To the Board of Directors and Stockholders of BSML, Inc.

Boca Raton, FL

We have audited the accompanying consolidated balance sheets of BSML, Inc. as of December 27, 2008 and December 29, 2007, and the related consolidated statements of operations, stockholders’ deficit and cash flows for each of the two years in the period ended December 27, 2008 and December 29, 2007.   These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. We were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 BSML, Inc. as of December 27, 2008, and December 29, 2007, and the results of its operations and its cash flows for each of the two years in the period ended December 27, 2008 and December 29, 2007 in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has yet to achieve profitability and had an accumulated deficit of $178,204,000 and a working capital deficiency of $5,104,000 as of December 27, 2008 and incurred a net loss from continuing operations and net cash used by operating activities of $1,681,000 and $5,422,000, respectively, for the fiscal year ended December 27,2008. The foregoing matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

 

 

 

Stonefield Josephson, Inc.

 

Los Angeles, California

April 13, 2009

 

 

 

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BSML, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

 

		December 27, 2008				December 29, 2007
ASSETS:
Current Assets;
Cash and cash equivalents		$	187			$	3,512
Trade accounts receivable			573				241
Inventories			863				753
Investments, restricted as to use			108				2,288
Prepaid expenses and other current assets			365				370
Total current assets			2,096				7,164
Property and equipment, net			2,142				3,036
Investments, restricted as to use							290
Deposits			755				899
Other			21				19
Total assets		$	5,014			$	11,408
LIABILITIES AND SHAREHOLDERS’ EQUITY (DEFICIT)
Current liabilities;
Accounts payable		$	3,175			$	1,555
Accrued liabilities			2,621				4,970
Accrual for Center closures			25				129
Prepaid and Gift certificate liability			456				1,721
Deferred revenue			922				2,746
Total current liabilities			7,199				11,121
Long-term liabilities
Accrual for Center closures							202
Deferred revenue			205				585
Accrued rental costs			253				632
Total long-term liabilities			458				1,419
Total liabilities			7,657				12,540
Commitments and Contingencies
Shareholders’ equity (deficit):
Common stock, $.001 par value, 50 million shares authorized and 12,332,544 and 12,443,713 shares issued and outstanding, respectively			40				39
Preferred stock, 5 million shares authorized, none outstanding at either date
Additional paid-in capital			175,621				175,452
Accumulated deficit			(178,204	)			(176,623	)
Total Shareholders’ equity (deficit)			(2,643	)			(1,132	)
Total liabilities and shareholders’ equity (deficit)		$	5,014			$	11,408

 

See accompanying notes to consolidated financial statement.

 

 

 

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BSML, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except data share)

 

		For fiscal year ended:
		December 27, 2008				December 29, 2007
Revenues		$	18,128			$	25,038
Operating costs and expenses
Operating and occupancy costs			13,836				14,097
Selling, general and administrative expenses			5,156				14,775
Depreciation and amortization			830				1,427
Total operating costs and expenses			19,822				30,299
Loss from operations			(1,694	)			(5,261	)
Interest income			29				368
Loss on Impairment			(438	)
Interest expense							(8	)
Other income (expense)			422				386
Loss from continuing operations before income tax provision			(1,681	)			(4,515	)
Income tax provision (credit)							(150	)
Net loss from continuing operations			(1,681	)			(4,365	)
Discontinued operations:
Income (loss) from discontinued operations, net of tax (fiscal year ended December 29, 2007 includes loss on settlement of claim, net of tax of $798 thousand;							(798	)
Net income (loss) attributable to common shareholders		$	(1,681	)		$	(5,163	)
Amounts per common share:
Basic and diluted net loss from continuing operations		$	(0.13	)		$	(0.40	)
Basic net income (loss) from discontinued operations		$	(0.00	)		$	(0.07	)
Basic net income (loss)		$	(0.13	)		$	(0.47	)
Diluted net income (loss)		$	(0.13	)		$	(0.47	)
Shares used in computing above amounts:
Basic and diluted net loss from continuing operations			12,387,823				10,902,223
Basic net and diluted lossfrom discontinued operations			12,387,823				10,902,223

 

See accompanying notes to consolidated financial statements.

 

 

 

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BSML, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

		The fiscal year ended:
		December 27, 2008				December 29, 2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)		$	(1,681	)		$	(5,163	)
Adjustments to reconcile to net cash (used in) operations:
Depreciation and amortization			830				1,427
Loss on disposal of property and equipment (gain)			1				1
Impairment charges			438				—
Loss on legal settlements from discontinued operations			—				798
Stock compensation expense			169				1,408
Settlement of litigation (issuance of common stock)							141
Changes in assets and liabilities:
Trade accounts receivable			(332	)			(28	)
Inventories			(110	)			520
Prepaid expenses and other current assets			5				(127	)
Other assets			142				40
Accounts payable			1,620				(215	)
Accrued liabilities			(1,513	)			(1,749	)
Accrual for Center closures			(104	)			(97	)
Prepaid and Gift certificate liability			(1,265	)			(54	)
Deferred revenue			(2,204	)			(611	)
Other long-term liabilities			(379	)			(260	)
Net cash provided by (used by) operating activities-discontinued operations							(857	)
Net cash (used in) operating activities			(5,422	)			(4,826	)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment-continuing operations			(373	)			(239	)
Proceeds from assets held for sale continuing operations							35
Investments, restricted as to use			2,470				3,808
Proceeds from sale of investment			—				—
Net cash provided by (used in) investing activities			2,097				3,604
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			(3,225	)			(1,222	)
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD			3,512				4,734
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD		$	187			$	3,512
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest		$				$	8
Cash( received) paid for income taxes							(158	)
SUMMARY OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Common stock issued for services		$	169			$	1,408
Common stock issued for settlement of litigation			---			$	141

 

See accompanying notes to consolidated financial statements.

 

 

 

 

 

 

 

 

 

       BSML, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY (DEFICIT)

(In thousands)

 

		Common Shares				Common Stock at Par				Additional Paid-In Capital				Accumulated Deficit				Total
Balance at December 25, 2005			10,549				38				173,340				(175,829	)			(2,451	)
Stock option compensation expense											281								281
Expenses paid by related party											20								20
Non-cash compensation-stock grant			115				1				262								263
Net income and comprehensive income															4,369				4,369
Balance at December 30, 2006			10,664				39				173,903				(171,460	)			2,482
Stock option compensation expense											81								81
Non-cash compensation-stock grant			1,699								1,327								1,327
Settlement of litigation			80								141								141
Net (loss) and comprehensive (loss)			—				—				—				(5,163	)			(5,163	)
Balance at December 29, 2007			12,443			$	39			$	175,452			$	(176,623	)		$	(1,132	)
Non-cash compensation-stock grant			1,129				1				169								169
Cancellation of prior restricted stock			(1,240	)
Net (loss) and comprehensive (loss)			—				—				—				(1,681	)			(1.681	)
Balance at December 27, 2008			12,332			$	40			$	175,621			$	(178,722	)		$	(2.643	)

 

See accompanying notes to consolidated financial statements.

 

 

 

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BSML, INC. AND SUBSIDIARIES

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. Description of Business and Basis of Presentation

 

BSML, Inc. is a Utah corporation (“BSML” or the “Company”) formerly known as BriteSmile, Inc. The Company and its affiliates develop, distribute, market and sell advanced teeth whitening technology, products, systems and services and provide certain cosmetic dental procedures such as veneers and the Invisalign products (a series of clear, removable, plastic aligners that are custom-made for a patient’s teeth) in various locations throughout the United States. The Company’s operations include the development of technologically advanced whitening processes and cosmetic dental procedures that are provided and distributed in professional salon settings known as BriteSmile Professional Teeth Whitening Centers (“Centers”). Prior to March 2006, the Company also offered its products and technologies through arrangements with existing independent dental offices known as BriteSmile Professional Teeth Whitening Associated Centers (“Associated Centers”). The Company’s Associated Centers business was sold in March 2006; see Note 3. The Company’s business is focused on one industry segment: products and procedures to whiten teeth.

 

The financial data of the Associated Centers has been prepared in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144), issued by the Financial Accounting Standards Board (“FASB”). Accordingly, the results of operations for the Associated Centers for all years presented have been reflected as discontinued operations. There were no assets or liabilities of the Associated Centers business as of December 30, 2006.

 

Going concern

 

As of the date of this Report, the Company had yet to achieve profitability. The Company had an accumulated deficit of $178,204,000 and working capital deficiency of $5,104,000 as of December 27, 2008, and net loss from continuing operations and net cash used by operating activities of $1,681,000 and $5,422,000, respectively, for the fiscal year ended December 27, 2008. The Company’s principal sources of liquidity historically have been proceeds from issuance of common stock and debt and related financial instruments, and in the prior fiscal year, from the sale of its Associated Centers business. The Company’s long-term debt was fully paid in March 2006 from the sale proceeds as required by the debt holders. The Company is not certain if its cash will be sufficient to maintain operations of the company at least through the next year due to the uncertainty of the Company’s ability to generate positive cash flow.

 

Except for items resulting from discontinued operations which has been accounted for in accordance with SFAS No. 144, the consolidated financial statements otherwise reflect a going concern basis of accounting. The Company cannot currently provide assurance that it can become profitable. If it cannot become profitable and without additional financing, which may be impossible to secure, the Company may not have sufficient liquidity to support its operating requirements through 2009.

 

Accordingly, BSML management believes that these factors raise substantial doubt as to whether the going concern basis of accounting reflected in these consolidated financial statements continues to be appropriate. The Company’s liquidity position may improve or deteriorate depending on these changing conditions. The accompanying consolidated financial statements do not include any adjustments that may be necessary if the Company is unable to continue as a going concern.

 

2. Summary of Significant Accounting Policies

 

Year-End

 

The Company’s year-end is the last Saturday in December of each year. The Company’s fiscal 2008 included 52 weeks and its fiscal years 2007 and 2006 included 52 and 52 weeks, respectively.

 

Consolidation

 

The accompanying consolidated financial statements include the accounts of the Company, its subsidiaries, and entities (“Centers”) in which the Company has a controlling interest. The Company consolidates the Centers for financial reporting purposes because the Company has a controlling financial interest in the Centers.  All inter-company balances and transactions have been eliminated upon consolidation.

 

Reclassifications

 

Certain amounts for the prior year have been reclassified to conform to the current year presentation.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) 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 the reported amounts of revenues and expenses during the reporting period. Actual results could differ materially from those estimates.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents are recorded at cost which approximates fair value.

 

Cash and Short-Term Investments, Restricted as to Use

 

At December 27, 2008, and December 29, 2007, the Company had restricted cash balances of $108,000 and $2,578,000, respectively, relating to remaining funds to be received in connection with sale of the Associated Center business in 2006, collateralized letters of credit and merchant banking reserve requirements. As further described in Notes 10, in February 2008, restricted cash of approximately $1.5 million was released to pay obligations; the balance of approximately $1.1 million that was released to the Company has been reported as unrestricted at December 29, 2007.

 

Concentrations of Credit Risk

 

Credit Risk

 

Financial instruments that potentially subject the Company to a significant concentration of credit risk consist principally of cash and cash equivalents.

 

The Company maintains cash and cash equivalents with various financial institutions. These financial institutions are located throughout the United States of America. The Company’s policy is designed to limit exposure to any one institution. The Company has not experienced any significant losses on its cash and cash equivalents. The Company performs periodic evaluations of the relative credit standing of those financial institutions that are considered in the Company’s investment strategy. The Company does not require collateral on these financial instruments. The Company maintains cash balances that sometimes exceed the Federal Deposit Insurance Corporation (“FDIC”) insured level of $250,000 per account; as of December 27, 2008, the Company had no bank cash balances that exceeded the FDIC insured limit per account.

 

Concentration of credit risk with respect to trade accounts receivable is limited due to the large number of entities comprising the Company’s customer base. No one customer accounted for 10% or more of revenue during any of the years covered in this Report.

 

Supply Risk

 

The Company believes it has access to sufficient quantities of goods and materials at competitive prices to enable it to operate effectively. However, the Company currently has only one contracted supplier for its whitening gel and BTG products. See Note 11.

 

Revenue Recognition

 

The Company recognizes revenue related to retail products at the time such products are shipped to customers and procedure revenues at the time the procedure is performed. Revenue is reported net of sales tax, discounts and allowances. In the third quarter of 2004, the Company introduced its SmileForever program. Under this program, Center customers could, for an additional fee, receive a limited number of touch-up procedures over a specified term, typically one to two years. The revenue associated with this program is deferred and recognized over the contractual term. Additionally, in cases where SmileForever revenue is bundled with procedure revenue and / or revenue from retail product sales, revenue is allocated to SmileForever using the fair values of the components of the bundle per the requirements of Emerging Issues Task Force Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables,” (“EITF 00-21”), and the revenue so allocated is then deferred and recognized over the contractual term. At December 27, 2008 and December 29, 2007, the deferred revenue balances associated with this program were approximately $1.1 million and $3.3 million, respectively.

 

Prior to the sale of the Associated Centers business, the Company’s operations involved the shipment of key cards and activation codes to Associated Centers, thereby permitting them to perform procedures. For domestic Associated Centers, the Company deferred the revenue generated on the sale of key cards and activation codes and recognized the revenue over the estimated performance period. For its customers outside of the United States, primarily distributors who sold to dentists, the Company deferred the revenue generated on the sale of key cards and activation codes and recognized related income over the estimated sell-through period for the distributor. Additionally, revenue from procedure sales was deferred if any of the components necessary to perform the procedure had not been sent to the dentist or distributor. The Company’s policy was to refuse the return of key cards or access codes during the course of the agreement with an Associated Center or a distributor.

 

Comprehensive Income

 

The Company has no comprehensive income other than as presented on its consolidated statements of operations.

 

Allowance for Doubtful Accounts: Trade

 

The Company maintains allowances for doubtful accounts for estimated losses resulting from the potential inability of its customers to make required payments. As of December 27, 2008 and December 29, 2007, the Company’s trade accounts receivable were essentially all related to one customer that the Company deemed credit worthy; therefore, no allowance for doubtful accounts has been established. If the financial condition of this customer deteriorates, or if the Company establishes trade credit relationships with other customers, allowances may be required.

 

Inventories

 

Inventories are stated at the lower of average cost or market. The Company writes down its inventory for estimated obsolescence or unmarketable inventory equal to the difference between the cost of inventory and the estimated market value based upon assumptions about future demand and market conditions, as well as for damaged goods. If market conditions are less favorable than those projected by management, additional inventory write-downs may be required. Inventories consist primarily of teeth whitening products and components, marketing materials and displays, and replacement component parts for the teeth whitening systems.

 

Property and Equipment

 

Property and equipment is stated at cost. Expenditures for maintenance and repairs are charged to expense as incurred, and expenditures for additions and betterments are capitalized. Furniture, fixtures and equipment are depreciated over their estimated useful lives, ranging from three to seven years, using the straight-line method. Leasehold improvements are amortized using the straight-line method over the shorter of the estimated useful life of the asset or the remaining term of the lease (useful life of five to ten years). Property and equipment consists of the following at year end 2008 and 2007 (in thousands):

 

	2008	2007
Furniture, fixtures and equipment	$6,684	$6,654
Leasehold improvements	10,863	11,626
	17,547	18,280
Less accumulated depreciation and amortization	(15,405)	(15,244)
Net property and equipment	$2,142	$3,036

 

 

 

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The Company adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on January 1, 2007. Management’s review of its inventory of tax positions indicated that there are two positions that are judged not to meet the standard of “more likely than not” to be upheld upon audit. Specifically, prior to 2006 the Company recorded gift card revenue as earned when utilized as opposed to when the cash was received. In addition the Company recorded revenue from its Smile Forever Program over an estimated two year period as opposed to a one year period of deferral as permitted under the tax code. The Company no longer is offering the Smile Forever program These positions would create a timing differences as to when revenue is recognized on the Company’s financial statements as compared to its tax return. However any tax, if due, would be offset by the substantial net operating loss deductions the company has. Accordingly, in accordance with FIN48 the Company has not recorded a liability for uncertain tax positions nor did we record any unrecognized tax benefits and no adjustments were recorded to the beginning balance of retained earnings on the balance sheet.

Advertising

 

Costs of advertising are expensed as incurred. Advertising costs related to continuing operations were $1.1 million, and $4.4 million for 2008, and 2007, respectively. Advertising costs related to discontinued operations, included in “Income (loss) from discontinued operations, net of tax” in the accompanying consolidated statements of operations, were $0.5 million for 2006 respectively.

 

 

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Stock-Based Compensation

 

Effective January 1, 2006, the Company adopted SFAS No. 123(R), the restatement of SFAS No. 123, “Accounting for Stock-Based Compensation” This standard requires that compensation cost relating to share-based payment transactions with employees be recognized in its financial statements. Prior to January 1, 2006, the Company accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion ( APB ) No. 25, “Accounting for Stock Issued to Employees” and related interpretations. The pro forma disclosures previously permitted under SFAS No. 123 are no longer an alternative to financial statement recognition. The Company has adopted SFAS No. 123(R) on a modified prospective basis, which requires that compensation cost relating to all new awards and to awards modified, repurchased, or cancelled be recognized in financial statements beginning January 1, 2006. Additionally, SFAS No. 123(R) requires that compensation cost for the portion of awards that were outstanding as of January 1, 2006, and for which the requisite vesting period was not completed as of January 1, 2006, to be recognized as the requisite vesting is rendered on or after January 1, 2006. Such compensation expense is based on the value of the portion of the share-based award that is ultimately expected to vest during the period. SFAS No. 123(R) further requires that the tax benefits resulting from tax deductions in excess of the compensation cost recognized for related options be classified as financing cash flows rather than operating cash flows as required prior to the adoption of SFAS No. 123(R). No options were exercised during fiscal 2007 or 2006, and the Company therefore had no such tax benefits relating to option exercises.

 

In accordance with the modified prospective transition method, the Company’s consolidated financial statements for prior periods have not been restated to reflect, and do not include, the impact of SFAS No. 123(R).

 

Option valuation models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions, including the expected life of the option. Because the Company’s employee stock options have characteristics significantly different from those of traded options and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

 

Product Development Cost

 

Costs associated with the development of new products or services are charged to operations as incurred. The Company incurred no such development costs in 2008 or 2007.

 

Income Taxes

 

The Company uses the liability method of accounting for income taxes pursuant to SFAS No. 109, “Accounting for Income Taxes.” Under the liability method, deferred tax assets and liabilities are provided on differences between the financial reporting and taxable loss, using the enacted tax rates.

 

The Company has elected to record interest and penalties recognized in accordance with FIN No. 48 in the consolidated financial statements as a component of income tax expense. Any subsequent change in classification of interest and penalties will be treated as a change in accounting principles subject to the requirements of SFAS No. 154, “Accounting Changes and Error Corrections.”

 

Impairment of Long-Lived Assets

 

The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company does not generally perform a periodic assessment of assets for impairment in the absence of such information or indicators. Conditions that would necessitate an impairment assessment include a significant decline in the observable market value of an asset, a significant change in the extent or manner in which an asset is used, or a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable. For long-lived assets to be held and used, the Company measures fair value based on quoted market prices or based on discounted estimates of future cash flows. Long-lived assets to be disposed are carried at fair value less costs to sell.

 

Fair Value of Financial Instruments

 

The following methods and assumptions were used by the Company in establishing its fair value disclosures for financial instruments:

 

Cash and cash equivalents: The carrying amount reported in the consolidated balance sheet for cash and cash equivalents approximates its fair value.

 

Accounts receivable, accounts payable, and accrued liabilities: The carrying amount reported in the consolidated balance sheet for accounts receivable, accounts payable, accrued liabilities and other current liabilities approximates its fair value.

 

Debt: As of December 27, 2008 and December 29, 2007, the Company had no debt.

 

Loss Per Common Share Basic net loss per common share is calculated as net loss divided by the weighted-average number of common shares outstanding. Diluted net loss per common share is calculated as net loss divided by the weighted-average number of common shares including equivalent shares from stock options and warrants, using the treasury stock method, and convertible notes payable,  provided that the result is not anti-dilutive. The following numbers of shares represented by options, warrants (prior to application of the treasury stock method) and convertible debt were excluded from the determination of diluted per share earnings because the result was anti-dilutive:0.3, 0.4 million  in 2008, 2007  respectively.

 

Recent Accounting Pronouncements

In May 2008, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principals” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (GAAP) in the United States (the GAAP hierarchy). SFAS 162 will become effective following approval by the Securities and Exchange Commission. Company does not believe SFAS 162 will have an impact on our consolidated financial statements.

 

In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)  No. 160, “Noncontrolling Interests in Consolidated Financial Statements- an Amendment of ARB No. 51s,” which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The provisions of SFAS No. 160 are effective for fiscal years beginning on or after December 15, 2008. The Company has evaluated SFAS No. 160 and does not believe its adoption will have a significant impact on its consolidated results of operations or financial condition.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities,” which provides that companies may elect to measure specified financial instruments and warranty and insurance contracts at fair value on a contract-by-contract basis, with changes in fair value recognized in earnings each reporting period. The election, called the “fair value option,” will enable some companies to reduce the variability in reported earnings caused by measuring related assets and liabilities differently. Companies may elect fair-value measurement when an eligible asset or liability is initially recognized or when an event, such as a business combination, triggers a new basis of accounting for that asset or liability. The election is irrevocable for every contract chosen to be measured at fair value and must be applied to an entire contract, not to only specified risks, specific cash flows,or portions of that contract. SFAS No. 159 is effective as of the beginning of a company’s first fiscal year that begins after November 15, 2007. Retrospective application is not allowed. Companies may adopt SFAS No. 159 as of the beginning of a fiscal year that begins on or before November 15, if the choice to adopt early is made after SFAS No. 159 has been issued and within 120 days of the beginning of the fiscal year of adoption and the entity has not issued any financial statements in accordance with GAAP for any interim period of the fiscal year that includes the early adoption date. Companies are permitted to elect fair-value measurement for any eligible item within the scope of SFAS No. 159 at the date they initially adopt SFAS No. 159. The adjustment to reflect the difference between the fair value and the current carrying amount of the assets and liabilities for which a company elects fair-value measurement is reported as a cumulative-effect adjustment to the opening balance of retained earnings upon adoption. Companies that adopt SFAS No. 159 early must also adopt all requirements of SFAS No. 157 at the early adoption date. Management is assessing the impact of adopting SFAS No. 159 and currently does not believe the adoption will have a material impact on its consolidated results of operations or financial condition.

 

.

 

In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations,” which establishes new principles and requirements for business combinations as to how the acquirer recognizes and measures the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree. The statement also addresses other business combination issues: goodwill acquired, gain from a bargain purchase and various disclosure requirements.

 

From time to time, new accounting pronouncements are issued by the FASB and other standard-setting bodies that are adopted by the Company as of the specified effective date. Unless otherwise discussed, the Company believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.

 

3. Discontinued Operations

 

Sale of Business

 

On March 13, 2006, the Company and its wholly owned subsidiaries, BriteSmile International Limited, an Ireland corporation, and BriteSmile Development, Inc. (“BDI”), a Delaware corporation (collectively, the “Sellers”) completed an asset sale with Discus Dental, Inc., a California corporation (“Discus”), where Discus acquired the assets and the operations of the Associated Centers for approximately $26.8 million plus the assumption of certain operating liabilities. Simultaneously, the parties entered into a global settlement of the litigation proceedings between the parties. Discus and the Company agreed that $8.7 million of the purchase price of $35.5 million, prior to consideration of related deal costs, legal expenses and income taxes, for the Associated Centers business and the Company’s intellectual property should be in settlement of all litigation between the Company and Discus. All litigation between the Company and Discus has now been dismissed; see Note 10.

 

The assets sold to Discus included certain tangible assets and proprietary rights related to the Associated Centers business, including the BriteSmile name and trademark, and substantially all intellectual property rights. Discus acquired the intellectual property subject to certain existing technology and trademark licenses in favor of Sellers that permit the operation of the Centers business of the Sellers and sales of certain retail products under the BriteSmile trademark. Discus also acquired all rights and claims against third parties relating to the intellectual property, except for the Company’s claims against third parties who may have infringed certain patents in the whitening strips field. The Company retained these claims under a license from Discus.

 

Based on the purchase prices described above for the sale of the Associated Centers business, the proceeds were greater than the carrying values of the assets and liabilities sold and thus there is no impairment of the related recorded values.

.

 

4. Accrual for Store Closures

 

The following table sets forth the activity related to store closures during the fiscal years ended December 27, 2008 and December 29, 2007, respectively (in thousands):

 

		Accrual for Store Closures at Beginning of Year				Restructuring Expense				Cash Paid				Accrual for Store Closures at End of Year
2008 lease liability		$	331			$				$	(206	)		$	25
2007 lease liability		$	428			$	45			$	(142	)		$	331

 

5. Accrued Liabilities

 

Accrued liabilities consist of the following (in thousands):

 

		December 27, 2008				December 29, 2007
Salaries and benefits		$	659			$	321
Professional services/settlement of litigation			355				2,084
Property taxes			109				508
Sales taxes			1,115				1,223
Advertising			-				293
Other accrued expenses			383				541
Total		$	2,730			$	4,970

 

6. Leases

 

The Company is party to leases for its Centers throughout the United States. These leases expire at various dates ranging from 2008 through 2015. Certain of the leases also provide for renewal options; there are no purchase options. Future minimum payments under with initial terms of one year or more consisted of the following at December 27, 2008 (in thousands):

 

2009		$	2,487
2010			815
2011			526
2012			530
2013			367
Thereafter			223
Total minimum lease payments		$	4,949

 

Rent expense attributable to continuing operations was $3.1 million, and  $4.1 million, , for 2008,and 2007 respectively.

 

As of December 30, 2006, the Company is no longer party to capital leases, all such leases being fully paid and or cancelled subsequent to the sale of the Associated Centers business.

 

7. Income Taxes

 

Income tax expense consists of (in thousands):

 

		2008				2007
Current:
Federal (see below)		$	( 0	)		$	(126	)
State (see below)			(0	)			(52	)
Total		$	(0	)		$	(178	)

 

The 2007 provision includes refunds of the prior year federal and state income taxes. Federal income taxes in 2006 result from application of Alternative Minimum Tax requirements. Of the $178,000 credit for income taxes in fiscal 2007, $28,000 relates to discontinued operations and $150,000 relates to continuing operations

 

Deferred income taxes reflect the net tax effects of net operating loss and tax credit carryovers and temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets are as follows (in thousands):

 

		2008				2007
Deferred tax assets:
Current:
Reserves and accruals		$	910			$	1,407
Other, net			7				7
Current deferred tax asset			917				1,414
Long-term:
Net operating loss carryforwards			53,413				51,978
Depreciation and amortization			3,146				3,283
Stock based compensation			595				595
Other			409				—
Long-term deferred income tax assets			57,563				55,856
Total deferred tax assets			58,480				57,270
Valuation allowance			( 58,480	)			(57,270	)
Net deferred tax assets		$	—			$	—

 

A reconciliation of the Federal statutory tax rate to the Company’s effective tax rate is as follows:

 

		2008				2007
Provision at statutory tax rate			(34.0	)%			(34.0	)%
State income tax, net of Federal benefit			-				.6	%
Permanent difference			(7.3	)%			(19.3	)%
Valuation allowance			41.3	%			49.2	%
Total			0				(3.5	)%

 

Realization of deferred tax assets is dependent upon future earnings, if any, the timing and amount of which are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. The valuation allowance incecreased by $1.2 million during 2008 and decreased by $4.4 million during 2007 ..

 

As of December 27,  2008, the Company had net operating loss carry forwards for Federal income tax purposes of approximately $136 million, which expire in the years 2009 through 2027, Federal research and development tax credits of approximately $362,000, which expire in the years 2008 through 2019, and alternative minimum tax credit carryovers of approximately $47,000. As of December 27, 2008, the Company had net operating loss carryforwards for state income tax purposes of approximately $117 million, which expire in the years 2008 through 2017.

 

.

 

A portion of the Federal and state losses is attributable to the professional corporations formed to comply with the corporate practice of medicine statutes in the jurisdictions where the company has operations. These professional corporations are not consolidated for income tax purposes. Utilization of the Company’s net operating loss and credit carryforwards may be subject to substantial annual limitation due to the ownership change limitations provided by the Internal Revenue Code and similar state provisions. Such an annual limitation could result in the expiration of the net operating loss and credits before utilization.

 

The Company files income tax returns in the U.S. federal and in the state of California. Our centers, which operate as professional corporations, also file federal income tax returns and state income tax returns in their respective states. The Company is currently not under any examination by nor has it received notices of examination from tax authorities.

 

 

9. Shareholders’ Equity

 

The Company’s shareholders authorized the creation of 5,000,000 shares of “blank check” preferred stock at the shareholders’ meeting held on September 30, 2005. No shares had been issued as of December 29, 2007.

 

Valuation and Expense Information under SFAS No. 123(R)

 

SFAS No. 123(R) requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The Company uses the Black-Scholes option-pricing model, which requires assumptions regarding future price volatility, expected life prior to exercise and expected future dividends. The Black-Scholes model also requires input of the risk-free Treasury rate that corresponds to the pricing term of the grant effective as of the date of the grant. In the fiscal 2008 and 2007 calculation, the Company assumed the following regarding stock-based awards:

 

		Year Ended December 29, 2007
Risk-free interest rate		4.61%
Expected life of options (years)		2.66
Expected volatility		121%
Expected dividends		None
Forfeiture rate		10%

 

The assumptions above are based on multiple factors, including historical exercise patterns of employees. The Company uses historical data to estimate the options’ expected term, which represents the period of time that options granted are expected to be outstanding. Volatility is also based on historical run-rate. Because, BSML has never paid and does not expect to pay dividends, it uses an expected dividend yield of zero when calculating the fair value of stock options. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve. The Company revised its expected forfeiture rate to 10%, effective July 2, 2006, to reflect the completion of restructuring efforts associated with the sale of the Associated Centers business in March 2006 (see Note 3). The Company generally uses this forfeiture rate except in specific cases where termination is known or likely, in which case the forfeiture rate to be applied is adjusted accordingly.

 

For the fiscal years 2008 and 2007, the Company recognized stock compensation expense related to stock options of approximately $169,000 and $81,000, respectively, as a result of the adoption of SFAS No. 123R.

 

In accordance with an employment agreement with the current CEO, Jeffery Nourse. the Company recognized stock compensation expense of $169,000 related to a grant of 1,128,000 restricted common shares. In 2007  The per share fair value on the date of the grant was $0.15. As of December 30, 2006, all shares of common stock related to this grant vested

 

All of the Company’s stock compensation expense has been included as a component of selling, general and administrative expense.

Stock Option Plans

 

In January 1997, the Company adopted the 1997 Stock Option and Incentive Plan (“1997 Plan”). Under the terms of the 1997 Plan, as amended to date, and as approved by the Company’s shareholders, 1,900,000 shares are available for issuance. Options may be granted at exercise prices of no less than the fair market value on the date of the grant, as determined by the Board of Directors and quoted market prices. Prior to 2006, options granted were generally scheduled to vest over a two to five-year period. Option grants made in 2006 vested over six months, and were entirely vested at December 30, 2006. The Company’s option grants have a maximum term of ten years. No further options can be issued as the 1997 Plan expired in January 2007.

 

A summary of the Company’s stock option activity and weighted-average exercise price per share for the periods ended December 27, 2008 and December 29, 2007 is as follows:

 

		Options				Per share
Options outstanding at December 30, 2006			487,490			$	13.88
Granted			40,000			$	1.77
Forfeited or cancelled			(425,740	)		$	15.55
Options outstanding and exercisable at December 29, 2007			101,750			$	2.15
Granted			261,000
Forfeited or cancelled			( 287,750	)
Options outstanding and exercisable at December 27, 2008			75,000			$	.40

 

With respect to the options outstanding and exercisable at December 27, 2008, the weighted-average remaining contractual term and the aggregate intrinsic value amounts are 8.51 years and $21,070, respectively. The weighted average fair value of options granted during 2008, and 2007, using the Black-Scholes option pricing valuation model, was $.40 and $1.48, respectively.

 

A summary of the status of options outstanding and exercisable at December 27, 2008 is as follows:

 

Outstanding and Exercisable Options
Range of Exercise Price per Share	Number Outstanding	Weighted Average Remaining Contractual Life (in Years)	Weighted Average Exercise Price per Share
$ 0.40 — $ 1.77	75,000	8.51	$0.40

 

 

Warrants

 

As of December 29, 2008, the Company had 0  warrants for common stock outstanding. The exercise price of the warrants is $6.00 per share. The warrants expired April 2008. During 2007, no warrants were exercised and 34,555 warrants were cancelled. As of December 30, 2006, the Company had 367,888 warrants for common stock outstanding with exercise prices ranging from $6 to $30 per share.

 

Shares Reserved for Future Issuance

 

In summary, the Company has reserved shares of common stock for future issuance as follows as of December 27, 2008:

 

Employee stock options outstanding	75,000
Non-employee stock options outstanding	0
Warrants outstanding	0

 

Notwithstanding the availability of stock options for grant under the 1997 Plan, the Company’s Board of Directors has determined that no future stock option grants will be made.

 

10. Litigation

 

From time to time the Company is the subject of legal actions. There are no current pending legal actions involving the Company that are expected to have a material adverse effect on the Company’s consolidated financial position or results of operations.

 

The Company is subject to legal proceedings and claims in the ordinary course of business, including claims of alleged personal injury, employee disputes, infringement of trademarks and other intellectual property rights. However, the Company believes any such claims that have been presented to the Company as of the date of this report are without merit and the Company will vigorously defend against any such claims.

 

 

Andrew Rudnick & Sleek, Inc., v. BSML, Inc., Circuit Court, 17th Judicial Circuit, Broward County, Florida, Case No. 08 30137. On June 30, 2008, Andrew Rudnick, the Company’s former CEO, and Sleek, Inc. a company controlled by Rudnick (the “Rudnick Plaintiffs”) filed suit against the Company alleging breach of an Amended and Restated Support Services Agreement and breach of a Separation and Release of Claims Agreement and fraud in the inducement relating to both agreements. The Rudnick Plaintiffs subsequently amended the complaint to allege conversion and to seek specific performance and permanent injunctive relief against the Company. As of the date of this Report, the Company had not filed its answer. The Company intends to defend itself vigorously against the allegations of the amended complaint and to assert various counter claims against the Rudnick Plaintiffs.

 

The following claims have been settled or dismissed:

 

2012710 Ontario Inc. Pure Laser Hair Removal & Treatment Clinic(carrying on business as Pure Med Spa, Pure Laser Hair Removal and Treatment Clinics Inc.) and Investment Partnership (2006) LP  v. BSML, Inc., and Jeff Nourse, Ontario Superior Court of Justice, Court File CV-08-00359260-0000.  In July 2008, 2012710 Ontario Inc. Pure Laser Hair Removal & Treatment Clinic and Investment Partnership (2006) LP (the “Canadian Plaintiffs”) brought an action against the Company and Jeff Nourse, the Company’s current CEO, alleging, among other claims, breach of Mr. Nourse’s fiduciary duty while an officer with Pure Med Spa, breach of duties following his resignation from Pure Med Spa, breach of a non-competition agreement, interference with Pure Med Spa’s suppliers, interference with potential investors, misappropriation of Pure Med Spa’s website, and improper disclosure of Pure’s confidential information. The Canadian Plaintiffs sought compensatory damages and punitive damages.  This matter was dismissed with prejudice on April 1, 2009.

Douglas Wu vs. BSML, Inc. and Andrew Rudnick, Contra Costa County Superior Court, California, Case No. C08-00358.  On February 21, 2008, Mr. Wu filed a complaint asserting a single cause of action alleging breach of contract for failing to pay $70,000 in severance allegedly due upon Mr. Wu’s termination of employment.  The Company denies the allegations of the complaint.  The claim against Mr. Rudnick was subsequently dismissed for lack of jurisdiction.  On November 12, 2008, the Company and Mr. Wu reached a settlement in principal whereby the Company agreed, without admitting liability, that the Company would pay $23,333 to Mr. Wu not later than December 31, 2008.  In exchange, Mr. Wu agreed to execute a general release and to dismiss the lawsuit.  The parties signed a written settlement agreement, and the case was dismissed with prejudice on January 21, 2009.

Green River Junction, Inc. v. BSML, Inc, United States District Court for the Eastern District of Pennsylvania, Civil Action No. 08CV2372. In May 2008, Green River Junction, Inc. (“Green River Plaintiffs”) brought action against the Company alleging, among other claims breach of contract, unjust enrichment and wrongful withholding of commissions. On September 23, 2008, the parties participated in a court-ordered settlement conference. On October 22, 2008, the Company settled the lawsuit with the Green River Plaintiffs. The settlement calls for the Company to pay as full settlement of all claims the sum of $180,000. Payments are due as follows: $30,000 immediately; $3,000 in December 2008; monthly payments of $9,000 from January through September 2009 and monthly payments of $11,000 from October 2009 through March 2010. The amount of the settlement was fully accrued by the Company

 

 

Claims of Longlife Health Ltd

 

Discus Dental Inc. (“Discus”), the purchaser of the Company’s Associated Center business and other assets in March 2006 (see Note 3), notified the Company in the first quarter of 2007 of a pending dispute over collection of receivables from Longlife Health Ltd. (“Longlife”), the Company’s former distributor in the United Kingdom. Subsequent to the sale of the Associated Centers business, Discus terminated Longlife’s distribution agreement. Longlife thereafter alleged that the termination of the distribution agreement was wrongful and, in response, withheld payment of the receivables due to Discus. A portion of the receivable in question was a component of the assets sold to Discus. As a result, Discus notified the Company that Longlife’s claims gave rise to a claim that the Company was in breach of certain representations made in the March 2006 Asset Purchase Agreement and exercised its rights to block disbursement to the Company of $3.5 million in funds escrowed at the time of the sale.

 

In October 2007, the Company reached a settlement with Longlife and Discus regarding these issues. Under the terms of the settlement, $1,005,396 was paid to Discus from the escrowed funds, with Discus remitting $581,588 of these funds to Longlife in settlement of its claim. The Company received $109,443 from the escrowed funds. The balance of the escrowed funds (plus interest) was released in the settlement of the litigation with Oraceutical LLC; .

 

Claims of Oraceutical LLC, Oraceutical Innovative Properties LLC, and R. Eric Montgomery:

 

In April 2007, Oracautical LLC, Oraceutical Innovative Properties LLC, and R. Eric Montgomery, a former director of the Company (collectively, “Oraceutical”) filed suit in California state court naming as defendents the Company and its subsidiary, BriteSmile Development, Inc. (“BDI”), the Company’s former Chief Executive Officer Julian C. Feneley (“Feneley”), and the Company’s former Chairman of the Board Anthony M. Pilaro (“Pilaro”). The complaint also names as defendants Discus and its subsidiary BriteSmile Professional, Inc., neither of whom is affiliated with the Company.

 

Oraceutical’s Amended Complaint sought to recover at least $11.3 million plus punitive and exemplary damages. The Amended Complaint asserted claims against the Company and BDI for breach of contract, breach of the implied covenant of good faith and fair dealing, fraud, violations of California law and accounting, and asserted a fraud claim against Feneley and Pilaro. The complaint also included a declaratory judgment claim again the Company, BDI and Discuss.

 

Oraceutical’s claims were based on an Asset Purchase Agreement, as subsequently amended (the “APA”), and entered into between Oraceutical, the Company and BDI in July 2003. Pursuant to the APA, BDI acquired intellectual property consisting primarily of certain United Stated and foreign patents, patent applications, continuations, continuations-in-part, trade secrets, technologies, know-how, trademarks and trade names relating to human oral care for a purchase price of $6.4 million, plus a participation interest, after offsets and deductions, in third-part royalties and infringement recoveries relating to the intellectual property acquired.

 

In March 2006, certain assets of the Company, including the intellectual property acquired from Oraceutical, were sold to Discus in a transaction valued at $35 million, of which $8.7 million was allocated to settlement of patent infringement litigation against Discuss. In connection with this transaction, the Company and Discus deposited $3.5 million in escrow (as discussed above with reference to the Lonlife claim). In its complaint, Oraceutical claimed that the value of the patent infringement claims and asserted that if the claims were valued fairly, Oraceutical would have shared in a portion of the recovery under the terms of the APA. Oraceutical also sought a declaration that Discus was bound by the terms of the APA as the party who acquired the subject intellectual property from BDI.

 

In June 2007, the Company filed a counterclaim against Oraceutical alleging fraud and misrepresentation in connection with representations made to the Company at the time of the Company acquired the intellectual property which, in part, was the subject of litigation, together with claims for breach of the APA.

 

Effective January 2, 2008, Oraceutical, the Company and BDI, Feneley, Pilaro, and Discus entered into a global settlement of these claims and counterclaims. As consideration for the settlement, the parties agreed to disburse all remaining funds held in escrow as follows: $1,366,155 was released to Oraceutical, $73,225 was released to Discus, $95,000 was released to Pilaro, as reimbursement of legal fees and the balance of the escrowed funds of $1,130,923 was released to the Company. In addition, the parties gave mutual releases of all claims between them arising before the date of the settlement agreement, Oraceutical and the Company entered into an Amended and Restated Consulting Agreement which amends and restates in its entirety the Consulting Agreement entered into between them on July 1, 2003, and the Company delivered to Oraceutical, with Discus’s consent, an Assignment of Patent License Agreement pertaining to whitening strips. Oraceutical agreed that, other than the rights assigned pursuant to the Patent License Agreement, it had no right, title or interest in the intellectual property that was transferred by the Company to Discus, nor any rights, interests, royalties, recoveries or other proceeds thereof. All of the claims asserted in the litigation were dismissed with prejudice on February 15, 2008. The Company has accrued this lawsuit settlement in prior year and accordingly no additional accrual is necessary for the fiscal year ended December 29, 2007.

 

Smile Inc. Asia Pte. Ltd. v. BriteSmile. In April 2002, Smile Inc. Asia Pte. Ltd. (“Smile”) sued the Company and BriteSmile Management, Inc., a wholly-owned subsidiary of the Company (“BriteSmile Management”), in Utah state court. Among other charges, the complaint sought $10 million in damages and alleged that BriteSmile Management breached its 1998 distributor agreement for laser-aided teeth whitening devices with Smile (exclusive as to Singapore and other surrounding countries) by failing to fill orders placed and to perform other obligations under the agreement.

 

On August 7, 2007, the Company settled this matter through payment to Smile of $1.5 million under the terms of a settlement agreement that provided for the mutual release of all claims asserted in the lawsuit.

 

BriteSmile, Inc. v. Discus Dental, Inc. and Salim Nathoo, filed in the United States District Court for the Northern District of California (the “Discus Patent Litigation”). As described in more detail in Note 3, this case was dismissed in March 2006 in connection with the sales transaction with Discus.

 

BriteSmile Development, Inc. v. Discus Dental, Inc. BSML Development, Inc., a wholly owned subsidiary of BSML, Inc. filed on October 28, 2005, a patent infringement suit against Discus in federal court in California. As described in more detail in Note 3, this case was dismissed in March 2006 in connection with the dismissal of the Discus patent litigation.

 

BriteSmile Inc. v. Discus Dental, Inc., filed in Contra Costa County Superior Court, California. As described in more detail in Note 3, this case was dismissed in March 2006 in connection with the dismissal of the Discus patent litigation.

 

On February 17, 2006, the parties entered into a global settlement of the litigation proceedings between the parties. As part of the settlement, the Company granted to P&G a nonexclusive license to certain patents relating to teeth whitening strips and P&G paid $4 million of which the Company received approximately $1 million, with the remainder paid to the Company’s legal counsel in the matter and to the REM Group.

 

Gregg A. Coccari v. BriteSmile, Inc., an arbitration proceeding with the American Arbitration Association filed on August 11, 2005. This matter was settled in February 2007. Under the terms of the settlement, Mr. Coccari, former Chief Executive Officer, received approximately $700,000 in cash payments, of which $200,000 was paid by the Company’s insurance carrier, and 80,000 shares of the Company’s common stock valued at approximately $141,000. As of December 30, 2006, the Company had accrued the full cost of this settlement.

 

Mayer, Brown, Rowe & Maw LLP v. BSML, Inc. and BSML Development, Inc., filed in the California Superior Court for San Francisco County. Mayer, Brown, Rowe & Maw LLP (“MBR&M”), the Company’s former patent litigation counsel in the Discus patent litigation, filed a complaint alleging causes of action for breach of contract, breach of the implied covenant of good faith and fair dealing, and unjust enrichment arising from the attorney-client relationship between MBR&M and the Company. On November 17, 2006, the Company and MBR&M agreed to a settlement under which the Company paid MBR&M a total of $5 million in full settlement of all outstanding claims. All related litigation matters were subsequently dismissed.

 

11. Related Party Transactions

 

LCO Properties Sublease

 

On December 1, 1999 the Company, as sublessee, entered into an Agreement of Sublease with LCO Properties, Inc., a Delaware corporation, as sublessor. LCO Properties, Inc. is affiliated with the Company’s principal shareholder, LCO Investments, Limited (“LCO”). The sublease covers approximately 4,821 square feet of space located in New York City for a Center. The sublease term is for ten years and called for initial lease payments of $402,000 per year, subject to increase in the event of increases in the rent payable under the primary lease for the property between LCO Properties, Inc., and its lessor. Rent expense for 2007 was approximately $462,000; the lease was terminated during the third quarter of the 2007.

 

LCO, a wholly owned subsidiary of ERSE Trust, is the Company’s principal shareholder; CAP Advisers is a co-trustee of the ERSE Trust. Mr. Pilaro, the Company’s former chairman, is also Chairman of CAP Advisers.

 

Consulting Agreement with Oraceutical, LLC (“Oraceutical”)

 

In November 2000, the Company entered into a Consulting Agreement with Oraceutical. Montgomery, a former director of the Company, is the founding manager and president of Oraceutical. Effective July 2003, the Consulting Agreement was terminated and replaced by a new Consulting Agreement (the “BDI Consulting Agreement”) between BDI and Oraceutical Innovative Properties (“OIP”), an affiliate of Oraceutical.

 

The BDI Consulting Agreement provided for a five-year term at a rate of $180,000 per year. As part of the settlement of the litigation with Oraceutical and its affiliate (as discussed in more detail in Note 10), this agreement was amended, effective January 2, 2008, to extend the term to December 31, 2012. In addition, the fixed-fee arrangement was eliminated; future compensation will be based upon a per diem rate of $3,200 plus expenses for any requested consulting services.

 

Fulfillment Services Agreement with Oraceutical

 

In 2004, BSML entered into an agreement with Oraceutical, LLC to outsource the Company’s whitening component and product fulfillment services beginning in 2005. Montgomery, the Chairman & CEO of Oraceutical, LLC, is a former member of BSML’s Board of Directors. During 2007, and 2006,  $1,019,000,  $1,516,000, and $2,254,000  respectively, were paid to Oraceutical under this agreement.

 

Related Party Payment

 

The following table summarizes the amounts paid to related parties in  2008 and 2007 (in thousands):

 

Related Party	Goods / Services Provided	2008	2007
Oraceutical	Merchandise/pack out charges and order fulfillment services	$1,019	$1,516
Oraceutical	Consulting		180
LCO Properties, Inc.	Monthly rent for New York Center	60	462
LCO (and affiliates)	Interest and pay off of debt and pay out for preferred stock	—	—
CAP America Trust	Interest and pay off of debt	—	—
EVL	Variable fees, fixed fees and pay off of deferred lease balance	—	—
Total		$1,079	$2,158

 

Nature of relationships in the above table: With respect to Oraceutical, LLC, a former BSML board member is a co-founder and managing director of Oraceutical. With respect to the other entities, they are deemed affiliates to the Company’s former board chairman.

 

Support Services Agreement

 

Effective December 10, 2007, the Company executed a Support Services Agreement with Sleek, Inc. (“Sleek”). Sleek is a Massachusetts corporation which is controlled by Mr. Rudnick. Pursuant to the three-year agreement, Sleek has agreed to provide marketing, consulting, cash management, personnel management and other services to BSML. The Company has agreed to pay an administrative fee to Sleek equal to the aggregate of Sleek’s actual costs, fees and expenses incurred in providing the services. As of December 29, 2007, the Company accrued approximately $31,000 for the services provided for the month. As part of the execution of this contract and as an inducement to Sleek to provide these services at cost, the Company issued Sleek 1.24 million shares with a market value of thirty cents per share on date of issuance; as of December 29, 2007, the Company recorded $372,000 of share-based payments as expense with an offsetting entry to additional paid-in capital. In addition, the agreement provides for additional equity compensation of 1.24 million shares for each $1 million of EBITDA (determined on a cumulative, rather than annual, basis); no additional amounts were accrued for the year ended December 29, 2007.

 

12. Benefit Plans

 

In March 2000, the Company adopted a 401(k) defined contribution plan covering substantially all employees. Employees become eligible to participate in the plan beginning the first month following their hire date. The plan contains provisions for an employer contribution at the discretion of management. To date, the Company has made no contributions to the plan. The Company pays the administrative fees of the plan. The administrative fees are not material to the Company’s operations.

 

13. Subsequent Events

           On February 10, 2009, BSML, Inc. (the “Company”), and its wholly owned subsidiary, Pure Acquisition Co., Inc., a Delaware corporation (“Pure Acquisition”), entered into an agreement (the “APA”) to purchase certain assets of Pure Laser Hair Removal & Treatment Clinics, Inc., a Delaware corporation (“Pure”), John Street Holdings, LLC, a Delaware limited liability company (“JSH”), and certain subsidiaries of Pure and JSH (collectively, the “Subsidiaries,” and together with Pure and JSH, the “Sellers”).

Pursuant to the terms and subject to the conditions set forth in the APA, Pure Acquisition agreed to purchase substantially all of the assets of the Sellers (the “Purchased Assets”) for a purchase price of: (i) Two Hundred Thousand Dollars ($200,000) (the “Cash Payment”); (ii) an unsecured promissory note in favor of Investment Partnership (2006) L.P. (“IP 2006”) in the aggregate principal amount of Five Hundred Thousand Dollars ($500,000) (the “Note”); (iii) the Company’s agreement for the twelve month period immediately following the closing of the purchase of the Purchased Assets, that IP 2006 can acquire the same type of equity securities offered by the Company in one or more offerings for a price per share equal to the price paid by third party investors up to a maximum of $2,500,000 (the “Investment Participation Agreement”); (iv) a twelve month warrant in favor of IP 2006 with the rights to purchase up to $2,500,000 (or such lesser amount as is available after IP 2006’s exercise of rights under the Investment Participation Agreement) of common stock of the Company (the “Warrant”); and (v) assumption of certain liabilities (the “Assumed Liabilities”) of the Sellers.

Further, on March 24, 2009, BDC agreed to accept Five Hundred Seventeen Thousand Dollars ($517,000) in full satisfaction of the obligations of Pure Acquisition under the BDC Loan.  On April 2, 2009, as a condition precedent to the Credit Agreement, as described in the Current Report on Form 8-K filed with the SEC on April 2, 2009, Pure Acquisition paid the BDC loan in full and BDC released all of the collateral secured by the BDC Loan.  Accordingly, neither Pure Acquisition nor the Company has any further obligation in favor of BDC.

The final closing conditions of the APA have been met, and the APA and related transactions closed as of April 1, 2009.

On March 27, 2009, BSML, Inc. (the “Company”) entered into a Credit Agreement (the “Credit Agreement”) between the Company, in its capacity as Borrower and a third-party lender (the “Lender”).

The Credit Agreement provides for a four-year asset-based revolving credit facility under which up to Two Million Five Hundred Thousand Dollars ($2,500,000) will be available.  Pursuant to the Credit Agreement, the Lender made initial term loans (the “Loans”) to the Company, to be advanced to the Company in four installments  The Loans mature on March 27, 2013 and bear interest at a rate of ten percent (10%) per annum, compounded monthly and payable quarterly beginning on August 1, 2009.  The proceeds of the Loans will be used for working capital and other general corporate purposes.

 

On December 28, 2008, 1,504,347 shares of common stock were issued to Jeffery Nourse in lieu of salary. This transaction was fully accrued as of December 27, 2008

 

 

.

 

.

 

14. Product Line Revenue:

 

The Company operates in one business segment, products and procedures to whiten teeth. Components of the Company’s revenue for the years ended December 27, 2008 December 29, 2007,and  December 30, 2006, respectively, are as follows (in thousands):

 

	2008	2007	2006
Center whitening fees, net	$14,916	$18,937	$19,125
Product and other revenue	3,211	6,101	7,089
Total	$18,127	$25,038	$26,214

 

Exhibit Index

 

Exhibit Number	Description
23	Consent of Stonefield Josephson Inc.
31.1	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	Certification of Principal Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

 

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Exhibit 23

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We consent to the incorporation by reference in Registration Statement Nos: 333-61054, 333-43790, 333-112361, and 333-12179 each on From S-3, and Registration Statement Nos. 333-82283 and 333-16935 each on Form S-8, of our report dated April 14, 2008 relating to the consolidated financial statements of BSML Inc. (formerly Britesmile, Inc.) and Subsidiaries as of December 29, 2007 and for fiscal year then ended appearing in this Annual report on Form 10-K of BSML Inc. and Subsidiaries for fiscal year ended December 27, 2008.

 

/s/ Stonefield Josephson Inc.

CERTIFIED PUBLIC ACCOUNTANTS

 

Los Angeles , California

April 13, 2009

 

 

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EXHIBIT 31.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Jeffery Nourse, certify that:

 

1. I have reviewed this amended annual report on Form 10-K of BSML, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined by Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

(c) evaluated the effectiveness of the registrant s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) disclosed in this report any change in the registrant s internal control over financial reporting that occurred during the registrant s most recent fiscal quarter (the registrant s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant s auditors and the Audit Committee of the registrant s Board of Directors (or persons performing the equivalent functions):

 

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant s ability to record, process, summarize and report financial information; and

 

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant s internal control over financial reporting.

 

Date: April 13, 2009

 

By:	/s/ Jeffery Nourse
	Jeffery  Nourse Chief Executive Officer and Director (Principal Executive Officer)

 

 

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EXHIBIT 31.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

 

I, James P. Cullin, certify that:

 

1. I have reviewed this amended annual report on Form 10-K of BSML, Inc.;

 

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

 

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

 

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in the Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

 

(a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiary, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

 

(b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

 

(c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

 

(d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

 

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the Audit Committee of the registrant’s Board of Directors (or persons performing the equivalent functions):

 

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

 

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

 

Date: April 13, 2009

 

By:	/s/ James P. Cullin
	James P. Cullin VP of Finance (Principal Accounting and Financial Officer)

 

 

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EXHIBIT 32.1

 

CERTIFICATION OF CHIEF EXECUTIVE OFFICER

PURSUANT TO

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

I, Jeffery Nourse, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of BSML, Inc. on Form 10-K for the fiscal year ended December 29, 2007 fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of BSML, Inc.

 

Date: April 13, 2009

 

By:	/s/ Jeffery Nourse
	Jeffery Nourse Chief Executive Officer and Director (Principal Executive Officer)

 

 

 

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EXHIBIT 32.2

 

CERTIFICATION OF CHIEF FINANCIAL OFFICER

PURSUANT TO

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

 

I, James P. Cullin, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Annual Report of BSML Inc. on Form 10-K for the fiscal year ended December 29, 2007 fully complies with the requirements of Section 13(a) or 15 (d) of the Securities Exchange Act of 1934 and that information contained in such Annual Report on Form 10-K fairly presents in all material respects the financial condition and results of operations of BSML, Inc.

 

Date: April 13, 2009

 

By:	/s/ James P. Cullin
	James P. Cullin VP of Finance (Principal Accounting and Financial Officer)