause to be filed a registration statement on Form S-4 registering the issuance of the 120,000,000 shares to the Cryobanks shareholders. Notwithstanding this registration, all of the 120,000,000 shares to be issued shall be subject to a one year restriction against transfer, except for approximately 91,879,402 shares held by the majority shareholder of Cryobanks, which will be subject to a six-month lockup.
Agreement to Purchase Subsidiaries and Cancel Shares
On November 22, 2005, our Chief Executive Officer, Marc Ebersole and our Directors, Scott Schweber and Christine Ebersole (the "Management Shareholders"), entered into an Agreement to Purchase Subsidiaries and Cancel Shares ("Spinoff Agreement"), with certain shareholders who hold Senior and Junior debentures with the Company (together with the Management Shareholders, the "Security Holders" as described below). Pursuant to the Spinoff Agreement, the Security Holders agreed to cancel the shares of the Company's common stock which they held in return for the transfer to them of the Company's two wholly owned subsidiaries ABS Holding Company, Inc. ("ABS") and BH Holding Company, Inc. ("BH"). Pursuant to the Spinoff Agreement, each Security Holder will receive one share of both ABS and BH for each four shares of the Company which they hold and the Company will then cancel each share of the Company's common stock which they held.
Additionally, pursuant to the Agreement to Purchase Subsidiaries and Cancel Shares, Hyde Investments, Ltd. ("Hyde"), which the Company currently owes $592,500 to in connection with the Senior Debenture, described above, has agreed to release the Company from any obligations under the Senior Debenture, upon the closing of the Merger, and that in exchange for such release, ABS and BH will both assume 50% of the $592,500 outstanding under the Senior Debenture.
The Spinoff Agreement is to be effective on the day following the closing of the Merger (described above).
Pursuant to the Spinoff Agreement, the following Security Holders have agreed to cancel the following share amounts:
o
Marc Ebersole 122,000,000 shares
o
Christine Ebersole 4,000,000 shares
o
Scott A. Schweber 4,000,000 shares
o
The Morpheus Trust 5,460,018 shares
o
Livingston Investments 6,200,000 shares
o
The Gateway Real Estate Investment Trust 5,090,026 shares
o
Burton Partners, LLC 6,200,000 shares
o
Picasso, LLC 6,200,000 shares
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Total 159,150,044 shares
Assuming the Closing of the Merger and the subsequent closing of the Spinoff Agreement, the Company will no longer have any interest in the operations of ABS and BH, the shareholders of Cryobanks will become the majority shareholders of the Company, and the Company's new business focus will be stem cells and the banking of stem cells as described below.
London Finance Group, Ltd.
Pursuant to a term sheet dated November 1, 2005, London Finance Group, Ltd. ("LFG") agreed, if requested by Cryobanks, to use its best efforts to assist the post-merger company in the completion of an additional financing of at least $5,000,000, based on the then existing market capitalization of the post-merger company. LFG also agreed to assist as a financial advisor in identifying investment banking, venture capital and other financial firms that the post-merger company may consider retaining. LFG is a warrant holder in the Company, and has a consulting agreement with the Company, which will remain in effect post-merger.
RECENT EVENTS
Cryobank Letter of Intent
On January 31, 2007, Cryobanks International, Inc., a Delaware corporation (“Cyrobanks”), which had previously entered into an Agreement and Plan of Merger with us (the “Merger,” as described in greater detail above), entered into a Letter of Intent with Samarium Technology Group, Ltd. (the “Letter of Intent” and “Samarium”), which Letter of Intent was agreed to and accepted by Samarium on February 13, 2007, but which acceptance was not communicated to Cryobanks until February 28, 2007. The Merger, which is contingent upon Cryobanks raising at least $10,000,000 pursuant to a private placement was originally scheduled to terminate if the Merger had not been consummated by March 1, 2006 but through various amendments has been extended to June 30, 2007.
Pursuant to the Letter of Intent, subject to completion of due diligence, by Samarium, which originally was required to be completed within thirty days, but which has since been extended until April 30, 2007, Samarium agreed to purchase $9,000,000 Class A Secured Convertible Debentures of Cryobanks, which are to bear interest at the rate of 10% per annum, are convertible into 7.5% of Cryobank’s outstanding common stock on a fully diluted basis, and are due and payable on December 31, 2008 (the “Samarium Debentures”). The Samarium Debentures automatically convert into registered shares of the Company’s common stock upon the completion of the Merger and the subsequent effectiveness of a registration statement on Form S-4 registering the shares which the Samarium Debentures are convertible into (the “Effectiveness Date”).
Pursuant to the Letter of Intent, Cryobanks is to receive $2,000,000 of the proceeds from the Samarium Debentures upon the execution of final documents regarding the transactions contemplated by the Letter of Intent (the “Closing”), with the remaining $7,000,000 payable on the Effectiveness Date.
The Letter of Intent calls for the Form S-4 registration statement to be filed by the Company within 60 days of the Closing and to obtain effectiveness of such Form S-4 registration statement within 150 days of the Closing. If the Form S-4 registration statement is not declared effective by the 150th day following the Closing, the Samarium Debentures shall bear interest at the rate of 15% per annum until paid in full, and Cryobanks shall commence monthly interest only payments starting the first day of the month following the expiration of such 150 day period.
The Letter of Intent also calls for Samarium to be able to elect two members to the Company’s Board of Directors, following the increase in the Company’s Board of Directors from three members to five members.
Samarium will also receive warrants in connection with the Closing, including a five year Class A Warrant to purchase up to 3.5% of Cryobanks’ outstanding common stock on a fully diluted basis (which includes the shares issuable in connection with the conversion of the Samarium Debentures), with an exercise price equal to the conversion price of the Samarium Debentures; and a five year Class B Warrant to purchase up to 3.75% of Cryobanks’ outstanding common stock on a fully diluted basis (which includes the shares issuable in connection with the conversion of the Samarium Debentures), with an exercise price equal to $0.001 per share.
The Letter of Intent additionally includes a closing fee equal to 13% of the proceeds received by Cryobanks, and a separate warrant to purchase 1.125% of Cryobank’s outstanding common stock on a fully diluted basis (which includes the shares issuable in connection with the conversion of the Samarium Debentures), on the same terms as the Samarium warrants to a consultant, as well as a $35,000 structuring fee payable to Samarium.
Finally, the Letter of Intent requires that all of the current shareholders of Cryobanks agree to lockup the shares which they currently hold for one year from the effective date of the Merger, which lockup shall terminate as to 25% of the shares locked up by each shareholder on the 90th, 180th, 270th and 365th day following the Merger.
The Closing is anticipated to occur during the second quarter of 2007, of which there can be no assurance, subject to completion of due diligence by Samarium in its sole discretion. The provisions of the final Closing documents to be executed by Cryobanks and Samarium may or may not contain the terms and provisions described above and in the Letter of Intent.
Amendment To Senior Debenture
In March 2007, with an effective date of December 31, 2006, the Company, ABS Holding Company, Inc. and BH Holding Company, Inc., our wholly owned subsidiaries, Marc Ebersole, our Chief Executive Officer and Hyde Investments, Ltd. (“Hyde”), entered into an “Amendment Dated as of 12/31/06 to Senior Secured Convertible Debenture” (the “Second Extension”), to amend the terms of our Senior Secured Convertible Debenture originally entered into with Hyde on October 15, 2004 (“Senior Debenture”). The Senior Debenture had a balance of $552,500 as of December 31, 2006, which pursuant to the then terms of the Senior Debenture was due and payable on December 31, 2006. Pursuant to the Second Extension the due date of the Senior Debenture was extended to December 31, 2007. Subsequent to December 31, 2006, we borrowed an additional $40,000 under the Senior Debenture, bringing the total outstanding amount of the Senior Debenture to $592,500 as of the filing of this report.
Amendment to Merger Agreement
On or about March 20, 2007, we entered into the “Fourth Amendment to Agreement and Plan of Merger,” with Cryobanks, whereby we amended the date Cryobanks was required to close the Merger by from March 31, 2007, to June 30, 2007. All other terms of the Merger Agreement remained the same as originally signed.
DESCRIPTION OF THE BUSINESS OF CRYOBANKS
Cryobanks International, Inc. ("CI," or "Cryobanks") is a Delaware corporation, incorporated in May 1999, located in Altamonte Springs, Florida, a suburb of Orlando. Cryobanks believes it is one of the leading companies in the collection, processing, and banking of stem cells derived from the umbilical cord immediately after birth. The units of cord blood ("CB") are processed and stored by the company for use in unrelated transplants (where the donor is a histocompatible match, but is anonymous and unrelated to the recipient) and for personal storage and use. Cryobanks believes that in recent years, cord blood transplants ("CBTs") have become widely recognized as a safe, effective, and in many ways preferable, alternative to bone marrow transplant ("BMT"). Cryobanks believes that there is tremendous potential need for CBTs in the United States and worldwide, and that Cryobanks is well poised to help meet that need.
Cryobanks was formed in 1994 as a blood and semen banking facility. In mid-1995, CI expanded its scope of business into the field of CB banking. The main goal of Cryobanks is to become the largest provider of cord blood stem cells ("CBSCs") for transplant and research purposes in the world.
Cord blood contains a very concentrated source of stem cells which ultimately may differentiate into all other cells in the body, such as red or white blood cells, platelets, brain cells, liver cells or any other cell type. Transplanted into humans with a variety of diseases, CBSCs can often reverse or even cure the disease. CB is a non-controversial source of stem cells, as it does not involve the use or destruction of an embryo or fetal tissue and would otherwise be discarded as medical waste. In addition to therapeutic uses through transplant, CB stem cells can be used to develop new therapies and as sources of specific cell types for research purposes. A new legislation, expected to be soon enacted by Congress, underscores the importance of this technology and should create a rapid expansion of a national cord blood inventory. The company is poised to be at the heart of this expansion.
Cryobanks is engaged in three core businesses, all related to CB collection, storage and use. The first business is the collection and storage of CB units donated by the parents at birth for unrelated cord blood transplants ("Donor Units"). While Cryobanks bears the cost of collection and processing, these Donor Units have three distinct uses for therapeutic purposes: for CB transplant, for research in the discovery of new therapeutics, and for sale of the stem cells for other research purposes. Currently, the company lists its unrelated transplantable units on three key worldwide registries.
The second business involves the collection of CB units for personal storage ("Storage Units"), to be used, if necessary, by the donor family or its designees. In this case, the donating family pays for collection, processing and storage, plus an annual fee for continued storage.
The third business involves technology licensing. Cryobanks has been asked by many international groups to help them set up CB collection and storage facilities. Cryobanks has developed a model for assisting other parties in this endeavor and already has agreements to assist in the formation of several facilities, in India and Greece.
Additionally, Cryobanks expects to help sponsor research in areas related to stem cell therapy. In return, Cryobanks will have first rights to licensing and royalty income when and if the therapies based on this research are developed. Due to the long, 10 to 12 year, development time of biological therapeutics, Cryobanks does not expect to see significant revenues from this business within the first five years. Cryobanks has signed one Material Transfer Agreement with a well-known cancer research center and has several other agreements pending, which there can be no assurance will close.
COMPETITION
Cryobanks has two categories of competitors. The first category is the personal storage for fee business. To date, this has been by far the most lucrative area of cord blood banking. For personal storage, a family will pay a large initial fee (usually $1,300 to $2,000) to process and store their cord blood for private use, plus an annual storage fee of $95 to $150. The primary companies in this area are Cord Blood Registry and ViaCell. Cord Blood Registry. Cryobanks believes that the prices it charges for the storage of cord blood is competitive with other companies. Additionally, the other companies that offer this service are for-profit companies.
Another category of competition in the cord blood arena is the collection of unrelated donated units (donations not from relatives), at no charge to the donor. Cryobanks invests its own money to process these units. The units are then placed on international registries with the expectation that these units will be selected for transplant. If a unit is selected for transplant, Cryobanks will receive approximately $20,000 as reimbursement for each transplantable CB unit. Not every unit donated will be selected for transplant and a facility must have a large inventory, estimated at 20,000 or greater, in order to have sales at a rate of 10 percent. The largest existing inventory is at the New York Blood Center - with approximately 16,000 stored and registered units of which over approximately 1,700 have already been used for transplant. The competing facilities in this category are hospitals and universities that are primarily funded through private or government grants. Historically, processing costs are high and efficiencies are low resulting in the failure or constant start-up/shut-down of their operations.
The Scientific & Medical Board of Advisors (Samba)
Cryobanks relies on a highly acclaimed team of scientists and doctors to provide guidance to its operations and activities.
ITEM 1A.
ITEM 1A. RISK FACTORS.
COMPANY RISK FACTORS
Need For Additional Financing.
The Company requires approximately $25,000 of additional financing to pay amounts owed in legal and accounting fees, which amounts the Company believes it will be able to pay from future sales revenue and future advances from Hyde, assuming the Company has approximately the same number of clients and receives approximately the same amount of income from its services, of which there can be no assurance. Additionally, the Company owed $552,500 to Hyde as of December 31, 2006 and owes $592,500 to Hyde as of the filing of this report, in connection with its Senior Debenture (as described above), and approximately $480,000 of consulting fees to London, in connection with the Consulting Agreement, described above as of December 31, 2006, which the Company currently does not have sufficient funds to repay. Additionally, the Company's current goal is to acquire or merge with a company in the stem cell business. The amount of money the Company will require for this acquisition or merger is dependent on what acquisition or merger the Company may choose to make. While the amount of additional financing the Company will require is currently unknown, the Company anticipates that it will require a substantial amount of additional financing. Currently, the Company does not have any commitments or identified sources of capital from third parties or from the Company's officers, directors or majority shareholders. There is no assurance that additional financing will be available on favorable terms, if at all. If the Company is unable to raise such financing, it may not be able to pay its continuing obligations, including its Senior Debenture with Hyde, and/or complete any acquisitions or mergers, and may be forced to curtail or abandon its business plan.
We Have Outstanding Liabilities Which We Do Not Currently Have Financial Resources To Pay.
The Company currently owes $592,500 to Hyde in connection with the Senior Debenture described above. The Senior Debenture is due and payable on December 31, 2007. As of December 31, 2006, the Company had negative working capital of $1,381,416 and had no commitments from any officers, directors or third parties to provide any financing to the Company. If the Company does not have the $592,500 to repay the Senior Debenture on December 31, 2007, Hyde will be able to convert the Senior Debenture into shares of the Company's common stock at the lesser of 30% of the average of the three lowest closing prices for the twenty (20) trading days proceeding the date of conversion or $0.025. If the Company is unable to extend or pay the Senior Debenture, Hyde could convert the Senior Debenture into shares of the Company's common stock and take substantial control of the Company. If this were to happen, the Company could be forced to abandon or curtail its operations and any investment in the Company could become worthless.
A Large Percentage Of Our Revenues For The Year Ended December 31, 2006, Came From A Small Number Of Parking Lots And If We Were To Lose Those Parking Lots As Clients, Our Revenues Would Be Adversely Affected.
During the year ended December 31, 2006, approximately 23% of our revenues came from valet parking services in connection with one parking lot, and a total of approximately 51% of our revenues came from a total of only three parking lots. Because of this high concentration of revenues, if we were to lose any of those three parking lots as clients, our revenues would likely decrease substantially. As a result, if we were to lose any of those lots as clients, and were not able to replace such lot or lots with similarly sized clients, we could be forced to curtail or abandon our business operations and any investment in our common stock could decline in value and/or become worthless.
We Are Currently In Negotiations To Acquire And/Or Merge With A Company In The Stem Cell Industry, Which Will Likely Cause Us To Change Our Business Focus, Discontinue Our Current Operations, Result In Dilution To Our Current Shareholders And Will Likely Cause The Composition Of The Company's Management And Board Of Directors To Change.
The Company has entered into a Merger Agreement with Cryobanks, a stem cell company. The Company has entered into agreements with a consultant, Financial Systems International, which is to provide consulting services to the Company in connection with such Merger. The Company can make no assurances that the Company will be able to acquire and/or merge with Cryobanks and/or that it will have sufficient funds to support its current operations until such acquisition and/or merger is complete, if ever. Additionally, in connection with London's Consulting Agreement, described above, London will receive 10% of any compensation paid to the Company in connection with any merger, acquisition or exchange entered into, including the Merger Agreement. In the event the Company does close the Merger, the Company's majority shareholders will change and new shares of common stock will be issued resulting in dilution to current shareholders. Additionally, the Company's new majority shareholders will change the composition of the Company's Board of Directors and replace the Company's management. The new management will change the Company's business focus to the stem cell field and currently plan to spin-off the Company's current operations to a separate private company, not affiliated with us. The Company can make no assurances that the Company's new management will be able to properly manage the direction of the Company or that this change in the Company's business focus will be successful. If the Company does close the Merger, and the Company's new management fails to properly manage and direct the Company, the Company may be forced to scale back or abandon its operations, which will cause the value of the Company's common stock to decline. The Company will continue with its current business in the event a merger or acquisition is not completed.
We Have Significant Debts For Which We Have Payment Obligations We May Not Meet.
We had total current liabilities of $1,404,692 at December 31, 2006. We had current assets of $66,175, and negative working capital of $1,338,517 as of December 31, 2006. Based on our financial condition, there are substantial risks that we will not meet our payment obligations. If any of our creditors were to seek repayment of amounts outstanding, the Company may be forced to curtail or abandon its business and an investment in our Company could become worthless.
We Will Face Substantial Additional Expenses In The Future, Which Expenses We May Not Be Able To Afford, In Connection With The Fact That We Will Become An Accelerated Filer, And Therefore Be Required To Perform An Annual Report Of Our Controls And Procedures.
Starting with this Form 10-K for the year ended December 31, 2006, we are classified as an "accelerated filer," are no longer be able to file small business reports, will be required to file our quarterly reports within 40 days (subject to a five calendar day extension) of our year end and our annual reports (including our Form 10-K for the year ended December 31, 2006) within 75 days of our year end (subject to a 15 calendar day extension), and be required to conduct an annual assessment of our internal controls and procedures. We anticipate these increased and accelerated filing requirements will require us to expend substantial additional legal and accounting expenses. Furthermore, our management will likely need to devote a substantial amount of time to these new compliance and filing requirements, which could take away from the time they have to spend on company matters. Finally, the required testing of our internal controls by us and our independent registered public accounting firm, may reveal deficiencies in our internal controls over financial reporting which are deemed to be material weaknesses and may require us to expend additional substantial expenses in bringing such controls and procedures in check with the Commission's guidelines. If we are not able to file our quarterly and annual reports within the accelerated deadlines set forth by the Commission, and we fail to file such reports on a timely basis three (3) times in any twenty-four (24) month period, of which we have already been late once during the current twenty-four (24) month period, our securities will be de-listed from the OTC Bulletin Board and the value of our common stock could become worthless. Additionally, the significant additional time and expense our status as an "accelerated filer" will create for us and our management could take away from the time and capital we have to spend on our business operations and could cause the value of our common stock to decline in value. Furthermore, if we are found to have deficiencies in our controls and procedures, and are not able to comply with the requirements in a timely manner, the market price of our stock could decline, and we could be subject to sanctions or investigations by the Commission or other regulatory authorities, which would likely require us to expend additional financial and management resources, which resources we may not have, and which may force us to curtail or abandon our business operations.
We Depend Heavily On Marc Ebersole, The Company's Chief Executive Officer.
The success of the Company depends heavily upon the personal efforts and abilities of Marc Ebersole, the Company's Chief Executive Officer and Director. The Company has entered into a Five (5) year employment agreement with Mr. Ebersole. However, the Company currently has no key man insurance or life insurance policies on Mr. Ebersole. The loss of Mr. Ebersole could have a material adverse effect on our business, results of operations and/or financial condition. In addition, the absence of Mr. Ebersole will force us to seek a replacement who may have less experience or who may not understand our business, or we may not be able to find a suitable replacement. If this were to happen, the Company may be forced to curtail or abandon its business plan.
Growth Will Place Significant Strains On Our Managerial, Administrative And Other Resources.
Any growth that we experience is expected to place a significant strain on our managerial and administrative resources. Marc Ebersole is our only officer. We have limited employees who perform administrative functions. Further, if our business grows, we will be required to manage multiple relationships with various clients and third parties and numerous valet parking personnel. These requirements will be exacerbated in the event of further growth. There can be no assurance that our other resources such as our systems, procedures or controls will be adequate to support our growing operations or that we will be able to achieve the rapid execution necessary to successfully offer our services and implement our business plan. Assuming that our business grows, our future success will depend on our ability to add additional management and administrative personnel to help compliment our current employees as well as other resources. If we are unable to add additional managerial and administrative resources, it may prevent us from continuing our business plan and could have an adverse effect on the value of our securities.
Marc Ebersole Can Vote Approximately 69.6% Of Our Common Stock And Can Exercise Control Over Corporate Decisions Including The Appointment Of New Directors.
Marc Ebersole, our Chief Executive Officer, can vote an aggregate of 122,000,000 shares or approximately 69.6% of our outstanding common stock. Accordingly, Mr. Ebersole will exercise control in determining the outcome of all corporate transactions and other matters, including the election of directors, mergers, consolidations, the sale of all or substantially all of our assets, and also the power to prevent or cause a change in control. Any investors who purchase shares of the Company's common stock, will be minority shareholders and as such will have little to no say in the direction of the Company and the election of Directors. Additionally, it will be difficult if not impossible for investors to remove Mr. Ebersole as a Director of the Company, which will mean he will remain in control of who serves as officers of the Company, as well as whether any changes are made in the Company's Board of Directors. As a potential investor in the Company, you should keep in mind that even if you own shares of the Company's common stock and wish to vote them at annual or special shareholder meetings, your shares will likely have little effect on the outcome of corporate decisions.
Dilution To Current Shareholders.
In the event the Agreement and Plan of Merger is successfully completed, this will result in dilution to the Company's shareholders as new stock will be issued in connection with both the Agreement and Plan of Merger as well as the private placement. Such dilution may result in a decrease in our share price.
Our Management Has Concluded Pursuant To A Review Of Our Internal Controls Over Financial Reporting, That Our Controls And Procedures Are Not Effective To Insure That Information Is Timely Communicated To Our Management To Allow Timely Decisions Regarding Our Required Disclosures.
Our management evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2006 and based on that evaluation and the existence of certain material weaknesses in our internal controls, concluded that such disclosure controls and procedures were not effective as of December 31, 2006. That conclusion was based on several weaknesses which were found in our internal control over financial reporting which are disclosed in greater detail below under “Item 9A. Controls and Procedures.”
Although our management will attempt to address and eliminate those weaknesses during the 2007 fiscal year, until such weaknesses are addressed, if ever, they may prevent us from timely filing our periodic reports with the Commission (which could in turn force us to be delisted from the OTCBB, as described in greater detail below) or could result in a misstatement in our annual or interim consolidated financial statements, which could materially misstate one or many of our financial results or disclosures and could require that such financial information will need to be restated and/or corrected in the future. Until we address and correct the weaknesses in our internal controls, our financial statements may be materially incorrect and/or need to be corrected or restated in the future, which could cause us to expend substantial funds and resources in the correction and/or restatement of such financial information, if such errors or omissions are found, of which there can be no assurance. The required payment of such funds and/or the misstatement of our financial statements could cause the value of our common stock to decrease and/or become worthless and could also open us up to investor lawsuits, if investors purchase our common stock based on inaccurate or materially misleading financial information.
The Company Faces Potential Liability for the Debts Of Its Former Wholly-Owned Subsidiary.
The Company's former Chief Executive Officer, Wayne Daley, represented to the Company's former auditor that $200,000 in notes payable of the Company's former wholly-owned subsidiary ("Notes") belonged to him, and that he therefore was able to release the Company from the obligations of the Notes in connection with a General Release and Settlement Agreement he entered into with the Company. The Company has received an executed release for liability for $100,000 of such notes. The Company has been unable to determine whether the remaining $100,000 in notes was validly assigned; however, as the remaining note was an obligation of the Company's former wholly-owned subsidiary, the Company is taking the position that it has no liability in connection with that note. There is a possibility that creditors of the Company's former wholly-owned subsidiary could make claims against the Company alleging various successor liability theories.
While the Company believes that such claims would have no merit, it cannot assure that such claims will not be successful. If the Company is forced to pay liabilities associated with the Company's former wholly-owned subsidiary, the Company may be liable for the $100,000 note, any accrued and unpaid interest, as well as any other liabilities associated with the Company's former wholly-owned subsidiary which are unknown to the Company at this time. If the Company is forced to defend or pay for liabilities associated with the Company's former wholly-owned subsidiary, it could have a materially adverse effect on the Company's results of operations and financial condition.
The Issuance And Sale Of Common Stock Underlying The Junior Debentures May Depress The Market Price Of Our Common Stock.
As of January 29, 2007, we had 175,218,044 shares of common stock outstanding. The Preferred Stock Sellers may convert their Junior Debentures into 347,000,000 shares of our common stock at a conversion price of $0.00025 per share, of which no shares have been issued as of the date of this report. Even though the Preferred Stock Sellers cannot own more than 4.99% of our outstanding common stock at any one time, they can continuously convert their debt and sell their sales over a period of time and stay below the 4.99% maximum ownership limit. As sequential conversions and sales take place, the price of our common stock may decline and other shareholders in the Company may have their shares diluted by the conversions of the Preferred Stock Sellers.
The Company Faces Competition for Its Services.
The Company faces intense competition for both its valet parking services and its vehicle immobilization services. These competitors include larger companies which compete with the Company in both the valet parking and vehicle immobilization industries, those companies may have financial resources, equipment, and expertise in the valet parking and vehicle immobilization fields which is greater than the Company's. As a result, the Company may be unable to compete with these larger companies and may be forced to abandon or curtail its business plan.
ABS Currently Relies On Approximately Three Major Customers For Its Revenue.
All of ABS's revenue currently comes from approximately three major clients. While the Company hopes to diversify ABS's client base in the future, if ABS were to lose its customers and fail to find additional clients for its booting services, it would have an adverse effect on the Company's operations. If this were to happen, the Company could be forced to abandon or curtail its vehicle immobilization operations, which would likely decrease the value of the Company's securities.
Our Auditors Have Expressed An Opinion That There Is Substantial Doubt About Our Ability To Continue As A Going Concern.
Our auditors have expressed an opinion that there is substantial doubt about our ability to continue as a going concern primarily because we incurred a net loss of $2,051,539 for the year ended December 31, 2006, and because we had an accumulated deficit of $15,190,930 at December 31, 2006. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The financial statements do not include any adjustments that might result from our inability to continue as a going concern. If we are unable to continue as a going concern, you will lose your entire investment.
If We Are Late Two More Times In Filing Our Quarterly Or Annual Reports With The SEC In The Current Twenty-Four (24) Month Period, Or Are Late Three Times In Any Subsequent Twenty-Four (24) Month Period, We Will Be De-Listed From The Over-The -Counter Bulletin Board.
Pursuant to new Over-The-Counter Bulletin Board ("OTCBB") rules relating to the timely filing of periodic reports with the SEC, any OTCBB issuer which fails to file a periodic report (Form 10-'s or 10-K's) by the due date of such report (not withstanding any extension granted to the issuer by the filing of a Form 12b-25), three (3) times during any twenty-four (24) month period is automatically de-listed from the OTCBB. Such removed issuer would not be re-eligible to be listed on the OTCBB for a period of one-year, during which time any subsequent late filing would reset the one-year period of de-listing. As we were late in filing our Form 10-KSB for the period ending December 31, 2005, if we are late in our periodic filings two more times during the next five fiscal quarters and/or late three times in any subsequent twenty-four (24) month period, we will be de-listed from the OTCBB, and as a result, our securities may become worthless, and we may be forced to curtail or abandon our business plan.
Investors May Face Significant Restrictions On The Resale Of Our Common Stock Due To Federal Regulations Of Penny Stocks.
Our common stock will be subject to the requirements of Rule 15(g)9, promulgated under the Securities Exchange Act as long as the price of our common stock is below $4.00 per share. Under such rule, broker-dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements, including a requirement that they make an individualized written suitability determination for the purchaser and receive the purchaser's consent prior to the transaction. The Securities Enforcement Remedies and Penny Stock Reform Act of 1990, also requires additional disclosure in connection with any trades involving a stock defined as a penny stock. Generally, the Commission defines a penny stock as any equity security not traded on an exchange or quoted on NASDAQ that has a market price of less than $4.00 per share. The required penny stock disclosures include the delivery, prior to any transaction, of a disclosure schedule explaining the penny stock market and the risks associated with it. Such requirements could severely limit the market liquidity of the securities and the ability of purchasers to sell their securities in the secondary market.
If There Is A Market For Our Common Stock, Our Stock Price May Be Volatile.
If there is a market for our common stock, we anticipate that such market will be subject to wide fluctuations in response to several factors, including, but not limited to:
(1)
actual or anticipated variations in our results of operations;
(2)
our ability or inability to generate new revenues;
(3)
the number of shares in our public float;
(4)
increased competition; and
(5)
conditions and trends in the parking and vehicle immobilization industries.
Furthermore, because our common stock is traded on the NASD over the counter bulletin board, our stock price may be impacted by factors that are unrelated or disproportionate to our operating performance. These market fluctuations, as well as general economic, political and market conditions, such as recessions, interest rates or international currency fluctuations may adversely affect the market price of our common stock.
Additionally, at present, we have a very limited number of shares in our public float, and as a result, there could be extreme fluctuations in the price of our common stock. Further, due to the limited volume of our shares which trade and our limited public float, we believe that our stock prices (bid, asked and closing prices) are entirely arbitrary, are not related to the actual value of the Company, and do not reflect the actual value of our common stock (and in fact reflect a value that is much higher than the actual value of our common stock). Shareholders and potential investors in our common stock should exercise caution before making an investment in the Company, and should not rely on the publicly quoted or traded stock prices in determining our common stock value, but should instead determine value of our common stock based on the information contained in the Company's public reports, industry information, and those business valuation methods commonly used to value private companies.
RISK FACTORS RELATING TO
CRYOBANKS*
* Please see "Company Risk Factors," above for a discussion of the risks facing the Company's current business operations.
The risk factors described below are only some of the risks associated with the business of Cryobanks.
Cryobanks Must Complete A Ten Million Dollar Private Placement To Close The Merger.
The Agreement and Plan of Merger has various conditions precedent in order for the parties to effect the merger, one of which includes Cryobanks raising a minimum of $10,000,000 in a private placement. Although $-0- has been raised to date, Cryobanks has entered into a Letter of Intent with a third party to raise approximately $9,000,000 in funding as described above under “Recent Events.” In the event Cryobanks is successful in raising a minimum of $10,000,000 of which there can be no assurance, $5,000,000 of such funds will be used to redeem $5,000,000 of Cryobanks Series A Preferred Stock. As of the filing of this report, Cryobanks has not raised any of the $10,000,000 which it is required to raise prior to the closing of the Merger. Cryobanks may never raise any money in a private offering and as a result, the Merger may never close. If this were to happen, the value of our common stock could decrease in value and/or become worthless.
CBSC Transplant Procedures Will Not Become Popular Or Will Not Grow In Numbers Fast Enough To Meet Projections.
While there is strong indication that CBSC transplants are in many ways superior to the current common practice of bone marrow transplants, and there appears to be an increasing use of CBSC transplants in place of bone marrow transplants, a significant portion of Cryobanks' projected revenues over the next five years is dependent on this trend to continue and increase even more over time. The slowing down of this trend would represent a significant risk to Cryobanks. Further, a major adverse event in the use of cord blood for transplant could adversely affect Cryobanks main business.
Personal Cord Blood Storage May Become Less Desirable Than Anticipated.
Some medical groups have recommended that birthing mothers not store cord blood for personal use. Reasons include the low likelihood that the personal unit will ever be used for homogeneic transplant (to the child). If there is a need within a family, there is a greater chance of a match, and the family members could take advantage of the stored unit. While estimations are that with 300,000 registered units in storage there would be sufficient units and matches to treat the world's population in need of transplant, these units are not yet available. A fraction of Cryobanks intended revenues comes from the projected building of the personal storage units business. Other companies have been able to build banks of 30,000 and 45,000 stored units, indicating the desirability of personal storage. However, the continued popularity of the practice of personal storage of cord blood cannot be guaranteed.
New Technology Replaces Use of CB Cells in Transplant.
Technology related to stem cells, regeneration of blood and immunological function and other therapeutic actions of CB is always being advanced. It is possible that some, currently undiscovered technology will be able to effect hematopoietic cell rejuvenation or the reversal of specific diseases that CB transfers will be targeting. While advances of these types cannot be ruled out, the time lag for development, regulatory approval, and acceptance likely gives Cryobanks a lead of five to ten years.
Additionally, a suite of patents held by Biocyte Corporation and its successors PharmaStem Therapeutics have been alleged to require licensing. In October 2003, PharmaStem won a jury verdict against ViaCell, Cryo-Cell International, CorCell and CBR Systems, the four largest personal storage unit companies. Following suit, the trial court invalidated the jury's findings and multiple appeals thereafter followed. Concurrently, the European Patent Office invalidated the patents on the continent of Europe and, after challenge, the United States Patent Office has invalidated one of the underlying patents. Despite these facts, and the fact that the United States patents expire in 2007, Cryobanks was named as a defendant in a patent infringement suit brought by PharmaStem.
Cryobanks has determined the cost and risks of litigation would likely far outweigh costs and risks of entering into a royalty agreement with PharmaStem. Accordingly, an agreement was reached which calls for payment of a sum for past violations and payment of a royalty on an ongoing basis. The agreement terminates if the patents are determined to be invalid or at the expiration of the patents, whichever is first to occur.
Increasing Competition and Limited Barrier To Entry.
There is no intellectual property that would prohibit human serum storage companies from entering into the business, or prohibit new companies from being formed in this area. Cryobanks believes that the Federal guidelines regulating cord blood collection and storage will create a significant barrier to entry to many other groups. Cryobanks believes it meets or exceeds all requirements in the new legislation.
Future Economic Downturns May Adversely Affect The Ability To Grow Cryobanks.
Historically, the general level of economic activity has significantly affected the demand for scientific research and advancement. If the general level of economic activity slows, our clients may not require our services and may delay or cancel plans that involve using our services and technology. Consequently, the time from initial contact with a potential client to the time of sale could increase and the demand for our services could decline, resulting in a loss of revenue harming our business, operating results and financial condition.
Cryobanks May Not Be Able To Grow Its Client Base And Revenue Because Of The Number Of Competitors, Resources Available To It And The Variety Of Sources Of Competition Its Faces.
Cryobanks future success will depend on its ability to grow and maintain its client base and revenue. This will require that Cryobanks offer services that are superior to the services being offered by its competitors and that its services are priced competitively.
Cryobanks May Not Be Able To Strengthen And Maintain Awareness Of Its Brand Name.
Cryobanks believes that its success will depend to a large extent on its ability to successfully develop, strengthen and maintain its brand recognition and reputation. In order to strengthen and maintain its brand recognition and reputation, we invest and will need to continue to invest substantial resources in our marketing efforts and maintain high standards for actual and perceived quality, and security. If it fails to successfully promote and maintain its brand name, particularly after incurring significant expenses in promoting its brand name, or encounters legal obstacles which prevent its continued use of its brand name, its business, operating results and financial condition could be materially adversely affected. Moreover, even if Cryobanks does continue to provide quality service to its clients, factors outside of its control, including actions by organizations that are mistaken for it and factors generally affecting its industry, could affect its brand and the perceived quality of its services.
Cryobanks Business Could Suffer If Financing Is Not Available When Required Or Is Not Available On Acceptable Terms.
Cryobanks future capital requirements depend on a number of factors, including its ability to grow its revenue. It is possible that Cryobanks may need to raise additional funds sooner than expected in order to fund expansion, develop new and enhance existing, services or acquire complementary businesses or technologies or if its revenues are less or its expenses are greater than is expected. Cryobanks business could suffer if financing is not available when required or is not available on acceptable terms.
Cryobanks' Business Could Be Adversely Affected If It Is Unable To Protect Its Proprietary Technologies.
Cryobanks success depends to a significant degree upon the protection of its proprietary technologies and brand names. The unauthorized reproduction or other misappropriation of its proprietary technologies could provide third parties with access to its technologies without payment. If this were to occur, Cryobank's proprietary technologies would lose value and its business, operating results and financial condition could be materially adversely affected. Cryobanks relies upon a combination of copyright, trade secret and trademark laws and non-disclosure and other contractual arrangements to protect its proprietary rights. The measures it has taken to protect its proprietary rights, however, may not be adequate to deter misappropriation of proprietary information or protect Cryobanks if misappropriation occurs. Policing unauthorized use of Cryobank's technologies and other intellectual property is difficult, particularly because of the global nature of its industry. Cryobanks may not be able to detect unauthorized use of its proprietary information and take appropriate steps to enforce its intellectual property rights. If Cryobanks resorts to legal proceedings to enforce its intellectual property rights, the proceedings could be burdensome and expensive and could involve a high degree of risk.
Cryobanks May Become Subject To Burdensome Government Regulation, Which Could Increase Its Costs Of Doing Business, Restrict Its Activities And/Or Subject It To Liability.
Uncertainty and new regulations relating to the biotechnology or stem cell storage could increase Cryobank's costs of doing business, prevent it from providing its services, slow the growth of its business model or subject it to liability, any of which could adversely affect its business, operating results and prospects. In addition to new laws and regulations being adopted, existing laws may be applied to the stem cell research business.
Dependence on Key Personnel.
Cryobanks is highly dependent upon the efforts of its senior management team, including Dwight C. Brunoehler, its President. The loss of the services of such individual could impede the achievement of product development, commercialization, and operational objectives. Cryobanks does not have key personnel life insurance on the life of such individual. Due to the specialized nature of Cryobanks business, Cryobanks is also highly dependent upon its ability to attract and retain qualified key management personnel.
There is intense competition for qualified personnel in the areas of Cryobanks' activities. Cryobanks' may have to hire additional personnel to meet its business goals. There can be no assurance that Cryobanks will be able to attract and retain qualified personnel necessary for the development of its business.
Cryobanks May Be Exposed To Product Liability Risks.
Cryobanks faces an inherent risk of exposure to product liability claims if the use of its products results, or is alleged to result in injury to persons who receive stem cell transplants from core blood supplied by Cryobanks. With respect to product liability claims, Cryobanks maintains product liability insurance. There can be no assurance that such insurance will continue to be available at a reasonable cost, or; if available, will adequately cover the Company's liabilities. If Cryobanks does not have adequate insurance, product liabilities relating to defective products could have a material adverse effect on Cryobanks' business, financial condition and results of operations.
Cryobanks May Have Potential Weaknesses In Intellectual Property Protection.
Cryobanks intends to rely on a combination of common law trademark rights, U.S. federal registration rights, patent and/or trade secret laws to protect its proprietary rights. Cryobanks received certain patent protection for certain elements of its technology.
There can be no assurance that Cryobanks will be able to enforce its proprietary rights or that it will be granted patent protection. Although the Company's technique for certain of its systems may be trade secrets, it may be independently developed or duplicated.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2.
ITEM 2. PROPERTIES.
The Company currently rents approximately 1,530 square feet of office space at Hannover Park Road, Suite 120, in Atlanta, Georgia, at a current monthly rental cost of $1,460.16. The Company's current lease began on April 1, 2004, and will expire on March 31, 2009. The Company paid base rent of $1,350 per month from April 1, 2004 to March 30, 2006 and base rent of $1,460.16 per month from April 1, 2006 to March 30, 2007. The Company’s rent will increase to $1,518.57 per month of base rent from April 1, 2007 to March 30, 2008 and to $1,579.31 per month of base rent from April 1, 2008 to March 30, 2009. The Company is also responsible for various expenses in connection with its rental space during the term of the lease.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS.
Allstate filed a lawsuit in Fulton County, GA, against the Company, in December 2004, alleging property damage, which was settled by the Company in March 2005, for $4,900, to be paid by the Company at the rate of $150 per month. The Company has been delinquent in making the monthly payments to Allstate.
In March 2006, the Company received correspondence from an individual residing in Arizona regarding the unauthorized faxing of unsolicited facsimiles. In March 2006, the Company received correspondence from the Idaho Attorney General's office regarding a potential violation of Idaho law in connection with the unauthorized faxing of unsolicited facsimiles. The letter was sent for informational purposes only, and the Company was not responsible for the unsolicited faxing of such facsimiles; however, the Company does not expect to receive any further correspondence from the Idaho Attorney General's office regarding such faxes.
From time to time, we may become party to litigation or other legal proceedings that we consider to be a part of the ordinary course of our business. Other than the legal proceedings listed above, which have both been settled or dismissed, we are not currently involved in legal proceedings that could reasonably be expected to have a material adverse effect on our business, prospects, financial condition or results of operations. However, we may become involved in material legal proceedings in the future.
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.
"Bid" and "asked" offers for our common stock are listed on the NASDAQ OTC-Bulletin Board published by the National Quotation Bureau, Inc.
Prior to June 2003, the Company's trading symbol was "WBVW," and from June 2003, to January 7, 2005, the Company's trading symbol was "CSCA." On January 7, 2005, in connection with the Company's name change and change in business focus, the Company's securities began trading under the symbol "NPKG." On or about November 18, 2005, in connection with the Company's name change to BioStem, Inc., the Company's securities began trading under the symbol "BTEM."
The following table sets forth the high and low bid prices for the Company's common stock for the periods indicated as reported by the NASDAQ OTC-Bulletin Board. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions.
Bid Prices(1)*
Quarter Ended
High
Low
December 31, 2006
3.40
1.40
September 30, 2006
3.00
1.50
June 30, 2006
4.50
1.25
March 31, 2006
6.80
3.76
December 31, 2005(1)
3.40
0.01
September 30, 2005
0.66
0.38
June 30, 2005
1.00
0.60
March 31, 2005(1)
1.25
0.31
* Approximate
(1) The Company affected a 4:1 forward stock split for shareholders of record as of October 20, 2005, and the bid prices for the quarter ended December 31, 2005, retroactively reflect this split. Additionally, the Company affected a 1 for 4,000 reverse stock split effective January 7, 2005 and a 60 for 1 forward stock split effective June 24, 2003.
There were approximately 29 holders of record of the Company's common stock as of January 29, 2007. The Company has never paid a cash dividend on its common stock and does not anticipate the payment of a cash dividend in the foreseeable future. The Company intends to reinvest in its business operations any funds that could be used to pay a cash dividend. The Company's common stock is considered a "penny stock" as defined in the Commission's rules promulgated under the Exchange Act. In general, a security which is not quoted on NASDAQ or has a market price of less than $5.00 per share where the issuer does not have in excess of $2,000,000 in net tangible assets (none of which conditions the Company meets) is considered a penny stock. The Commission's rules regarding penny stocks impose additional sales practice requirements on broker-dealers who sell such securities to persons other than established customers and accredited investors (generally persons with net worth in excess of $1,000,000 or an annual income exceeding $200,000 or $300,000 jointly with their spouse). For transactions covered by the rules, the broker-dealer must make a special suitability determination for the purchaser and receive the purchaser's written agreement to the transaction prior to the sale. Thus, the Rules affect the ability of broker-dealers to sell the Company's shares should they wish to do so because of the adverse effect that the Rules have upon liquidity of penny stocks. Unless the transaction is exempt under the Rules, under the Securities Enforcement Remedies and Penny Stock Reform Act of 1990, broker-dealers effecting customer transactions in penny stocks are required to provide their customers with (i) a risk disclosure document; (ii) disclosure of current bid and ask quotations if any; (iii) disclosure of the compensation of the broker-dealer and its sales personnel in the transaction; and (iv) monthly account statements showing the market value of each penny stock held in the customer's account. As a result of the penny stock rules the market liquidity for the Company's securities may be severely adversely affected by limiting the ability of broker-dealers to sell the Company's securities and the ability of purchasers of the securities to resell them.
Recent Sales of Unregistered Securities
We issued no shares of common stock during the three months ended December 31, 2006.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA.
You should read the following selected consolidated financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes appearing elsewhere in this Form 10-K.
The consolidated statements of income data for the years ended December 31, 2006, 2005, and 2004 and the consolidated balance sheet data at December 31, 2006 and 2005, are derived from our audited consolidated financial statements appearing elsewhere in this Form 10-K. The consolidated statements of income data for the years ended December 31, 2002 and 2003, and the consolidated balance sheet data at December 31, 2002, 2003 and 2004, are derived from our audited consolidated financial statements, which are not included in this Form 10-K, but which have previously been filed in our previous Form 10-KSB filings with the Commission for the years ended December 31, 2002, 2003 and 2004. The historical results are not necessarily indicative of the results to be expected in any future period.
ITEM 7.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
PLAN OF OPERATIONS
If the Company is unable to close the Merger (described above), the Company's goal will be to grow its operations by acquiring additional booting and/or parking companies in the Atlanta, Georgia area and possibly throughout the South East, which may include the acquisition of valet parking, parking management, parking control, or parking equipment companies, or possibly purchasing existing parking lots or lots which the Company can make into parking lots. The amount of money the Company will require for these acquisitions is dependent on what acquisitions the Company may choose to make, but is expected to be substantial. As of the date of this filing, the Company has no definite plans for future acquisitions, or financing in place to complete any future acquisitions, if any. The Company believes it will require an additional $100,000 in funding to continue its business operations for the next 12 months at its current levels and approximately $250,000 within the next 12 months to expand its business operations, which there can be no assurances will be available through additional drawdown’s on the Hyde note.
COMPARISON OF OPERATING RESULTS
YEAR ENDED DECEMBER 31, 2006 COMPARED TO THE YEAR ENDED DECEMBER 31,
We had net sales of $1,762,241 for the year ended December 31, 2006, compared to net sales of $1,085,057 for the year ended December 31, 2005, an increase in net sales of $677,184 or 62.4%. The increase in net sales was mainly due to new valet parking service contracts entered into during the end of 2005, which led to increased revenues for the year ended December 31, 2006, compared to the prior year.
We had total costs and expenses of $3,813,780 for the year ended December 31, 2006, compared to total costs and expenses of $8,942,181 for the year ended December 31, 2005, a decrease in total costs and expenses of $5,128,401 or 57.4% from the prior period. The decrease in total costs and expenses was mainly due to the decrease of $5,568,416 or 80% in interest expense, which was due to the beneficial conversion features on the Junior and Senior Convertible Debentures and the $255,383 or 36.1% decrease in professional and consulting fees, offset by an increase in compensation and benefits of $160,988 for the year ended December 31, 2006 from the year ended December 31, 2005, a $368,869 increase in lot lease expense for the year ended December 31, 2006 compared to the year ended December 31, 2005, and a $163,020 increase in other operating expenses for the year ended December 31, 2006 compared to the year ended December 31, 2005.
We had a net loss of $2,051,539 for the year ended December 31, 2006, compared to a net loss of $7,857,124 for the year ended December 31, 2005, a decrease in net loss of $5,805,585 or 73.9% from the prior year. The decrease in net loss was mainly due to the $5,568,416 or 80% decrease in interest expense, in connection with the decrease in the beneficial conversion feature of the Junior and Senior Convertible Debentures, an increase in net sales of $677,184 and the decrease in professional and consulting fees of $255,383 or 36.1% for the year ended December 31, 2005 compared to the year ended December 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
We had total assets as of December 31, 2006 of $248,902, which included current assets of $66,175 relating to accounts receivable of $56,012 and cash of $10,163, equipment, net of depreciation of $30,030 and intangible assets, consisting of our covenant not-to-competes with various parties with whom we have purchased assets from in the past, including the former owner of the assets of Blue Sky and BH as described above, net of amortization of $152,697. This represented a decrease in total assets of $196,179 or 44% from total assets of $445,081 as of December 31, 2005, which decrease was mainly due to the $163,916 or 51.7% decrease in covenant-not-to-compete from covenant-not-to-compete of $316,613 as of December 31, 2005 to covenant-not-to-compete of $152,697 as of December 31, 2006, and the $67,500 decrease in prepaid consulting fees from prepaid consulting fees of $67,500 at December 31, 2005 compared to prepaid consulting fees of $0 at December 31, 2006.
Total current assets as of December 31, 2006 consisted solely of accounts receivable of $56,012 and cash of $10,163.
Equipment net of accumulated depreciation as of December 31, 2006 was $30,030, which included a Company van, booting equipment, and valet equipment including signs, key storage equipment and various other valet parking equipment.
Liabilities as of December 31, 2006 totaled $1,491,442, and included current liabilities of $1,404,692 and long term liabilities relating to loans payable of $86,750 which included amounts owed on an installment loan for equipment assumed in the ABS and BH acquisition transaction, amounts owed to a former shareholder in connection with the ABS and BH acquisition transaction, which amount is non-interest bearing and is payable at the rate of $2,778 per month, and amounts owed pursuant to our Junior Debentures, which are non-interest bearing, convertible into the Company's common stock (as described above under "Junior Debentures"), and are due January 31, 2010, less current portion of long-term debt.
Current liabilities, which increased $549,389 or 64.2% to $1,404,692 as of December 31, 2006, compared to current liabilities of $855,303 as of December 31, 2005 were mainly made up of $692,585 of accrued expenses, which was mainly due to approximately $480,000 owed to London pursuant to the Consulting Agreement, described above, as of December 31, 2006, and $584,618 of current portion of long-term debt, which included the $552,500 which we had borrowed under the Hyde note as of December 31, 2006, and certain amounts of accrued but unpaid interest on such note, which was payable in full on December 31, 2006, but which has since been extended by Hyde to December 31, 2007.
As of December 31, 2006, we had negative net working capital of $1,338,517 and an accumulated deficit of $15,190,930.
We had $73,329 of net cash used in operating activities for the year ended December 31, 2006, which was mainly due to $2,051,539 of net loss and $35,306 of accounts receivable, offset by $1,339,788 of beneficial conversion feature in connection with the Junior and Senior Debentures, $333,815 of accrued expenses, $174,787 of depreciation and amortization, $97,626 of accounts payable and $67,500 of amortization of prepaid consulting fees.
We had $1,550 in cash used in investing activities for the year ended December 31, 2006, which was from the purchase of fixed assets.
We had $90,398 of net cash provided by financing activities for the year ended December 31, 2006, which included proceeds from senior debenture of $132,500, which represented additional amounts borrowed under the Hyde note during the year ended December 31, 2006, which note had an outstanding balance of $552,500 as of December 31, 2006, and a $3,800 loan from officer, which represented amounts loaned to the Company from the Company's Chief Executive Officer, Marc Ebersole, which was offset by $40,603 of payments on debt.
We owed $552,500 in connection with the Hyde note as of December 31, 2006, and have borrowed an additional $40,000 under the Hyde note as of the filing of this report, bringing the balance of such note to $592,500, which note is due and payable on December 31, 2007, and bears interest at the rate of 10% per annum until paid, which amount is being accrued to date. The repayment of the Hyde note is secured by a security interest in all of our assets. The Hyde note is also convertible into shares of our common stock at any time at the lower of (i) 30% of the average of the three lowest closing prices in the twenty (20) trading days immediately preceding the date of conversion or (ii) $0.025.
We owed $86,750 under our Junior Debentures as of December 31, 2006, which are described in greater detail herein, and which are non-interest bearing and due and payable on January 31, 2010. The Junior Debentures are convertible into shares of our common stock at the request of the holders, at the lesser of (i) 30% of the average of the three lowest closing prices in the twenty (20) trading days immediately preceding the date of conversion or (ii) $0.00025.
In January 2007, we borrowed $5,000 under a business line of credit with the Bank of America, which amount bears 18.24% interest per annum.
On January 12, 2007, we entered into a vehicle lease for a van to be used for parking services, which lease provides for us to pay $1,184 per month for a term of forty-seven (47) months.
Due to the $15,190,930 of accumulated deficit and negative working capital of $1,338,517 as of December 31, 2006, as well as the $592,500 which we currently owe under the Hyde note and amounts owed to the Junior Debenture holders, we will require a substantial amount of additional funding to continue to meet our ongoing commitments throughout fiscal 2007. Meeting these commitments may be easier, assuming the Merger is finalized with Cryobanks, as pursuant to the Spinoff Agreement, certain of these liabilities will be assumed by our current officers and Directors and transferred to our current wholly owned subsidiaries which will be spun off into stand alone entities, of which there can be no assurance. The Company does not have any commitments or identified sources of additional capital from third parties or from its officers, directors or majority shareholders. There is no assurance that additional financing will be available on favorable terms, if at all. If the Company is unable to raise such additional financing, it would have a materially adverse effect upon the Company's ability to implement its business plan and may cause the Company to curtail, scale back, or abandon its current operations and/or its stem cell operations if the Merger closes.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We do not engage in transactions in derivative financial instruments or derivative commodity instruments. As of December 31, 2006, our financial instruments were not exposed to significant market risk due to interest rate risk, foreign currency exchange risk, commodity price risk or equity price risk.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
BIOSTEM, INC.
(Formerly National Parking Systems, Inc.)
AUDITED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED DECEMBER 31, 2006
(2005 and 2004 Restated)
CONTENTS
__________________________________________________________________________________________
Page
Reports of Independent Registered Public Accounting Firm
F
Consolidated Balance Sheets
F
Consolidated Statements of Operations
F
Consolidated Statements of Cash Flows
F
Consolidated Statement of Stockholders’ Deficit
F
Notes to Consolidated Financial Statements
F
MEYLER & COMPANY, LLC
CERTIFIED PUBLIC ACCOUNTANTS
ONE ARIN PARK
HIGHWAY
MIDDLETOWN, NJ07748
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Biostem, Inc.
We have audited the accompanying consolidated balance sheets of Biostem, Inc. as of December 31, 2006 and 2005 (restated), and the related consolidated statements of income, stockholders’ deficit, and cash flows for each of the years in the three-year period ended December 31, 2006 (2005 and 2004 restated). 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall 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 financial position of Biostem, Inc. as of December 31, 2006 and 2005 (restated), and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2006 (2005 and 2004 restated) in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note A, the accompanying 2004 and 2005 consolidated financial statements have been restated.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the consolidated financial statements, the Company has incurred net losses of $2,051,539 in 2006, $7,857,124 in 2005 and $5,200,418 in 2004, has negative working capital of $1,338,517, and a stockholders’ deficit of $1,242,540 at December 31, 2006, and there are existing uncertain conditions the Company faces relative to its ability to obtain capital and operate successfully. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding those matters are also described in Note C. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effectiveness of Biostem Inc.’s internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 28, 2007 expressed an unqualified opinion on management’s assessment of internal control over financial reporting and an adverse opinion on the effectiveness of internal control over financial reporting due to material weaknesses.
/s/ Meyler & Company, LLC
Middletown, NJ
March 28, 2007
MEYLER & COMPANY, LLC
CERTIFIED PUBLIC ACCOUNTANTS
ONE ARIN PARK
HIGHWAY 35
MIDDLETOWN, NJ 07748
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Biostem, Inc.
We have audited management’s assessment, included in Management’s Report on Internal Control Over Financial Reporting, that Biostem, Inc. did not maintain effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organization of the Treadway Commission (COSO). Biostem’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the company’s internal control over financial reporting based on our audit.
We conducted our audit 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process 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. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The following material weaknesses have been identified and included in management’s assessment:
1.
The Company’s financial and accounting organization was not adequate to support our financial accounting and reporting needs. Specifically, the Company did not maintain a sufficient number of personnel with an appropriate level of accounting knowledge commensurate with the Company’s financial reporting requirements and in fact, none of the Company’s personnel have significant technical and reporting experience. The lack of a sufficient number of personnel with an appropriate level of accounting knowledge contributed to the control deficiencies noted in items 2 through 5 below.
2.
The Company did not maintain an Audit Committee, Compensation Committee, Code of Conduct or Ethics and/or a “whistle-blower” hotline. The Company does not currently have an independent Audit Committee to provide oversight of the Company’s financial statements. Additionally, the Company does not currently have an independent Compensation Committee to provide oversight of executive compensation, a Code of Conduct and Ethics for senior management or employees, or a “whistle-blower” hotline to anonymously report suspicious activity.
3.
The Company does not maintain effective controls against the risk of fraud. Specifically, an inadequate number of controls exist to ensure that safeguarding of the Company’s assets and to address potential fraud; the Company has not completed a fraud risk assessment; neither a Code of Conduct or Ethics has been implemented for the Company’s senior management; the Company does not have an internal control department; and as stated above, no “whistle-blower” policy or hotline is in effect.
4.
The Company places an overwhelming amount of reliance on manual controls. In connection with management’s review of accounting procedures as of December 31, 2006, it was determined that 94% of controls were manual and that those manual controls were conducted infrequently, i.e. either monthly, quarterly, annually or on an unscheduled basis.
5.
Additional material weaknesses are present in the Company’s control framework, including that:
·
Cash is not adequately secured prior to depositing such cash in the bank;
·
Contracts are not properly executed before work under such contracts begin;
·
No controls exist to ensure that all revenue, accounts receivable and cash receipt transactions have been posted to the correct account or recorded in the prior period;
·
No controls exist to ensure that all expense, accounts payable and cash disbursement transactions have been posted to the correct account or recorded in the proper period;
·
No controls exist to ensure that fixed assets accounted for physically exist;
·
No controls exist to ensure that purchases have been properly approved or goods/services rendered; and
·
An inadequate number of employees has created issues regarding those employees separation of duties and job functions
These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the 2006 consolidated financial statements, and this report does not affect our report dated March 28, 2007 on those consolidated financial statements.
In addition to the above material weaknesses identified by the Company, we identified the following specific misstatements which were subsequently corrected in the consolidated financial statements:
·
Revenues relating to certain booting contracts were initially not recorded by the Company.
·
Certain operating expenses were paid in cash without supporting documentation.
·
Amounts paid to the President of the Company were initially recorded as advances rather than as Compensation expense.
·
The Company restated its financial statements for the years ended December 31, 2005 and 2004 to account for beneficial conversion features on the senior and junior debentures.
In our opinion, management’s assessment that Biostem, Inc did not maintain effective internal control over financial reporting as of December 31, 2006, is fairly stated, in all material respects, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Also, in our opinion, because of the effect of the material weakness described above on the achievement of the objectives of the control criteria, Biostem, Inc. has not maintained effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of Biostem, Inc. and our report dated March 28, 2007 expressed an unqualified opinion with an explanatory paragraph regarding the Company’s ability to continue as a going concern.
/s/ Meyler & Company, LLC
Middletown, NJ
March 28,
BIOSTEM, INC.
(Formerly National Parking Systems, Inc.)
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS’ DEFICIT
See accompanying notes to financial statements.
BIOSTEM, INC.
(Formerly National Parking Systems, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
See accompanying notes to financial statements.
BIOSTEM, INC.
(Formerly National Parking Systems, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
See accompanying notes to financial statements.
BIOSTEM, INC.
(Formerly National Parking Systems, Inc.)
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
(Restated)
See accompanying notes to financial statements.
BIOSTEM
(Formerly National Parking Systems, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2006
NOTE A - RESTATMENTS
The Company’s consolidated financial statements for the years ended December 31, 2005 and 2004 have been restated to record the effects of the beneficial conversion features on the Senior and Junior Debentures and to reclassify warrants issued in 2005 from Accrued expenses to Additional paid-in capital. The effects of the restatements are presented in the following table:
The restatements related to the beneficial conversion features results in an increase in $6,917,122 and $5,177,589 in Interest expense and Additional paid-in capital in 2005 and 2004, respectively (See also Note J). The restatement related to the warrants results in a $42,900 decrease in Accrued liabilities and corresponding increase in Additional paid-in capital in 2005.
The Statement of Stockholders’ Deficit has been retrospectively restated to give effect to the stock split which occurred October 20, 2005. Additionally, the weighted average shares outstanding for the year ended December 31, 2004 were restated from 173,700,044 to 161,700,044 to reflect a typographic error.
NOTE B - MERGER AGREEMENT
Merger Agreement
On November 22, 2005, the Company entered into an Agreement and Plan of Merger with Cryobanks International Inc., a Delaware corporation ("Cryobanks"). Pursuant to the Merger Agreement, shares of common stock, warrants and preferred stock of Cryobanks which are issued and outstanding immediately prior to the effective date of the merger will be converted into the right to receive common stock of the Company. Pursuant to the merger, Cryobanks will be merged with and into BioStem Acquisition Company, Inc., a to be formed subsidiary of the Company and a Delaware corporation ("Acquisition Company") and Cryobanks shall be dissolved. The closing date of the merger is the business day after satisfaction or waiver of the conditions set forth below. (“Closing Date”)
Pursuant to the Merger Agreement, the aggregate number of shares of the Company issued and outstanding immediately prior to the closing shall be no more than 15,650,000 shares of common stock, and there shall be no more than 2,000,000 warrants outstanding which shall have an exercise price of $1.00 per share.
Among other conditions described in the Merger Agreement, a material condition to the effectiveness and closing of the merger is the successful completion of a financing by Cryobanks which results in net proceeds to Cryobanks of at least $10,000,000 pursuant to a Private Placement, which attempts to sell 10,000,000 shares of Cryobanks preferred stock to investors at $1.00 per share and warrants to purchase 3,000,000 shares of Cryobanks common stock, exercisable at $1.10 per share, on or before the closing date of the merger. The preferred shares issued by Cryobanks in such financing will be convertible into one share of the Company for each share of preferred stock issued to such investors. These Company shares (which are in addition to the 120,000,000 shares issued to the holders of Cryobanks common stock and warrants), and
NOTE B - MERGER AGREEMENT (Continued)
Merger Agreement (Continued)
2,000,000 shares which are issuable upon conversion of $2,000,000 of debt of Cryobanks, will not be subject to any restriction or lock-up, and will be registered for resale by the Company through a registration statement.
Cryobanks has an agreement with the holder of its Series A Preferred Stock, of which there are 7,000,000 shares outstanding, that fifty percent of the proceeds of the above financing will be used to redeem the Series A Preferred Stock at a redemption price of $1.00 per share, up to $10.0 million of gross proceeds, and 100% of gross proceeds in excess of $10.0 million will be used to redeem the balance of such shares of Series A Preferred Stock.
The boards of directors of both the Company and Cryobanks have approved and the majority shareholders of both companies have consented to the merger agreement.
The Merger Agreement stated that the agreement would terminate if the merger was not consummated by March 1, 2006, or by the mutual written consent of the Company and Cryobanks, or for any other reason as described in the Merger Agreement. Such agreement has been extended until March 31, 2007.
Pursuant to the terms of the Merger Agreement, the Company will divest itself of its two operating subsidiaries, and will have no more than $25,000 of accrued but unpaid liabilities on the effective date of the merger. On the effective date of the merger, Cryobanks will merge with and into the Acquisition Company, which will become the surviving corporation in the merger. All of the outstanding shares of Series A Preferred, Series B Preferred Stock and warrants of Cryobanks will be converted into shares of common stock of the Company at an exchange ratio of 0.852578, unless such Series A Preferred Stock, Series B Preferred Stock and warrants are issued pursuant to the planned Private Placement. The total amount of shares to be issued in connection with the conversion of the Series A Preferred Stock, Series B Preferred Stock and warrants shall total 120,000,000 shares of the Company's common stock, and the exchange ratio shall be adjusted if any shares of the Company's common stock are issued prior to the closing, by dividing 120,000,000 by the sum of the then outstanding shares of the Company's common stock and warrants.
Shareholders of Cryobanks who dissent to the Merger are entitled to receive payment for their shares in lieu of shares of the Company.
All warrants to purchase shares of Cryobanks common stock which are outstanding prior to the Merger will be assumed by the Company as provided in the Merger Agreement.
Upon the closing of the merger, the Company will issue 120,000,000 shares of its common stock to the shareholders of Cryobanks, and the board of directors of Cryobanks will be appointed to the Company's board, and the current members of the Company's board will resign. On the effective date of the merger, immediately prior to the merger, the Company will have 15,650,000 shares of common stock outstanding, and warrants to purchase 2,000,000 shares of common stock with an exercise price of $1.00 per share. All other shares currently outstanding shares (159,150,044 shares) will be cancelled in exchange for the transfer by the Company of all of the common stock of its current two operating subsidiaries to those shareholders canceling shares.
Subsequent to the Merger, the Company and Cryobanks will cause to be filed a registration statement on Form S-4 registering the issuance of the 120,000,000 shares to the Cryobanks shareholders. Notwithstanding this registration, all of the 120,000,000 shares so issued shall be subject to a one year restriction against transfer, except for approximately 91,879,402 shares held by the majority shareholder of Cryobanks, which will be subject to a six-month restriction.
NOTE B - MERGER AGREEMENT (Continued)
Agreement to Purchase Subsidiaries and Cancel Shares
On November 22, 2005, the Chief Executive Officer, Marc Ebersole, and Directors, Scott Schweber and Christine Ebersole (the "Management Shareholders"), entered into an Agreement to Purchase Subsidiaries and Cancel Shares ("Spin-off Agreement"), with certain shareholders who hold Senior and Junior debentures with the Company (together with the Management Shareholders, the "Security Holders" as described below.) Pursuant to the Spin-off Agreement, the Security Holders agreed to cancel the shares of the Company's common stock which they held in return for the transfer to them of the Company's two wholly owned subsidiaries, ABS Holding Company (“ABS”) and BH Holding Company, Inc. (“BH”). Pursuant to the Spin-off Agreement, each Security Holder will receive one share of both ABS and BH for each four shares of the Company which they hold and the Company will then cancel each share of the Company's common stock which they held.
Additionally, pursuant to the Agreement to Purchase Subsidiaries and Cancel Shares, Hyde, to which the Company currently owes $552,500 ($420,000 at December 31, 2005) in connection with a Senior Debenture, agreed to release the Company from any obligations under the Senior Debenture and in exchange for such release, ABS and BH would both assume 50% of the then outstanding under the Senior Debenture.
The Spin-off Agreement is to be effective on the day following the closing of the merger with Cryobanks.
Pursuant to the Spin-off Agreement, the following Security Holders agreed to cancel share amounts as follows:
Marc Ebersole
122,000,000 shares
Christine Ebersole
4,000,000 shares
Scott A. Schweber
4,000,000 shares
The Morpheus Trust
5,460,018 shares
Livingston Investments
6,200,000 shares
The Gateway Real Estate
Investment Trust
5,090,026 shares
Burton Partners, LLC
6,200,000 shares
Picasso, LLC
6,200,000 shares
Total
159,150,044 shares
Assuming the closing of the merger and the subsequent closing of the Spin-off Agreement, the Company will no longer have any interest in the operations of ABS and B&H, and the shareholders of Cryobanks will become the majority shareholders of the Company.
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
BioStem, Inc. (formerly National Parking Systems, Inc.) (the “Company”) presently provides parking and valet services to establishments and booting services to parking garages and lots in Atlanta, Georgia through its wholly owned subsidiaries: BH Holding Company, Inc., which owns J&K Parking, Inc., and ABS Holding Company, Inc. BH Holding Company, Inc. and ABS Holding Company, Inc. are Nevada Corporations and J&K Parking, Inc. is a Georgia Corporation. All of these companies were under the common control of one individual prior to the reverse merger.
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Reverse Merger
On January 13, 2005, the Company entered into a stock exchange agreement with Cascade Mountain Mining Company, Inc. (“Cascade”) which subsequently changed its name to National Parking Systems, Inc, and then BioStem, Inc. whereby Cascade issued 40,350,000 shares of its common stock to acquire BioStem, Inc. Additionally, Cascade authorized a 1 for 4,000 reverse split of its common stock prior to the merger. In connection with the merger, BioStem, Inc. became a wholly owned subsidiary of Cascade. Prior to the merger, Cascade was a non-operating “shell” corporation. Pursuant to Securities and Exchange Commission rules, the merger of a private operating company, BioStem, Inc., into a non-operating public shell corporation, with nominal net assets, is considered a capital transaction. At the time of the merger, the officers and directors of Cascade resigned and were replaced with the officers and directors of BioStem, Inc. For financial statement presentation, the merger has been reflected in the financial statements as though it occurred on December 31, 2004. The historical financial statements prior to December 31, 2004 are those of BioStem, Inc. Since the merger is a recapitalization and not a business combination, pro forma information is not presented.
Going Concern
As shown in the accompanying financial statements, the Company has incurred net losses of $2,051,539 in 2006, $7,857,124 in 2005 and $5,200,418 in 2004, has negative working capital of $1,338,517, and a stockholders’ deficit of $1,242,540 at December 31, 2006. Management’s plans include the raising of capital through the equity markets to fund future operations, seeking additional acquisitions, the generating of revenue through its business, and the merger with Cryobanks International Inc. as discussed in Note G. Failure to raise adequate capital and generate adequate sales revenues could result in the Company having to curtail or cease operations. Additionally, even if the Company does raise sufficient capital to support its operating expenses and generate adequate revenues, there can be no assurances that the revenue will be sufficient to enable it to develop business to a level where it will generate profits and cash flows from operations. These matters raise substantial doubt about the Company’s ability to continue as a going concern. However, the accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
Consolidated Financial Statements
The consolidated financial statements include the Company and its wholly owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash Equivalents
For purposes of reporting cash flows, cash equivalents include investment instruments purchased with an original maturity of three months or less.
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Fair Values of Financial Instruments
The Company uses financial instruments in the normal course of business. The carrying values of cash, accounts receivable, advance receivable, bank overdraft, accounts payable and accrued expenses approximate their fair value due to the short-term maturities of these assets and liabilities. The carrying values of notes payable and loans payable approximate their fair value based upon management’s estimates using the best available information.
Property and Equipment and Depreciation
Property and equipment is stated at cost and is depreciated using the straight line method over the estimated useful lives of the respective assets. Routine maintenance, repairs and replacement costs are expensed as incurred and improvements that extend the useful life of the assets are capitalized. When property and equipment is sold or otherwise disposed of, the cost and related accumulated depreciation are eliminated from the accounts and any resulting gain or loss is recognized in operations.
Net Loss Per Common Share
The Company computes per share amounts in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share”. SFAS No. 128 requires presentation of basic and diluted EPS. Basic EPS is computed by dividing the income (loss) available to Common Stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS is based on the weighted-average number of shares of Common Stock and Common Stock equivalents outstanding during the periods.
Although there were common stock equivalents outstanding at December 31, 2006, they were not included in the calculation of earnings per share because they would have been considered antidilutive.
Revenue Recognition Policy
Revenue is recognized for the valet and parking establishments when the service is performed. Cash is collected immediately and deposited in the bank the next day. In connection with the booting services, revenue is recognized when the service is performed
Stock-Based Compensation
The Company accounts for employee stock based compensation and stock issued for services using the fair value method. In accordance with SFAS No. 123R, the measurement date of shares issued for services is the date at which the counterparty’s performance is complete.
The Company accounts for stock issued for services using the fair value method. In accordance with Emerging Issues Task Force (“EITF”) 96-18, the measurement date of shares issued for services is the date at which the counterparty’s performance is complete.
Impairment of Long-Lived Assets
The Company reviews long-lived assets for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeded the fair value of the assets.
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income Taxes
The Company utilizes SFAS No. 109, Accounting for Income Taxes. Under this method, the Company recognizes a deferred tax liability or asset for temporary differences between the tax basis of an asset or liability and the related amount reported on the financial statements.
Beneficial Conversion Features
The Company follows EITF 00-27, “Application of Issue No. 98-5 to Certain Convertible Instruments”, and EITF 98-5, “Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios” in accounting for beneficial conversion features associated with its convertible debentures. A beneficial conversion feature is computed as the difference between the effective conversion price and the fair value of the stock at the commitment date multiplied by the number of shares which the security is convertible.
Recent Accounting Pronouncements
In June 2006, the Financial Accounting Standards Board (“FASB”) issued Interpretation 48, “Accounting for Income Tax Uncertainties” (“FIN 48”). FIN 48 defines the threshold for recognizing the benefits of tax return positions in the financial statements as “more-likely-than-not” to be sustained by the taxing authority. Recently issued literature also provides guidance on the derecognition, measurement and classification of income tax uncertainties, along with any related interest and penalties. FIN 48 also includes guidance concerning accounting for income tax uncertainties in interim periods and increases the level of disclosures associated with any recorded income tax uncertainties. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company expects to adopt the provisions of FIN 48 beginning in the first quarter of 2007. The Company is currently in the process of determining the impact, if any, of adopting the provisions of FIN 48 on its financial position, results of operations and liquidity.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value under other accounting pronouncements that permit or require fair value measurements, changes the methods used to measure fair value and expands disclosures about fair value measurements. In particular, disclosures are required to provide information on the extent to which fair value is used to measure assets and liabilities; the inputs used to develop measurements; and the effect of certain of the measurements on earnings (or changes in net assets). SFAS No. 157 is effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. Early adoption, as of the beginning of an entity’s fiscal year, is also permitted, provided interim financial statements have not yet been issued. The Company expects to adopt the provisions of FIN 48 beginning in the first quarter of 2008. The Company is currently evaluating the potential impact, if any, that the adoption of SFAS No. 157 will have on its consolidated financial statements.
In September 2006, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (“SAB No. 108”). SAB No. 108 provides guidance on how prior year misstatements should be considered when quantifying misstatements in the current year financial statements. SAB No. 108 requires registrants to quantify misstatements using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative
and qualitative factors are considered, is material. SAB No. 108 does not change the guidance in SAB No. 99, “Materiality,” when evaluating the materiality of misstatements. SAB No. 108 is effective for fiscal years ending after November 15, 2006. Upon initial application, SAB No. 108 permits a one-time cumulative effect adjustment to beginning retained earnings. The Company adopted SAB No. 108 for the fiscal year ended December 31, 2006. Adoption of SAB No. 108 did not have a material impact on the consolidated financial statements.
NOTE C - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Recent Accounting Pronouncements (Continued)
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (“SFAS 159”). SFAS 159 allows entities to measure at fair value many financial instruments and certain other assets and liabilities that are not otherwise required to be measured at fair value. SFAS 159 is effective for fiscal years beginning after November 15, 2007. We have not determined what impact, if any, that adoption will have on our results of operations, cash flows or financial position.
NOTE D - EQUIPMENT
Equipment at December 31, 2006 and 2005 is as follows:
Average
Useful Life
Automobile
$15,000
$ 15,000
Booting equipment
26,550
25,000
Valet equipment
10,000
10,000
51,550
50,000
Less: accumulated depreciation
(21,520)
(10,649)
$30,030
$ 39,351
Depreciation expense of $10,871, $9,999 and $650 is included within Depreciation and amortization expense on the Statement of Operations for the years ended December 31, 2006, 2005 and 2004, respectively.
NOTE E - COVENANT-NOT-TO-COMPETE
On November 4, 2004 and prior to the reverse merger, Mr. Marc Ebersole, the Chief Executive Officer of National Parking Systems, Inc. formed two corporations: (1) BH Holding Company, Inc. (BH) and (2) ABS Holding Company, Inc. (ABS). Each company had 500 common shares outstanding.
On November 4, 2004, BH acquired J&K Parking, Inc. d/b/a B&H Parking. Mr. Ebersole, who owned 50% of B&H Parking, merged his interest in BH for a $30,000 promissory note for assets and a three year covenant not to compete. Since the company had no other assets, the value was placed on the covenant not to compete. BH acquired the other 50% from Mr. Ebersole’s partner for $200,000. Of this amount, $175,000 was loaned under the Senior Secured Convertible Debenture and the Company issued an additional $25,000 promissory note to Mr. Ebersole’s partner. No value was placed on the customer lists, the only other asset since the contracts were not binding on either party and were considered month to month.
On November 4, 2004, ABS acquired the assets of Blue Sky Parking, Inc. for $200,000. Blue Sky was primarily in the booting business. A value of $25,000 was placed on the booting equipment which was deemed to be the fair market value at date of acquisition. A payment of $100,000 was made from borrowings under the Senior Secured Convertible Promissory Note and ABS issued a $100,000 promissory note to the former owners. The purchase price of $200,000 contained a non-compete agreement. Blue Sky had two informal booting contracts and one was cancelled prior to acquisition. The other agreement was on a month to month basis.
The share exchange agreement exchanges all of the outstanding common stock of BH and ABS for 130,000,000 shares of National Parking Systems’, Inc. common stock. The share exchange agreement
NOTE E - COVENANT-NOT-TO-COMPETE (Continued)
contained a non-compete agreement. Additionally, the right to receive preferred stock of BH and ABS was exchanged for 31,000,000 shares of National Parking Systems’, Inc. common stock and a Junior Convertible Debenture in the amount of $86,750. These share exchange agreements contained non-compete agreements with the owners of the acquired business.
The following is a summary of the covenants not to compete at December 31, 2005 and 2004 :
Amortization expense of $163,916, $163,916 and $11,221 is included within Depreciation and amortization expense on the Statement of Operations for the years ended December 31, 2006, 2005 and 2004, respectively. Estimated amortization for 2007 is $152,697.
NOTE F - RELATED PARTY TRANSACTIONS
In connection with the original merger, the Company issued a $30,000 note to the President and Chief Executive Officer, who was also the majority owner of one of the companies acquired, for a non-compete agreement. The note is payable at the rate of $900 per month commencing December 1, 2004 with a final balloon payment due on November 1, 2005. The note is unsecured and bears interest at the rate of 18% per annum. During 2005, this amount was repaid. The President, at December 31, 2005, has an outstanding advance from the Company of $911 and a balance due from the company of $1,389 at December 31, 2006.
Professional and consulting fees in 2006 and 2005 to Hyde Investments, Ltd. (“Hyde”) and London Finance Group, Ltd. (“London”) which are under common control, amounted to $240,000 and $582,900 and interest of $48,122 and $41,455 was also incurred to Hyde in 2006 and 2005.
NOTE G - LONG-TERM DEBT
NOTE G - LONG-TERM DEBT (Continued)
NOTE H - INCOME TAXES
The principal types of differences, which are measured at current tax rates, are net operating loss carry forwards. At December 31, 2006 and 2005, these differences resulted in a deferred tax asset of approximately $652,000 and $328,000, respectively. SFAS No. 109 requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets. Since realization is not assured, the Company has recorded a valuation allowance for the entire deferred tax asset, and the accompanying financial statements do not reflect any net asset for deferred taxes at December 31, 2006 and, 2005.
The Company’s net operating loss carry forwards amounted to approximately $1,917,000 and $980,000 at December 31, 2006 and 2005 respectively, which will expire through 2021.
NOTE I - STOCKHOLDERS’ DEFICIT
The Company’s certificate of incorporation was amended January 4, 2005 to change the name of the company from Cascade Mountain Mining Company, Inc. to National Parking, Inc. Additionally, a 1 to 4,000 reverse stock split was effected. The financial statements give effect to these transactions.
In connection with the reverse merger, 161,400,000 shares of the Company’s common stock were issued to acquire National Parking, Inc.
In July 2005, the Company issued 12,000,000 shares under an approved S-8 stock plan to consultants for services rendered in connection with the Company’s reverse merger. The shares were valued at $0.25 per share. Accordingly, stock for services in the amount of $300,000 was recorded and included in professional and consulting fees expense.
In October 2005, the Company issued 18,000 shares of common stock to attorneys in consideration for legal services rendered to the Company. The shares were valued at $0.15 per share. Accordingly, stock for services in the amount of $2,700 was recorded and included in professional and consulting fees expense.
The Company affected a 4:1 forward stock split for shareholders of record as of October 20, 2005. All tabular data and EPS have been adjusted.
In November 2005, the Company issued 1,500,000 shares of common stock to consultants. The shares were valued at $0.06 per share. Accordingly, stock for services in the amount of $90,000 was recorded, of which $67,500 was recorded in Prepaid consulting fees and $22,500 was recorded in professional and consulting fees expense. The Prepaid consulting fees are being amortized over the life of the consulting agreement.
NOTE J - COMMITMENTS AND CONTINGENCIES
Senior Secured Convertible Debenture
On October, 15, 2004, the Company issued a Senior Secured Convertible Debenture which allows for the Company to borrow up to $1,000,000. $552,500 and $420,000 were outstanding at December 31, 2006 and 2005, respectively. The Debenture was due October 15, 2005; however, the due date of the Senior Debenture was extended by Hyde and the Company. As a result of the extension, the due date was extended to December 31, 2007. The Debenture bears interest at the rate of 10% per annum, and has a general security lien against all of the Company’s assets. The Debenture, including accrued interest, is convertible into the Company’s common stock at the lesser of a) 30% of the average of the three lowest closing prices in the twenty (20) trading days immediately preceding the conversion date or, b) $0.10 (pre-split). The Debenture contains restrictions on the issuance of additional shares of preferred or common stock, payment of dividends, or issuance of additional debentures without the consent of a majority of the Senior Convertible Debenture holders and is personally guaranteed by the Company’s CEO.
The Company computed a beneficial conversion feature of $7,980,815, which consisted of $5,177,589, $1,463,438, and $1,339,788 in 2004, 2005, and 2006, respectively. This feature was determined by subtracting the effective conversion price of from the fair value of the Company’s stock at the dates of issuance, multiplied by the shares which the debenture is convertible according to the debenture agreements. The entire beneficial conversion is included in Interest Expense as the debenture is immediately convertible into common stock.
Junior Convertible Debenture
In connection with the merger, the Company issued $86,750 in 5 year Junior Convertible Debentures dated January 13, 2005. The Debentures are due January 31, 2010 and are non-interest bearing. The holder of the Debentures is entitled to convert the Debentures into common stock of the Company at the lesser of a) 30% of the average of the three lowest closing prices in the twenty (20) trading days immediately preceding the conversion date or, b) $0.10 (pre-split).
The Company computed a beneficial conversion feature of $5,453,684 for the year ended December 31, 2005. This feature was determined by subtracting the effective conversion price of from the fair value of the Company’s stock at the dates of issuance, multiplied by the shares which the debenture is convertible according to the debenture agreements. The entire beneficial conversion is included in Interest Expense as the debenture is immediately convertible into common stock.
Warrant Agreements
In connection with the merger, the Company, on January 5, 2005, issued a warrant to London for 1,000,000 shares of the Company’s common stock at an exercise price of $0.10 per share (pre-split). The warrants vest immediately and expire January 5, 2009. The warrants have participating rights should the Company file a registration statement with the Securities and Exchange Commission. The Company recorded $42,900 in professional and consulting fees, which represents the fair value of the warrants at the time services were performed.
The Company entered into a consulting agreement with Vijay Alimchandani, dba Financial Systems International (“Financial”), on November 11, 2005 which lasted until June 30, 2006. In connection with this agreement, the Company gave Financial a warrant to purchase 500,000 shares of common stock at an exercise price of $1.00 per share. The warrants vested immediately and expire November 1, 2010. Since the Company did not complete the merger with Cryobanks by June 30, 2006, the Company has the right to purchase the warrant, along with the 1,500,000 shares issued to consultants in November of 2005 (see Note I), for $1,000. No expense was recorded for the warrants since they were determined to have no value at the time services were performed.
NOTE J - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Consulting Agreement
The Company, on January 5, 2005, entered into a 2 year consulting agreement with London for services relating to mergers, acquisitions, and the establishment of investment banking relationships. Under the terms of the consulting arrangement, the Company is to a) pay a non-refundable retainer of $5,000 per month, b) issue 3,000,000 shares of the Company’s common stock to be registered as promptly as possible but no later than the date the Company files its first registration statement, c) pay a fee of 10% of the consideration paid for any acquisition or sale by the Company and d) reimburse London for reasonable travel expenses. Additionally, the Company would issue to London a warrant to purchase up to 1,000,000 shares of the Company’s common stock at an exercise price of $0.10 per share (pre-split). The common stock issuable upon exercise will be registered at the Company’s expense. The warrants vest immediately.
On November 23, 2005, the Company amended the London agreement to reduce the number of warrants to be issued from 4,000,000 post 4:1 forward split shares to 1,500,000 post 4:1 forward split shares, and increased the exercise price of those warrants from $0.025 to $1.00 per share. Additionally, the fee was increased to $20,000 per month and the expiration date extended to January 31, 2009. As of December 31, 2006 and 2005 the Company has accrued $480,000 and $240,000 respectively as consulting expense related to this agreement.
Employment Agreement
The Company, on December 1, 2004, entered into a 3 year employment agreement with the President and Chief Executive Officer. The agreement allows for an annual salary of $120,000 plus health benefits and an auto allowance.
Lease Agreement
On February 13, 2004, the Company entered into a 5 year lease agreement for its corporate headquarters. Rent expense was $19,010, $17,361, and $15,109 for the years ended December 31, 2006, 2005, and 2004, respectively.
The Company also has various equipment leases for surveillance cameras and automated parking stations.
License Agreements
On January 2, 2006, the Company entered into two separate three year license agreements to provide valet and other parking services at two locations in the Atlanta area. These agreements, with a 60 day cancellation clause, call for annual rental payments by the Company of $354,000 ($29,500 monthly) in exchange for managing, monitoring, and collection of all fees for the “work of the properties”. Lot rental expense including late fees as $356,000 for the year ended December 31, 2006.
The minimum annual rental payments for the agreements described above are as follows:
NOTE K - CONCENTRATIONS
For the year ended December 31, 2006, approximately 23% of the Company’s sales were with one lot and approximately 51% were with three lots.
NOTE L - SEGMENT INFORMATION
The Company’s two reportable segments are Parking and Booting. In evaluating these segments, the Company analyzes Sales, Income (Loss) Before Depreciation, Amortization and Interest, and Net Income (Loss). The following summarizes the Company’s reportable segments.
NOTE M - SUBSEQUENT EVENTS
The Company has entered into a vehicle lease agreement effective January 12, 2007. The agreement calls for annual rental payments by the company of $14,205 ($1,184 monthly) for a total of forty-seven months.
The Company has borrowed an additional $40,000 under the Senior Convertible debenture subsequent to December 31, 2006 bringing the total outstanding to $592,500.
NOTE M - SUBSEQUENT EVENTS (Continued)
The Company has borrowed $5,000 under a business credit line issued by the Bank of America. The annual percentage rate on this credit line is 18.24%.
NOTE N- QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The following summarizes the unaudited quarterly financial information of the Company:
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES.
(a) Disclosure Controls and Procedures - We maintain disclosure controls and procedures that are designed to ensure that the information disclosed in the reports we file with the SEC under the Exchange Act of 1934 as amended (the Exchange Act) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.
Management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), Marc Ebersole, evaluated the effectiveness of our disclosure controls and procedures, as of December 31, 2006, in accordance with Rules 13a-15(b) and 15d-15(b) of the Exchange Act. Based on that evaluation and the existence of certain material weaknesses discussed below under “Management’s Report on Internal Control Over Financial Reporting,” our CEO and CFO concluded that our disclosure controls and procedures were not effective as of December 31, 2006.
(b) Management’s Report on Internal Control Over Financial Reporting - Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act). A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and the oversight of the board of directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision of our CEO and CFO, management conducted an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006, using the criteria set forth in the framework established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control - Integrated Framework.
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of a company’s annual or interim financial statements will not be prevented or detected. Management identified the following material weaknesses in our internal control over financial reporting as of December 31, 2006:
(5)
Additional material weaknesses are present in our control framework, including that:
· Cash is not adequately secured prior to depositing such cash in the bank;
· Contracts are not properly executed before work under such contracts begin;
· No controls exist to ensure that all revenue, accounts receivable and cash receipt transactions have been posted to the correct account or recorded in the prior period;
· No controls exist to ensure that all expense, accounts payable and cash disbursement transactions have been posted to the correct account or recorded in the proper period;
· No controls exist to ensure that fixed assets accounted for physically exist;
· No controls exist to ensure that purchases have been properly approved or goods/services rendered; and
· An inadequate number of employees has created issues regarding those employees separation of duties and job functions
The control deficiencies in item (1) above, and to a lesser extent, the control deficiencies listed in items (2) through (5) above resulted in us filing our Annual Report on Form 10-KSB for the period ended December 31, 2005, past such deadline as required by the Securities and Exchange Commission, and caused us to file several other of our Quarterly Reports on Form 10-QSB on the extended deadline such reports are required to be filed with the Commission. Additionally, each of the control deficiencies described in items (1) through (5) above could result in a misstatement in our annual or interim consolidated financial statements that would not be prevented or detected. Management has determined that each of the control deficiencies described in Items (1) through (5) constitutes a material weakness to our controls over financial reporting.
As a result of these material weaknesses, management has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2006, based on criteria established in Internal Control - Integrated Framework issued by the COSO. Management’s assessment of the effectiveness of our internal control over financial reporting as of December 31, 2006, has been audited by Meyler & Company, LLC, our independent registered public accounting firm, as stated in its report, which appears in Item 8 of this Annual Report on Form 10-K.
Plan for Remediation of Material Weaknesses - The deficiencies set forth above have been noted by our management. Throughout fiscal 2007, we hope to put in place controls and procedures and/or plans of action to address the deficiencies set forth in items (1) through (5) above, of which there can be no assurance.
(c) Changes in internal control over financial reporting. There were no changes in the Company's internal control over financial reporting during the fourth fiscal quarter that materially affected, or are reasonably likely to materially affect, the 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 GOVERNACE.
DIRECTORS AND OFFICERS
The Directors and Officers of the Company are as follows:
Name
Age
Position
Marc Ebersole
Chief Executive Officer,
President, Treasurer,
Secretary and Director
Christine Ebersole
Director
Scott Schweber
Director
Marc Ebersole
Marc Ebersole has served as the Company's Chief Executive Officer and Director since September 1, 2004. He has served as Chief Executive Officer of the Company's wholly owned subsidiaries ABS Holding Company, Inc. ("ABS") and BH Holding Company, Inc. ("BH"), since their inception on November 4, 2004. Since June 1988, he has served as Chief Executive Officer of BH's wholly owned subsidiary J & K Parking d/b/a B&H Parking ("J&K"). From May 1984 to June 1988, he served as General Manager of J&K Parking and from October 1980 to May 1984, Mr. Ebersole was employed as a valet with J&K Parking.
Christine Ebersole
Christine Ebersole has served as a Director of the Company since August 12, 2005. She has served as the Company's Office Manager since November 2004. From June 2003 to April 2004, she worked as a waitress at the Executive Club in New York City, New York. From September 2002 to June 2003, she was employed as an Office Manager with Sanford and Associates, in New York City, New York. From September 1999 to September 2002, she was employed as territory manger and pet sitter for Critter Sitters in Atlanta, Georgia. Ms. Ebersole is the niece of our Chief Executive Officer and Director, Marc Ebersole.
Scott Schweber
Scott Schweber has served as a Director of the Company since August 12, 2005. Mr. Schweber has provided various legal services to the Company since November 2004. Since January 2004, he has served as "Of Counsel" to Dietrick, Evans, Scholz & Williams, L.L.C. in Atlanta, Georgia. From January 1993 to January 2004, he served as a partner with the law firm Schweber, Izenson & Anderson, LLP, in Atlanta Georgia. Mr. Schweber obtained a Bachelors degree in Social Thought and Political Economy in 1982, from the University of Massachusetts and a Juris Doctorate from Emory University in 1985. Mr. Schweber is admitted to the State Bar of Georgia.
All Directors of the Company will hold office until the next annual meeting of the shareholders, and until their successors have been elected and qualified. Officers of the Company are elected by the Board of Directors and hold office at the pleasure of the Board. Christine Ebersole is the niece of our Chief Executive Officer and Director, Marc Ebersole.
Changes in the Company's Officers and Directors
On January 14, 2005, Ari Kaplan resigned as a Director of the Company, leaving Marc Ebersole as the sole office and Director of the Company. On August 12, 2005, the Company's Board of Directors appointed Scott Schweber and Christine Ebersole, who is the niece of our Chief Executive Officer and Director, Marc Ebersole, as Directors of the Company.
Employment Agreement
On November 4, 2004, Marc Ebersole, the Company's Chief Executive officer entered into an Employment Agreement with the Company ("Employment Agreement"). Mr. Ebersole's duties under the Employment Agreement include responsibility for the day to day operations of the Company and other duties associated with his position as the Company's Chief Executive Officer. The term of the Employment Agreement is for a period of five (5) years terminating on October 31, 2009. Under the Employment Agreement, Mr. Ebersole is entitled to One Hundred and Twenty Thousand dollars ($120,000.00) a year (his "Basic Compensation"), as well as an automobile allowance of $950.00 a month, until such time as Mr. Ebersole's vehicle is paid in full, and $500.00 a month as a healthcare allowance. Additionally, Mr. Ebersole is eligible for annual bonuses under the Employment Agreement, not to exceed Fifty percent (50%) of his Basic Compensation. The Company also agreed to reimburse Mr. Ebersole for all necessary and usual expenses incurred by him on behalf of the Company.
Under the Employment Agreement, Mr. Ebersole is entitled to paid vacation days pursuant to the Company's vacation policies, which shall not exceed fifteen (15) days per year. Unused vacation days shall expire at the end of each calendar year. Additionally, under the Employment Agreement, the Company agrees to indemnify Mr. Ebersole for all claims and causes of action asserted against him relating to his position as an officer and Director of the Company, including reimbursement for all of the fees and expenses of his counsel associated with such claims and causes of actions.
In connection with the Employment Agreement and BH's acquisition of J&K from Mr. Ebersole and Mr. Pringle, Mr. Ebersole signed a covenant not to compete ("Covenant").
Under the Covenant, Mr. Ebersole agreed not to engage in, be employed in, or have any interest in any occupation or business similar to that of BH or ABS, within the Southeast United States, including Georgia, Alabama, Louisiana, Tennessee, Florida, South Carolina, North Carolina and any location where BH and/or ABS conduces valet parking, parking management and vehicle immobilization, for three (3) years from the date of the termination of this employment with the Company.
SECTION 16 (A) BENEFICIAL OWNERSHIP
REPORTING COMPLIANCE
Section 16(a) of the securities Exchange Act of 1934, as amended, requires the Company's directors, executive officers and persons who own more than 10% of a class of the Company's equity securities which are registered under the Exchange Act to file with the Securities and Exchange Commission initial reports of ownership and reports of changes of ownership of such registered securities. Such executive officers, directors and greater than 10% beneficial owners are required by Commission regulation to furnish the Company with copies of all Section 16(a) forms filed by such reporting persons.
To the Company's knowledge, based solely on a review of the copies of such reports furnished to the Company and on representations that no other reports were required, no person required to file such a report failed to file during fiscal 2004. Based on stockholder filings with the SEC, Marc Ebersole, Christine Ebersole and Scott Schweber are subject to Section 16(a) filing requirements.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION
* Does not include perquisites and other personal benefits which amounts total less than 10% in aggregate of the executive’s total compensation as disclosed above. No executive officers were issued any restricted stock awards, options or SARs, LTIP payouts, non-equity incentive plan compensation, non-qualified deferred compensation, during the years presented above. Other than the executive officers named above, no officer of the Company made more than $100,000 during the years presented above.
(1) Pursuant to Mr. Ebersole's Employment Agreement, described above, we agreed to pay Mr. Ebersole $125,000 per year in salary until the expiration of the Employment Agreement on October 31, 2009. We also agreed to pay him $950 a month in compensation for his automobile and $500 per month as a healthcare allowance pursuant to his Employment Agreement, which amounts are included under the "Other Annual Compensation" column of the table above.
(2) Mr. Ebersole was appointed Chief Executive Officer of the Company on September 1, 2004. On the same day, Ari Kaplan resigned as Chief Executive Officer of the Company. Mr. Kaplan subsequently resigned from his position as a Director of the Company on January 14, 2005.
(3) Wayne Daley resigned as Chief Executive Officer and Director of the Company on August 1, 2004. On the same date, Mr. Kaplan was appointed Chief Executive Officer and Director of the Company. Mr. Daley was paid $5,000 per month as salary and $2,000 per month as reimbursement for business expenses, under a two year employment contract he signed with the Company in July 2003.
COMPENSATION DISCUSSION AND ANALYSIS
Director Compensation
No non-executive members of our Board of Directors have ever received any compensation for any services performed in their capacity as a Director of the Company, however, the Board of Directors reserves the right in the future to award the members of the Board of Directors cash or stock based consideration for their services to the Company, which awards, if granted shall be in the sole determination of the Board of Directors.
Executive Compensation Philosophy
Our Board of Directors, consisting of Marc Ebersole (our sole executive officer for the year ended December 31, 2006), Christine Ebersole (an employee of us) and Scott Schweber, determines the compensation given to our executive officers in their sole determination. Our executive compensation program is designed to attract and retain talented executives to meet our short-term and long-term business objectives. In doing so, we attempt to align our executives’ interests with the interests of our shareholders by providing an adequate compensation package to such executives. This compensation package includes a base salary, which we believe is competitive with other companies of our relative size. In addition, although we have not to date, our Board of Directors also reserves the right to award incentive bonuses which are linked to our performance, as well as to the individual executive officer’s performance. This package may also include long-term, stock based compensation to certain executives which is intended to align the performance of our executives with our long-term business strategies. While our Board of Directors has not granted any performance base stock options to date, the Board of Directors reserves the right to grant such options in the future, if the Board in its sole determination believes such grants would be in the best interests of the Company.
Base Salary
The base salary of our sole executive officer, Marc Ebersole, our Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer, was established by the Employment Agreement which we entered into with Mr. Ebersole in December 2005, which base salary was established by evaluating the range of responsibilities of his positions, as well as the anticipated impact Mr. Ebersole could have in meeting our strategic objectives. The established base salary is then benchmarked to comparable positions with that of industry best practices. Base salaries are adjusted to reflect the varying levels of position responsibilities and individual executive performance.
Incentive Bonus
Along with Mr. Ebersole’s base salary under his Employment Agreement, the Board of Directors reserves the right to give Mr. Ebersole incentive bonuses, which bonuses the Board of Directors may grant in its sole discretion, if the Board of Directors believes such bonuses are in the Company’s best interest, after analyzing our current business objectives and growth, if any, and the amount of revenue we are able to generate each month, which revenue is a direct result of the actions and ability of Mr. Ebersole.
As of the date of this filing, no executive officers or Directors hold any outstanding options to purchase shares of common stock in the Company, nor were there any outstanding options to purchase shares in the common stock of the Company as of December 31, 2006 or 2005.
Long-term, Stock Based Compensation
In order to attract, retain and motivate executive talent necessary to support the Company’s long-term business strategy we may award certain executives with long-term, stock based compensation in the future, in the sole discretion of our Board of Directors, which we do not currently have any immediate plans to award.
Criteria for Compensation Levels
The Company has always sought to attract and retain qualified executives and employees able to positively contribute to the success of the Company for the benefit of its various stakeholders, the most important of which is its shareholders, but also including its customers, its employees, and the communities in which the Company operates.
The Board of Directors (in establishing compensation levels for Chief Executive Officer) and the Company (in establishing compensation levels for other executives, if any) considers many factors, including, but not limited to, the individual’s abilities and executed performance that results in: the advancement of corporate goals of the Company, execution of the Company’s business strategies, contributions to positive financial results, and contributions to the development of the management team and other employees. An officer must demonstrate his or her ability to deliver results in his or her areas of responsibility, which can include, among other things: business development with new and existing customers, development of new products, efficient management of operations and systems, implementation of appropriate changes and improvements to operations and systems, personnel management, financial management, and strategic decision making. In determining compensation levels, the Board of Directors also considers: competitiveness of compensation packages relative to other comparable companies, both inside and outside of the valet parking and vehicle immobilization industry, and the experience level of each particular individual.
Compensation levels for executive officers are generally reviewed upon the expiration of such executive’s employment agreement (if any), or annually, but may be reviewed more often as deemed appropriate.
Compensation Philosophy and Strategy
In addition to the “Criteria for Compensation Levels” set forth above, the Company has a “Compensation Philosophy” for all employees of the Company (set forth below), and a “Compensation Strategy for Key Management Personnel” (set forth below), a substantial portion of which also applies to all employees of the Company.
Compensation Philosophy
The Company’s compensation philosophy is as follows:
•
The Company believes that compensation is an integral component of its overall business and human resource strategies. The Company’s compensation plans will strive to promote the hiring and retention of personnel necessary to execute the Company’s business strategies and achieve its business objectives.
•
The Company’s compensation plans will be strategy-focused, competitive, and recognize and reward individual and group contributions and results. The Company’s compensation plans will strive to promote an alignment of the interests of employees with the interests of the shareholders by having a portion of compensation based on financial results and actions that will generate future shareholder value.
•
In order to reward financial performance over time, the Company’s compensation programs generally will consist of: base compensation, and may also consist of short-term variable incentives and long-term variable incentives, as appropriate.
•
The Company’s compensation plans will be administered consistently and fairly to promote equal opportunities for the Company’s employees.
Compensation Strategy for Key Management Personnel
The Company’s compensation strategy for its key management personnel is as follows:
•
Total compensation will include base salary and short-term and long-term variable incentives based on annual performance, and long-term variable incentives, in each case, where appropriate.
•
Compensation will be comparable to general and industry-specific compensation practices.
•
Generally, base compensation, and targeted short and long-term variable compensation, if any, will be established within the range of compensation of similarly situated companies. The Company’s organization size and complexity will be taken into account, and therefore similarly situated companies includes companies of similar size and complexity whether or not such companies are in the Company’s industry or not.
•
When determining compensation for officers and managers, the Company takes into account the employee’s knowledge and experience, including industry specific knowledge and experience, to the extent such knowledge and experience contributes to the Company’s ability to achieve its business objectives.
•
The Company reserves the right to adjust annual base salaries of employees if individual performance is at or above pre-established performance expectations.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table sets forth information as of January 29, 2007, with respect to the beneficial ownership of the common stock by (i) each director and officer of the Company, (ii) all directors and officers as a group and (iii) each person known by the Company to own beneficially 5% or more of the common stock:
Name
No. of shares
Percentage(1)
Marc Ebersole
122,000,000
69.6%
Christine Ebersole
4,000,000
2.3%
Scott Schweber
4,000,000
2.3%
All the officers
130,000,000
74.2%
and Directors
as a group (3 persons)
(1) Using 175,218,044 shares issued and outstanding as of January 29, 2007
Changes in Control of Registrant
At the Closing of the Merger (described above), of which there can be no assurance, it is anticipated that the officers and Directors of Cryobanks will become the officers and Directors of the Company until the earlier of their resignation or removal or until their respective successors are duly elected and qualified. It is possible that the officers and Directors of Cryobanks set forth below may change prior to the Closing of the Merger.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
On November 4, 2004, the Company entered into an Employment Agreement with the Company's Chief Executive Officer, Marc Ebersole. Under the Employment Agreement, Mr. Ebersole is to serve as the Company's Chief Executive Officer and perform the day to day operations of the Company. The Employment Agreement is for a term of Five (5) years, ending on October 31, 2009. Mr. Ebersole is to be paid One Hundred and Twenty Thousand dollars($120,000.00) a year ("Basic Compensation"), and is eligible for an annual bonus not to exceed Fifty percent (50%) of his Basic Compensation. Mr. Ebersole's Employment Agreement is described in further detail under "Item 9. Directors, Executive Officer, Promoters and Control Persons Compliance with Section 16(a) of the Exchange Act," above.
On January 24, 2005, the Company issued the Company's Chief Executive Officer, Marc Ebersole, 130,400,000, restricted shares of the Company's common stock in connection with an Exchange Agreement entered into between Mr. Ebersole and the Company. Subsequent to this issuance, Mr. Ebersole transferred 4,400,000 restricted shares to two individuals, and 4,000,000 restricted shares to his niece, Christine Ebersole, who is also a Director of the Company, leaving him the current beneficial owner of 122,000,000 shares of the Company's common stock.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
Audit Fees
The aggregate fees billed for the fiscal years ended December 31, 2006 and 2005, for professional services rendered by the Company's principal accountants, Meyler & Company, LLC ("Meyler") for the audit of the Company's annual financial statements was $23,700 and $25,000, respectively.
The aggregate fees billed for each of the fiscal years ended December 31, 2006 and 2005 for professional services rendered by the Company's principal independent auditor Meyler, for the years ended December 31, 2006 and 2005, for review of the financial statements included in the Company's Form 10-QSB’s or for services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years was $13,000 and $10,000, respectively.
Audit Related Fees
None.
Tax Fees
None.
All Other Fees
None.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Exhibit No.
Description
2.1(1)
Agreement and Plan of Merger
2.2(1)
Subsidiary Transfer Agreement
2.3(+)
First Amendment to Agreement and Plan of Merger
2.4(5)
Second Amendment to Agreement and Plan of Merger
10.1(2)
Stock Exchange Agreement
10.2(2)
Junior Convertible Debenture - The Morpheus Trust
10.3(2)
Junior Convertible Debenture - The Gateway Real Estate Investment Trust
10.4(2)
Junior Convertible Debenture - Picasso, LLC
10.5(2)
Junior Convertible Debenture - Burton Partners, LLC
10.6(2)
Junior Convertible Debenture - Livingston Investments, Ltd.
10.7(2)
Senior Secured Debenture with Hyde Investments, Ltd.
10.8(2)
Security Agreement
10.9(2)
Marc Ebersole's Employment Agreement
10.10(2)
Marc Ebersole's Covenant Not To Compete
10.11(2)
Consulting Agreement
10.12(2)
Warrant Agreement
10.13(3)
Addendum to Stock Exchange Agreement
10.14(3)
General Release and Settlement Agreement
10.15(4)
Consulting Agreement with Financial Systems International
10.16(4)
Warrant Agreement with Financial Systems International
10.17(4)
Agreement to Extend Senior Secured Convertible Debenture with Hyde
10.18(1)
Amendment to Consulting Agreement
10.19(6)
Third Amendment to Agreement and Plan of Merger
10.20(7)
Letter of Intent between Cryobanks and Samarium
10.21(7)
Amendment to Senior Debenture
10.22(8)
Fourth Amendment and Plan of Merger with Cryobanks
31.1*
Certificate of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1*
Certificate of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of
(1) Filed as Exhibits to the Company's Form 8-K filed on November 28, 2005, and incorporated herein by reference.
(2) Filed as Exhibits to the Company's Form 8-K filed on January 28, 2005, and incorporated herein by reference.
(3) Filed as Exhibits to the Company's Form 10-QSB filed on November 21, 2005 and incorporated herein by reference.
(4) Filed as Exhibits to the Company's Form 10-KSB filed on May 3, 2005, and incorporated herein by reference.
(+) Filed as an exhibit to our Form 10-QSB filed on May 22, 2006, and incorporated herein by reference.
(5) Filed as an exhibit to our Form 10-QSB filed on August 21, 2006, and incorporated herein by reference.
(6) Filed as an exhibit to our Form 10-QSB filed on November 20, 2006, and incorporated herein by reference.
(7) Filed as exhibits to our Form 8-K filed on March 14, 2007, and incorporated herein by reference.
(8) Filed as an exhibit to our Form 8-K filed on March 22, 2007, and incorporated herein by reference.
* Filed herein.
Reports on Form 8-K:
We filed a report on Form 8-K during the period covered by this Annual Report on November 28, 2006, to report Cryobanks dissemination of a power point presentation in connection with the planned Merger.
We filed a report on Form 8-K subsequent to the period covered by this Annual Report on March 14, 2007, to report Cryobanks entry into the Letter of Intent with Samarium and our entry into the amendment to the Hyde Note.
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.
BIOSTEM, INC.
DATED: April 2, 2007
By: /s/ Marc Ebersole
Marc Ebersole
Chief Executive Officer and Chief Financial Officer (Principal Accounting Officer)
In accordance with 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.
NAME TITLE DATE
/s/ Marc Ebersole Chief Executive Officer, April 2, 2007
Marc Ebersole Chief Financial Officer,
(Principal Accounting Officer)
Secretary, Treasurer and Director
/s/ Christine Ebersole Director April 2,
Christine Ebersole