SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
|
x
|
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
fiscal year ended December 31, 2007
OR
|
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
For
the
transition period from ________ to ________
Commission
file number: 0-10909
NEOSTEM,
INC.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
22-2343568
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
No.)
|
|
420
Lexington Avenue
Suite
450
New
York, New York
|
10170
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
|
Registrant’s
telephone number, including area code:
|
(212)
584-4180
|
Securities
Registered Pursuant to Section 12(b) of the Act:
|
Title
of Each Class
|
Name
of Each Exchange
On
Which Registered
|
|
Common
Stock, $0.001 par value
|
American
Stock Exchange
|
|
Class
A Common Stock Purchase Warrants
|
American
Stock Exchange
|
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act. o Yes x
No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934. x Yes o
No
Indicate
by check mark whether the registrant (1) has filed all reports required to
be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for
the past 90 days. x Yes o
No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this Chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. x
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
| Large accelerated filer o | Accelerated filer o |
| Non-accelerated filer o | Smaller reporting company x |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act.
o
Yes x No
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 29, 2007 (the last business day
of
the most recently completed second fiscal quarter) was approximately
$12,159,244, based upon the closing sales price of $5.30 reported for such
date.
(For purposes of determining this amount, only directors, executive officers,
and 10% or greater stockholders have been deemed affiliates).
On
March
28, 2008, 5,073,699 shares of the registrant's common stock, par value $0.001
per share, were outstanding.
Documents
incorporated by reference: Portions of the registrant’s definitive Proxy
Statement for the 2008 Annual Meeting of Stockholders, to be filed with the
Commission not later than 120 days after the close of the registrant’s
fiscal year, have been incorporated by reference, in whole or in part, into
Part III, Items 10, 11, 12, 13 and 14 of this Annual Report on
Form 10-K.
2
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PART
I
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4
|
|
ITEM
1. BUSINESS
|
4
|
|
ITEM
1A. RISK FACTORS
|
22
|
|
ITEM
1B. UNRESOLVED STAFF COMMENTS
|
33
|
|
ITEM
2. PROPERTIES
|
33
|
|
ITEM
3. LEGAL PROCEEDINGS
|
34
|
|
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
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34
|
|
PART
II
|
34
|
|
ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND
ISSUER PURCHASES OF EQUITY SECURITIES
|
34
|
|
ITEM
6. SELECTED FINANCIAL DATA
|
39
|
|
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS
OF OPERATION
|
40
|
|
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
|
49
|
|
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND
FINANCIAL DISCLOSURE
|
50
|
|
ITEM
9A. CONTROLS AND PROCEDURES
|
50
|
|
ITEM
9B. OTHER INFORMATION
|
51
|
|
PART
III
|
52
|
|
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
52
|
|
ITEM
11.EXECUTIVE COMPENSATION
|
52
|
|
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
AND RELATED
STOCKHOLDER MATTERS
|
52
|
|
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
52
|
|
ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
|
52
|
|
PART
IV
|
53
|
|
ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
53
|
3
This
Annual Report on Form 10-K contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. For this
purpose, any statements contained herein that relate to future events or
conditions, including without limitation, the statements regarding our financial
position, potential, business strategy, efforts, plans and objectives for future
operations and potential acquisitions and funding, may be deemed to be forward
looking statements. All such statements, which are all statements other than
of
historical fact, involve known and unknown risks, uncertainties and other
factors, which may cause the actual results, performance or achievements of
NeoStem, Inc. (the "Company"), or industry results, to be materially different
from any future results, performance or achievements expressed or implied by
such forward-looking statements. These statements are commonly identified by
the
use of such terms and phrases as “intends,” “expects,” “anticipates,” “should,”
“estimates,” “seeks,” “believes,” “plans,” “may,” “will,” “could” and “continue”
or similar expressions or other variations or comparable terminology.
Additionally, statements concerning our ability to develop the adult stem cell
business, to develop the VSEL technology, the future of regenerative medicine
and the role of adult stem cells and VSELs in that future, the future use of
adult stem cells and VSELs as a treatment option and the potential revenue
growth of such business are forward-looking statements. Our ability to enter
the
adult stem cell arena and our success in such arena, our ability to expand
our
operations and future operating results are dependent upon many factors,
including but not limited to: (i) our ability to obtain sufficient capital
or a
strategic business arrangement to fund our expansion plans; (ii) our ability
to
build the management and human resources and infrastructure necessary to support
the growth of our business; (iii) competitive factors and developments beyond
our control; (iv) scientific and medical developments beyond our control; (v)
our inability to obtain appropriate governmental licenses or any other adverse
effect or limitations caused by government regulation of the business; (vi)
whether any of our current or future patent applications result in issued
patents; and (vii) other risk factors discussed in Item 1A, "Risk Factors"
contained herein. We cannot guarantee future results or achievements, and
readers are cautioned not to place undue reliance on these forward-looking
statements. In addition, any forward-looking statements represent our
expectation only as of the date hereof and should not be relied on as
representing our expectations as of any subsequent date. While we may elect
to
update forward-looking statements at some point in the future, we specifically
disclaim any obligation to do so except as specifically required by law and
the
rules of the SEC, even if our expectations change or as a result of new
information, future events or otherwise.
INTRODUCTION
NeoStem,
Inc. (“we” or “the Company”) is engaged in a platform business of operating a
commercial autologous (donor and recipient are the same) adult stem cell bank
and is pioneering the pre-disease collection, processing and long-term storage
of stem cells from adult donors that they can access for their own future
medical treatment. We are managing a growing nationwide network of adult stem
cell collection centers, and believe that as adult stem cell therapies obtain
necessary regulatory approvals and become Standard of Care, individuals will
need the infrastructure, methods and procedures being developed by the Company
to have their stem cells safely collected and conveniently stored for future
therapeutic use. Stem cells, which are very primitive and undifferentiated
cells
that have the unique ability to transform into many different cells (such as
white blood cells, nerve cells or heart muscle cells), can be found in the
bone
marrow or peripheral blood of adults. The Company only works with adult (not
embryonic) stem cells. Using the Company’s process, stem cells are moved
(mobilized) by a mobilizing agent administered in the days preceding collection
from the bone marrow in which they reside to the peripheral blood and collected
through a safe, minimally invasive procedure called “apheresis.” We also
recently entered the research and development arena, through the acquisition
of
a worldwide exclusive license to an early-stage technology to identify and
isolate rare stem cells from adult human bone marrow, called VSEL (very small
embryonic-like) stem cells. VSELs have many physical characteristics typically
found in embryonic stem cells, including the ability to differentiate into
specialized cells found in substantially all the different types of cells and
tissue that make up the body.
4
On
January 19, 2006 we consummated the acquisition of the assets of NS California,
Inc., a California corporation (“NS California”) relating to NS California’s
business of collecting and storing adult stem cells. Effective with the
acquisition, the business of NS California became our principal business, rather
than our historic business of providing capital and business guidance to
companies in the healthcare and life science industries. We now provide adult
stem cell processing, collection and banking services with the goal of making
stem cell collection and storage widely available, so that the general
population will have the opportunity to store their own stem cells for future
healthcare needs. Using our proprietary process, we provide the infrastructure,
methods and systems that allow adults to have their stem cells safely collected
and conveniently banked for future therapeutic use as needed in the treatment
of
such life-threatening diseases as diabetes, heart disease and radiation sickness
that may result from a bioterrorist attack or nuclear accident. We also hope
one
day to become a leading provider of adult stem cells for diagnostic and
therapeutic use in the burgeoning field of regenerative medicine, and are
exploring entering the stem cell supply business for research, which we believe
may have the potential to be a significant business in its own right. According
to the National Institutes of Health, there are over 1,500 clinical trials
currently underway relating to the use of adult stem cells, over 500 relating
to
autologous use, in the treatment of numerous serious diseases and conditions,
including those that address cardiac disease, autoimmune disorders such as
lupus, multiple sclerosis, peripheral vascular diseases, and age related
musculoskeletal disorders, as well as diabetes, cancer, neurological disease
and
wound healing.
During
2007, we were focused on establishing a nationwide network of collection centers
in certain major metropolitan areas of the United States to drive growth, with
the goal of generating significant revenue in 2008. To date, our revenues
generated from the collection, processing and storage of adult stem cells have
not been significant although our efforts in 2007 produced an increase over
2006
revenues.
We
also
recently entered the research and development arena through our acquisition
from
the University of Louisville of the worldwide exclusive license to the VSEL
technology. VSELs have many physical characteristics typically found in
embryonic stem cells, including the ability to differentiate into specialized
cells found in different types of tissue that would be able to interact with
the
specific organ in order to repair degenerated, damaged or diseased tissue (the
three “Ds” of aging). NeoStem has the ability to harvest and cryopreserve these
VSELs from individual patients, setting the stage for their use in personalized
regenerative medicine. If VSELs can be expanded from individual patients and
their potential to develop into different types of tissue cells maintained,
it
would represent a significant step toward overcoming the two major limitations
in the development of stem cell therapies today, the ethical dilemma regarding
use of embryonic stem cells and the immunological problems associated with
using
cells from a third party donor. In connection with the license agreement, we
also entered into a sponsored research agreement with the University of
Louisville pursuant to which the Company is funding research relating to our
VSEL technology at the laboratory of its co-inventor, Mariusz Ratajczak, M.D.,
Ph.D., head of the Stem Cell Biology Program at the James Graham Brown Cancer
Center at the University of Louisville. The acquisition of the VSEL technology
was made through our acquisition of our new subsidiary Stem Cell Technologies,
Inc. (“SCTI”) in a stock-for-stock exchange, which as a condition to the
acquisition was funded by the seller in amounts sufficient to pay certain
near-term costs under the license agreement and the sponsored research
agreement.
Our
company currently generates revenue and earnings as follows: (1) upfront and
annual fees from the collection centers in our network, (2) patient collection
fees, (3) processing center collection fees and (4) storage fees, which
represent recurring revenue paid each year or month. We are structuring a direct
to consumer marketing plan to drive awareness and target individuals who can
afford our services. We have also established a relationship with CareCredit,
a
GE Financial Services Company and the nation’s leading patient financing program
to assist our patients who wish to pay for our services over time—which we
believe opens up a broader client base to us. We are planning to educate
individuals that have a family history or early diagnosis of diseases being
treated with stem cell therapy as well as those who have banked their infant’s
stem cells that can afford this “bioinsurance.” Additionally we are working on
establishing collaborations with high profile medical centers and academic
institutions involved in cutting edge research and clinical trials relating
to
stem cells. In addition to the research we are currently funding of the
University of Louisville, we are also in discussions relating to other research
at the University of Louisville to generate data relating to other clinical
applications of VSELs, including neural, cardiac and ophthalmic, to expand
our
research efforts and maximize the value of this technology. We believe that
there is a significant need for our banking services for our first responders
and homeland security personnel. We are moving forward to educate those groups
and find resources to protect those individuals who protect us. Our other go-to
market strategies include collaboration with cord blood companies, tissue banks,
pharmaceutical companies, concierge medical programs, executive health plans,
regenerative medicine specialists and first responder groups. In April 2007,
the
Company participated in the founding of The
Stem for Life Foundation (the
“Foundation”). The Mission of the Foundation is to heighten public awareness and
knowledge of the benefits and promise of adult stem cells in treating serious
medical conditions.
5
We
have
engaged in various capital raising activities to pursue these business
opportunities, raising approximately $3,573,000 in 2006 and $2,320,000 through
July 2007 through the private sale of our common stock, warrants and convertible
promissory notes. In August 2007, we completed a public offering of units
consisting of shares of common stock and warrants to purchase common stock,
which raised approximately $5,619,000. Such capital raising activities have
enabled us to pursue our business plan and begin to grow our adult stem cell
collection and storage business, including expanding marketing and sales
activities. However, fully developing our business, particularly defining the
optimal marketing and distribution model, has taken longer than anticipated.
In
order to fully develop our business, we expect to require additional
capital.
We
are
currently actively exploring acquisition opportunities of revenue generating
businesses, both domestically and abroad, including businesses that are
synergistic with our current business or additive to our current business,
and
in February 2008 engaged a financial advisor on an exclusive basis for a six
month period to assist us in this regard.
On
August
29, 2006, our stockholders approved an amendment to our Certificate of
Incorporation to effect a reverse stock split of our Common Stock at a ratio
of
one-for-ten shares and to change our name from Phase III Medical, Inc. to
NeoStem, Inc. On June 14, 2007, our stockholders approved an amendment to our
Certificate of Incorporation to effect a reverse split of our Common Stock
at a
ratio of up to one-for-ten shares in the event it was deemed necessary by our
Board of Directors in order to be accepted onto a securities exchange. On July
9, 2007, our Board of Directors approved a one-for-ten reverse stock split
to be
effective upon the initial closing of the Company’s public offering in order to
satisfy the listing requirements of the American Stock Exchange. On August
9,
2007 the reverse split was effective and the Company’s Common Stock commenced
trading on The American Stock Exchange under the symbol “NBS.” Accordingly, all
numbers in this report have been adjusted to reflect both a one-for-ten reverse
stock split which was effective as of August 31, 2006, and the one-for-ten
reverse stock split which was effective as of August 9, 2007.
The
Company’s prior business was providing capital and business guidance to
companies in the healthcare and life science industries, in return for a
percentage of revenues, royalty fees, licensing fees and other product sales
of
the target companies. Additionally, through June 30, 2002, the Company was
a provider of extended warranties and service contracts via the Internet at
warrantysuperstore.com. The Company was engaged in the “run off” of such
extended warranties and service contracts through March 2007. For a discussion
of the Company’s involvement in such other activities and Company history, see
“Former Business Operations.”
The
Company was incorporated under the laws of the State of Delaware in September
1980 under the name Fidelity Medical Services, Inc. Our corporate headquarters
is located at 420 Lexington Avenue, Suite 450, New York, NY 10170, our telephone
number is (212) 584-4180 and our website address is www.neostem.com. The
information on our website does not constitute a part of this report. The
Company’s information as filed with the Securities and Exchange Commission is
available via a link on its websites as well as at www.sec.gov.
6
ADULT
STEM CELL COLLECTION BUSINESS
What
are Stem Cells?
Stem
cells are very primitive and undifferentiated cells that have the unique ability
to transform into many different cells, such as white blood cells, nerve cells
or heart muscle cells. Stem cells can be found in the bone marrow or peripheral
blood of adults. Certain processes can cause the stem cells to leave the bone
marrow and enter the blood where they can be collected. The Company currently
only works with adult stem cells collected from peripheral blood through a
safe,
minimally invasive procedure called “apheresis.”
Stem
Cells and Regenerative Medicine
The
Company is developing its business in the adult stem cell field and seeking
to
capitalize on the increasing importance the Company believes adult stem cells
will play in the future of regenerative medicine. The use of adult stem cells
as
a treatment option for those who develop heart disease, certain types of cancer
and other critical health problems is a burgeoning area of clinical research
today. The adult stem cell industry is a field independent of embryonic stem
cell research. The Company believes that embryonic stem cell therapies have
certain barriers to development due to political, ethical, legal and technical
issues. Medical researchers, scientists, medical institutions, physicians,
pharmaceutical companies and biotechnology companies are currently developing
therapies for the treatment of disease using adult stem cells. As these adult
stem cell therapies obtain necessary regulatory approvals and become Standard
of
Care, patients will need a service to collect, process and bank their stem
cells. The Company intends to provide this service. According to Robin Young,
a
leading medical technology analyst and founder and CEO of RRY Publications
who
organized the 3rd
Annual
Stem Cell Summit held in New York City in February 2008, an increasing number
of
physicians are incorporating stem cell therapies into their therapeutic tools.
According to Mr. Young, in the past 24 months over 11,000 people in the United
States have already received stem cell therapies as part of their conventional
treatment and he projects that by 2017 there will be 1.973 million annual
procedures using stem cell therapies in multiple medical markets, generating
an
estimated annual $8.5 billion.
The
Future of Adult Stem Cell Therapies Using Cells Collected from Peripheral
Blood
The
Company currently only works with adult stem cells collected from peripheral
blood, as opposed to stem cells derived or collected through other methods.
An
article in the February 27, 2008 volume of The Journal of the American Medical
Association entitled, "Clinical
Applications of Blood-Derived and Marrow-Derived Stem Cells for Nonmalignant
Diseases" studied
a
broad array of clinical studies conducted between January 1997 and December
2007
and concluded that there was evidence that stem cells harvested from blood
or
bone marrow do appear to provide disease-ameliorating effects in certain auto-
immune diseases and cardiovascular disorders. The article also highlighted
that
the vast majority of human stem cell trials have focused on clinical
applications for hematopoietic and/or mesenchymal stem cells, both of which
may
be obtained from peripheral blood, bone marrow, or umbilical cord blood and
placenta. The National Institutes of Health lists more than 1,500 clinical
trials currently underway investigating adult stem cell use as potential
therapies for a wide-range of diseases, including, cancer, diabetes, heart
and
vascular disease, and autoimmune disorders such as lupus, multiple sclerosis
and
arthritis. More than 500 of these trials relate to autologous use.
7
NeoStem's
ability to provide adult stem cell collection and banking services to the
general population for their future medical use places the Company in a unique
position to benefit from the rapidly growing need for autologous, blood-derived
stem cells. We believe that as clinical understanding of the benefits of
blood-derived stem cells grows, so does the potential value of a personal supply
of one's own stem cells. With our expanding nationwide network of collection
centers, we are enabling people to donate and store their own stem cells for
their personal use in times of future medical need.
Plan
of Operations
The
Company is engaging in the business of autologous adult stem cell collection,
processing and banking. The Company believes that as adult stem cell therapies
obtain necessary regulatory approvals and become more and more widely used,
individuals will need the infrastructure, methods and procedures being developed
by the Company to have their stem cells safely collected and conveniently stored
for future therapeutic use. The Company intends to generate revenues from the
following:
· up
front and annual fees from the collection centers in our network
·
initial
collection of adult stem cells
·
processing
and storage of adult stem cells (generating recurring revenue)
·
utilization
of adult stem cells (when stem cells are used)
The
Company is developing a service model to create a source of stem cells that
potentially enables physicians to treat a variety of diseases and engage in
research to progress therapeutic development using adult stem cells. The Company
anticipates fees being derived from collection centers operated by physicians
and medical institutions who join its network. Currently, the Company generates
revenues through upfront and annual fees from the collection centers in our
network, patient collection fees, processing center fees and storage fees.
The
Company is also seeking to obtain government grants and catalogue and store
adult stem cells in a biorepository. As this biorepository grows, it is
anticipated there will be revenues derived from relationships with
pharmaceutical companies and other companies developing stem cell therapies
who
require access to cells. The Company is currently processing and storing the
adult stem cells collected with its processes at its California facility. In
2007 the Company entered into an agreement with New England Cryogenic Center,
Inc. (“NECC”) pursuant to which NECC (subject to receipt of appropriate
licensure) will provide processing and cryogenic storage services for adult
stem
cells collected by members of the Company’s network. This strategic alliance
with NECC, one of the country’s largest cryogenic laboratories, will provide
increased processing and storage capacity, redundancy of storage and an expanded
Northeast presence as the Company expands its services and collection network
in
the United States. See “- Processing and Storage.”
The
Company plans to:
· continue
to expand the geographic scope of its collection business.
· continue
to expand its patent portfolio in the adult stem cell arena. Toward this end,
in
November 2007 the Company acquired the exclusive worldwide license to the VSEL
technology and is sponsoring additional research relating to the VSEL technology
at the University of Louisville and has exclusive rights to the results of
this
research. See “- Research and Development; Therapeutics
Marketplace.”
· continue
to explore acquisition opportunities of revenue generating businesses in
healthcare, including businesses that are synergistic with or additive to our
current business.
· continue
to explore entering the adult stem cell supply business for
research.
8
Marketing
and Customers
The
Company is embarking on a marketing, advertising and sales campaign individually
and through collaborations with others for the purpose of educating physicians
and potential clients on the benefits of adult stem cell collection and storage.
The Company’s “Go-To-Market” strategy is to drive this general awareness. The
essence of this strategy is to reach the end-customers as quickly as possible
and to accelerate the adoption curve of our service. In addition, the Company
plans to utilize marketing resources to increase the number of physicians who
collaborate with us in the operation of collection centers.
The
Company believes several consumer segments may recognize and experience the
long-term benefits from banking their own stem cells. These
include:
·
Individuals
with a family history of serious diseases that show potential for treatment
with
stem cell therapies that are currently under research, e.g., diabetes, heart
disease, or cancer
·
Wellness
and regenerative medicine communities
·
Families
who have already banked the umbilical cord blood from their
newborns
·
Patients
diagnosed with early-stage cancer, cardiovascular disease, or
diabetes
·
High
net
worth and educated consumers
·
Individuals
at high risk for radiation exposure or hazardous materials
The
Company is designing its marketing efforts to educate physicians on the benefits
both of making stem cell collection and banking services available to their
adult patients and participating in our collection program.
Company
Initiatives
The
Company’s current initiatives include plans to:
·
Develop
strategic initiatives with cord blood companies, tissue banks and pharmaceutical
companies
·
Collaborate
with academic institutions on licensing opportunities, build out of collection
centers and provision of collection services for ongoing clinical trials (see
above)
·
Develop
partnerships with executive health programs, wellness physicians, concierge
medical programs, medical spas and first responder groups
·
Expand
the Company’s intellectual property portfolio within the stem cell arena (see
above)
·
Expand
its Government Programs Initiatives, and in this regard has efforts underway
targeting key federal and state agencies as well as congressional committees
in
order to raise awareness of the benefits of adult stem cell therapy as a
treatment option
·
Submit
grant applications to National Institutes of Health and others to fund Company
programs
·
Assist
in
further developing The Stem for Life Foundation, an adult stem cell foundation
formed to generate awareness of stem cell therapies
In
April 2007, the Company participated in the founding of The
Stem for Life Foundation
(the
“Foundation”). The Mission of the Foundation is to heighten public awareness and
knowledge of the benefits and promise of Adult Stem Cells in treating serious
medical conditions. The Foundation is committed to assisting those who protect
us. First Responders (Fire, Police, Rescue and Military) are at high risk for
exposure to radiation, burns, wounds, and other trauma. The Foundation will
help
provide resources, not just for those emergency workers, but also to other
individuals who become chronically ill and will be in need of assistance to
collect, process and store their own stem cells now for use in the future.
The
Foundation was formed under the Pennsylvania Not-for-Profit Corporation Law
and
is intended to qualify as a 501(c)(3) corporation under the Internal
Revenue Code, as amended. Certain members of the Company’s management are
officers and/or sit on the Board of Trustees of the Foundation.
9
Adult
Stem Cell Collections
During
2007, we were focused on establishing a nationwide network of collection centers
and participating physicians in certain major metropolitan areas of the United
States to drive growth, with the goal of generating significant revenue in
2008.
Initial
participants in our collection center network have been single physician
practices who opened collection centers in California, Pennsylvania and Nevada.
Revenues generated by these early adopters have not been significant and are
not
expected to become significant. However, these centers have served as a platform
for the development of the Company’s business model and today the Company is
focusing on multi-physician and multi-specialty practices joining its network.
In
October 2007, the Company signed an agreement to open an adult stem cell
collection center with ProHEALTH Care Associates, one of the largest and most
prominent multi-specialty practices in the region, with over 100 doctors and
500,000 patients. In January 2008 ProHEALTH received a provisional license
from
the New York State Department of Health. In March 2008, the Company entered
into
an agreement with HC Resource Solutions to provide marketing and sales
activities with regard to the ProHEALTH facility at a monthly cost of $10,000,
one-half of which is being reimbursed to the Company by an affiliate of
ProHEALTH. Launch activities are currently underway.
The
Company is currently reviewing its opportunities for multi-physician and
multi-specialty practices in New York City to join its network and is
anticipating the end of the second quarter of 2008 as the date by which the
identification of this practice group will be completed.
The
terms
of the Company’s collection center agreements are substantially similar. The
Company provides adult stem cell processing and storage services, as well as
management, expertise and other services to the collection center. In each
case,
the collection center agrees that the Company will be the exclusive provider
to
it of adult stem cell processing and storage, management and other specified
services. The agreements generally provide for the payment to the Company by
the
collection center of specified marketing and support fees and annual network
services fees, and provide a fee schedule and the allocation of expenses and
revenues among the parties. Each of the agreements is for a multi-year period,
depending on the particular center, typically has an automatic renewal for
consecutive one year periods at the end of the initial term and may relate
to a
territory. The agreements contain insurance obligations and indemnification
provisions, limitations on liability and other standard provisions. The Company
grants to each collection center a non-exclusive license to use its trademarks
and intellectual property but otherwise retains all rights thereto, and each
collection center is bound by confidentiality obligations to the Company and
non-competition provisions. The agreements may be terminated upon prior written
notice of a specified period in advance upon certain uncured material breaches
of the agreement or, depending on the agreement, certain other specified
occurrences.
In
order
to increase the number and quality of physician practices joining the collection
network, the Company has entered into development agreements with two separate
entities experienced in recruiting and organizing physician practices to
identify locations, form entities and guide those entities through the process
of joining our network and opening a collection center.
In
January 2008, the Company entered into a Development Agreement with CelVida
LLC
(“CelVida”), an entity formed by individuals experienced in recruiting and
organizing physicians and their practices, to act as a developer of collection
centers to join the Company’s network by finding locations, organizing operating
entities and guiding those entities in constructing, equipping, furnishing
and
staffing the collection facility. Pursuant to the terms of the agreement,
CelVida may from time to time identify to NeoStem territories in which it
proposes performing due diligence to determine the feasibility of locating
one
or more centers in the territory. NeoStem may, in its discretion, advise whether
CelVida may or may not proceed in the identified territory and in the event
CelVida is authorized to proceed, CelVida has specified time periods in which
to
complete its due diligence as to feasibility, organize an operating entity
for
the center and construct, equip, furnish and staff a center for operation.
So
long as these periods are adhered to and subject to the Company’s right to
choose at its option not to enter into a collection center agreement with a
proposed entity for a proposed territory, the Company will refrain from engaging
in discussions or authorizing any person other than CelVida to take any action
to develop a center in the specified territory (“exclusivity”). In the event
CelVida does not complete each of these tasks within the specified period of
time, then CelVida’s rights to exclusivity in the territory cease. CelVida is
bound by certain confidentiality provisions and non-competition provisions.
The
Agreement is for an initial term of three (3) years and may be terminated by
either party by giving prior notice to the other party upon their uncured
material breach of the Agreement. Pursuant to the terms of this Agreement,
in
January 2008, the Company and CelVida signed a collection center agreement
with
respect to the Miami/Coral Gables, Florida area.
10
In
October 2007, the Company entered into a development agreement with Stem Collect
LLC (“Stem Collect”) that also provides for a structure similar to CelVida by
which due diligence may be performed, and entities organized to construct,
equip, furnish and staff a center for operation in a territory. Stem Collect
is
bound by certain confidentiality provisions and non-competition provisions.
Exclusivity is provided to Stem Collect so long as time periods relating to
progression in opening centers are complied with. In exchange for an initial
24
territories identified by the parties, including six initial territories in
which Stem Collect intends to conduct due diligence in connection with the
opening of a center and for which Stem Collect was given exclusivity, Stem
Collect agreed to make certain upfront payments of which $30,000 were paid
through December 31, 2008. In December 2007, the parties amended the terms
of
this agreement to provide for the extension of certain other payment and notice
periods under the development agreement and in March 2008 Stem Collect advised
the Company that due diligence resulting in their revising their targeted
locations and associated funding requirements were requiring that Stem Collect
have additional time to meet its notice and payment obligations under the
development agreement. Accordingly, the parties have agreed in principal to
a
restructuring of the development agreement and discussions are underway.
Pursuant to the development agreement, a center agreement has been entered
into
with Stem Collect Beverly Hills.
Part
of
the Company’s strategy is to leverage off of established companies in the blood
collection and storage arena. To this end, on December 15, 2006, the
Company entered into a five year agreement with HemaCare Corporation
(“HemaCare”) pursuant to which HemaCare will provide the Company with collection
services for the procurement of adult stem cells from peripheral blood for
the
purpose of long-term storage. HemaCare will provide services consisting of
apheresis collection of adult stem cells from peripheral blood for long-term
storage and for other purposes, such as research purposes, if requested by
the
Company. These services will be provided at either a HemaCare facility, a
Company facility or a third party center affiliated with the Company, including
members of the Company’s physician’s network, subject to the terms of HemaCare’s
license and other regulatory requirements. HemaCare has operations on the West
Coast and parts of the Northeast. Additionally, under the agreement HemaCare
will provide to the Company standard operating procedures (“SOPs”) for the
collection of peripheral blood progenitor cells to be used by the Company as
its
own SOPs and will keep these SOPs up to date. The Company may continue to use
the SOPs for up to ten years following termination of the agreement, subject
to
continued payment by the Company of a maintenance fee. HemaCare will also
provide the Company with assistance in staff training and opening other
facilities, whether Company owned facilities or a third party center affiliated
with the Company, including members of the Company’s physician’s
network.
The
provision of apheresis, services for the collection of adult stem cells from
peripheral blood for long term storage, will be provided to the Company on
an
exclusive basis during the term of the agreement. The Company has also given
to
HemaCare the first right to negotiate an arrangement with the Company for the
provision of other collection services should the Company choose to expand
its
business model. New inventions that may arise as a result of performance of
the
services will be the sole property of the Company and we may seek intellectual
property protection for such new inventions, if any. The parties have agreed
to
standard confidentiality obligations during the term of the agreement and for
three years thereafter. The agreement is for a term of five years, subject
to
earlier termination by either party, generally upon 180 days’ prior notice. The
Company will provide to HemaCare payment for such services as set forth in
the
agreement, which will be fixed for a 12 month period and may thereafter be
increased based on mutual agreement of the parties. The parties are currently
in
discussions relating to new payment terms. The services will be provided by
HemaCare in accordance with all FDA regulations and guidelines, licensing
requirements of any jurisdiction in which the services are performed, cGMP
standards and all other applicable federal, state or local laws. This agreement
supersedes the terms of a prior agreement with HemaCare acquired by the Company
in connection with the acquisition of its adult stem cell business in
January 2006 from NS California.
11
Processing
and Storage
The
Company is currently processing and storing the adult stem cells collected
with
its processes at its California facility. The California facility has a
biologics license from the State of California. California requires a laboratory
to be in full compliance with the American Association of Blood Banks (“AABB”)
in order to be licensed. In April 2007, the Company received two
provisional licenses from the State of New York for its California facility.
The
first license permits the Company’s California facility to collect, process and
store hematopoietic progenitor cells (“HPCs”) collected from New York residents.
The second license permits solicitation in New York relating to the collection
of HPCs. A third provisional license received in January 2008, permits the
California facility to collect, process, store and use for medical research
HPCs
collected from New York residents. Each license is subject to certain
limitations stated therein. The Company will need to transfer its processing
and
storage operations to a larger facility in the near term due to space
constraints at its California facility. The Company is considering opportunities
on the east coast, including utilizing New England Cryogenic Center, Inc.
(“NECC”) as its primary processing and storage facility or opening a processing
and storage facility in connection with its activities at the University of
Louisville or at some other AABB licensed facility.
Effective
as of August 15, 2007, the Company entered into a Master Services Agreement
(the
"services agreement") with NECC, under which NECC will provide processing and
cryogenic storage services for adult stem cells ("ASCs") collected by the
Company. This strategic alliance with NECC, one of the country’s largest
cryogenic laboratories, will provide increased processing and storage capacity,
redundancy of storage and an expanded Northeast presence as the Company expands
its services and physician's network in the United States. The Company is also
considering making NECC its primary processing and storage facility in
connection with transferring its processing and storage operations from its
California facility. The services agreement is for an initial term of five
years, with automatic renewal for consecutive two year periods at the end of
the
initial term. The parties will enter into a statement of work for each specific
project to be performed by NECC under the services agreement, with the
responsibilities of the parties, specific fees for processing and cryogenic
storage and expense reimbursement to be agreed upon in each statement of work.
The services agreement contains standard confidentiality and mutual
indemnification provisions. The Company generally retains the rights to all
inventions and intellectual property developed during the course of performance
of a project under the services agreement, and NECC is bound by certain
non-competition provisions during the term of the services agreement and for
two
years thereafter. Either party may terminate the services agreement upon 180
days' written notice prior to the end of the then current term, or at any time
upon certain uncured events of default. NECC will continue to store ASCs for
not
less than 12 months from the date of any termination so as to enable the Company
to make appropriate arrangements for replacement of processing and storage
services. Effective as of August 15, 2007, the parties have entered into the
first statement of work under the services agreement pursuant to which NECC
is
to provide processing and cryogenic storage at its FDA registered and licensed
facility in Newton, Massachusetts. NECC has applied for a license from the
State
of New York to process, store and use for research HPCs collected from New
York
residents.
12
Industry
and Geographical Segmental Information
As
a
result of the Company’s acquisition of substantially all the assets and
operations of NS California on January 19, 2006, through March 2007 the
Company had operations in two segments. One segment is the collection,
processing and banking of adult stem cells and the other segment was the “run
off” of its sale of extended warranties and service contracts via the Internet.
This “run-off” of warranty and service contracts was completed in March 2007.
For further financial information regarding segments, please see the financial
statements and notes thereto included elsewhere in this report. The Company’s
operations are conducted entirely in the United States.
Acquisition
of NS California, Inc.
On
January 19, 2006, the Company, through a wholly-owned subsidiary,
consummated its acquisition of the assets of NS California relating to NS
California’s business of collecting, processing and storing adult stem cells,
pursuant to an Asset Purchase Agreement dated December 6, 2005. The
purchase price consisted of 50,000 shares of the Company’s common stock, plus
the assumption of certain enumerated liabilities of NS California and
liabilities under assumed contracts. The Company also entered into employment
agreements with NS California’s chief executive officer and one of its founders
as part of the transaction. NS California was incorporated in California in
July 2002, and from its inception through the acquisition by the Company
was engaged in the sale of adult stem cell banking services. In
October 2003, NS California leased laboratory space in a research facility
at Cedars Sinai Hospital in California and entered into an agreement with a
third party to provide adult stem cell collection services. By
December 2003, NS California had outfitted its laboratory with equipment
for processing, cryopreservation and storage of adult stem cells. In
May 2004, after a validation process and inspection and approval by the
State of California, NS California received a biologics license and commenced
commercial operations. In January 2005, NS California moved its adult stem
cell processing and storage facility to Good Samaritan Hospital in California.
NS California was compelled to cease operations because it did not have
sufficient assets to complete the revalidation of the new laboratory and NS
California’s biologics license was suspended. In October 2005, NS
California restarted the validation of the laboratory at Good Samaritan
Hospital, and on May 29, 2006 the Company was issued a new biologics
license from the State of California. Pursuant to the Asset Purchase Agreement,
NS California was obligated to return to the Company (out of the 50,000 shares
of common stock issued) 167 shares per day for each day after February 15,
2006 that such biologics license had not been issued up to a total of 10,000.
NS
California has returned 10,000 shares to the Company.
Prior
Relationship with NS California
On
March 31, 2004, the Company entered into a joint venture agreement to
assist NS California in finding uses of and customers for NS California’s
services and technology. The Company’s initial efforts concentrated on
developing programs utilizing NS California’s services and technology through
government agencies. That agreement was terminated as a result of the NS
California acquisition. On September 9, 2005, the Company signed a revenue
sharing agreement with NS California pursuant to which the Company had agreed
to
fund NS California certain amounts to pay pre-approved expenses and other
amounts based on a formula relating to the Company’s ability to raise capital.
Once funded, NS California would pay the Company monthly based on the
revenue generated in the previous month with a minimum payment due each month.
That agreement was terminated as a result of the NS California
acquisition.
13
RESEARCH
AND DEVELOPMENT; THERAPEUTICS MARKETPLACE
In
addition to our platform business of collecting, processing and storing adult
stem cells from the peripheral blood, we recently entered the research and
development arena through our acquisition from the University of Louisville
of
the worldwide exclusive license to the VSEL technology.
Acquisition
of VSEL Technology
On
November 13, 2007, the Company entered into an acquisition agreement with UTEK
Corporation ("UTEK") and Stem Cell Technologies, Inc., a wholly-owned subsidiary
of UTEK ("SCTI"), pursuant to which the Company acquired all the issued and
outstanding common stock of SCTI in a stock-for-stock exchange. Pursuant to
a
license agreement (the "License Agreement") between SCTI and the University
of
Louisville Research Foundation ("ULRF"), SCTI owns an exclusive, worldwide
license to a technology developed by researchers at the University of Louisville
to identify and isolate rare stem cells from adult human bone marrow, called
VSELs (very small embryonic like) stem cells. Concurrent with the SCTI
acquisition, NeoStem entered into a sponsored research agreement (the "Sponsored
Research Agreement" or "SRA") with ULRF under which NeoStem will support further
research in the laboratory of Mariusz Ratajczak, M.D., Ph.D., a co-inventor
of
the VSEL technology and head of the Stem Cell Biology Program at the James
Graham Brown Cancer Center at the University of Louisville. SCTI was funded
by
UTEK in amounts sufficient to pay certain near-term costs under the License
Agreement and the SRA. In consideration for the acquisition, the Company issued
to UTEK 400,000 unregistered shares of its common stock for all the issued
and
outstanding common stock of SCTI.
VSELs
have many characteristics typically found in embryonic stem cells, including
the
ability to differentiate into specialized cells found in different types of
tissue that would be able to interact with the specific organ in order to repair
degenerated, damaged or diseased tissue (the three "Ds" of aging). NeoStem
has
the ability to harvest and cryopreserve these VSELs from individual patients,
setting the stage for their use in personalized regenerative medicine. If VSELs
can be expanded from individual patients and their potential to develop into
different types of tissue cells maintained, it would represent a significant
step toward overcoming the two major limitations in the development of stem
cell
therapies today, the ethical dilemma regarding use of embryonic stem cells
and
the immunological problems associated with using cells from a third party
donor.
Under
the
License Agreement, SCTI agreed to engage in a diligent program to develop the
VSEL technology. Certain license fees and royalties are to be paid to ULRF
from
SCTI, and SCTI is responsible for all payments for patent filings and related
applications. The prior funding of SCTI by UTEK will pay for a portion of SCTI’s
obligations. The License Agreement, which has an initial term of 20 years,
calls
for the following specific payments: (i) reimbursement of $29,000 for all
expenses related to patent filing and prosecution incurred before the effective
date (“Effective Date”) of the license agreement (all of which has been paid);
(ii) a non-refundable prepayment of $20,000 creditable against the first $20,000
of patent expenses incurred after the Effective Date, due upon commencement
of
research under the SRA; (iii) a non-refundable license issue fee of $46,000,
due
upon commencement of research under the SRA; (iv) a non-refundable annual
license maintenance fee of $10,000 upon issuance of the licensed patent in
the
United States; and (v) a royalty of 4% on net sales. The License Agreement
also
contains certain provisions relating to "stacking," permitting SCTI to pay
royalties to ULRF at a reduced rate in the event it is required to also pay
royalties to third parties exceeding a specified threshold for other technology
in furtherance of the exercise of its patent rights or the manufacture of
products using the VSEL technology.
Although
the funds obtained through the acquisition of SCTI were to fund near term
obligations under our agreements relating to the VSEL technology, substantial
additional funds will be needed to continue to fund needed research and
development activities in order to seek to develop a product for the commercial
marketplace and meet our due diligence obligations under the license agreement.
The Company anticipates seeking to obtain such funds through applications for
State and Federal grants, direct investments into SCTI, sublicensing
arrangements as well as other funding sources to help offset all or a portion
of
the costs associated with developing the VSEL technology.
14
SCTI
has
the right to sublicense the VSEL technology in accordance with the terms of
the
License Agreement. The License Agreement also sets forth the parties rights
and
obligations with regard to patent prosecution, including that SCTI will take
the
lead in connection therewith. SCTI can terminate the License Agreement for
any
reason upon 60 days' prior written notice, and either party can terminate upon
30 days' prior written notice upon certain uncured material breaches of the
agreement or immediately upon certain bankruptcy related events. Portions of
the
license may be converted to a non-exclusive license if SCTI does not diligently
develop the VSEL Technology or terminated entirely if SCTI chooses to not pay
for the filing and maintenance of any patents thereunder. ULRF retained the
right under the License Agreement to license and practice the VSEL Technology
for noncommercial purposes only, such as education, academic research, teaching
and public service, and also retained the right of publication subject to
certain confidentiality limitations and prior review by SCTI.
Sponsored
Research of VSEL Technology
Concurrently
with the License Agreement, the Company entered into the Sponsored Research
Agreement with ULRF. Pursuant to the SRA, the Company will support additional
research relating to the VSEL technology to be carried out in the laboratory
of
Dr. Ratajczak as principal investigator. In return, the Company will receive
the
exclusive first option to negotiate a license to the research results. Under
the
SRA, the Company agrees to support the research as set forth in a research
plan
in an amount of $375,000. The prior funding of SCTI by UTEK will pay for a
portion of these research costs. Such costs are to be paid by the Company in
accordance with a payment schedule which sets forth the timing and condition
of
each such payment over a two and one-half year period which commences with
the
commencement of the research, as follows: (i) $100,000 upon receipt of all
approvals and stem cell specimens on which to perform the research (the “First
Payment Date”); (ii) $100,000 on the first yearly anniversary of the First
Payment Date; (iii) $75,000 on the second yearly anniversary of the First
Payment Date; and (iv) $25,000 upon the achievement of each of four specified
milestones.
Under
the
SRA, ULRF retains the rights to intellectual property developed by its employees
in performance of the research relating to the VSEL Technology, and the Company
and ULRF jointly own intellectual property developed jointly by employees of
ULRF and the Company in performance of the research. So long as the Company
continues to support and fund the filing of patent applications and other
intellectual property protection for the same, the Company has the first option
to negotiate for an exclusive, worldwide commercial license to ULRF's interest
in any such developed or jointly developed intellectual property. The SRA also
establishes rates for royalties and revenue sharing between the parties in
the
event no license agreement is executed with regard to joint intellectual
property but one party chooses to develop or license it to a third
party.
The
term
of the research is two and one-half years and shall commence after all
applicable institution (e.g., institutional review board ("IRB")) and Federal
approvals are obtained and upon the adult stem cell specimens required for
the
research being provided to the laboratory. Certain of SCTI's diligence
obligations with respect to developing the VSEL technology commence upon receipt
of these cell specimens. Either party may terminate the SRA if Dr. Ratajczak
is
unable to perform the research and an acceptable successor is not available,
or
if required approval of a review committee at the University of Louisville
or
ULRF is not given or is withdrawn. The Company may terminate the SRA upon 90
days' written notice to ULRF and either party may terminate the SRA on 30 days'
written notice in the event of uncured defaults or breaches. In March 2008,
the
Company shipped to Dr. Ratajczak the preliminary specimens needed for the
research for which an initial IRB approval is in place.
15
Other
Research
We
are
reviewing our options with regard to establishing an independent research
facility on our own or in collaboration with other commercial or blood banking
entities on the East Coast in order that we may expand our research activities
relating to the VSEL technology and potentially other research projects
identified from time to time.
The
Company is also in discussions relating to other research at the U of L in
the
laboratories of other research scientists to generate data relating to other
clinical applications of VSELS, including neural, cardiac and ophthalmic,
among
others.
POTENTIAL
ACQUISITIONS
We
have
recently engaged a financial advisor on an exclusive basis for a six month
period through August 15, 2008 to assist us in exploring acquisition
opportunities of revenue generating businesses, both domestically and abroad,
including businesses that are synergistic with our current business or additive
to our current business. There can be no assurance, however, that any particular
transaction will be completed or that any other suitable opportunities will
arise.
INTELLECTUAL
PROPERTY
We
are
seeking patent protection for our technology. The Company acquired and is
prosecuting two pending U.S. patent applications which had been filed by NS
California. The first patent application is directed to a process by which
stem
cells from the bone marrow are mobilized, isolated from adult peripheral blood
and stored. The second patent application is directed to the analysis of stored
stem cells to provide information relating to the etiology, diagnosis, prognosis
and treatment of disease. The second patent application is further directed
to
the use of stem cells to treat infectious disease and cancer. In addition,
the
Company has filed a patent application directed to low-dose, short course,
cytokine induction of stem cell immobilization. Pursuant to the License
Agreement, SCTI acquired from ULRF the exclusive, worldwide license to patents
and know-how relating to very small embryonic-like (VSEL) stem cells. A U.S.
patent application filed by ULRF on the VSEL technology is being prosecuted
by
the Company. This patent relates to the method of isolating and using VSELs.
SCTI also received a license under the License Agreement to unpatented
inventions and discoveries contained in certain manuscripts relating to
transplantation of VSELs and mobilization of VSELs in certain circumstances,
which may be pursued in subsequently filed patent applications. There can be
no
assurance that any of the Company’s patent applications will issue as patents or
should patents issue that they will not be found invalid. The patent position
of
biotechnology companies generally is highly uncertain and involves complex
legal, scientific and factual questions.
GOVERNMENTAL
REGULATION
For
a
description of matters relating to governmental regulation, please see “Risk
Factors - Risks Relating to the Company’s Business - We operate in a highly
regulated environment, and our failure to comply with applicable regulations,
registrations and approvals would materially and adversely affect our business,”
“Risk Factors - Risks Relating to the Company’s Business - Our adult stem cell
collection, processing and storage business was not contemplated by many
existing laws and regulations” and “Risk Factors - Risks Relating to the
Company’s Business - Our new research and development activities present
additional risks.”
16
COMPETITION
For
a
description of matters relating to competition, please see “Risk Factors - Risks
Relating to Competition” and “Risk Factors - Risks Relating to the Company’s
Business - Our new research and development activities present additional
risks.”
FINANCING
ACTIVITIES
2007
Financing Activities
In
January 2007, the Company had entered into a strategic alliance with UTEK,
a specialty finance company focused on technology transfer, as part of its
plan
to move forward to expand its proprietary position in the adult stem cell
collection and storage arena as well as the burgeoning field of regenerative
medicine. The purpose of the agreement was to identify potential technology
acquisition opportunities that fit the Company’s strategic vision. Through its
strategic alliance agreements with companies in exchange for their equity
securities, UTEK assists such companies in enhancing their new product pipeline
by facilitating the identification and acquisition of innovative technologies
from universities and research laboratories worldwide. UTEK is a business
development company with operations in the United States, United Kingdom and
Israel. In January 2007, the Company issued 12,000 shares of common stock
to UTEK, vesting as to 1,000 shares per month commencing January 2007. See
above for information on the Company’s acquisition of the VSEL technology in
November 2007 via a transaction with UTEK.
In
January and February 2007, the Company raised an aggregate of
$2,500,000 through the private placement of 250,000 units at a price of $10.00
per unit to 35 accredited investors (the “January 2007 private placement”).
Each unit was comprised of two shares of the Company’s common stock, one
redeemable seven-year warrant to purchase one share of common stock at a
purchase price of $8.00 per share and one non-redeemable seven-year warrant
to
purchase one share of common stock at a purchase price of $8.00 per share.
The
Company issued an aggregate of 500,000 shares of common stock, and warrants
to
purchase up to an aggregate of 500,000 shares of common stock at an exercise
price of $8.00 per share. Emerging Growth Equities, Ltd (“EGE”), the placement
agent for the January 2007 private placement, received a cash fee equal to
$171,275 and was entitled to expense reimbursement not to exceed $50,000. The
Company also issued to EGE redeemable seven-year warrants to purchase 34,355
shares of common stock at a purchase price of $5.00 per share, redeemable
seven-year warrants to purchase 17,127 shares of common stock at a purchase
price of $8.00 per share and non-redeemable seven-year warrants to purchase
17,127 shares of common stock at a purchase price of $8.00 per share. Pursuant
to the terms of the January 2007 private placement, the Company was
obligated to prepare and file, no later than ten days after the filing of the
Company’s Annual Report on Form 10-K, a registration statement with the SEC
to register the shares of common stock issued to the investors and the shares
of
common stock underlying the warrants issued to the investors and to EGE. Such
registration statement was filed with the SEC on February 7, 2007. The
January 2007 private placement was conditioned upon entry by the Company’s
Board of Directors and executive officers into a lock-up agreement, pursuant
to
which such directors and officers will not, without the consent of EGE, sell
or
transfer their common stock until the earlier of: (a) six months following
the effective date of the registration statement filed to register the shares
underlying the units, or (b) twelve months following the sale of the units.
This registration statement was declared effective by the SEC on April 25,
2007.
In
August, 2007, the Company raised an aggregate of $6,350,000 through a best
efforts underwritten public offering of 1,270,000 units at a price of $5.00
per
unit (the “August 2007 public offering”). Each unit consisted of one share of
common stock and a five year Class A warrant to purchase one-half a share of
common stock at a price of $6.00 per share. Thus, 1,000 units consisted of
1,000
shares of common stock and Class A warrants to purchase 500 shares of common
stock. The aggregate number of units sold was 1,270,000, the aggregate number
of
shares of common stock included within the units was 1,270,000 and the aggregate
number of Class A Warrants included within the units was 535,000. Mercer
Capital, Ltd. (“Mercer”) acted as lead underwriter for the August 2007 public
offering. In connection with this offering, the Company issued five year
warrants to purchase an aggregate of 95,250 shares of common stock at $6.50
per
share to Mercer and other participating underwriters. After payment of
underwriting commissions and expenses and other costs of the August 2007 public
offering, the aggregate net proceeds to the Company were $5,620,000.
17
2006
Financing Activities
On
December 30, 2005, and in January 2006, the Company consummated the
private placement sale to 19 accredited investors of units consisting of
convertible promissory notes and detachable warrants (“the WestPark private
placement”). Gross proceeds raised were $250,000 on December 30, 2005 and
$250,000 in January 2006, totaling an aggregate of $500,000 in gross
proceeds. Each unit was comprised of: (a) a nine month note in the
principal amount of $25,000 bearing 9% simple interest, payable semi-annually,
with the 2nd payment paid upon maturity, convertible into shares of the
Company’s common stock at a conversion price of $6.00 per share; and
(b) 4,167 detachable three year warrants, each for the purchase of one
share of common stock at an exercise price of $12.00 per share. The notes were
subject to mandatory conversion by the Company if the closing price of the
common stock had been at least $18.00 for a period of at least 10 consecutive
trading days prior to the date on which notice of conversion was sent by the
Company to the holders of the promissory notes, and if the underlying shares
were then registered for resale with the SEC. Holders of the units are entitled
to certain registration rights (see below). The Company issued to WestPark
Capital, Inc., the placement agent for the WestPark private placement,
(i) 5,000 shares of common stock (2,500 shares on December 30, 2005
and 2,500 shares in January 2006); and (ii) warrants to purchase an
aggregate of 8,334 shares of the Company’s common stock (4,167 on
December 30, 2005 and 4,167 in January 2006). By January 2007 all
the convertible promissory notes issued in the WestPark private placement had
either been converted into shares of the Company’s common stock or repaid by the
Company (see below).
In
May 2006, the Company entered into an advisory agreement with Duncan
Capital Group LLC (“Duncan”). Pursuant to the advisory agreement, Duncan
provided to the Company on a non-exclusive best efforts basis, services as
a
financial consultant in connection with any equity or debt financing, merger,
acquisition as well as with other financial matters. In return for these
services, the Company was paying to Duncan a monthly retainer fee of $7,500
(50%
of which could be paid by the Company in shares of its common stock valued
at
fair market value) and reimbursing it for its reasonable out-of-pocket expenses
up to $12,000. Pursuant to the advisory agreement, Duncan also agreed that
it or
an affiliate would act as lead investor in a proposed private placement of
securities, for a fee of $200,000 in cash and 24,000 shares of restricted common
stock. On June 2, 2006 (the “June 2006 private placement”), the
Company entered into a securities purchase agreement with 17 accredited
investors (the “June 2006 investors”). DCI Master LDC, an affiliate of
Duncan, acted as lead investor. Duncan received its fee as described above.
The
Company issued to each June 2006 investor shares of its common stock at a
per-share price of $4.40 along with a five-year warrant to purchase a number
of
shares of common stock equal to 50% of the number of shares of common stock
purchased by the June 2006 investor (together with the common stock issued,
the “June 2006 securities”). The gross proceeds from this sale were
$2,079,000. In February 2007, the term of this agreement was extended
through December 2007. Additionally, it was amended to provide that the
monthly retainer fee be entirely paid by issuing to Duncan an aggregate of
15,000 shares of common stock vesting monthly over the remaining term of the
agreement. The vesting of these shares was accelerated in July 2007 such that
they were fully vested and the advisory agreement was canceled in August
2007.
Pursuant
to the securities purchase agreement for the June 2006 private placement,
the Company expanded the size of its Board to four directors, and appointed
Dr. Robin L. Smith as Chairman of the Board and Chief Executive Officer of
the Company. Dr. Smith, who was previously Chairman of the Advisory Board
of the Company, purchased 5,000 shares of common stock and warrants to purchase
2,400 shares of common stock pursuant to the terms of the securities purchase
agreement. The Company also agreed to expand the size of the Board upon the
initial closing under the securities purchase agreement to permit DCI Master
LDC
to designate one additional independent member to the Company’s Board of
Directors reasonably acceptable to the Company. Richard Berman was originally
appointed to the Company’s Board of Directors in November 2006 to serve as
such designee. The securities purchase agreement also prohibits the Company
from
taking certain action without the approval of a majority of the Board of
Directors for so long as the purchasers in the June 2006 private placement
own at least 20% of the common stock, including making loans, guarantying
indebtedness, incurring indebtedness that is not already included in a Board
approved budget on the date of the securities purchase agreement that exceeds
$100,000, encumbering the Company’s technology and intellectual property or
entering into new or amending employment agreements with executive officers.
DCI
Master LDC was also granted access to Company facilities and personnel and
given
other information rights. Pursuant to the securities purchase agreement, all
then current and future officers and directors of the Company were to not,
without the prior written consent of DCI Master LDC, dispose of any shares
of
capital stock of the Company, or any securities convertible into, or
exchangeable for or containing rights to purchase, shares of capital stock
of
the Company until three months after the effective date of the registration
statement filed with the SEC to register the securities issued in the
June 2006 private placement (described below). Such registration statement
was declared effective on November 6, 2006.
18
The
officers of the Company, as a condition of the initial closing under the
securities purchase agreement for the June 2006 private placement, entered
into letter agreements with the Company pursuant to which they converted an
aggregate of $278,653 of accrued salary into shares of common stock at a per
share price of $4.40. After adjustments for applicable payroll and withholding
taxes which were paid by the Company, the Company issued to such officers an
aggregate of 37,998 shares of common stock. The Company also adopted an
Executive Officer Compensation Plan, effective as of the date of closing of
the
securities purchase agreement and pursuant to the letter agreements each officer
agreed to be bound by the Executive Officer Compensation Plan. In addition
to
the conversion of accrued salary, the letter agreements provided for a reduction
by 25% in base salary for each officer until the Company achieves certain
milestones, the granting of options to purchase shares of common stock under
the
Company’s 2003 Equity Participation Plan which become exercisable upon the
Company achieving certain revenue milestones and the acceleration of the vesting
of certain options and restricted shares held by the officers. In
January 2007, the milestones relating to the reduction in base salary had
been achieved; however, the same officers (and in addition the Chief Executive
Officer who became an employee in connection with the June 2006 private
placement) agreed to subsequent amendments to or replacements of their
employment agreements which provided instead for a 20% reduction in base salary
and/or agreement by the officer to extend their employment term, as well as
certain additional or amended terms.
In
connection with the securities purchase agreement, on June 2, 2006 the
Company entered into a registration rights agreement with each of the
June 2006 investors (the “June 2006 registration rights agreement”).
Pursuant to the June 2006 registration rights agreement, the Company was
obligated to prepare and file no later than June 30, 2006 a registration
statement with the SEC to register the shares of common stock and the warrants
issued in the June 2006 private placement. The Company and the
June 2006 investors agreed to amend the registration rights agreement and
extend the due date of the registration statement to August 31, 2006. A
registration statement was filed pursuant thereto and declared effective by
the
SEC on November 6, 2006.
Pursuant
to the terms of the WestPark private placement (described above), the Company
agreed to file with the SEC and have effective by July 31, 2006, a
registration statement registering the resale by the investors in the WestPark
private placement of the shares of common stock underlying the convertible
promissory notes and the warrants sold in the WestPark private placement. In
the
event the Company did not do so, (i) the conversion price of the
convertible promissory notes would be reduced by 5% each month, subject to
a
floor of $4.00; (ii) the exercise price of the warrants would be reduced by
5% each month, subject to a floor of $10.00; and (iii) the warrants could
be exercised pursuant to a cashless exercise provision. The Company did not
have
the registration statement effective by July 31, 2006 and requested that
the investors in the WestPark private placement extend the date by which the
registration statement was required to be effective until February 28,
2007. The Company also offered to the investors the option of (A) extending
the term of the convertible note for an additional four months from the maturity
date in consideration for which (i) the Company would issue to the investor
for each $25,000 in principal amount of the convertible note 568 shares of
unregistered common stock; and (ii) the exercise price per warrant would be
reduced from $12.00 to $8.00, or (B) converting the convertible note into
shares of the Company’s common stock in consideration for which (i) the
conversion price per conversion share would be reduced to $4.40; (ii) the
Company would issue to the investor for each $25,000 in principal amount of
the
Note, 1,136 shares of common stock; (iii) the exercise price per warrant
would be reduced from $12.00 to $8.00; and (iv) a new warrant would be
issued substantially on the same terms as the original Warrant to purchase
an
additional 4,167 shares of common stock for each $25,000 in principal amount
of
the convertible note at an exercise price of $8.00 per share. Pursuant to this,
the investor was also being asked to waive any and all penalties and liquidated
damages accumulated as of the date of the agreement.
19
In
September 2006, the Company revised the offer relating to the option of
conversion of the WestPark Notes by eliminating the issuance of the additional
1,136 shares of common stock for each $25,000 in principal amount of the Note
converted. As of October 30, 2006, investors holding $425,000 of the
$500,000 of convertible promissory notes had agreed to convert them into shares
of common stock and $162,500 (of which $137,500 in principal amount was
subsequently transferred and converted by the transferees) had agreed to extend
the term of the convertible promissory notes on the terms set forth above.
On
November 6, 2006, the registration statement was declared effective. In
January 2007, the remaining $75,000 in outstanding convertible promissory
notes were repaid.
During
July and August 2006, the Company raised an aggregate of $1,750,000
through the private placement to 34 accredited investors of 397,727 shares
of
its common stock at $4.40 per share and warrants to purchase 198,864 shares
of
common stock at $8.00 per share (the “Summer 2006 private placement”). The terms
of the Summer 2006 private placement were substantially similar to the terms
of
the June 2006 private placement.
CORPORATE
ACTIONS
On
August 29, 2006, our stockholders approved an amendment to our Certificate
of Incorporation to effect a reverse stock split of our common stock at a ratio
of one-for-ten shares. The primary purposes of effecting the reverse stock
split
was (i) to raise the per share market price of the Company’s common stock
to facilitate future financing or to be able to use our capital stock in
acquisitions, (ii) to raise the per share price to be able to possibly
consider a Nasdaq or other listing for our shares in the future and
(iii) to save administrative expenses by reducing the number of our
stockholders. This reverse stock split was effective as of August 31,
2006.
Also
on
August 29, 2006, our stockholders approved an amendment to our Certificate
of Incorporation to change our name from Phase III Medical, Inc. to
NeoStem, Inc. As the Company’s business efforts were then focused on
developing NS California’s (previously known as NeoStem, Inc.) business of
adult stem cell collection and storage, it was appropriate to change the
corporate name to NeoStem, Inc. to better reflect our current business
operations.
On
June
14, 2007, our stockholders approved an amendment to our Certificate of
Incorporation to effect a reverse stock split of our common stock at a ratio
between one-for-three and one-for-ten shares in the event it was deemed
necessary by the Company’s Board of Directors to be accepted onto a securities
exchange. On July 9, 2007, the Board authorized the reverse stock split at
a
ratio of one-for-ten shares in order to satisfy the listing requirements of
the
American Stock Exchange, to be effective concurrently with the initial closing
of the Company’s August 2007 public offering. On August 9, 2007 the reverse
split was effective and the Company’s common stock commenced trading on The
American Stock Exchange under the symbol “NBS.”
20
History
The
Company was incorporated under the laws of the State of Delaware in
September 1980 under the name Fidelity Medical Services, Inc. Under
prior management it engaged in various businesses, including the development
and
sale of medical imaging products, the retail sale and wholesale distribution
of
stationery and related office products in the United Kingdom, operation of
a
property and casualty insurance business, and ultimately through June 2002
was the sale of extended warranties and service contracts over the Internet
covering automotive, home, office, personal electronics, home appliances,
computers and garden equipment. In June 2002, management determined, in
light of continuing operating losses, to discontinue its warranty and service
contract business and to seek new business opportunities for the Company. See
Medical Biotech/Business, below. In addition to such activities, since June
2002
the Company continued to “run off” the sale of its warranties and service
contracts. This run off was completed in March 2007.
Medical/Biotech
Business
On
February 6, 2003, the Company appointed Mark Weinreb as a member of the
Board of Directors and as its President and Chief Executive Officer. Under
his
direction, the Company entered a new line of business where it provided capital
and guidance to companies in multiple sectors of the healthcare and life science
industries, in return for a percentage of revenues, royalty fees, licensing
fees
and other product sales of the target companies. The Company continued to
recruit management, business development and technical personnel, and developed
its business model, in furtherance of its business plan.
On
July 24, 2003, the Company changed its name to Phase III
Medical, Inc., which better described the Company’s then current business
plan. On December 12, 2003, the Company signed a royalty agreement with
Parallel Solutions, Inc. (“PSI”) to develop a new bioshielding platform
technology for the delivery of therapeutic proteins and small molecule drugs.
Under this agreement, the Company was to provide capital and guidance to PSI
for
a proof of concept study, and PSI was to pay the Company a percentage of
revenues received from certain sales and licensing activities. PSI ultimately
did not progress beyond the proof of concept stage and therefore there were
no
royalties to be paid to the Company. The last payments made by the Company
to
PSI were in 2004. The Company does not anticipate any further activity pursuant
to the PSI agreement.
The
Company engaged in various capital raising activities to pursue its new
medical/biotech business, raising $489,781 in 2003, $1,289,375 in 2004,
$1,325,000 in 2005 and $3,573,000 in 2006, respectively. Such capital raising
activities from 2003 to 2006 enabled the Company to pursue the arrangements
with
PSI and NS California, and to launch the Company’s current adult stem cell
business.
As
of
March 28, 2008, the Company had 16 employees, of which 12 are full-time.
21
ITEM
1A. RISK FACTORS
THE
RISKS DESCRIBED BELOW ARE NOT THE ONLY RISKS FACING THE COMPANY. ADDITIONAL
RISKS THAT THE COMPANY DOES NOT YET KNOW OF OR THAT IT CURRENTLY THINKS ARE
IMMATERIAL MAY ALSO IMPAIR ITS BUSINESS OPERATIONS. IF ANY OF THE RISKS OCCUR,
ITS BUSINESS STRATEGY, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE
ADVERSELY AFFECTED.
RISKS
RELATING TO THE COMPANY'S FINANCIAL CONDITION AND COMMON STOCK
We
have a history of operating losses and we will continue to incur
losses.
Since
our
inception in 1980, we have generated only limited revenues from sales and have
incurred substantial net losses of $10,445,473, $6,051,400 and $1,745,039 for
the years ended December 31, 2007, 2006 and 2005, respectively. We expect to
incur
additional operating losses as well as negative cash flow from our adult stem
cell collection, processing and storage business operations until we
successfully commercialize and develop this business, if ever. It is also
expected that, beyond the utilization of the SCTI funds to support the near-term
costs relating to our newly-acquired VSEL technology under the license and
sponsored research agreements with the University of Louisville Research
Foundation, the Company will incur losses and negative cash flow for the
foreseeable future as a result of our new research and development activities
until the VSEL technology can be successfully implemented, integrated into
our
business and commercialized, if ever.
We
have a history of liquidity problems, which may affect our ability to raise
capital.
At
December 31, 2007, we had a cash balance of $2,304,227, working capital of
$1,930,851 and stockholders’
equity
of $3,316,194. Our history of illiquidity and losses may make it difficult
for
us to raise capital on favorable terms. We have from time to time raised capital
for our activities through the sale of our equity securities and promissory
notes. Most recently, we raised $2,500,000 in January and February 2007 through
the private placement sale of our common stock and warrants to purchase our
common stock, and $6,350,000 in August 2007 through the public offering sale
of
units consisting of shares of our common stock and warrants to purchase common
stock. Such capital raising activities have enabled us to pursue our business
plan and begin to grow our adult stem cell collection and storage business,
including expanding marketing and sales activities. The funds we obtained
through the acquisition of SCTI are sufficient to fund certain near term
obligations under our agreements relating to our VSEL technology; however,
substantial additional funds will need to be raised in order for us to continue
to fund additional research and development activities relating to the VSEL
technology, including in order to allow us to meet our development obligations
under our license agreement with the University of Louisville Research
Foundation. The Company anticipates seeking to obtain funds through applications
for State and Federal grants, direct investments into SCTI, sublicensing
arrangements as well as other funding sources to help offset all or a portion
of
these costs; however, there can be no assurance that such funding will be
received.
We
will need substantial additional financing to continue
operations.
We
will
require substantial additional capital to fund our current operating plan for
our business, including the development of our VSEL technology. In addition,
our
cash requirements may vary materially from those now planned because of expenses
relating to marketing, advertising, sales, distribution, research and
development and regulatory affairs, as well as the costs of maintaining,
expanding and protecting our intellectual property portfolio, including
potential litigation costs and liabilities.
22
If
we are unable to obtain future capital on acceptable terms, this will negatively
affect our business operations and
current investors.
We
expect
that in the future we will seek additional capital through public or private
financings. Additional financing may not be available on acceptable terms,
or at
all. If additional capital is raised through the sale of equity, or securities
convertible into equity, further dilution to then existing stockholders will
result. If additional capital is raised through the incurrence of debt, our
business could be affected by the amount of leverage incurred. For instance,
such borrowings could subject us to covenants restricting our business
activities, paying interest would divert funds that would otherwise be available
to support commercialization and other important activities, and holders of
debt
instruments would have rights and privileges senior to those of equity
investors. If we are unable to obtain adequate financing on a timely basis,
we
may be required to delay, reduce the scope of or eliminate some of our planned
activities, any of which could have a material adverse effect on the
business.
We
will continue to experience cash outflows.
We
continue to incur expenses, including the salary of our executive officers,
rent, legal, marketing and
accounting fees, insurance and general administrative expenses. We are building
the infrastructure for our business and will experience
additional cash outflows in the foreseeable future. It is not possible at this
time to state whether we will be able to finance these cash outflows or when
we
will be able to achieve and sustain a positive cash position. Our ability to
become profitable will depend on many factors, including
our ability to successfully commercialize and develop the business. We cannot
assure that we will ever become
profitable and we expect to continue to incur losses. NS California, the company
from which we initially acquired our adult stem cell business, had nominal
operations and nominal assets at the time of our acquisition. From its inception
in 2002 through September 30, 2005, NS California had aggregate revenues of
$25,500, and aggregate losses of $2,357,940. We cannot guarantee that we will
be
more successful than NS California in achieving sufficient revenues for
profitability. Even if we do achieve profitability, we cannot guarantee that
we
can sustain or increase profitability in the future. If revenues grow slower
than we anticipate, or if operating expenses exceed our expectations or cannot
be adjusted accordingly, then our business, results of operations, financial
condition and cash flows will be materially and adversely affected. Because
our
strategy might include acquisitions of other businesses, products or
technologies, acquisition expenses and any cash used to make these acquisitions
will reduce our available cash.
Our
stock has historically had limited trading volume.
Our
common stock currently trades on the American Stock Exchange and until August
9,
2007 was traded on the OTC Bulletin Board, an electronic, screen-based trading
system operated by the National Association of Securities Dealers, Inc. Our
stock has generally been thinly traded and, although trading volume has
increased since it has commenced trading on the American Stock Exchange, we
cannot assure you that our stock will continue to have improved liquidity or
that it will increase above current levels. Our Class A Warrants also trade
on
the American Stock Exchange, but have had very limited trading volume. As
a
result,
an investor may find it difficult to dispose of our common stock or warrants.
Our
securities prices could be volatile.
The
price
of our common stock has fluctuated in the past and may be more volatile in
the
future. Factors
such as the announcements of government regulation, new products or services
introduced by us or
by our
competition, healthcare legislation, trends in health insurance, litigation,
fluctuations in operating results,
our success in commercializing our business, market conditions for healthcare
stocks in general
as well
as economic recession could have a significant impact on the future price of
our
common stock. The historically low volume of trading in our common stock has
made it more vulnerable, and it may continue to be more vulnerable, to rapid
changes in price in response to market conditions.
23
Sales
of substantial amounts of our common stock in the open market, or the
availability of such shares for sale, could
adversely affect the price of our common stock and other
securities.
We
had
5,073,699 shares of common stock outstanding as of March 28, 2008. The following
securities that
may be
exercised for, or are convertible into, shares of our common stock were issued
and outstanding as of March 28, 2008:
· Options.
Stock options to purchase 1,827,800 shares of our common stock at a weighted
average exercise price of approximately $4.01 per share.
· Warrants.
Warrants to purchase 1,377,688 shares of our common stock at a weighted average
exercise price of approximately $7.25 per share.
· Class
A
Warrants. Warrants to purchase 635,000 shares of our common stock at an exercise
price of $6.00 per share. The Class A warrants were issued in our public
offering in August 2007.
· Underwriters
Warrants. Warrants issued to the underwriter in our public offering in August
2007 to purchase 95,250 shares of our common stock at an exercise price of
$6.50
per share (130% of the price of the common stock sold in the public offering).
The
vast
majority of the outstanding shares of our common stock, as well as substantially
all the shares
of our
common stock that may be issued under our outstanding options, warrants, Class
A
warrants and underwriter warrants, are registered or otherwise not restricted
from trading.
Our
outstanding warrants may negatively affect our ability to raise additional
capital.
During
the terms of our outstanding warrants, Class A warrants and underwriter
warrants, their holders are given the opportunity to profit from a
rise
in the
market price of our common stock. So long as these warrants are outstanding,
the
terms on which we
could
obtain additional capital may be adversely affected. The holders of these
warrants might be expected
to exercise them at a time when we would, in all likelihood, be able to obtain
any needed capital
by a new
offering of securities on terms more favorable than those provided by these
warrants.
Failure
To Maintain Effective Internal Controls In Accordance With Section 404 Of
The Sarbanes-Oxley Act Could Have A Material Adverse Effect On Our Business
And
Stock Price.
If
we
fail to maintain adequacy of our internal controls in accordance with the
requirements of Section 404 of the Sarbanes-Oxley Act of 2002 and as such
standards are modified, supplemented or amended from time to time, we may not
be
able to ensure that we can conclude on an ongoing basis that we have effective
internal controls over financial reporting in accordance with Section 404
of the Sarbanes-Oxley Act. Failure to achieve and maintain an effective internal
control environment could have a material adverse effect on our stock price.
During
the course of our testing of our internal controls, we may identify, and have
to
disclose, material weaknesses or significant deficiencies in our internal
controls that will have to be remediated. Implementing any appropriate changes
to our internal controls may require specific compliance training of our
directors, officers and employees, entail substantial costs in order to modify
our existing accounting systems, and take a significant period of time to
complete. Such changes may not, however, be effective in maintaining the
adequacy of our internal controls, and any failure to maintain that adequacy,
or
consequent inability to produce accurate financial statements on a timely basis,
could increase our operating costs and could materially impair our ability
to
operate our business. In addition, investors’ perceptions that our internal
controls are inadequate or that we are unable to produce accurate financial
statements may negatively affect our stock price.
24
RISKS
RELATING TO THE COMPANY'S BUSINESS
If
the potential of stem cell therapy to treat serious disease is not realized,
the
value of our stem cell collection, processing
and storage and our development programs could be significantly
reduced.
The
potential of stem cell therapy to treat serious disease is currently being
explored. Stem cell therapy is not a commonly used procedure and it has not
been
proven in clinical trials that stem cell therapy will be an effective treatment
for diseases other than those currently addressed by hematopoietic stem
cell
transplants (hematopoietic stem cells are the stem cells from which all blood
cells are made). No stem cell products have been successfully developed and
commercialized to date, and
none
have received regulatory approval in the United States or internationally.
Stem
cell therapy may
be
susceptible to various risks, including undesirable and unintended side effects,
unintended immune system responses, inadequate therapeutic efficacy or other
characteristics that may prevent or limit its approval or commercial use. The
value of our stem cell collection, processing and storage and our development
programs could be significantly reduced if the use of stem cell therapy to
treat
a wide-range of serious diseases
is not
proven effective in the near future.
Because
the stem cell industry is subject to rapid technological and therapeutic
changes, our future success will materially
depend on the viability of the commercial use of stem cells for the treatment
of
disease.
Our
success materially depends on the development of therapeutic treatments and
cures for disease using stem cells. The broader medical and research environment
for such treatments and cures critically affects
the utility of stem cells, the services we offer to the public, and our future
success. The value of stem
cells in
the treatment of disease is subject to potentially revolutionary technological,
medical and therapeutic changes. However, future technological and medical
developments or improvements in conventional therapies could render the use
of
stem cells and our services and equipment obsolete and unmarketable.
As a result, there can be no assurance that our services will provide
competitive advantages
over
other technologies. If technological or medical developments arise that
materially alter the commercial
viability of our technology or services, we may be forced to incur significant
costs in replacing
or
modifying equipment in which we have already made a substantial investment
prior
to the end of its anticipated
useful life. Alternatively, significant advances may be made in other treatment
methods or in
disease
prevention techniques which could significantly reduce or entirely eliminate
the
need for the services
we provide. The materialization of any of these risks could have a material
adverse effect on our
business, financial condition, the results of operations or our ability to
operate at all.
We
may be forced to undertake lengthy and costly efforts to build market acceptance
of our stem cell collection, processing and storage services, the success of
which is critical to our profitability. There can be no assurance that these
services will gain market acceptance. To date, only a minimal number of
collections have been performed at the collection centers in our
network.
Our
future success in the business of collecting, processing and storing adult
stem
cells depends on the successful and continued market acceptance of this service.
Broad use and acceptance of our service requires marketing expenditures and
education and awareness of consumers and medical practitioners who, under
present law, must order stem cell collection on behalf of a potential customer.
The time and expense required to educate and build awareness of our services
and
its potential benefits could significantly
delay market acceptance and our ultimate profitability. The successful
commercialization of our
services will also require that we satisfactorily address the concerns of
medical practitioners in order to
avoid
potential resistance to recommendations for our services and ultimately reach
our potential consumers.
No assurances can be given that our business plan and marketing efforts will
be
successful, that
we will
be able to commercialize our services, or that there will be market acceptance
of our services or clinical acceptance of our services by physicians sufficient
to generate any material revenues for us. To date, only a minimal number of
collections have been performed at the collection centers in our
network.
25
Ethical
and other concerns surrounding the use of stem cell therapy may increase the
regulation of or negatively impact the public perception of our stem cell
services, thereby reducing demand for our services.
The
use
of embryonic stem cells for research and stem cell therapy has been the subject
of debate regarding related ethical, legal and social issues. Although our
business only utilizes adult stem cells and does
not
involve the more controversial use of embryonic stem cells, the use of other
types of human stem cells
for
therapy could give rise to similar ethical, legal and social issues as those
associated with embryonic
stem
cells. Additionally, it is possible that our business could be negatively
impacted by any stigma associated
with the use of embryonic stem cells if the public fails to appreciate the
distinction between the
use of
adult versus embryonic stem cells. The commercial success of our business will
depend in part on public acceptance of the use of stem cell therapy, in general,
for the prevention or treatment of human diseases.
Public attitudes may be influenced by claims that stem cell therapy is unsafe
or
unnecessary, and stem
cell
therapy may not gain the acceptance of the public or the medical community.
Public pressure or
adverse
events in the field of stem cell therapy that may occur in the future also
may
result in greater governmental regulation of our business creating increased
expenses and potential regulatory delays relating to the approval or licensing
of any or all of the processes and facilities involved in our stem cell
banking
services. In the event that the use of stem cell therapy becomes the subject
of
adverse commentary or
publicity, our business could be adversely affected and the market price for
our
common stock could be
significantly harmed.
We
operate in a highly regulated environment, and our failure to comply with
applicable regulations, registrations and approvals would materially and
adversely affect our business.
Historically,
the FDA has not regulated banks that collect and store stem cells. More recent
changes,
however,
require establishments engaged in the recovery, processing, storage, labeling,
packaging or distribution of any Human Cells, Tissues, and Cellular and
Tissue-Based Products (HCT/Ps) or the screening or testing of a cell tissue
donor to register with the FDA. The registration requirement was effective
as of January 2004 and we are currently so registered. The FDA also adopted
rules in May 2005 that regulate current Good Tissues Practices
(cGTP). We may be or become subject to such regulations, and there can be no
assurance that we will be able, or will have the resources, to comply. Future
FDA regulations
could also adversely impact or limit our ability to market or perform our
services. In order to collect
and store blood stem cells we must conduct (or arrange for the conduct of)
a
variety of laboratory tests
which are regulated under the federal Clinical Laboratory Improvement Amendments
(CLIA). Any
facility
conducting regulated tests must obtain a CLIA certificate of compliance and
submit to regular inspection.
Some
states require additional regulation and oversight of clinical laboratories
operating within their borders and some impose obligations on out-of-state
laboratories providing services to their residents. Many of the states in which
we, our strategic partners or members of our collection network engage in
collection, processing or storage activities have licensing requirements that
must be complied with. Additionally, there may be state regulations impacting
the use of blood products that would impact our business. We currently have
a
biologics license from the State of California. We also have two provisional
licenses from the State of New York, which permit the Company’s California
facility to collect, process and store hematopoietic progenitor cells (“HPCs”)
collected from New York residents, and also permit the solicitation in New
York
relating to the collection of HPCs. A third provisional license received in
January 2008, permits the California facility to collect, process, store and
use
for medical research HPCs collected from New York residents. NECC, the cryogenic
laboratory with whom we have formed a strategic alliance to provide additional
processing and storage capacity for consumers on the East Coast, has applied
for
a license from the State of New York to process, store and use for research
HPCs
collected from New York residents. Each such license is or will be subject
to
certain limitations. There can be no assurance that we, our strategic partners
or members of our collection center network will be able to obtain any necessary
licenses required to conduct business in any states, or maintain licenses that
are required and obtained with respect to such states, including California
and
New York. We may also be subject to state and federal privacy laws related
to
the protection of our customers’ personal health information to which we would
have access through the provision of our services. We may be required to spend
substantial amounts of time and money to comply with any regulations and
licensing requirements, as well as any future legislative and regulatory
initiatives. Failure to comply with applicable regulatory requirements or delay
in compliance may result in, among other things, injunctions, operating
restrictions, and civil fines and criminal prosecution which would have a
material adverse effect on the marketing and sales of our services and impair
our ability to operate profitably or preclude our ability to operate at all
in
the future. The Company will need to transfer its processing and storage
operations to a larger facility due to space constraints at its California
facility. The Company is considering opportunities on the east coast, including
utilizing NECC as its primary processing and storage facility and opening a
processing and storage facility in connection with its activities at the
University of Louisville or at some other AABB licensed facility. Any delay
in
complying with licensing requirements applicable to a new processing and storage
facility could have a material adverse impact on our business.
26
Our
adult stem cell collection, processing and storage business was not contemplated
by many existing laws and regulations.
The
service that we provide is unique. It is not medical treatment, although it
involves medical procedures. It is not clinical research, although we have
recently entered the research and development arena relating to the VSEL
technology and additional research participation is part of our business plan.
Our research activities are subject to different regulations than our commercial
activities. Our adult stem cell collection, processing and storage business
was not contemplated by many of the regulations in the field in which we operate
and as a result, there
is
often considerable uncertainty when we are analyzing the applicability of
regulatory requirements.
We have
devoted significant resources to ensuring compliance with those laws that we
believe to be applicable
and when applicability of a law is in doubt, we have opted to comply in order
to
minimize risk. It
is
possible, however, that regulators may disagree with some of our interpretations
of the law prompting additional compliance requirements or even enforcement
actions. Such enforcement may have a material adverse effect on our operations
or may require re-structuring of our operations or impair our ability to operate
profitably.
Our
failure to comply with laws related to hazardous materials could materially
harm
us.
We
are
subject to state and federal laws regulating the proper disposal of biohazardous
material. Although
we believe we are currently in compliance with all such applicable laws, a
violation of such laws,
or the
future enactment of more stringent laws or regulations, could subject us to
liability for noncompliance
and may require us to incur costs and/or otherwise have a material adverse
effect on our
ability
to do business.
Side
effects or limitations of the stem cell collection process or a failure in
the
performance of our cryopreservation storage facility
or systems could harm our business and reputation.
To
the
extent a customer experiences adverse side effects from the stem cell collection
process, the quantities of stem cells collected through our process are
ultimately determined to be in inadequate therapeutic amounts, or
our
cryopreservation storage service is disrupted, discontinued or our ability
to
provide banked stem cells is impaired for any reason, our business and
operations could be adversely affected. Any equipment failure that causes a
material interruption or discontinuance in our cryopreservation storage of
stem
cell specimens could result in stored specimens being damaged and unable to
be
utilized. Adverse side effects of
the
collection process, limitations of the collection process (such as whether
the
collection process produces a sufficient quantity of stem cells for all future
therapeutic applications) or specimen damage (including contamination or loss
in
transit to us), could result
in
litigation against us and reduced future revenue, as well as harm to our
reputation. Our insurance may not
adequately compensate us for any losses that may occur due to any such adverse
side effects, limitations or failures
in our
system or interruptions in our ability to maintain proper, continued,
cryopreservation storage services.
Our systems and operations are vulnerable to damage or interruption from fire,
flood, equipment
failure,
break-ins, tornadoes and similar events for which we do not have redundant
systems or a formal disaster recovery plan and we may not carry sufficient
business interruption insurance to compensate us for losses that may occur.
Any
claim of adverse side effects or limitations or material disruption in our
ability to maintain continued uninterrupted storage systems could have a
material adverse effect on our business, operating results and financial
condition.
27
We
are dependent on existing relationships with third parties to conduct our
business.
Our
process of collecting stem cells involves the injection of a “mobilizing agent”
which causes the stem
cells to leave the bone marrow and enter into the blood stream. The injection
of
this mobilizing agent
is an
integral part of the collection process. There is currently only one supplier
of
this mobilizing agent, and we are currently dependent upon our relationship
with
such supplier to maintain an adequate supply. Although we continue to explore
alternative methods of stem cell collection, there can be no assurance that
any
such methods will prove to be successful. In the event that our supplier is
unable or unwilling to continue to supply a mobilizing agent to us on
commercially reasonable terms, and we are unable to identify
alternative methods or find substitute suppliers on commercially reasonable
terms, we may not be able
to
successfully commercialize our business. We are also currently using only one
outside “apheresis”
provider
that also is expected to be the apheresis provider to certain of our collection
centers being operated by members of our network. “Apheresis” is the process
through which stem cells are extracted from a patient’s
whole blood and it is an integral part of our collection process. Although
other
third parties could
provide
apheresis services, any disruption in the relationship with this service would
cause a delay in the delivery of our services. In order to successfully
commercialize our business, we will continue to depend upon our relationship
with such companies or we or the collection centers operated by members of
our
network will need to develop internal capabilities to provide this service
and
obtain appropriate licensure. See also “-
Our
new research and development activities present additional
risks”
for
additional risks relating to our dependence on third parties for development
of
our VSEL technology.
Our
success will depend in part on establishing and maintaining effective strategic
partnerships and collaborations,
which may impose restrictions on our business and subject us to additional
regulation.
A
key
aspect of our business strategy is to establish strategic relationships in
order
to gain access to critical supplies, to expand or complement our research and
development or commercialization capabilities, or to reduce the cost of research
and development or commercializing services on our own. There can be no
assurance that we will enter into such relationships, that the arrangements
will
be on favorable terms or that such relationships will be successful.
Relationships with licensed
professionals such as physicians may be subject to state and federal laws
including fraud and abuse
regulations restricting the referral of business, prohibiting certain payments
to physicians, or otherwise limiting our options for structuring a relationship.
If our services become widely reimbursable by government or private insurers,
we
could be subject to additional regulation and perhaps additional limitations
on
our ability to structure relationships with physicians. Additionally, state
regulators may impose restrictions on the types of business relationships into
which licensed physicians or other licensed professionals
may enter. Failure to comply with applicable fraud and abuse regulations or
other regulatory
requirements could result in civil fines, criminal prosecution or other
sanctions. Even if we do enter into these
arrangements, we may not be able to maintain these relationships or establish
new ones in the future
on
acceptable terms. Furthermore, these arrangements may require us to grant
certain rights to third parties, including exclusive rights or may have other
terms that are burdensome to us. If any of our partners terminate their
relationship with us or fail to perform their obligations in a timely manner,
our research and development
activities or commercialization of our services may be substantially impaired
or
delayed. If we fail to structure our
relationships with physicians in accordance with applicable fraud and abuse
laws
or other regulatory requirements it could have a material adverse effect on
our
business.
28
We
are dependent upon our management, scientific and medical personnel and we
may
face difficulties in attracting
qualified employees or managing the growth of our
business.
Our
future performance and success are dependent upon the efforts and abilities
of
our management, medical
and scientific personnel. Furthermore, our future growth will require hiring
a
significant number of
qualified technical, medical, scientific, commercial, business and
administrative personnel. Accordingly,
recruiting and retaining such personnel in the future will be critical to our
success. If we are not able to attract and retain, on acceptable terms, the
qualified personnel necessary for the continued development of our business,
including those required in order for us to obtain and maintain appropriate
licensure, we may not be able to sustain our operations or achieve our business
objectives. Our failure to manage growth effectively could limit our ability
to
achieve our commercialization and other goals relating to, and we may fail
in
developing, our new business.
General
economic recession could negatively impact demand for our
services.
Economic
recession, including attendant job loss, could negatively impact the demand
for
our services.
Our
new research and development activities present additional
risks.
Our
new
research and development activities relating to the VSEL technology are subject
to the same risks as our adult stem cell collection, processing and storage
business, and there can be no assurance that we independently or through
collaborations will successfully develop, commercialize or market our
processing, collection and storage activities utilizing this VSEL technology.
Further,
we have development obligations under our exclusive license agreement with
the
University of Louisville pursuant to which we have licensed the VSEL technology.
As we currently have minimal capacity to conduct research and development
activities, to assist in meeting such development obligations we have entered
into a sponsored research agreement with the University of Louisville pursuant
to which research services are being provided and on which we are currently
dependent on their performance in developing the VSEL technology. Additional
research projects at the University of Louisville are also under discussion.
We
will, however, require additional research and development capacity and access
to funds to meet our obligations under the license agreement and fully
develop the VSEL technology and integrate it into our business, and expect
losses to increase as our research and development efforts progress. The Company
anticipates seeking to obtain such funds through applications for State and
Federal grants, direct investments into SCTI, sublicensing arrangements as
well
as other funding sources to help offset all or a portion of these costs;
however, there can be no assurance that such funds will be received. We must
also develop increased internal research capability and sufficient laboratory
facilities or establish relationships with third parties to provide such
research capability and facilities. There can be no assurance that we will
be
able to establish and maintain such relationships on commercially acceptable
terms, if at all. Further, we must meet payment and other obligations under
the
license and sponsored research agreements. The license agreement requires the
payment of certain license fees, royalties and milestone payments, payments
for
patent filings and applications and the use of due diligence in developing
and
commercializing the VSEL technology. The sponsored research agreement requires
periodic and milestone payments. Our failure to meet financial or other
obligations under the license or sponsored research agreements in a timely
manner could result in the loss of some or all of our rights to proprietary
technology (as an example, portions of the license may be converted to a
non-exclusive license or it can be terminated entirely), and/or we could lose
our right to have the University of Louisville conduct research and development
efforts.
29
The
commercial viability of our VSEL technology is subject to substantially the
same
risks as our adult stem cell collection, processing and storage business, but
it
will also depend upon the ability to successfully expand the number of VSELs
collected through our adult stem cell collection process into a therapeutically
viable amount as well as the utility of VSELs for therapeutic purposes. As
the
number of VSELs which can be isolated from the adult peripheral blood collected
is relatively small, the
ability to create a therapeutic quantity of VSELs from a small number of cells
will be essential to effectively using
VSELs.
There are many biotechnology laboratories attempting to develop stem cell
expansion technology, but to date, stem cell expansion techniques are very
inefficient and typically the target cells stop
dividing naturally, keeping the yield low. A
critical aspect of our adult stem cell collection and banking service relating
to the VSEL technology will therefore be the utilization of stem cell expansion
processes, and there can be no assurance that such technology will be available.
Moreover, stem cell collection and harvesting techniques are becoming the
subject of new and rapidly developing technologies and could undergo significant
change in the future. Rapid technological development could result in our VSEL
technology becoming obsolete prior to its successful integration into the
process and commercialization of our collection, processing and storage
business. Successful biotechnology development in general is highly uncertain
and is dependent on numerous factors, many of which are beyond our control.
Technology that appears promising in the early phases of development may fail
to
be successfully commercialized for numerous reasons, including, but not limited
to competing technologies for the same indication.
We
believe that the VSEL technology is properly classified under the FDA’s HCT/P
regulatory paradigm and not as a medical device or as a biologic or
drug. There can be no assurance that the FDA would agree that this
category of regulatory classification applies to the VSEL technology, and the
reclassification of this technology could have adverse consequences for us
and
make it more difficult or expensive for us to conduct this business by requiring
regulatory clearance, approval and/or compliance with additional regulatory
requirements.
Any
future acquisitions may expose us to additional risks.
We
continuously review acquisition prospects that would complement our current
business, increase the size and geographic scope of our operations or otherwise
offer revenue generating or other growth opportunities. We recently engaged
the
services of a financial advisor for a six month period on an exclusive basis
to
assist us in exploring acquisition opportunities of revenue generating
businesses, both domestically or abroad, including businesses that are
synergistic with or additive to our current business. The financing for any
of
these acquisitions could dilute the interests of our stockholders, result in
an
increase in our indebtedness or both. Acquisitions may entail numerous risks,
including:
|
|
·
|
|
difficulties
in assimilating acquired operations, technologies or products, including
the loss of key employees from acquired businesses;
|
30
|
|
·
|
|
diversion
of management’s attention from our core business;
|
|
|
·
|
|
risks
of entering markets (including those overseas) in which we have
limited or no prior experience; and
|
|
|
·
|
|
our
management team has limited experience in purchasing and integrating
new
businesses.
|
Our
failure to successfully complete the integration of any acquired business could
have a material adverse effect on our business, financial condition and
operating results. In addition, there can be no assurance that we will be able
to identify suitable acquisition candidates or consummate acquisitions on
favorable terms.
RISKS
RELATING TO COMPETITION
The
stem cell preservation market has and continues to become increasingly
competitive.
We
may
face competition from companies with far greater financial, marketing, technical
and research resources, name recognition, distribution channels and market
presence than us, who are marketing
or developing new services that are similar to the services that are now being
or may in the
future
be developed by us. There can be no assurance that we will be able to compete
successfully.
For
example, in the established market for cord blood stem cell banking, the growth
in the number of families
banking their newborn’s cord blood stem cells has been accompanied by an
increasing landscape
of
competitors. Our business, which has been more recently developed, already
faces
competition from other
established operators of stem cell preservation businesses and providers of
stem
cell storage services. We
believe that certain of our competitors have established stem cell banking
services to process and store stem
cells collected from adipose tissue (fat tissue). This type of stem cell banking
will require partnering with
cosmetic surgeons who perform liposuction procedures. In addition, we believe
the use of adult stem cells
from adipose tissue will require extensive clinical trials to prove the safety
and efficacy of such cells and
the
enzymatic process required to extract adult stem cells from fat. From a
technology perspective this ability
to expand a small number of stem cells could present a competitive alternative
to stem cell banking. The
ability to create a therapeutic quantity of stem cells from a small number
of
cells is essential to using embryonic
stem cells and would be desirable to treat patients who can only supply a small
number of their
own stem
cells. There are many biotechnology laboratories attempting to develop stem
cell
expansion technology, but to date, stem cell expansion techniques are very
inefficient and typically the target cells stop
dividing naturally, keeping the yield low. This could also have an adverse
effect on our ability to fully utilize our VSEL technology, which will be
dependent upon access to reliable stem cell expansion technology. However,
even
though reliable stem cell expansion technology may ease some of the limitations
of the competitive alternatives to our business, it would also allow us to
utilize the VSEL technology and also complement adult
stem
cell banking by allowing individuals to extend the banking of an initial
collection of cells for many applications.
We
also
understand that other technologies are being developed which claim the ability
to harvest stem cells through a variety of other techniques, such as turning
skin cells into cells that behave like embryonic stem cells or harvesting stem
cells from the pulp of baby teeth. No assurance can be given that such
technologies, or any other technologies, will not ultimately prove to be more
successful, have a faster rate of market penetration or have broader application
than ours. There can be no assurance that technological
or medical breakthroughs by our current or future competitors will not render
the Company’s business of stem cell preservation commercially or otherwise
unappealing or obsolete. In addition, the Company believes that one’s use of
their own (autologous) stem cells presents fewer risks and increases the
therapeutic value of stem cell therapy but the Company could nonetheless face
competition from companies seeking to promote the benefits of third party
donors.
31
In
the
event that we are not able to compete successfully with our current or potential
competitors, it may
be
difficult for us to grow our revenue and maintain our existing business without
incurring significant
additional expenses to try to refine our technology, services or approach to
our
business to better compete, and even then there would be no guarantee of
success.
We
may face competition in the future from established cord blood banks and some
hospitals.
Cord
blood banks such as ViaCord (a division of ViaCell International, a wholly-owned
subsidiary of PerkinElmer, Inc.) or Cryo-Cell International may
be
drawn to the field of stem cell collection because their processing labs and
storage facilities can be used
for
processing adult stem cells from peripheral blood and their customer lists
may
provide them with
an easy
access to the market. We estimate that there are approximately 56 cord blood
banks in the United States,
approximately 27 of which are autologous (donor and recipient are the same)
and
approximately 29
of which
are allogeneic (donor and recipient are not the same). Hospitals that have
transplant centers to serve cancer patients may elect to provide some or all
of
the services that we provide. We estimate that there are approximately 197
hospitals in the United States with stem cell transplant centers. All of these
competitors
may have access to greater financial resources. In addition, other established
companies with
greater
access to financial resources may enter our markets and compete with us. There
can be no assurance that we will be able to compete successfully.
There
is significant uncertainty about the validity and permissible scope of patents
in the biotechnological industry.
We may not be able to obtain patent protection.
There
can
be no assurance that the patent applications to which we hold rights will result
in the issuance
of patents, or that any patents issued or licensed to our company will not
be
challenged and held
to be
invalid or of a scope of coverage that is different from what we believe the
patent’s scope to be. Further, there can be no assurance that any future patents
related to these technologies will ultimately provide adequate patent coverage
for or protection of our present or future technologies, products or processes.
Our success will depend, in part, on whether we can obtain patents to protect
our own technologies;
obtain licenses to use the technologies of third parties if necessary, which
may
be protected
by
patents; protect our trade secrets and know-how; and operate without infringing
the intellectual property and proprietary rights of others.
We
may be unable to protect our intellectual property from infringement by third
parties.
Despite
our efforts to protect our intellectual property, third parties may infringe
or
misappropriate our intellectual property or may develop intellectual property
competitive to ours. Our competitors may independently develop similar
technology, duplicate our processes or services or design around our
intellectual property rights. As a result, we may have to litigate to enforce
and protect our intellectual property
rights to determine their scope, validity or enforceability. Intellectual
property litigation is costly,
time-consuming, diverts the attention of management and technical personnel
and
could result in substantial uncertainty regarding our future viability. The
loss
of intellectual property protection or the inability to secure or enforce
intellectual property protection would limit our ability to develop and/or
market
our services in the future. This would also likely have an adverse affect on
the
revenues generated by
any
sale or license of such intellectual property. Furthermore, any public
announcements related to such
litigation or regulatory proceedings could adversely affect the price of our
common stock.
32
Third
parties may claim that we infringe on their intellectual
property.
We
also
may be subject to costly litigation in the event our technology infringes upon
another party’s proprietary
rights. Third parties may have, or may eventually be issued, patents that would
be infringed by
our
technology. Any of these third parties could make a claim of infringement
against us with respect to our technology. We may also be subject to claims
by
third parties for breach of copyright, trademark or license usage rights. An
adverse determination in any litigation of this type could require us to design
around a third party’s patent, license alternative technology from another party
or otherwise result in limitations in our ability to use the intellectual
property subject to such claims. Litigation and patent interference
proceedings could result in substantial expense to us and significant diversion
of efforts by our technical
and management personnel. An adverse determination in any such interference
proceedings or in
patent
litigation to which we may become a party could subject us to significant
liabilities to third parties
or, as
noted above, require us to seek licenses from third parties. If required, the
necessary licenses may not be available on acceptable financial or other terms
or at all. Adverse determinations in a judicial or administrative
proceeding or failure to obtain necessary licenses could prevent us, in whole
or
in part, from
commercializing our products, which could have a material adverse effect on
our
business, financial condition and results of operations.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
Effective
as of July 1, 2006, the Company entered into an agreement for the use of
space at 420 Lexington Avenue, New York, New York. This space is subleased
from an affiliate of Duncan Capital Group LLC (a former financial advisor to
and
an investor in the Company) and DCI Master LDC (the lead investor in the
Company’s June 2006 private placement). Pursuant to the terms of the
Agreement, the Company was obligated to pay $7,500 monthly for the space,
including the use of various office services and utilities. The agreement is
on
a month to month basis, subject to a thirty day prior written notice requirement
to terminate. The space serves as the Company’s principal executive offices. On
October 27, 2006, the Company amended this agreement to increase the
utilized space for an additional payment of $2,000 per month. In May 2007,
the Board approved an amendment to this agreement whereby, in exchange for
a
further increase in utilized space, the Company would pay on a monthly basis
(i) $10,000 in cash and (ii) shares of the Company’s restricted common
stock with a value of $5000 based on the fair market value of the common stock
on the date of issuance. Commencing in August 2007, the parties agreed this
monthly fee of $15,000 would be paid in cash on a month to month basis. In
February 2008, the Company was advised that a portion of this sublet space
was
no longer available. The Company agreed to utilize the smaller space for a
monthly fee of $9,000 beginning in March 2008, as many of our employees will
be
spending a majority of their time in Long Island, New York, helping to launch
the ProHEALTH Care collection center. The Company believes this space should
be
sufficient for its near term needs. Effective October 1, 2006, the Company
terminated the lease for its Melville, New York facility.
In
January 2005, NS California began leasing space at Good Samaritan Hospital
in Los Angeles, California at an annual rental of approximately $26,000 for
use
as its stem cell processing and storage facility. The lease expired on
December 31, 2005, but the Company continues to occupy the space on a
month-to-month basis. This space will be sufficient for the Company’s needs in
the short term but the Company will need to transfer its processing and storage
operations to a larger facility due to space constraints at this facility.
The
Company is considering opportunities on the east coast, including utilizing
New
England Cryogenic Center, Inc. (“NECC”) as its primary processing and storage
facility and opening a processing and storage facility in connection with its
activities at the University of Louisville or at some other AABB licensed
facility.
33
NS
California also leased office space in Agoura Hills, California on a
month-to-month basis from Symbion Research International at a monthly rental
of
$1,687, an arrangement we continued until March 31, 2008. We currently do not
anticipate a continuing need for office space in California.
The
Company is not aware of any material pending legal proceedings against the
Company.
No
matters were submitted to a vote of the Company's stockholders during the fourth
quarter of 2007.
ITEM
5(a). MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
Our
Common Stock trades on the American Stock Exchange under the symbol “NBS.” From
August 31, 2006 to August 8, 2007, it traded on the OTC Bulletin Board under
the
symbol “NEOI” and from July 24, 2003 to August 30, 2006 traded
under the symbol “PHSM.” The following table sets forth the high and low sales
prices and high and low bid prices (as applicable) of our Common Stock for
each
quarterly period within the two most recent fiscal years, and for the current
year to date, as reported by the American Stock Exchange and Nasdaq Trading
and
Market Services (as applicable). On March 27, 2008, the closing sales price
for
our Common Stock was $1.50. Information set forth in the table below reflects
inter-dealer prices without retail mark-up, mark-down, or commission, and may
not necessarily represent actual transactions.
|
2008
|
High
|
Low
|
|||||
|
First
Quarter (to March 27, 2008)
|
$
|
1.88
|
$
|
1.40
|
|||
|
2007
|
High
|
Low
|
|||||
|
First
Quarter
|
$
|
8.00
|
$
|
2.50
|
|||
|
Second
Quarter
|
6.40
|
3.70
|
|||||
|
Third
Quarter
|
7.65
|
3.65
|
|||||
|
Fourth
Quarter
|
4.75
|
1.28
|
|||||
|
2006
|
High
|
Low
|
|||||
|
First
Quarter
|
$
|
10.00
|
$
|
5.00
|
|||
|
Second
Quarter
|
9.00
|
5.00
|
|||||
|
Third
Quarter
|
10.10
|
4.00
|
|||||
|
Fourth
Quarter
|
10.10
|
4.50
|
|||||
34
HOLDERS.
As of March 27, 2008, there were approximately 1,236 holders of record of the
Company's Common Stock (which does not include beneficial owners for whom
Cede & Co. or others act as nominees).
DIVIDENDS.
Holders of Common Stock are entitled to dividends when, as, and if declared
by
the Board of Directors out of funds legally available therefor. We have not
paid
any cash dividends on our Common Stock and, for the foreseeable future, intend
to retain future earnings, if any, to finance the operations, development and
expansion of our business. Future dividend policy is subject to the discretion
of the Board of Directors.
EQUITY
COMPENSATION PLAN INFORMATION
The
following table gives information about the Company’s Common Stock that may be
issued upon the exercise of options, warrants and rights under the Company’s
2003 Equity Participation Plan as of December 31, 2007. This plan was the
Company’s only equity compensation plan in existence as of December 31,
2007.
|
Plan
Category
|
(a)
Number
of Securities to be Issued Upon Exercise of Outstanding Options,
Warrants
and
Rights
|
(b)
Weighted-Average
Exercise Price of Outstanding Options, Warrants
and Rights
|
(c)
Number
of Securities Remaining Available For Future Issuance Under Equity
Compensation Plan (Excluding Securities Reflected In Column
(a))
|
|||||||
|
Equity
Compensation Plans Approved by Shareholders
|
1,113,800
|
$
|
5.66
|
794,835
|
||||||
|
Equity
Compensation Plans Not Approved by Shareholders
|
0
|
0
|
0
|
|||||||
|
TOTAL
|
1,113,800
|
$
|
5.66
|
794,835
|
||||||
35
In
February 2007, the Company issued 15,000 shares of common stock to a financial
advisor as an advisory fee payment, vesting monthly through December 2007.
In
May 2006, the Company had entered into an advisory agreement with such advisor,
providing that in
return
for these services, the Company was to pay a monthly retainer fee of $7,500,
50%
of which could be paid by the Company in shares of its Common Stock valued
at
fair market value. In February 2007, the
term
of the financial advisory agreement was extended through December 2007,
providing that the monthly fee be paid entirely in shares of Common Stock and
the 15,000 shares were issued with the vesting schedule described above. The
vesting of these shares was accelerated in July 2007 such that they were fully
vested and the advisory agreement was canceled in August 2007.
In
January 2007 and February 2007 and as described in “Business—2007
Financing Activities,” the Company entered into Subscription Agreements with
certain accredited investors, pursuant to which the Company issued units each
comprised of two shares of its common stock, one redeemable seven-year warrant
to purchase one share of common stock at a purchase price of $8.00 per share
and
one non-redeemable seven-year warrant to purchase one share of common stock
at a
purchase price of $8.00 per share (the “January 2007 private
placement”). The Company issued an aggregate of 250,000 units at a per unit
price of $10.00 per unit, for an aggregate purchase price of $2,500,000.
The Company thus issued an aggregate of 500,000 shares of common stock, and
Warrants to purchase up to an aggregate of 500,000 shares of common stock
at an exercise price of $8.00 per share. The Company also issued to Emerging
Growth Equities, Ltd (“EGE”), the placement agent for the January 2007
private placement, redeemable seven-year warrants to purchase 34,355 shares
of common stock at a purchase price of $5.00 per share, redeemable
seven-year warrants to purchase 17,127 shares of common stock at a purchase
price of $8.00 per share and non-redeemable seven-year warrants to purchase
17,127 shares of common stock at a purchase price of $8.00 per
share.
In
February 2007, the Company issued 30,000 shares of its common stock to
a financial advisor in connection with a commitment for the placement of up
to
$3,000,000 of the Company’s preferred stock.
In
March 2007, in connection with the engagement by the Company of a marketing
and investor relations consultant, the Company issued to this
consultant warrants to purchase 150,000 shares of its common stock at
a purchase price of $4.70 per share. Such warrants were scheduled to vest over
a
12 month period at a rate of 12,500 per month, subject to acceleration
in certain circumstances, and are exercisable until April 30, 2010. In
November 2007, the engagement was discontinued and therefore the unvested
portion of the warrants to purchase 100,000 shares of common stock was
cancelled.
In
April
2007, the Company issued 3,688 shares of common stock to its public
relations consultant in payment for services rendered equal to $22,500 at a
per
share price of $6.10.
In
May
2007 the Company issued 15,000 shares of common stock to an investor
relations consultant in partial payment for services being rendered under a
consulting agreement. Also in May 2007, the Company issued warrants to purchase
10,000 shares of common stock to the consultant as additional compensation.
Such warrants vest in their entirety on December 31, 2007 subject to
consultant’s fulfillment of services under the agreement, and are exercisable
until May 20, 2010 at a per share exercise price of $4.90.
On
May 1,
2007, June 1, 2007 and July 1, 2007, the Company issued 1,087 shares
of common stock, 1,064 shares of common stock and 909 shares of common
stock, respectively, to the lessor of the Company’s executive offices in payment
of $5,000 due for rent for each of May 2007, June 2007 and July 2007 pursuant
to
the terms of an agreement.
36
In
May
2007, the Company issued 1,000 shares of common stock to an investor
relations consultant for services rendered.
In
June
2007, the Company issued 12,000 shares of common stock to a law firm in
payment of services rendered in 2007, which shares vest monthly on a pro rata
basis as to 1/12 of such shares of common stock during 2007.
In
June
2007, the Company issued to a marketing design consultant a warrant to purchase
4,000 shares of common stock which warrants are exercisable until June 14,
2012 at a per share price of $6.10.
In
August
2007, the Company issued five year warrants to purchase an aggregate of 95,250
shares of Common Stock at $6.50 per share, to the participating underwriters
in
its August 2007 public offering of 1,270,000 units consisting of shares of
Common Stock and Class A Warrants to purchase Common Stock. The shares
underlying the underwriter warrants were registered under the Securities Act
of
1933, as amended (the "Securities Act”).
In
August, 2007, in consideration for continued services, the Company extended
the
expiration date of warrants to purchase 1,250 shares of Common Stock previously
issued to the Company’s public relations firm, from August through December 2007
to August through December 2009.
In
October 2007 the Company issued 15,000 shares of its Common Stock to an investor
relations consultant for services being rendered under a consulting agreement.
In
October 2007, the Company engaged a consultant to create marketing materials
for
our sales and marketing staff. Pursuant to this agreement, the Company issued
to
the consultant warrants to purchase 3,000 shares of its Common Stock at a
purchase price of $4.61 per share. Such warrants vested on issuance and are
exercisable until October 1, 2012.
On
November 13, 2007, the Company issued 400,000 shares of its Common Stock to
UTEK
Corporation (“UTEK”) in connection with the acquisition of Stem Cell
Technologies, Inc. (“SCTI”) as described in “Business - Therapeutics.” In
November, 2007, the Company entered into an acquisition agreement with UTEK
and
SCTI, a wholly-owned subsidiary of UTEK, pursuant to which the Company acquired
all the issued and outstanding common stock of SCTI in a stock-for-stock
exchange. Pursuant to a license agreement (the "License Agreement") between
SCTI
and the University of Louisville Research Foundation ("ULRF"), SCTI owns an
exclusive, worldwide license to a technology developed by researchers at the
University of Louisville to identify and isolate rare stem cells from adult
human bone marrow, called VSELs (very small embryonic like) stem cells.
Concurrent with the SCTI acquisition, NeoStem entered into a sponsored research
agreement (the "SRA") with ULRF under which NeoStem will support further
research in the laboratory of Mariusz Ratajczak, M.D., Ph.D., a co-inventor
of
the VSEL technology and head of the Stem Cell Biology Program at the James
Graham Brown Cancer Center at the University of Louisville. SCTI was funded
by
UTEK in amounts sufficient to pay certain near-term costs under the License
Agreement and the SRA. In consideration for the acquisition, the Company issued
to UTEK 400,000 shares of its common stock for all the issued and outstanding
common stock of SCTI. The total value of the transaction was
$940,000.
In
November 2007, the Company entered into a one year consulting agreement with
a
corporate consulting firm. As consideration for these services, in December
2007
the Company issued 75,000 shares of its Common Stock to the consultant. The
issuance of such shares was subject to the approval of the American Stock
Exchange, which approval was obtained on November 30, 2007.
Effective
as of January 1, 2008, the Company entered into a one year consulting agreement
with a financial services firm. As consideration for these services, on February
15, 2008 the Company issued to the consultant, (i) 50,000 shares of Common
Stock; and (ii) two warrants to purchase an aggregate of 120,000 shares of
Common Stock. The first warrant grants the consultant the right to purchase
up
to 20,000 shares of Common Stock at a per share purchase price equal to $2.00;
and the second Warrant grants the consultant the right to purchase up to 100,000
shares of Common Stock at a per share purchase price equal to $5.00, all as
set
forth in the Warrants. The Warrants shall vest on a pro rata basis so long
as
services continue to be provided under the agreement and are exercisable until
January 1, 2013. The issuance of such securities was subject to the approval
of
the American Stock Exchange, which approval was obtained on February 15, 2008.
37
On
February 8, 2008, the Company entered into a one year consulting agreement
with
a law firm to assist in funding efforts from the State and Federal Governments
as well as other assignments from time to time, in consideration for which
it
issued to the firm 40,000 shares that vest ratably on a monthly basis during
2008. The issuance of the shares was subject to the approval of the American
Stock Exchange. Such approval was obtained on March 20, 2008 and on that date
these shares were issued.
On
February 15, 2008, the Company entered into a six month engagement agreement
with a financial advisor pursuant to which they are acting as the Company’s
exclusive financial advisor for the term in connection with a potential
acquisition of a revenue generating business, domestically or abroad, or similar
transaction. As partial consideration, the Company will issue shares of Common
Stock with a $45,000 value based on the five day average of the closing prices
of the Common Stock preceding the date of issuance which shall be paid on a
pro
rata basis during the term of the agreement. The issuance of such securities
was
subject to the approval of the American Stock Exchange. Such approval was
obtained on March 20, 2008, and on that date the Company issued to the financial
advisor the initial payments in stock under the agreement totaling 9,516 shares.
On
February 20, 2008, the Company entered into a six month advisory services
agreement with a financial securities firm. As consideration for such services,
the Company has agreed to issue 150,000 shares of Common Stock that shall vest
over the term of the Agreement, provided that the agreement continues to be
in
effect. The issuance of such securities was subject to the approval of the
American Stock Exchange. Such approval was obtained on March 20, 2008, and
on
that date the Company issued under the advisory services agreement the initial
payments in stock totaling 50,000 shares.
On
February 25, 2008, the Company entered into a six month consulting agreement
with an investor relations advisor who has provided investor relations and
media
services to the Company since 2005. In consideration for providing services
under the Agreement, the Company agreed to issue to the advisor an aggregate
of
50,000 shares of Common Stock. The issuance of such shares was subject to the
approval of the American Stock Exchange. Such approval was obtained on March
20,
2008 and on that date these shares were issued.
Unless
otherwise noted, the offer and sale by the Company of the securities described
above were made in reliance upon the exemption from registration provided by
Section 4(2) of the Securities Act for transactions by an issuer not involving
a
public offering. The offer and sale of such securities were made without general
solicitation or advertising to "accredited investors," as such term is defined
in Rule 501(a) of Regulation D promulgated under the Securities
Act.
Not
applicable.
ITEM
5(c) REPURCHASES OF EQUITY SECURITIES
There
were no repurchases of equity securities by the Company or any affiliated
purchaser during the fourth quarter of the fiscal year ended December 31, 2007
as to which information is required to be furnished.
38
ITEM
6. SELECTED FINANCIAL DATA
The
selected statements of operations and balance sheet data set forth below are
derived from audited financial statements of the Company. The information set
forth below should be read in conjunction with the Company's audited
consolidated financial statements and notes thereto. See Item 8 "Financial
Statements and Supplementary Data" and Item 7 "Management's Discussion and
Analysis of Financial Condition and Results of Operations." The requirement
to
provide geographical information for the operations of the Company is not
practical.
|
Statement of Operations:
($’000 except net
loss
per share which is stated in
$ and weighted average
number of shares)
|
Year Ended
December 31,
2007
|
Year Ended
December 31,
2006
|
Year Ended
December 31,
2005
|
Year Ended
December 31,
2004
|
Year Ended
December 31,
2003
|
|||||||||||
|
Earned
revenues
|
$
|
232
|
$
|
45
|
$
|
35
|
$
|
49
|
$
|
65
|
||||||
|
Direct
costs
|
25
|
22
|
25
|
34
|
44
|
|||||||||||
|
Gross
profit
|
207
|
23
|
10
|
15
|
21
|
|||||||||||
|
Operating
(loss)
|
(10,439
|
)
|
(4,691
|
)
|
(1,601
|
)
|
(1,474
|
)
|
(894
|
)
|
||||||
|
Net
loss
|
(10,445
|
)
|
(6,051
|
)
|
(1,745
|
)
|
(1,748
|
)
|
(1,068
|
)
|
||||||
|
Basic
and diluted earnings per share:
|
||||||||||||||||
|
Net
loss
|
(3.18
|
)
|
(4.43
|
)
|
(3.51
|
)
|
(5.37
|
)
|
(4.54
|
)
|
||||||
|
Weighted
average number of shares outstanding
|
3,284,116
|
1,365,027
|
497,758
|
325,419
|
235,093
|
|
Balance Sheet Data:
$’000
|
As of
December 31,
2007
|
As of
December 31,
2006
|
As of
December 31,
2005
|
As of
December 31,
2004
|
As of
December 31,
2003
|
|||||||||||
|
Working
Capital (Deficiency)
|
$
|
1,931
|
$
|
(310
|
)
|
$
|
(1,245
|
)
|
$
|
(1,239
|
)
|
$
|
(794
|
)
|
||
|
Total
Assets
|
3,775
|
1,195
|
643
|
99
|
312
|
|||||||||||
|
Current
Liabilities
|
444
|
838
|
1,752
|
1,288
|
1,023
|
|||||||||||
|
Long
Term Debt
|
15
|
65
|
—
|
—
|
—
|
|||||||||||
|
(Accumulated
Deficit)
|
(30,752
|
)
|
(20,307
|
)
|
(14,255
|
)
|
(12,510
|
)
|
(10,762
|
)
|
||||||
|
Total
Stockholders’ (Deficit)/ Equity
|
3,316
|
292
|
(1,818
|
)
|
(1,932
|
)
|
(1,503
|
)
|
39
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATION
The
following discussion and analysis of our financial condition and results of
operations should be read together with the audited financial statements and
related notes included in Item 8 of this report, and is qualified in its
entirety by reference thereto. This discussion contains forward-looking
statements. Please see “Special Note Regarding Forward-Looking Statements” for a
discussion of the risks, uncertainties and assumptions relating to these
statements.
GENERAL
The
Company engages in the business of operating a commercial autologous (donor
and
recipient are the same) adult stem cell bank and the pre-disease collection,
processing and long-term storage of adult stem cells that donors can access
for
their own future medical treatment. We are managing a growing nationwide network
of adult stem cell collection centers, and
believe that as adult stem cell therapies obtain necessary regulatory approvals
and become Standard of Care, individuals will need the infrastructure, methods
and procedures provided by the Company using its proprietary process to have
their stem cells safely collected and conveniently stored for future therapeutic
use as needed in
the
treatment of such
life-threatening diseases as diabetes, heart disease and radiation sickness
that
may result from a bioterrorist attack or nuclear accident. We
also
recently entered the research and development arenas, through the acquisition
of
a worldwide exclusive license to an early-stage technology to identify and
isolate rare stem cells from adult human bone marrow, called VSELs (very small
embryonic-like stem cells). VSELs have many physical characteristics typically
found in embryonic stem cells, including the ability to differentiate into
specialized cells found in substantially all the different types of cells and
tissue that make up the body. We also hope one day to become a leading provider
of adult stem cells for diagnostic and therapeutic use in the burgeoning field
of regenerative medicine, and are exploring entering the stem cell supply
business for research, which we believe may have the potential to be a
significant business in its own right.
The
adult
stem cell industry is a field independent of embryonic stem cell research which
the Company believes is more likely to be burdened by governmental, legal,
ethical and technical issues than adult stem cell research. Medical researchers,
scientists, medical institutions, physicians, pharmaceutical companies and
biotechnology companies are currently developing therapies for the treatment
of
disease using adult stem cells. As these adult stem cell therapies obtain
necessary regulatory approvals and become standard of care, patients will need
a
service to collect, process and bank their stem cells. The Company intends
to
provide this service.
During
2007, we were focused on establishing a nationwide network of collection centers
in certain major metropolitan areas of the United States to drive growth, with
the goal of generating significant revenue in 2008. To date, our revenues
generated from the collection, processing and storage of adult stem cells have
not been significant although our efforts in 2007 produced an increase over
2006
revenues.
On
January 19, 2006 the Company consummated the acquisition of the assets of
NS California relating to its business of processing, collecting and storing
adult stem cells. Effective with the acquisition, the business of NS California
became the principal business of the Company, rather than its historic business
of providing capital and business guidance to companies in the healthcare and
life science industries. The Company now provides adult stem cell processing,
collection and banking services with the goal of making stem cell collection and
long-term storage widely available, so that the general population will have
the
opportunity to store their own stem cells for future healthcare needs. Effective
as of August 29, 2006, the Company changed its name from “Phase III
Medical, Inc.” to “NeoStem, Inc.” in order to better describe its new
business.
Until
the
NS California acquisition, the business of the Company was providing capital
and
business guidance to companies in the healthcare and life science industries,
in
return for a percentage of revenues, royalty fees, licensing fees and other
product sales of the target companies. Additionally, through
June 30, 2002, the Company was a provider of extended warranties and
service contracts via the Internet at warrantysuperstore.com. From June 2002
to
March 2007 the Company was partially engaged in the "run off" of such extended
warranties and service contracts. As of March 31, 2007 the recognition of
revenue from the sale of extended warranties and service contracts was
completed.
40
The
Company engaged in various capital raising activities to pursue its new business
opportunities, raising approximately $872,000 in 2005, $3,573,000 in 2006 and
$7,939,000 in 2007 through the sale of its Common Stock, warrants and
convertible promissory notes. These amounts include an aggregate of $2,079,000
raised from the June 2006 private placement of shares of Common Stock and
warrants to purchase shares of Common Stock (the “June 2006 private
placement”) and an aggregate of $1,750,000 raised from the additional private
placement of shares of Common Stock and warrants to purchase shares of Common
Stock in rolling closings in the summer of 2006 (the “Summer 2006 private
placement”). These amounts also include an aggregate of $2,500,000 (net proceeds
of $2,320,000) raised in January and February 2007 from the private
placement of units consisting of shares of Common Stock and warrants to purchase
shares of Common Stock (the “January 2007 private placement”) and an aggregate
of $6,350,000 (net proceeds of $5,619,000) raised in August 2007 from the public
offering of 1,270,000 units consisting of shares of Common Stock and warrants
to
purchase shares of Common Stock (the “August 2007 public offering”). These
capital raising activities enabled us previously to pursue the Company’s prior
business, and subsequently to acquire the business of NS California, pursue
our
business plan and grow our adult stem cell collection and storage business,
including expanding marketing and sales activities.
The
acquisition of the VSEL technology was made through our acquisition of our
new
subsidiary Stem Cell Technologies, Inc. in a stock-for-stock exchange, which
as
a condition to the acquisition was founded by the seller in amounts sufficient
to pay certain near-term costs associated with the development of the VSEL
technology. We will require substantial additional funds in order to continue
to
fund needed research and development activities relating to the VSEL technology.
The Company anticipates seeking to obtain such funds through applications for
State and Federal grants, direct investments into SCTI, sublicensing
arrangements as well as other funding sources to help offset all or a portion
of
these costs.
CRITICAL
ACCOUNTING POLICIES
The
Company’s “Critical Accounting Policies” are as follows, and are also described
in Note 2 to the audited consolidated financial statements and notes thereto,
included in Item 8 of this report.
Revenue
Recognition:
In the
fourth quarter of 2006, the Company initiated the collection and banking of
autologous adult stem cells and the first collection center in its physician’s
network opened. The Company recognizes revenue related to the collection and
cryopreservation of autologous adult stem cells when the cryopreservation
process is completed (generally twenty four hours after cells have been
collected). Revenue related to advance payments of storage fees is recognized
ratably over the period covered by the advance payments. Start up fees that
are
received from physicians that seek to open collection centers (in consideration
of the Company establishing a service territory for the physician) are
recognized after agreements are signed and the physician has been qualified
by
the Company’s credentializing committee.
Income
Taxes and Valuation Reserves:
We are
required to estimate our income taxes in each of the jurisdictions in which
we
operate as part of preparing our financial statements. This involves estimating
the actual current tax in addition to assessing temporary differences resulting
from differing treatments for tax and financial accounting purposes. These
differences, together with net operating loss carryforwards and tax credits,
are
recorded as deferred tax assets or liabilities on our balance sheet. A judgment
must then be made of the likelihood that any deferred tax assets will be
realized from future taxable income. A valuation allowance may be required
to
reduce deferred tax assets to the amount that is more likely than not to be
realized. In the event we determine that we may not be able to realize all
or
part of our deferred tax asset in the future, or that new estimates indicate
that a previously recorded valuation allowance is no longer required, an
adjustment to the deferred tax asset is charged or credited to net income in
the
period of such determination.
41
RESULTS
OF OPERATIONS
Years
Ended December 31, 2007 and December 31,
2006
For
the
year ended December 31, 2007, total revenues were $232,000 compared to $46,000
for the year ended December 31, 2006. The revenues generated in the years ended
December 31, 2007 and 2006 were derived from a combination of revenues from
the
collection of autologous adult stem cells, start up fees collected from
physicians in the Company’s physician’s network and recognition of fees received
in prior years from the sale of extended warranties and service contracts via
the Internet, which were deferred and recognized over the life of such
contracts. For the year ended December 31, 2007, the Company earned $41,000
from
the collection of autologous adult stem cells and $189,000 of start up fees.
For
the year ended December 31, 2006, the Company earned $11,000 from the collection
of autologous adult stem cells and $10,000 from start up fees. The Company
recognized revenues from the sale of extended warranties and service contracts
via the Internet of $1,700 for the year ended December 31, 2007, as compared
to
$25,000 for the year ended December 31, 2006. Since the Company has not
been in the business of offering extended warranties since 2002 it was expected
that this revenue source would decline and the recognition of these revenues
ended in March 2007.
Direct
costs are comprised of the cost of collecting autologous stem cells from clients
and the pro-rated cost of reinsurance purchased at the time an extended contract
was sold to underwrite the potential obligations associated with such
warranties. For the year ended December 31, 2007, the direct costs of collecting
autologous stem cells were $24,000 and $1,000 was associated with the pro-rata
cost of reinsurance purchased for associated extended warranties. For the year
ended December 31, 2006, the direct costs of collecting autologous stem cells
were $4,000 and $18,000 was associated with the pro-rata cost of reinsurance
purchased for associated extended warranties.
Selling,
general and administration expenses for the year ended December 31, 2007 has
increased by $5,931,000 or 126% over the year ended December 31, 2006, from
$4,715,000 to $10,646,000. The increase in selling, general and administrative
expenses is primarily due to increases in marketing efforts through the hiring
of staff, preparation of marketing materials, attending key marketing events
and
retaining the services of specialized marketing consulting firms. However,
a
substantial portion of the increase is due to the compensatory element of stock
options and stock awards granted under the Company’s 2003 Equity Participation
Plan to certain officers, employees and consultants to the Company, totaling
$2,980,000 for the year, an increase in operating expenses of $2,147,000 over
2006. In addition, and in order to conserve cash, the Company used common stock
and common stock purchase warrants as consideration for services. During 2007,
the Company issued common stock and common stock purchase warrants valued at
$1,653,000 as consideration for director fees, consulting fees, investor
relations, marketing, rent and marketing services, an increase of $1,432,000
over 2006. Cash expenditures increased $2,352,000 over 2006. Increases in staff
have increased salary and benefits by $1,078,000 over 2006; staff increases
also
increased travel and entertainment expenses by $281,000, cash expenditures
for
rent by $73,000 and telephone expense by $19,000 over 2006. For key, limited
role, functions the Company has utilized consultants to support staff efforts
resulting in an increase in cash expenditures for consulting expense of
$183,000. Marketing efforts to enlarge our physician network and develop new
markets has increased operating expenses by $324,000. The Company has also
sought to increase public and investor awareness of the value of adult stem
cells which has resulted in increases in investor relations expenses by $385,000
over 2006. In comparison to 2006, legal expenses increased $57,000, accounting
fees increased $44,000, stock transfer fees increased $30,000, postage increased
$25,000, bad debts increased $20,000, depreciation and amortization increased
$25,000, licensure expense increased $49,000 and stock exchange fees increased
$64,000. Such increases were essentially offset by reductions in fees paid
to
investment bankers in 2006 of $138,000 and settlement costs paid in 2006 of
$189,000.
42
Interest
expense for the year ended December 31, 2007 was $22,000 as compared to
$1,371,000 for the year ended December 31, 2006, a decrease of $1,349,000.
This
decrease was primarily as a result of the conversion of convertible promissory
notes issued in the Westpark private placement (through which the Company raised
$500,000 through the sale of convertible promissory notes and warrants in
December 2005 and January 2006 and in which Westpark Capital, Inc. acted as
placement agent). Substantially all of this debt was converted to common stock
in 2006 and the remaining $75,000 in principal balance outstanding was repaid
in
January 2007. See “ -Liquidity and Capital Resources - Years Ended December 31,
2006 and December 31, 2005.”
Years
Ended December 31, 2006 and December 31,
2005
For
the
year ended December 31, 2006, total revenues were $46,000 compared to $35,000
for the year ended December 31, 2005. The revenues generated in the year ended
December 31, 2006 were derived from a combination of fees received in prior
years from the sale of extended warranties and service contracts via the
Internet, which were deferred and recognized over the life of such contracts,
and revenues from the collection of autologous adult stem cells and fees
collected from physicians in the Company’s physician’s network to set up stem
cell collection facilities. The revenues generated in the year ended December
31, 2005 were derived entirely from fees received in prior years from the sale
of extended warranties and service contracts. The Company recognized revenues
from the sale of extended warranties and service contracts via the Internet
of
$25,000 for the year ended December 31, 2006, as compared to $35,000 for the
year ended December 31, 2005. Warranty revenue for the year ended December
31, 2006 was not keeping pace with warranty revenue recognized in the year
ended
December 31, 2005 and was in fact declining. Warranty revenue will continue
to
decline as policy periods expire since the Company is no longer selling extended
warranty contracts. Similarly, direct costs incurred in connection with the
extended warranty contracts were $18,000 for the year ended December 31, 2006,
as compared to $25,000 for the year ended December 31, 2005. For the year
ended December 31, 2006, the Company earned $21,000 in fees for the collection
of autologous adult stem cells and start-up fees in connection with a physician
in the Company’s physician’s network that opened a stem cell collection center.
Selling,
general and administration expenses for the year ended December 31, 2006 has
increased by $3,103,000 or 193% over the year ended December 31, 2005, from
$1,612,000 to $4,715,000. In 2006, the Company changed its primary business
model to collection and banking of adult stem cells. In addition, in 2006,
the
Company began recognizing the compensatory value of employee stock options
which
has had a dramatic increase in our operating expenses. As the result of entering
into the business of adult stem cell collection, processing and storage, the
Company has increased its staffing levels and payroll expense which increased
by
$406,000 over the year ended December 31, 2005. In addition, the
compensatory element of stock options and restricted stock grants issued to
staff members and common stock issued to Robin L. Smith, MD, upon being
appointed Chairman of the Board and Chief Executive Officer, increased operating
expenses by $833,000. The new business of the Company has resulted in new
expenses such as marketing and trade show expenses of $115,000, product
liability insurance of $96,000, laboratory expense of $56,000 and website
development of $50,000. As the result of the new business, legal fees, including
those related to expanding the Company’s patent portfolio, increased $497,000,
consulting fees increased $113,000, travel and entertainment expense increased
$138,000 and rent increased $96,000, over the year ended December 31, 2005.
In
addition, the settlement with Robert Aholt increased expenses for 2006 by
$250,000. The Company expanded its Board of Directors with two independent
directors and implemented a compensation arrangement for non-employee directors.
In connection with this arrangement restricted stock was granted to two
directors that resulted in $163,000 of expense for the fair value of common
stock that vested. The various stock registration filings and increased trading
levels of the Company’s common stock increased costs in auditing fees, stock
transfer fees and investment banking fees, which resulted in an overall increase
of $148,000 over the year ended December 31, 2005.
43
Interest
expense for the year ended December 31, 2006 was $1,371,000 as compared to
$97,000 for the year ended December 31, 2005, an increase of $1,274,000. This
increase was primarily as a result of the issuance and early conversion of
convertible promissory notes issued in the WestPark private placement (through
which the Company raised $500,000 through the sale of convertible promissory
notes and warrants in December 2005 and January 2006 and in which WestPark
Capital, Inc. acted as placement agent). Substantially all of this debt was
converted to common stock in 2006. The increase in interest expense includes
increases resulting from amortization of debt discount associated with the
convertible notes of $213,000, interest payments of $31,000 and the fair value
of common stock purchase warrants issued to these debtholders of $227,000.
In an
effort to improve the Company’s financial position, the Company had approached
these convertible debtholders with proposals to either extend the term of their
promissory notes or convert their promissory notes to common stock of the
Company earlier than the original terms called for. Incentives included, among
other things, the issuance of shares of common stock and additional warrants
to
purchase shares of common stock, reduced conversion prices for the notes and
reduced exercise prices for the warrants. As a result, in 2006 holders of
$163,000 in principal amount of promissory notes agreed to extend the due dates
of their respective notes for four months, and the Company converted $425,000
in
principal amount of promissory notes to common stock (including $138,000 of
the
$163,000 in principal amount for which the due date was originally extended
for
four months prior to conversion). The impact of these conversions and extension
of due dates was to increase interest expense by $872,000 due to the cost of
additional common shares and warrants to purchase common stock granted to
accomplish such conversions and extended due dates. However, these increased
costs are non-cash related and the company will realize a reduction in its
cash
interest payments and cash required to pay back such promissory notes.
44
LIQUIDITY
AND CAPITAL RESOURCES
General
At
December 31, 2007, the Company had working capital of $1,931,000. The Company
generates revenues from its adult stem cell collection activities. To date,
our
revenues generated from such activities have not been significant although
our
efforts in 2007 produced an increase in revenues over 2006. The Company
currently intends to meet its cash requirements in the near term through
financing activities, an acquisition transaction that generates revenue or
through collaborative arrangements. In the event these activities are not
successful, the Company would need to delay or defer expansion
activities.
The
Company has recently entered into certain arrangements with financial advisors
relating to actively exploring acquisition opportunities of revenue generating
businesses or pursuing capital raising opportunities.
Years
Ended December 31, 2007 and December 31, 2006
The
following chart represents the net funds provided by or used in operating,
financing and investment activities for each period indicated:
|
Year Ended
|
|||||||
|
December 31, 2007
|
December 31, 2006
|
||||||
|
Cash
(used) in Operating activities
|
$
|
(6,132,000
|
)
|
$
|
(3,639,000
|
)
|
|
|
Cash
provided/(used) in investing activities
|
$
|
153,000
|
$
|
(43,000
|
)
|
||
|
Cash
provided by financing activities
|
$
|
7,847,000
|
$
|
3,630,000
|
|||
At
December 31, 2007, the Company had a cash balance of $2,304,000, working
capital of $1,931,000 and a stockholders’ equity of $3,316,000. The Company
incurred a net loss of $10,445,000 for the year ended December 31, 2007. Such
loss adjusted for non-cash items, including common stock, common stock option
and common stock purchase warrant issuances which were related to services
rendered of $4,590,000, and depreciation of $54,000 which was offset by cash
settlements of various accounts payable, notes payable and accrued liabilities
of $352,000, resulted in cash used in operations totaling $6,132,000 for the
year ended December 31, 2007. Accordingly, the large difference between
operating loss and cash used in operations was the result of a number of
non-cash expenses charged to results of operations.
To
meet
its cash requirement for the year ended December 31, 2007, the Company relied
on
proceeds from the sale of its securities resulting in net proceeds of $7,939,000
from the January 2007 private placement and the August 2007 public offering
(as
described below).
In
January and February 2007, the Company raised an aggregate of
$2,500,000 through the private placement of 250,000 units at a price of $10.00
per unit (the “January 2007 private placement”). Each unit was comprised of
two shares of the Company’s Common Stock, one redeemable seven-year warrant to
purchase one share of Common Stock at a purchase price of $8.00 per share and
one non-redeemable seven-year warrant to purchase one share of Common Stock
at a
purchase price of $8.00 per share. The Company issued an aggregate of 500,000
shares of Common Stock, and warrants to purchase up to an aggregate of 500,000
shares of Common Stock at an exercise price of $8.00 per share. Emerging Growth
Equities, Ltd (“EGE”), the placement agent for the January 2007 private
placement, received a cash fee equal to $171,275 and was entitled to expense
reimbursement not to exceed $50,000. The Company also issued to EGE redeemable
seven year warrants to purchase 34,255 shares of Common Stock at a purchase
price of $5.00 per share, redeemable seven-year warrants to purchase 17,127
shares of Common Stock at a purchase price of $8.00 per share and non-redeemable
seven-year warrants to purchase 17,127 shares of Common Stock at a purchase
price of $8.00 per share. The net proceeds of this offering were approximately
$2,320,000.
45
In
August, 2007, the Company completed a sale of 1,270,000 units at a price of
$5.00 per unit pursuant to a best efforts public offering. A registration
statement on Form SB-2A (File No. 333-142923) relating to these units was filed
with
the
Securities and Exchange Commission and declared effective on July 16,
2007.
Each
unit consisted of one share of common stock and one-half of a five year Class
A
warrant to purchase one-half a share of common stock at a price of $6.00 per
share. Thus, 1,000 units consisted of 1,000 shares of common stock and Class
A
warrants to purchase 500 shares of common stock. T he aggregate number of shares
of common stock included within the units was 1,270,000 and the aggregate number
of Class A Warrants included within the units was 535,000. In connection with
the public offering, the Company issued five year warrants to purchase an
aggregate of 95,250 shares of common stock at $6.50 per share to the
underwriters for the offering. After payment of underwriting commissions and
expenses and other costs of the offering, the aggregate net proceeds to the
Company were $5,579,000.
The
following table reflects a summary of the Company’s contractual cash
obligations, including applicable interest, as of December 31, 2007:
|
Payments due by period
|
||||||||||||||||
|
Contractual
Obligations
|
Total
|
Less than 1 year
|
1-3 years
|
3-5 years
|
More than
5 years
|
|||||||||||
|
Notes
payable & other liabilities
|
$
|
79,000
|
$
|
79,000
|
$
|
-
|
$
|
-
|
$
|
-
|
||||||
|
Capitalized
leases
|
47,000
|
31,000
|
16,000
|
-
|
-
|
|||||||||||
|
Minimum
royalties due University of Louisville
|
256,000
|
66,000
|
20,000
|
20,000
|
150,000
|
|||||||||||
|
Sponsored
research agreement - University of Louisville
|
275,000
|
100,000
|
100,000
|
75,000
|
||||||||||||
|
Consulting
agreement
|
155,000
|
143,000
|
12,000
|
|||||||||||||
|
Employment
agreements
|
1,206,000
|
890,000
|
316,000
|
-
|
-
|
|||||||||||
|
Total
|
$
|
2,018,000
|
$
|
1,309,000
|
$
|
464,000
|
$
|
95,000
|
$
|
150,000
|
||||||
Years
Ended December 31, 2006 and December 31, 2005
The
following chart represents the net funds provided by or used in operating,
financing and investment activities for each period
indicated:
|
Year Ended
|
|||||||
|
December 31, 2006
|
December 31, 2005
|
||||||
|
Cash
used in Operating activities
|
$
|
(3,639,000
|
)
|
$
|
(834,000
|
)
|
|
|
Cash
used in investing activities
|
$
|
(43,000
|
)
|
- | |||
|
Cash
provided by financing activities
|
$
|
3,630,000
|
1,295,000
|
||||
The
Company incurred a net loss of $6,051,000 for the year ended December 31, 2006.
Such loss adjusted for non-cash items, including common stock, option and
warrant issuances and warrant repricing which were related to services rendered
and interest of $2,281,000, amortization and depreciation of $240,000 and
interest related to the Series A Preferred of $9,900 which was offset by cash
settlements of various accounts payable, notes payable and accrued liabilities
of $30,500 resulted in cash used in operations totaling $3,639,000 for the
year
ended December 31, 2006. This use of cash for operations also included additions
to prepaid expenses, accounts receivable and other current assets of $81,300.
Accordingly, the large difference between operating loss and cash used in
operations was the result of a number of non-cash expenses charged to results
of
operations.
To
meet
its cash requirement for the year ended December 31, 2006, the Company relied
on
proceeds from the sale of $250,000 of convertible notes, and proceeds from
the
sale of shares of Common Stock resulting in net proceeds of $3,573,000 from
the
June 2006 private placement and the Summer 2006 private placement (as described
below).
46
On
December 30, 2005 the Company commenced the Westpark Private Placement to
sell 9% six month convertible notes in $25,000 units. Each unit consisted of
a
9% note convertible into shares of the Company’s Common Stock at $6.00 per share
and 4,167 warrants to purchase the Company’s Common Stock at an exercise price
of $12.00 per share. On December 30, 2005, the Company sold $250,000 of
these notes and through January 31, 2006 an additional $250,000 of these
notes for a total of $500,000. The net proceeds from the sales of these notes
to
the Company were $443,880. In an effort to improve the financial position of
the
Company, in July 2006 the WestPark convertible debtholders were offered the
option of (A) extending the term of the convertible note for an additional
four
months from the maturity date in consideration for which (i) the Company would
issue to the investor for each $25,000 in principal amount of the convertible
note 568 shares of unregistered Common Stock; and (ii) the exercise price per
warrant would be reduced from $12.00 to $.8.00, or (B) converting the
convertible note into shares of the Company’s Common Stock in consideration for
which (i) the conversion price per conversion share would be reduced to $4.40;
(ii) the Company would issue to the investor for each $25,000 in principal
amount of the note, 1,136 shares of Common Stock; (iii) the exercise price
per
warrant would be reduced from $12.00 to $8.00; and (iv) a new warrant would
be
issued substantially on the same terms as the original warrant to purchase
an
additional 4,167 shares of Common Stock for each $25,000 in principal amount
of
the convertible note at an exercise price of $8.00 per share. Pursuant to this,
the investor was also asked to waive any and all penalties and liquidated
damages accumulated as of the date of the agreement. This offer was terminated
on August 31, 2006. As of that date, investors holding $237,500 in principal
amount of the total $500,000 of convertible promissory notes had agreed to
convert their respective convertible notes into shares of the Company’s common
stock for the consideration described above and investors holding $162,500
in
principal amount of the total $500,000 of convertible promissory notes had
agreed to extend the term of the convertible note for an additional four months
from the maturity date for the consideration described above.
In
September 2006, a new offer was extended to the remaining WestPark convertible
debtholders to convert the convertible note into shares of the Company’s Common
Stock, in consideration for which (i) the conversion price per conversion share
would be reduced to $4.40; (ii) the exercise price per warrant would be reduced
from $12.00 to $8.00; and (iii) a new warrant would be issued substantially
on
the same terms as the original warrant to purchase an additional 4,167 shares
of
Common Stock for each $25,000 in principal amount of the convertible note at
an
exercise price of $8.00 per share. This offer resulted in the conversion of
$125,000 in principal amount of the total $500,000 of convertible promissory
notes to common stock. In October 2006, WestPark convertible debtholders owning
an additional $62,500 in convertible promissory notes also agreed to early
conversion on the terms of the September 2006 offer. As of December 31, 2006
there were only $75,000 in principal amount of the WestPark convertible
promissory notes outstanding, which were due and paid in January
2007.
In
May 2006, the Company entered into an advisory agreement with Duncan
Capital Group LLC (“Duncan”). Pursuant to the advisory agreement, Duncan
provided to the Company on a non-exclusive “best efforts” basis, services as a
financial consultant in connection with any equity or debt financing, merger,
acquisition as well as with other financial matters. In return for these
services, the Company was paying to Duncan a monthly retainer fee of $7,500,
50%
of which could be paid by the Company in shares of its Common Stock valued
at
fair market value and reimbursing it for its reasonable out-of-pocket expenses
in an amount not to exceed $12,000. (Effective February 1, 2007, the advisory
agreement was extended through December 31, 2007, providing that the monthly
fee
be paid entirely in shares of common stock to vest at the rate of 1,364 shares
per month). Pursuant to the advisory agreement, Duncan also agreed, subject
to
certain conditions, that it or an affiliate would act as lead investor in a
proposed private placement of shares of Common Stock and warrants to purchase
shares of Common Stock in an amount that was not less than $2,000,000 or greater
than $3,000,000. If the financing closed, Duncan was to receive a fee of
$200,000 in cash and 24,000 shares of restricted Common Stock.
47
On
June 2, 2006, the Company entered into a securities purchase agreement
pursuant to which the Company issued to each of 17 investors shares of its
Common Stock, at a per-share price of $4.40, along with a five-year warrant
to
purchase a number of shares of Common Stock at a per share purchase price of
$8.00 equal to 50% of the number of shares of Common Stock purchased by each
investor (together with the Common Stock issued, the “June 2006
securities”). The gross proceeds from the sale were $2,079,000. Duncan received
its fee as described above. The officers of the Company, as a condition of
the
initial closing under the securities purchase agreement, entered into letter
agreements with the Company pursuant to which they converted an aggregate of
$278,653 of accrued and unpaid salary that dated back to 2005 into shares of
Common Stock at a per share price of $4.40. After adjustments for applicable
payroll and withholding taxes which were paid by the Company, the Company issued
to such officers an aggregate of 37,998 shares of Common Stock. The Company
also
adopted an Executive Officer Compensation Plan, effective as of the date of
closing of the securities purchase agreement and pursuant to the letter
agreements each officer agreed to be bound by the Executive Officer Compensation
Plan. In addition to the conversion of accrued salary, the letter agreements
provided for a reduction by 25% in base salary for each officer, the granting
of
options to purchase shares of Common Stock under the Company’s 2003 Equity
Participation Plan which become exercisable upon the Company achieving certain
revenue milestones and the acceleration of the vesting of certain options and
restricted shares held by the officers.
In
connection with the securities purchase agreement, on June 2, 2006 the
Company entered into a registration rights agreement with each of the investors,
pursuant to which the Company agreed to prepare and file no later than
June 30, 2006 a registration statement with the SEC to register the shares
of Common Stock issued to investors and the shares of Common Stock underlying
the warrants. The Company and the investors agreed to amend the registration
rights agreement and extend the due date of the registration statement to
August 31, 2006. In the event that the Registration Statement was not
declared effective by the SEC within 180 days of the closing date of the
securities purchase agreement, the Company was obligated to pay to each investor
an amount equal to 1% of the purchase price of the June 2006 securities
purchased by the investor, and to pay such amount for each month or partial
month that the registration statement was not declared effective by the SEC.
The
registration statement was filed and subsequently declared effective on November
6, 2006.
In
July
and August 2006, the Company sold 397,727 shares of its Common Stock at $4.40
per share along with warrants to purchase 198,864 shares of its Common Stock
at
$8.00 per share (the “Summer 2006 Private Placement”), resulting in proceeds to
the Company of $1,750,000. Additionally, in July and August, it issued 8,341
shares of its Common Stock as partial or complete payment of certain accounts
payable and 7,567 shares of its Common Stock as partial payment of certain
services rendered. In October 2006, the Company issued 3,400 shares of Common
Stock in consideration of certain services rendered. In December 2006, the
Company issued 1,042 shares of its Common Stock in consideration of certain
services rendered.
The
following table reflects a summary of the Company’s contractual cash
obligations, including applicable interest, as of December 31, 2006:
|
Payments due by period
|
||||||||||||||||
|
Contractual
Obligations
|
Total
|
Less than 1 year
|
1-3 years
|
3-5 years
|
More than
5 years
|
|||||||||||
|
Notes
payable
|
$
|
225,700
|
$
|
201,300
|
$
|
24,400
|
$
|
-
|
$
|
-
|
||||||
|
Capitalized
leases
|
78,000
|
31,200
|
46,800
|
-
|
-
|
|||||||||||
|
Employment
agreements
|
2,133,600
|
1,131,200
|
1,002,400
|
-
|
-
|
|||||||||||
|
Total
|
$
|
2,437,300
|
$
|
1,363,700
|
$
|
1,073,600
|
$
|
-
|
$
|
-
|
||||||
Material
changes to the contractual obligations above as of January 2007 included
(i) the payment in January 2007 of all the remaining outstanding
convertible notes issued in the WestPark Private Placement (as described above
in Liquidity and Capital Resources) and (ii) amendments to or replacements
of employment agreements or arrangements with officers of the Company on January
26, 2007 providing for a 20% reduction in base salary and/or an agreement by
the
officer to extend their employment term, as well as certain additional or
amended terms.
48
INFLATION
The
Company does not believe that its operations have been materially influenced
by
inflation in the fiscal year ended December 31, 2007, a situation which is
expected to continue for the foreseeable future.
SEASONALITY
The
Company does not believe that its operations are seasonal in nature.
OFF-BALANCE
SHEET ARRANGEMENTS
The
Company does not have any off-balance sheet arrangements.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
financial statements and notes thereto required to be filed under this Item
are
presented commencing on page F-1 of this Annual Report on Form 10-K. Following
is supplementary financial information:
Selected
Quarterly Financial Data
|
$’000
(except
net loss per share which is stated in $)
|
Quarter
Ended
12/31/07
|
|
Quarter
Ended
9/30/07
|
|
Quarter
Ended
6/30/07
|
|
Quarter
Ended
3/31/07
|
|
Quarter
Ended
12/31/06
|
|
Quarter
Ended
9/30/06
|
|
Quarter
Ended
6/30/06
|
|
Quarter
Ended
3/31/06
|
||||||||||
|
Revenues
|
$
|
157
|
$
|
13
|
$
|
6
|
$
|
56
|
$
|
27
|
$
|
6
|
$
|
6
|
$
|
6
|
|||||||||
|
Direct
Costs
|
15
|
7
|
2
|
1
|
10
|
4
|
4
|
4
|
|||||||||||||||||
|
Gross
profit
|
142
|
6
|
4
|
55
|
17
|
2
|
2
|
2
|
|||||||||||||||||
|
Operating
Loss
|
(2,342
|
)
|
(4,322
|
)
|
(1,957
|
)
|
(1,818
|
)
|
(1,718
|
)
|
(998
|
)
|
(1,038
|
)
|
(937
|
)
|
|||||||||
|
Net
Loss
|
(2,343
|
)
|
(4,328
|
)
|
(1,958
|
)
|
(1,816
|
)
|
(1,860
|
)
|
(1,807
|
)
|
(1,245
|
)
|
(1,139
|
)
|
|||||||||
|
Net
loss per share
|
(.51
|
)
|
(1.26
|
)
|
(.74
|
)
|
(.73
|
)
|
(.95
|
)
|
(1.09
|
)
|
(1.23
|
)
|
(1.51
|
)
|
|||||||||
49
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
(a)
Disclosure Controls and Procedures
Disclosure
controls and procedures are the Company’s controls and other procedures that are
designed to ensure that information required to be disclosed in the reports
that
the Company files or submits under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”) is recorded, processed, summarized and reported in
a complete, accurate and appropriate manner, within the time periods specified
in the Securities and Exchange Commission’s rules and forms. Disclosure controls
and procedures include, without limitation, controls and procedures designed
to
ensure that information required to be disclosed in the reports that the Company
files under the Exchange Act is accumulated and communicated to management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow timely decisions regarding required disclosure. As of
the
end of the Company's fourth fiscal quarter ended December 31, 2007 covered
by
this report, the Company carried out an evaluation, with the participation
of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the Company's disclosure
controls and procedures pursuant to Rule 13a-15 of the Exchange Act. Based
on
that evaluation, the Company's Chief Executive Officer and Chief Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in ensuring that information required to be disclosed by the Company
in the reports that it files or submits under the Securities Exchange Act is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. Due to the inherent limitations of control
systems, not all misstatements may be detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and the
breakdowns can occur because of a simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control.
Our
controls and procedures can only provide reasonable, not absolute, assurance
that the above objectives have been met.
(b) Management’s
Annual Report on Internal Control Over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). Under the supervision and with the participation of the
Company’s management, including the Company’s Chairman and Chief Executive
Officer along with the Company’s Vice President and Chief Financial Officer, the
Company conducted an evaluation of the effectiveness of internal control over
financial reporting based on the framework in Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on the evaluation under the framework in Internal
Control — Integrated Framework, management concluded that the Company’s
internal control over financial reporting was effective as of December 31,
2007.
(c)
Attestation Report of Registered Public Accounting Firm
This
annual report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management's report
in this annual report.
50
(d)
Changes in Internal Control over Financial Reporting
There
have been no changes in the Company's internal controls over financial
reporting, as such term is defined in Exchange Act Rule 13a-15, that occurred
during the Company's last fiscal quarter to which this report relates that
have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
ITEM
9B. OTHER INFORMATION
None.
51
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The
information required by this Item is incorporated into this Annual Report on
Form 10-K by reference to the Proxy Statement for our 2008 Annual Meeting of
Stockholders, to be filed not later than April 29, 2008 (120 days after the
close of our fiscal year ended December 31, 2007).
The
information required by this Item is incorporated into this Annual Report on
Form 10-K by reference to the Proxy Statement for our 2008 Annual Meeting of
Stockholders, to be filed not later than April 29, 2008.
The
information required by this Item is incorporated into this Annual Report on
Form 10-K by reference to the Proxy Statement for our 2008 Annual Meeting of
Stockholders, to be filed not later than April 29, 2008.
The
information required by this Item is incorporated into this Annual Report on
Form 10-K by reference to the Proxy Statement for our 2008 Annual Meeting of
Stockholders, to be filed not later than April 29, 2008.
The
information required by this Item is incorporated into this Annual Report on
Form 10-K by reference to the Proxy Statement for our 2008 Annual Meeting of
Stockholders, to be filed not later than April 29, 2008.
52
The
following documents are being filed as part of this Report:
Reference
is made to the Index to Financial Statements and Financial Statement Schedule
on
Page F-1.
(a)(2)
FINANCIAL STATEMENT SCHEDULE:
Reference
is made to the Index to Financial Statements and Financial Statement Schedule
on
Page F-1.
All
other
schedules have been omitted because the required information is not present
or
is not present in amounts sufficient to require submission of the schedule,
or
because the information required is included in the Financial Statements or
Notes thereto.
(a)(3)
EXHIBITS:
|
Exhibit
|
Description
|
Reference
|
||
|
1(a)
|
Underwriting
Agreement(4)
|
|||
|
3(a)
|
Amended
and Restated Certificate of Incorporation dated August 29,
2006(16)
|
3.1
|
||
|
(b)
|
Amendment
to Amended and Restated Certificate of Incorporation dated August
8, 2007 (26)
|
3.1
|
||
|
(c)
|
Amended
and Restated By-laws(2)
|
3.1
|
||
|
(d)
|
First
Amendment to Amended and Restated By-laws(3)
|
3.2
|
||
|
4(a)
|
Form
of Underwriter’s Warrant dated August 14, 2007 (28)
|
10.2
|
||
|
(b)
|
Form
of Class A Warrant Agreement and Certificate(4)
|
4.2
|
||
|
(c)
|
Restated
Warrant Agreement dated August 14, 2007 (28)
|
10.1
|
||
|
(d)
|
Form
of Promissory Note—September 2002 Offering(5)
|
4.1
|
||
|
(e)
|
Form
of Promissory Note—February 2003 Offering(5)
|
4.2
|
||
|
(f)
|
Form
of Promissory Note—March 2003 Offering(5)
|
4.3
|
||
|
(g)
|
Specimen
Certificate for Common Stock (26)
|
4.1
|
||
|
10(a)
|
Employment
Agreement dated as of February 6, 2003 by and between Corniche
Group
Incorporated and Mark Weinreb* (6)
|
99.2
|
||
|
(b)
|
Stock
Option Agreement dated as of February 6, 2003 between Corniche
Group Incorporated
and Mark Weinreb* (6)
|
99.3
|
||
|
(c)
|
Form
of Stock Option Agreement* (5)
|
10.2
|
||
|
(d)
|
Employment
Agreement dated as of September 13, 2004 between Phase III Medical,
Inc. and Robert Aholt, Jr.(7)
|
10.3
|
||
|
(e)
|
Letter
Agreement dated as of August 12, 2004 by and between Phase III
Medical,
Inc. and Dr. Wayne A. Marasco(7)
|
10.6
|
53
|
(f)
|
Board
of Directors Agreement by and between Phase III Medical, Inc. and
Joseph
Zuckerman* (7)
|
10.8
|
||
|
(g)
|
Stock
Purchase Agreement, dated April 20, 2005, between Phase III Medical,
Inc. and Catherine M. Vaczy(1)
|
10.1
|
||
|
(h)
|
Promissory
Note made by the Company in favor of Catherine M. Vaczy(1)
|
10.2
|
||
|
(i)
|
Letter
Agreement, dated April 20, 2005, between Phase III Medical, Inc.
and
Catherine M. Vaczy* (1)
|
10.3
|
||
|
(j)
|
Stock
Option Agreement dated April 20, 2005, between Phase III Medical,
Inc. and
Catherine M. Vaczy* (1)
|
10.4
|
||
|
(k)
|
Amendment
dated July 18, 2005 to Stock Purchase Agreement with Catherine
M. Vaczy
dated April 20, 2005* (2)
|
10.1
|
||
|
(l)
|
Amendment
dated July 20, 2005 to Employment Agreement with Mark Weinreb dated
February 6, 2003* (2)
|
10.2
|
||
|
(m)
|
Amendment
dated July 20, 2005 to Employment Agreement with Wayne A. Marasco
dated
August 12, 2004(2)
|
10.3
|
||
|
(n)
|
Amendment
dated July 20, 2005 to Employment Agreement with Robert Aholt dated
September 13, 2004(2)
|
10.4
|
||
|
(o)
|
Form
of Option Agreement dated July 20, 2005* (2)
|
10.5
|
||
|
(p)
|
Form
of Promissory Note Extension(2)
|
10.6
|
||
|
(q)
|
Letter
Agreement dated August 12, 2005 with Catherine M. Vaczy*
(2)
|
10.7
|
||
|
(r)
|
Restricted
Stock Agreement with Mark Weinreb* (8)
|
10.8
|
||
|
(s)
|
Asset
Purchase Agreement dated December 6, 2005 by and among Phase III
Medical,
Inc., Phase III Medical Holding Company, and NeoStem,
Inc.(9)
|
99.1
|
||
|
(t)
|
Letter
Agreement dated December 22, 2005 between Phase III Medical, Inc.
and
Catherine M. Vaczy* (10)
|
10(y)
|
||
|
(u)
|
Form
of Convertible Promissory Note(11)
|
10.1
|
||
|
(v)
|
Form
of Warrant(11)
|
99.1
|
||
|
(w)
|
Employment
Agreement between the Company and Larry A. May dated January 19,
2006*
(12)
|
10.1
|
||
|
(x)
|
Employment
Agreement between the Company and Denis O. Rodgerson dated January
19,
2006(12)
|
10.2
|
||
|
(y)
|
Letter
Agreement dated January 30, 2006 between Phase III Medical, Inc.
and Catherine
M. Vaczy* (10)
|
10(cc)
|
||
|
(z)
|
Settlement
Agreement and General Release dated March 31, 2006 between Phase
III
Medical, Inc. and Robert Aholt, Jr.(10)
|
10(dd)
|
||
|
(aa)
|
Advisory
Agreement dated May 2006 between Phase III Medical, Inc. and Duncan
Capital Group LLC(13)
|
10(ee)
|
||
|
(bb)
|
Securities
Purchase Agreement, dated June 2, 2006, between Phase III Medical,
Inc.
and certain investors listed therein(14)
|
10.1
|
||
|
(cc)
|
Registration
Rights Agreement, dated June 2, 2006, between Phase III Medical,
Inc. and
certain investors listed therein(14)
|
10.2
|
||
|
(dd)
|
Form
of Warrant to Purchase Shares of Common Stock of Phase III Medical,
Inc(14)
|
10.3
|
||
|
(ee)
|
Employment
Agreement between Phase III Medical, Inc. and Dr. Robin L. Smith,
dated
May 26, 2006* (14)
|
10.4
|
54
|
(ff)
|
Letter
Agreement between Phase III Medical, Inc. and Mark Weinreb effective
as of
June 2, 2006* (14)
|
10.5
|
||
|
(gg)
|
Letter
Agreement between Phase III Medical, Inc. and Catherine M. Vaczy
effective
as of June 2, 2006* (14)
|
10.6
|
||
|
(hh)
|
Letter
Agreement between Phase III Medical, Inc. and Larry A. May effective
as of
June 2, 2006* (14)
|
10.7
|
||
|
(ii)
|
Letter
Agreement between Phase III Medical, Inc. and Wayne A. Marasco
effective
as of June 2, 2006(14)
|
10.8
|
||
|
(jj)
|
NeoStem,
Inc. 2003 Equity Participation Plan* (15)
|
B-1
|
||
|
(kk)
|
Form
of Phase III Medical, Inc. Securities Purchase Agreement from July/August
2006(16)
|
10.1
|
||
|
(ll)
|
Form
of Phase III Medical, Inc. Registration Rights Agreement from July/August
2006(16)
|
10.2
|
||
|
(mm)
|
Form
of Phase III Medical, Inc. Warrant to Purchase Shares of Common
Stock from
July/August 2006(16)
|
10.3
|
||
|
(nn)
|
Form
of Amendment Relating to Purchase by Investors in Private Placement
of
Convertible Notes and Warrants December 2005 and January
2006(16)
|
10.4
|
||
|
(oo)
|
Second
Form of Amendment Relating to Purchase by Investors in Private
Placement
of Convertible Notes and Warrants December 2005 and January
2006(17)
|
10.1
|
||
|
(pp)
|
NeoStem,
Inc. 2003 Equity Participation Plan, as amended* (17)
|
10.2
|
||
|
(qq)
|
Sublease
Agreement dated October 27, 2006 between NeoStem, Inc. and DC Associates
LLC(17)
|
10.3
|
||
|
(rr)
|
Form
of Subscription Agreement among NeoStem, Inc, Emerging Growth Equities,
Ltd. and certain investors listed therein(18)
|
10.1
|
||
|
(ss)
|
Form
of Redeemable Warrant to Purchase Shares of Common Stock of NeoStem,
Inc.(18)
|
10.2
|
||
|
(tt)
|
Form
of Non-Redeemable Warrant to Purchase Shares of Common Stock of
NeoStem,
Inc.(18)
|
10.3
|
||
|
(uu)
|
January
26, 2007 Amendment to Employment Agreement of Robin Smith*
(19)
|
10.1
|
||
|
(vv)
|
January
26, 2007 Amendment to Employment Agreement of Mark Weinreb*
(19)
|
10.2
|
||
|
(ww)
|
January
26, 2007 Amendment to Employment Agreement of Larry A. May*
(19)
|
10.3
|
||
|
(xx)
|
January
26, 2007 Employment Agreement with Catherine M. Vaczy*
(19)
|
10.4
|
||
|
(yy)
|
Stem
Cell Collection Services Agreement dated December 15, 2006 between
the
Company
and HemaCare Corporation(20)
|
10.1
|
||
|
(zz)
|
Amendment
dated February 1, 2007 to Advisory Agreement dated May 2006 between
Phase III Medical, Inc. and Duncan Capital Group
LLC(20)
|
10.2
|
||
|
(aaa)
|
Amendment
to sublease agreement between NeoStem, Inc. and DC Associates LLC
dated May 22, 2007(4)
|
|||
|
(bbb)
|
Amendment
to sublease agreement between NeoStem, Inc. and DC Associates LLC
dated June 2007(4)
|
|||
|
(ccc)
|
Employment
Agreement between NeoStem, Inc. and Renee F. Cohen dated August
15, 2007* (22)
|
10.1
|
||
|
(ddd)
|
September
27, 2007 Amendment to Employment Agreement of Robin L. Smith* (23)
|
10.1
|
55
|
(eee)
|
September
28, 2007 Amendment to Employment Agreement of Mark
Weinreb*
|
10.2
|
||
|
(23)
|
||||
|
(fff)
|
Agreement
and Plan of Acquisition among NeoStem, Inc., Stem Cell Technologies,
Inc.
and UTEK Corporation (24)
|
10.1
|
||
|
(hhh)
|
License
Agreement between Stem Cell Technologies, Inc. and the University
of
Louisville Research Foundation, Inc. (24)
|
10.2
|
||
|
(iii)
|
Sponsored
Research Agreement between NeoStem, Inc. and the University of
Louisville
Research Foundation, Inc. (24)
|
10.3
|
||
|
(jjj)
|
Letter
agreement dated January 9, 2008 with Dr. Robin Smith* (25)
|
10.1
|
||
|
(kkk)
|
Letter
agreement dated January 9, 2008 with Catherine M. Vaczy*
(25)
|
10.2
|
||
|
14(a)
|
Code
of Ethics for Senior Financial Officers (14)
|
14.1
|
||
|
21(a)
|
Subsidiaries
of the Registrant (27)
|
21.1
|
||
|
23(a)
|
Consent
of Holtz Rubenstein Reminick LLP (27)
|
23.1
|
||
|
31(a)
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-
Oxley
Act of 2002 (27)
|
31.1
|
||
|
31(b)
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-
Oxley
Act of 2002 (27)
|
31.2
|
||
|
32(a)
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350,
as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(27)
|
32.1
|
||
|
32(b)
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350,
as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(27)
|
32.2
|
*
Management contract or compensatory plan or arrangement required to be filed
as
an exhibit to this Form 10-K pursuant to Item 15(b) of Form
10-K.
| (1) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the current report of the Company on Form 8-K,
dated April 20, 2005, which exhibit is incorporated here by
reference.
|
| (2) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the quarterly report of the Company on Form 10-Q
for the quarter ended June 30, 2005, which exhibit is incorporated
here by reference.
|
| (3) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the current report of the Company on Form 8-K,
dated August 1, 2006, which exhibit is incorporated here by
reference.
|
| (4) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to Pre-Effective Amendment No. 3 to the Company’s
Registration Statement on Form SB-2/A, File No. 333-142923,
which exhibit is incorporated here by
reference.
|
| (5) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the annual report of the Company on Form 10-K for
the year ended December 31, 2003, which exhibit is incorporated here
by reference. Certain portions of Exhibit 10(d) (10.1) were
omitted based upon a request for confidential treatment, and the
omitted
portions were filed separately with the Securities and Exchange Commission
on a confidential basis.
|
| (6) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the current report of the Company on Form 8-K,
dated February 6, 2003, which exhibit is incorporated here by
reference.
|
56
| (7) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the Company’s annual report on Form 10-K for the
year ended December 31, 2004, which exhibit is incorporated here by
reference.
|
| (8) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the quarterly report of the Company on Form 10-Q
for the quarter ended September 30, 2005, which exhibit is
incorporated here by reference.
|
| (9) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the current report of the Company on Form 8-K,
dated December 6, 2005, which exhibit is incorporated here by
reference.
|
| (10) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the Company’s annual report on Form 10-K for the
year ended December 31, 2005, which exhibit is incorporated here by
reference.
|
| (11) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the current report of the Company on Form 8-K,
dated December 31, 2005, which exhibit is incorporated here by
reference.
|
| (12) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the current report of the Company on Form 8-K,
dated January 19, 2006, which exhibit is incorporated here by
reference.
|
| (13) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the quarterly report of the Company on Form 10-Q
for the quarter ended March 31, 2006, which exhibit is incorporated
herein by reference.
|
| (14) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the current report of the Company on Form 8-K,
dated June 2, 2006, which exhibit is incorporated here by
reference.
|
| (15) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the Preliminary Proxy Statement on Schedule 14A,
dated
July 18, 2006, which exhibit is incorporated here by
reference.
|
| (16) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the Company’s Registration Statement on Form S-1,
File No. 333-137045, which exhibit is incorporated here by
reference.
|
| (17) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to Pre-Effective Amendment No. 1 to the Company’s
Registration Statement on Form S-1, File No. 333-137045, which
exhibit is incorporated here by
reference.
|
| (18) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the current report of the Company on Form 8-K,
dated January 26, 2007, which exhibit is incorporated here by
reference.
|
| (19) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the second current report of the Company on
Form 8-K, dated January 26, 2007, which exhibit is incorporated
here by reference.
|
| (20) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the Company’s annual report on Form 10-K for the
year ended December 31, 2006, which exhibit is incorporated here by
reference.
|
| (21) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the Company’s Registration Statement on
Form SB-2, File No. 333-142923, which exhibit is incorporated
here by reference.
|
| (22) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the current report of the Company on Form 8-K,
dated August 15, 2007, which exhibit is incorporated here by
reference.
|
57
| (23) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the current report of the Company on Form 8-K,
dated September 27, 2007, which exhibit is incorporated here by
reference.
|
| (24) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the current report of the Company on Form 8-K,
dated November 13, 2007, which exhibit is incorporated here by reference.
Certain portions of Exhibits 10(hhh) (10.2) and 10(iii) (10.3) were
omitted based upon a request for confidential treatment, and the
omitted
portions were filed separately with the Securities and Exchange Commission
on a confidential basis.
|
| (25) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the current report of the Company on Form 8-K,
dated January 9, 2008, which exhibit is incorporated here by
reference.
|
| (26) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the Company’s Registration Statement on Form S-3,
File No. 333-145988, which exhibit is incorporated here by
reference.
|
| (27) |
Filed
herewith.
|
| (28) |
Filed
with the Securities and Exchange Commission as an exhibit, numbered
as
indicated above, to the quarterly report of the Company on
Form 10-QSB for the quarter ended September 30, 2007, which exhibit
is incorporated here by reference.
|
58
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 in the City of New York, State of
New
York, on March 28, 2008.
|
NEOSTEM,
INC.
|
||
| |
|
|
| By: |
/s/
Robin L. Smith
|
|
|
Name:
Robin
L. Smith
|
||
|
Title:
Chief
Executive Officer
|
||
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has
been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
||||||
|
/s/
Robin L. Smith
|
|
Director,
Chief Executive
|
|
|
||||||
|
Robin
L. Smith
|
|
Officer
and Chairman of the
Board
(Principal Executive Officer)
|
|
March
28, 2008
|
||||||
|
/s/
Larry A. May
|
|
Chief
Financial Officer
|
|
|
||||||
|
Larry
A. May
|
|
(Principal
Financial Officer and
Principal
Accounting Officer)
|
|
March
28, 2008
|
||||||
|
/s/
Mark Weinreb
|
|
Director
and President
|
|
March
28, 2008
|
||||||
|
Mark
Weinreb
|
|
|
|
|
||||||
|
/s/
Joseph Zuckerman
|
|
Director
|
|
March
28, 2008
|
||||||
|
Joseph
Zuckerman
|
|
|
|
|
||||||
|
/s/
Richard Berman
|
|
Director
|
|
March
28, 2008
|
||||||
|
Richard
Berman
|
|
|
|
|
||||||
|
/s/
Steven S. Myers
|
|
Director
|
|
March
28, 2008
|
||||||
|
Steven
S. Myers
|
|
|
|
|
||||||
59
NeoStem,
Inc. and Subsidiaries
Table
of
Contents
|
Page
|
||||
|
Report
of Independent Registered Public Accounting Firm -
|
||||
|
Holtz
Rubenstein Reminick LLP
|
F
- 1
|
|||
|
Financial
Statements:
|
||||
|
Consolidated
Balance Sheets at December 31, 2007 and 2006
|
F
- 2
|
|||
|
|
||||
|
Consolidated
Statements of Operations
|
||||
|
Years
Ended December 31, 2007, 2006 and 2005
|
F
- 3
|
|||
|
Consolidated
Statements of Stockholders’ Equity/ (Deficit)
|
||||
|
Years
Ended December 31, 2007, 2006 and 2005
|
F
- 4 - F-5
|
|||
|
Consolidated
Statements of Cash Flows
|
||||
|
Years
Ended December 31, 2007, 2006 and 2005
|
F
- 6 - F-7
|
|||
|
Notes
to Consolidated Financial Statements
|
F
-8- F - 29
|
|||
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors and Stockholders
NeoStem,
Inc. (Formerly Phase III Medical, Inc.) and Subsidiaries
We
have
audited the accompanying consolidated balance sheets of NeoStem, Inc. and
Subsidiaries as of December 31, 2007 and 2006 and the related consolidated
statements of operations, stockholders' equity/ (deficit) and cash flows
for
each of the years in the three-year period ended December 31, 2007. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, audits of its internal
control
over financial reporting. Our audits include consideration of internal control
over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
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 NeoStem, Inc. and
Subsidiaries as of December 31, 2007 and 2006 and the results of their
operations and cash flows for each of the years in the three year period
ended
December 31, 2007 in conformity with accounting principles generally accepted
in
the United States of America.
/s/
HOLTZ
RUBENSTEIN REMINICK LLP
Melville,
New York
March
19.
2008
F-1
NEOSTEM,
INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
|
December
31,
|
|||||||
|
2007
|
|
2006
|
|||||
|
ASSETS
|
|||||||
|
Current
assets:
|
|||||||
|
Cash
and cash equivalents
|
$
|
2,304,227
|
$
|
436,659
|
|||
|
Accounts
receivable, net of allowance for doubtful
|
|||||||
|
accounts
of $19,500 and $0, respectively
|
24,605
|
9,050
|
|||||
|
Prepaid
expenses and other current
assets
|
46,248
|
82,451
|
|||||
|
Total
current assets
|
2,375,080
|
528,160
|
|||||
|
Property
and equipment, net
|
164,122
|
96,145
|
|||||
|
Intangible
asset
|
669,000
|
-
|
|||||
|
Goodwill
|
558,169
|
558,169
|
|||||
|
Other
assets
|
8,778
|
12,500
|
|||||
|
$
|
3,775,149
|
$
|
1,194,974
|
||||
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY/(DEFICIT)
|
|||||||
|
Current
liabilities:
|
|||||||
|
Accounts
payable
|
$
|
158,453
|
$
|
372,348
|
|||
|
Accrued
liabilities
|
228,726
|
241,388
|
|||||
|
Unearned
revenues
|
2,902
|
2,420
|
|||||
|
Notes
payable - related party, current
|
24,022
|
125,000
|
|||||
|
Note
payable - current
|
4,720
|
1,313
|
|||||
|
Current
portion of capitalized lease obligation
|
25,406
|
20,829
|
|||||
|
Convertible
debentures
|
-
|
75,000
|
|||||
|
Total
current liabilities
|
444,229
|
838,298
|
|||||
|
|
-
|
||||||
|
Note
payable - related party, long term
|
24,439
|
||||||
|
Capitalized
lease obligation, net of current portion
|
14,726
|
40,132
|
|||||
|
COMMITMENTS
AND CONTINGENCIES
|
|||||||
|
Stockholders’
equity:
|
|||||||
|
Preferred
stock; authorized, 5,000,000 shares Series B
|
|||||||
|
convertible
redeemable preferred stock, liquidation
|
|||||||
|
value,
1 share of common stock per share, $.01 par
|
|||||||
|
value;
authorized, 825,000 shares; issued and
|
|||||||
|
outstanding,
10,000 shares at December 31, 2007 and
|
|||||||
|
December
31, 2006
|
100
|
100
|
|||||
|
Common
stock, $.001 par value; authorized, 500,000,000 shares;
|
|||||||
|
issued
and outstanding, 4,826,055 at December 31, 2007
|
|||||||
|
and
2,078,121 shares at December 31, 2006
|
4,826
|
2,078
|
|||||
|
Additional
paid-in capital
|
34,802,309
|
20,968,358
|
|||||
|
Unearned
compensation
|
(738,803
|
)
|
(371,666
|
)
|
|||
|
Accumulated
deficit
|
(30,752,238
|
)
|
(20,306,765
|
)
|
|||
|
Total
stockholders’ equity
|
3,316,194
|
292,105
|
|||||
|
$
|
3,775,149
|
$
|
1,194,974
|
||||
|
The
accompanying notes are an integral part of these consolidated
financial
statements
|
|||||||
F-2
NEOSTEM,
INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
|
Years
ended December 31,
|
||||||||||
|
2007
|
|
2006
|
|
2005
|
||||||
|
Revenues
|
$
|
231,664
|
$
|
45,724
|
$
|
35,262
|
||||
|
Direct
Costs
|
24,847
|
22,398
|
24,776
|
|||||||
|
Gross
Profit
|
206,817
|
23,326
|
10,486
|
|||||||
|
Selling,
general and administrative
|
10,645,653
|
4,714,568
|
1,611,398
|
|||||||
|
Operating
loss
|
(10,438,836
|
)
|
(4,691,242
|
)
|
(1,600,912
|
)
|
||||
|
Other
income (expense):
|
||||||||||
|
Interest
income
|
15,331
|
20,432
|
137
|
|||||||
|
Interest
expense - Series A mandatorily
|
||||||||||
|
Redeemable
convertible preferred stock
|
-
|
(9,934
|
)
|
(47,684
|
)
|
|||||
|
Interest
expense
|
(21,968
|
)
|
(1,370,656
|
)
|
(96,580
|
)
|
||||
|
(6,637
|
)
|
(1,360,158
|
)
|
(144,127
|
)
|
|||||
|
Net
Loss
|
$
|
(10,445,473
|
)
|
$
|
(6,051,400
|
)
|
$
|
(1,745,039
|
)
|
|
|
Basic
earnings per share
|
||||||||||
|
Net
loss
|
$
|
(3.18
|
)
|
$
|
(4.43
|
)
|
$
|
|||