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
|
)
|
$
|
(3.51
|
)
|
|
|
Weighted
average common shares outstanding
|
3,284,116
|
1,365,027
|
497,758
|
|||||||
|
The
accompanying notes are an integral part of these consolidated
financial
statements
|
||||||||||
F-3
|
NEOSTEM,
INC. AND SUBSIDIARIES
|
|
|
Consolidated
Statements of Stockholders' Equity/(Deficit)
|
|
Series
B Convertible
Preferred Stock |
|
Common
Stock
|
|||||||||||||||||||||||
|
Unearned
|
|
Additional
|
|
|
|
|
|||||||||||||||||||
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Compens
ation
|
|
Paid
in
Capital
|
|
Accumulated
Deficit
|
|
Total
|
|||||||||
|
Balance
at December 31. 2004
|
10,000
|
$
|
100
|
4,102,955
|
$
|
4,104
|
$
|
-
|
$
|
10,574,338
|
$
|
(12,510,326
|
)
|
$
|
(1,931,784
|
)
|
|||||||||
|
Adjustment
for Reverse Common
Stock
|
|||||||||||||||||||||||||
|
Split
|
(3,692,659
|
)
|
(3,694
|
)
|
3,694
|
-
|
|||||||||||||||||||
|
Issuance
of common stock for cash, net of offering
costs
|
125,929
|
126
|
871,874
|
872,000
|
|||||||||||||||||||||
|
Issuance
of common stock for conversion
of debt
|
98,658
|
99
|
564,901
|
565,000
|
|||||||||||||||||||||
|
Issuance
of common stock to officers and directors
|
60,207
|
60
|
237,226
|
237,286
|
|||||||||||||||||||||
|
Issuance
of common stock for services
|
10,350
|
10
|
76,098
|
76,108
|
|||||||||||||||||||||
|
Equity
component of issuance of convertible
debt
|
83,333
|
83,333
|
|||||||||||||||||||||||
|
Issuance
of common stock purchase warrants
for services
|
25,458
|
25,458
|
|||||||||||||||||||||||
|
Net
loss
|
(1,745,039
|
)
|
(1,745,039
|
)
|
|||||||||||||||||||||
|
Balance
at December 31. 2005
|
10,000
|
100
|
705,440
|
705
|
-
|
12,436,922
|
(14,255,365
|
)
|
(1,817,638
|
)
|
|||||||||||||||
|
Issuance
of common stock for cash, net of offering costs
|
945,382
|
945
|
3,572,123
|
3,573,068
|
|||||||||||||||||||||
|
Issuance
of common stock for conversion of preferred stock
|
54,494
|
55
|
1,219,614
|
1,219,669
|
|||||||||||||||||||||
|
Issuance
of common stock to officers and directors
|
40,000
|
40
|
207,960
|
208,000
|
|||||||||||||||||||||
|
Issuance
of restricted common stock to officers and directors
|
90,000
|
90
|
(600,000
|
)
|
599,910
|
-
|
|||||||||||||||||||
|
Vesting
of unearned compensation related to restricted common stock
issued to
officers and directors
|
228,334 | 228,334 | |||||||||||||||||||||||
|
Issuance
of common stock for services
|
17,618
|
18
|
112,970
|
112,988
|
|||||||||||||||||||||
|
Equity
component of issuance of convertible debt
|
263,612
|
263,612
|
|||||||||||||||||||||||
|
Issuance
of common stock purchase warrants
for services
|
75,496
|
75,496
|
|||||||||||||||||||||||
|
Issuance
of common stock for purchase of assets of NS
California
|
40,000
|
40
|
199,960
|
200,000
|
|||||||||||||||||||||
|
Issuance
of common stock to pay off current
liabilities
|
66,458
|
66
|
308,396
|
308,462
|
|||||||||||||||||||||
|
Issuance
of common stock for conversion
of convertible debt
|
107,386
|
107
|
692,789
|
692,896
|
|||||||||||||||||||||
|
Issuance
of common stock for extension of
due dates of convertible debt
|
3,693
|
4
|
21,019
|
21,023
|
|||||||||||||||||||||
|
Issuance
of common stock purchase warrants
for the early conversion of convertible debt
|
652,130
|
652,130
|
|||||||||||||||||||||||
|
Issuance
of common stock for conversion
of debt
|
7,650
|
8
|
44,992
|
45,000
|
|||||||||||||||||||||
|
Compensatory
element of stock options issued
to staff
|
560,465
|
560,465
|
|||||||||||||||||||||||
|
Net
Loss
|
(6,051,400
|
)
|
(6,051,400
|
)
|
|||||||||||||||||||||
|
Balance
at December 31. 2006
|
10,000
|
100
|
2,078,121
|
2,078
|
(371,666
|
)
|
20,968,358
|
(20,306,765
|
)
|
292,105
|
|||||||||||||||
F-4
|
NEOSTEM,
INC. AND SUBSIDIARIES
|
|
|
Consolidated
Statements of Stockholders' Equity/(Deficit)
--(Con't,)
|
|
Series
B Convertible Preferred Stock
|
Common
Stock
|
Additional
|
|||||||||||||||||||||||
|
Unearned
|
|
Paid
in
|
|
Accumulated
|
|||||||||||||||||||||
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Compensation
|
|
Capital
|
|
Deficit
|
|
Total
|
|||||||||||
|
Issuance
of common stock for cash,
|
|||||||||||||||||||||||||
|
net
of offering costs
|
1,770,000
|
1,770
|
7,937,536
|
7,939,306
|
|||||||||||||||||||||
|
Issuance
of common stock to acquire
Stem
Cell Technologies, Inc.
|
400,000
|
400
|
939,600
|
940,000
|
|||||||||||||||||||||
|
Issuance
of common shares for capital
commitment
|
30,000
|
30
|
164,970
|
165,000
|
|||||||||||||||||||||
|
Issuance
of common stock to officers
and directors
|
12,000
|
12
|
55,398
|
55,410
|
|||||||||||||||||||||
|
Issuance
of restricted common stock for services
|
95,542
|
95
|
(481,910
|
)
|
481,815
|
-
|
|||||||||||||||||||
|
Vesting
of unearned compensation relatedto
restricted common stock issued for services
|
392,135
|
392,135
|
|||||||||||||||||||||||
|
Issuance
of restricted common stock to officers and directors
|
289,500
|
290
|
(1,446,957
|
)
|
1,446,667
|
-
|
|||||||||||||||||||
|
Vesting
of unearned compensation related to restricted common stock
issuedto
officers and directors
|
1,169,595
|
1,169,595
|
|||||||||||||||||||||||
|
Issuance
of common stock for services
|
150,892
|
151
|
386,363
|
386,514
|
|||||||||||||||||||||
|
Issuance
of common stock purchase warrants
for services
|
213,786
|
213,786
|
|||||||||||||||||||||||
|
Compensatory
element of stock options
issued to staff
|
2,207,816
|
2,207,816
|
|||||||||||||||||||||||
|
Net
Loss
|
(10,445,473
|
)
|
(10,445,473
|
)
|
|||||||||||||||||||||
|
Balance
at December 31. 2007
|
10,000
|
$
|
100
|
4,826,055
|
$
|
4,826
|
$
|
(738,803
|
)
|
$
|
34,802,309
|
$
|
(30,752,238
|
)
|
$
|
3,316,194
|
|||||||||
|
The
accompanying notes are an integral part of these consolidated
financial
statements
|
F-5
|
NEOSTEM,
INC. AND SUBSIDIARIES
|
|
|
Consolidated
Statements of Cash Flows
|
|
Years
ended December 31,
|
||||||||||
|
2007
|
|
2006
|
|
2005
|
||||||
|
Cash
flows from operating activities:
|
$
|
(10,445,473
|
)
|
$
|
(6,051,400
|
)
|
$
|
(1,745,039
|
)
|
|
|
Net
loss
|
||||||||||
|
Adjustments
to reconcile net loss to net cash used in
|
||||||||||
|
operating
activities:
|
||||||||||
|
Common
shares issued and stock options granted
|
||||||||||
|
as
payment for interest expense and for services
|
||||||||||
|
rendered
|
4,590,256
|
2,280,779
|
338,852
|
|||||||
|
Depreciation
|
53,778
|
27,623
|
1,958
|
|||||||
|
Bad
debt expense
|
19,500
|
-
|
-
|
|||||||
|
Amortization
of debt discount
|
-
|
212,500
|
5,882
|
|||||||
|
Series
A mandatorily redeemable
|
||||||||||
|
convertible
preferred stock dividends
|
-
|
9,935
|
47,684
|
|||||||
|
Unearned
revenues
|
482
|
(24,325
|
)
|
(35,262
|
)
|
|||||
|
Deferred
acquisition costs
|
1,254
|
17,868
|
24,776
|
|||||||
|
Changes
in operating assets and liabilities :
|
||||||||||
|
Prepaid
expenses and other current assets
|
34,810
|
(72,251
|
)
|
2,786
|
||||||
|
Accounts
receivable
|
(35,055
|
)
|
(9,050
|
)
|
-
|
|||||
|
Other
assets
|
-
|
-
|
(111,753
|
)
|
||||||
|
Accounts
payable, accrued expenses
|
||||||||||
|
and
other current liabilities
|
(351,976
|
)
|
(30,510
|
)
|
636,120
|
|||||
|
Net
cash used in operating activities
|
(6,132,424
|
)
|
(3,638,831
|
)
|
(833,996
|
)
|
||||
|
Cash
flows from investing activities:
|
||||||||||
|
Cash
received in connection with acquisition of technology
|
271,000
|
-
|
-
|
|||||||
|
Acquisition
of property and equipment
|
(117,893
|
)
|
(43,136
|
)
|
-
|
|||||
|
Net
cash provided by/(used) in investing activities
|
153,107
|
(43,136
|
)
|
-
|
||||||
|
Cash
flows from financing activities:
|
||||||||||
|
Net
proceeds from issuance of capital stock
|
7,939,306
|
3,573,068
|
872,000
|
|||||||
|
Proceeds
from notes payable
|
337,120
|
180,396
|
203,000
|
|||||||
|
Repayment
of notes payable
|
(408,712
|
)
|
(352,898
|
)
|
(30,000
|
)
|
||||
|
Repayment
of capitalized lease obligations
|
(20,829
|
)
|
(20,813
|
)
|
||||||
|
Proceeds
from sale of convertible debentures
|
-
|
250,000
|
250,000
|
|||||||
|
Net
cash provided by financing activities
|
7,846,885
|
3,629,753
|
1,295,000
|
|||||||
|
Net
increase/ (decrease) in cash and cash equivalents
|
1,867,568
|
(52,213
|
)
|
461,004
|
||||||
|
Cash
and cash equivalents at beginning of year
|
436,659
|
488,872
|
27,868
|
|||||||
|
Cash
and cash equivalents at end of year
|
$
|
2,304,227
|
$
|
436,659
|
$
|
488,872
|
||||
|
The
accompanying notes are an integral part of these consolidated
financial
statements
|
||||||||||
F-6
|
NEOSTEM,
INC. AND SUBSIDIARIES
|
|
|
Consolidated
Statements of Cash Flows - continued
|
|
Years
ended December 31,
|
||||||||||
|
2007
|
|
2006
|
|
2005
|
||||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||
|
Cash
paid during the year for:
|
||||||||||
|
Interest
|
$
|
21,968
|
$
|
285,096
|
$
|
92,010
|
||||
|
Supplemental
schedule of non-cash investing
|
||||||||||
|
and
financing activities
|
||||||||||
|
Issuance
of common stock for services rendered
|
$
|
386,514
|
$
|
188,485
|
$
|
313,394
|
||||
|
Compensatory
element of stock options
|
$
|
2,207,816
|
$
|
560,466
|
$
|
25,458
|
||||
|
Issuance
of restricted common stock for compensation
|
$
|
1,446,957
|
$
|
-
|
$
|
-
|
||||
|
Issuance
of common stock for compensation
|
$
|
55,410
|
$
|
-
|
$
|
-
|
||||
|
Issuance
of common stock purchase warrants for
|
||||||||||
|
services
|
$
|
213,786
|
$
|
-
|
$
|
-
|
||||
|
Issuance
of restricted common stock for services
|
$
|
481,910
|
$
|
-
|
$
|
-
|
||||
|
Issuance
of common stock for purchase of Stem Cell
|
||||||||||
|
Technologies,
Inc.
|
$
|
940,000
|
$
|
-
|
$
|
-
|
||||
|
Issuance
of common stock for capital commitment
|
$
|
165,000
|
$
|
-
|
$
|
-
|
||||
|
Net
accrual of dividends on Series A preferred stock
|
$
|
-
|
$
|
9,935
|
$
|
-
|
||||
|
Issuance
of common stock for assets of NS California
|
$
|
-
|
$
|
200,000
|
$
|
-
|
||||
|
Common
stock for conversion of convertible debt
|
$
|
-
|
$
|
425,000
|
$
|
-
|
||||
|
Common
stock issued for debt
|
$
|
-
|
$
|
45,000
|
$
|
565,000
|
||||
|
The
accompanying notes are an integral part of these consolidated financial
statements
|
||||||||||
F-7
Note
1 - The Company
NeoStem,
Inc. (“NeoStem”) 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.
NeoStem
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. 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
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. 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. The Company provides 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.
Prior
to
the NS California acquisition, the business of the Company was to provide
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 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.
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. This
reverse stock split was effective as of August 31, 2006. 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
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 stock split was effective and the Company's Common Stock
commenced trading on The American Stock Exchange under the symbol "NBS."
All
shares and per share amounts in the accompanying consolidated financial
statements have been retroactively adjusted for all periods presented to
reflect
the reverse stock splits effective as of August 31, 2006 and August 9,
2007.
Note
2 - Summary of Significant Accounting Policies
Principles
of consolidation:
The
consolidated financial statements include the accounts of NeoStem, Inc. (a
Delaware corporation) and its wholly-owned subsidiaries, NeoStem Therapies,
Inc.
and Stem Cell Technologies, Inc. All intercompany transactions and balances
have
been eliminated.
Use
of Estimates:
The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to
make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Cash
Equivalents:
Short-term cash investments, which have a maturity of ninety days or less
when
purchased, are considered cash equivalents in the consolidated statement
of cash
flows.
Concentrations
of Credit-Risk:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash. The Company places
its cash accounts with high credit quality financial institutions, which
at
times may be in excess of the FDIC insurance limit.
Property
and Equipment:
The
cost of property and equipment is depreciated over the estimated useful lives
of
the related assets of 3 to 5 years. The cost of computer software programs
are
amortized over their estimated useful lives of five years. Depreciation is
computed on the straight-line method. Repairs and maintenance expenditures
that
do not extend original asset lives are charged to expense as
incurred.
F-8
Income
Taxes:
The
Company, in accordance with SFAS 109, “Accounting for Income Taxes”, recognizes
(a) the amount of taxes payable or refundable for the current year and, (b)
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in an enterprise’s financial statement or tax returns.
Comprehensive
income (loss): Refers
to
revenue, expenses, gains and losses that under generally accepted accounting
principles are included in comprehensive income but are excluded from net
income
as these amounts are recorded directly as an adjustment to stockholders’ equity.
At December 31, 2007, 2006 and 2005 there were no such adjustments
required.
Goodwill:
Goodwill
represents the excess of the purchase price over the fair value of the net
assets acquired in a business combination. The Company reviews recorded goodwill
for potential impairment annually or upon the occurrence of an impairment
indicator. The Company performed its annual impairment tests as of December
31,
2007 and determined no impairment exists. The Company will perform its future
annual impairment as of the end of each fiscal year.
Intangible
asset:
SFAS No.
142 requires purchased intangible assets other than goodwill to be amortized
over their useful lives unless those lives are determined to be indefinite.
Purchased intangible assets are carried at cost less accumulated amortization.
Definite-lived intangible assets, which consists of patents and rights
associated with the Very Small Embryonic Like (“VSEL”) Stem Cells which
constitutes the principal assets acquired in the acquisition of Stem Cells
Technologies, Inc., have been assigned a useful life and are amortized on
a
straight-line basis over a period of twenty years.
Impairment
of long-lived assets:
We
review long-lived assets and certain identifiable intangibles to be held
and
used for impairment on an annual basis and whenever events or changes in
circumstances indicate that the carrying amount of an asset exceeds the fair
value of the asset. If other events or changes in circumstances indicate
that
the carrying amount of an asset that we expect to hold and use may not be
recoverable, we will estimate the undiscounted future cash flows expected
to
result from the use of the asset or its eventual disposition, and recognize
an
impairment loss. The impairment loss, if determined to be necessary, would
be
measured as the amount by which the carrying amount of the assets exceeds
the
fair value of the assets.
Accounting
for Stock Option Compensation: In
December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment" ("SFAS
No.
123(R)"). SFAS No. 123(R) establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods
or
services. This statement focuses primarily on accounting for transactions
in
which an entity obtains employee services in share-based payment transactions.
SFAS No. 123(R) requires that the fair value of such equity instruments be
recognized as an expense in the historical financial statements as services
are
performed. Prior to SFAS No. 123(R), only certain pro forma disclosures of
fair
value were required. The provisions of this statement are effective for the
first interim or annual reporting period that begins after June 15, 2005.
The
Company has adopted SFAS No. l23(R) effective January 1, 2006. The Company
determines value of stock options by the Black-Scholes option pricing model.
The
value of options issued during 2007 and 2006 or that were unvested at January
1,
2006 are being recognized as an operating expense ratably on a monthly basis
over the vesting period of each option.
Pro
Forma Effect of Stock Options: For
the
year ended December 31, 2005, the Company followed Financial
Accounting Standards Board Interpretation No. 44, an interpretation of APB
Opinion No. 25 and SFAS No. 123 which requires that effective July 1, 2000,
all
options issued to non-employees after January 12, 2000 be accounted for under
the rules of SFAS No. 123.
Assuming
the fair market value of the option at the date of grant $6.00 in February
2005,
$5.00 in April and July 2005, $8.00 in September 2005 and $6.00 in December
2005, the life of the options to be from three to ten years, the expected
volatility at between 15% and 200%, expected dividends are none, and the
risk-free interest rate of approximately 3%, the Company would have recorded
compensation expense of $116,146 for the years ended December 31, 2005 as
calculated by the Black-Scholes option pricing model. The weighted average
fair
value per option of options granted during 2005 was $6.00.
The
Black-Scholes option valuation model was developed for use in estimating
the
fair value of traded options, which have no vesting restrictions and are
fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility.
F-9
Proforma
net loss and net loss per share would be as follows:
|
2005
|
||||
|
Net
loss as reported
|
$
|
(1,745,039
|
)
|
|
|
Additional
compensation
|
(116,146
|
)
|
||
|
Adjusted
net loss
|
$
|
(1,861,185
|
)
|
|
|
Net
loss per share as reported
|
$
|
(3.51
|
)
|
|
|
Adjusted
net loss per share
|
$
|
(3.74
|
)
|
|
Earnings
Per Share:
Basic
(loss)/earnings per share is based on the weighted effect of all common shares
issued and outstanding, and is calculated by dividing net (loss)/income
available to common stockholders by the weighted average shares outstanding
during the period. Diluted (loss)/earnings per share, which is calculated
by
dividing net (loss)/income available to common stockholders by the weighted
average number of common shares used in the basic earnings per share calculation
plus the number of common shares that would be issued assuming conversion
of all
potentially dilutive securities outstanding, is not presented as it is
anti-dilutive in all periods presented.
Advertising
Policy:
All
expenditures for advertising is charged against operations as
incurred.
Revenue
Recognition:
The
Company initiated the collection and banking of autologous adult stem cells
in
the fourth quarter of 2006. The Company recognizes revenue related to the
collection and cryopreservation of autologous adult stem cells when the
cryopreservation process is completed which is 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 advanced payments. The
Company also earns revenue, in the form of start up fees, from physicians
seeking to establish autologous adult stem cell collection centers. These
fees
are in consideration of the Company establishing a service territory for
the
physician. Starts up fees are recognized once the agreement has been signed
and
the physician has been qualified by the Company’s credentialing
committee.
Warranty
and service contract reinsurance premiums are recognized on a pro rata basis
over the policy term. The deferred policy acquisition costs are the net cost
of
acquiring new and renewal insurance contracts. These costs are charged to
expense in proportion to net premium revenue recognized. The provisions for
losses and loss-adjustment expenses include an amount determined from loss
reports on individual cases and an amount based on past experience for losses
incurred but not reported. Such liabilities are necessarily based on estimates,
and while management believes that the amount is adequate, the ultimate
liability may be in excess of or less than the amounts provided. The methods
for
making such estimates and for establishing the resulting liability are
continually reviewed, and any adjustments are reflected in earnings
currently.
The
Company had sold, via the Internet, through partnerships and directly to
consumers, extended warranty service contracts for seven major consumer
products. The Company recognized revenue ratably over the length of the
contract. The Company purchased insurance to fully cover any losses under
the
service contracts from a domestic carrier. The insurance premium and other
costs
related to the sale are amortized over the life of the contract.
Purchase
of Royalty Interests: The
Company charges payments for the purchase of future potential royalty interests
to expense as paid and will record revenues when royalty payments are received.
Note
3 - Acquisition of NS California
On
January 19, 2006, the Company consummated the acquisition of the assets of
NS
California, Inc. (“NS California”) relating to NS California 's business of
collecting and storing adult stem cells, issuing 40,000 shares of the Company's
common stock with a value of $200,000. In addition, the Company assumed certain
liabilities of NS California’s which totaled $476,972. The underlying physical
assets acquired from NS California were valued at $109,123 resulting in the
recognition of goodwill in the amount of $558,169. Upon completion of the
acquisition the operations of NS California were assumed by the Company and
have
been reflected in the Statement of Operations since January 19, 2006. Effective
with the acquisition, the business of NS California became the principal
business of the Company. The Company now is providing 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.
F-10
Note
4- Intangible Asset
At
December 31, 2007 our intangible asset consisted of patent applications and
rights associated with the VSEL Technology which constitutes the principal
assets acquired in the acquisition of Stem Cells Technologies, Inc.
|
Estimated
amortization expense for the five years subsequent to December
31, 2007 is
as follows:
|
|
Years
Ending December 31,
|
||||
|
2008
|
$
|
33,450
|
||
|
2009
|
33,450
|
|||
|
2010
|
33,450
|
|||
|
2011
|
33,450
|
|||
|
2012
|
33,450
|
|||
|
Thereafter
|
501,750 | |||
|
The
remaining weighted-average amortization period as of December 31,
2007 is
20 years.
|
Note
5 - Accrued Liabilities
Accrued
liabilities are as follows:
|
December
31,
|
|||||||
|
2007
|
2006
|
||||||
|
Professional
fees
|
$
|
66,000
|
$
|
148,255
|
|||
|
Interest
on notes payable
|
218
|
1,919
|
|||||
|
Salaries
and related taxes
|
132,804
|
31,003
|
|||||
|
Other
|
29,704
|
60,211
|
|||||
|
$
|
228,726
|
$
|
241,388
|
||||
Note
6- Notes Payable
On
March
17, 2003, the Company commenced a private placement offering to raise up
to
$250,000 in 6-month promissory notes in increments of $5,000 bearing interest
at
15% per annum. Only selected investors which qualify as “accredited investors”
as defined in Rule 501(a) under the Securities Act of 1933, as amended, were
eligible to purchase these promissory notes. The Company raised the full
$250,000 through the sale of such promissory notes, resulting in net proceeds
to
the Company of $225,000, net of offering costs. The notes contain a default
provision which raises the interest rate to 20% if the notes are not paid
when
due. The Company issued $250,000 of these notes. During 2006, $90,000 had
been
converted into 15,300 shares of the Company’s Common Stock and $160,000 was
repaid.
In
August
2004, the Company sold 30 day 20% notes in the amount of $55,000 to two
accredited investors to fund current operations. As of December 31,
2006 $30,000
of these notes has been paid and $25,000 converted into 4,250 shares of the
Company’s Common Stock.
In
December 2004, the Company sold four notes to four accredited investors totaling
$100,000 with interest rates that range from 8% to 20%. As of December 31,
2006, $15,000
has been repaid and $85,000 converted into 14,450 shares of the Company’s Common
Stock.
In
March
2005, the Company sold a 30 day 8% note in the amount of $17,000, in August
2005, an 8% note in the amount of $10,000 and in September 2005, two 8% notes
in
the amounts of $6,000 and $15,000 to its President and then CEO, totaling
$48,000 and were all due on demand. In January 2006, all notes were repaid.
On
December 30, 2005, the Company sold $250,000 of convertible nine month
Promissory Notes which bore 9% simple interest with net proceeds to the Company
of $220,000. These convertible notes were sold in connection with a subscription
agreement between the Company and Westpark Capital, Inc. (“Westpark”). (The
convertible notes and warrants sold in December, 2005 and January, 2006 in
the
transaction in which Westpark Capital, Inc. acted as the placement agent
is
sometimes referred to here in as the “Westpark Private Placement”) The Company
recorded a debt discount associated with the conversion feature in the amount
of
$83,333, which was charged to interest expense during the year ended December
31, 2006. The debt discount recorded of $83,333 does not change the amount
of
cash required to payoff the principal value of these Promissory Notes, at
any
time during the term, which is $250,000. As part of the Westpark Private
Placement, these Promissory Notes have 4,167 detachable warrants for each
$25,000 of debt, which entitle the holder to purchase one share of the Company’s
Common Stock at a price of $12.00 per share. The warrants are exercisable
for a
period of three years from the date of the Promissory Note. The Promissory
Notes
convert to the Company’s Common Stock at $6.00 per share. The Promissory Notes
are convertible at anytime into shares of Common Stock at the option of the
Company subsequent to the shares underlying the Promissory Notes and the
shares
underlying the warrants registration if the closing price of the Common Stock
has been at least $18.00 for a period of at least 10 consecutive days prior
to
the date on which notice of conversion is sent by the Company to the holders
of
the Promissory Notes. Pursuant to the terms of the Westpark Private Placement,
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
notes
and the warrants sold in the Westpark Private Placement. This registration
statement was not made effective by July 31, 2006 and certain additional
rights
have accrued to the Convertible Promissory Noteholders (see below for a detailed
description of these additional rights). In 2005, the Company recorded an
expense of $2,573 associated with the warrants as their fair value using
the
Black Scholes method.
F-11
In
January 2006, the Company sold an additional $250,000 of convertible nine
month
Promissory Notes which bore 9% simple interest with net proceeds to the Company
of $223,880 as part of the Westpark Private Placement. The Company recorded
a
debt discount associated with the conversion feature in the amount of $129,167.
For the year ended December 31, 2006, the Company charged $127,932 of the
debt
discount to interest expense. The debt discount recorded of $129,167 does
not
change the amount of cash required to payoff the principal value of these
Promissory Notes, at any time during the term, which is $250,000. These
Promissory Notes were sold on the same terms and conditions as those sold
in
December, 2005 as part of the Westpark Private Placement. For the year ended
December 31, 2006, the Company recorded as interest expense $263,612 associated
with the warrants as their fair value using the Black Scholes method.
As
mentioned previously, pursuant to the terms of the Westpark Private Placement,
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 was reduced by 5% each month, subject to a floor of $4.00;
(ii)
the exercise price of the warrants was 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 is
required to be effective until February 28, 2007. In August, 2006 the Company
filed with the SEC a registration statement registering the resale by the
investors of the Westpark Private Placement of the shares of Common Stock
underlying the convertible promissory notes and the warrants sold in the
Westpark Private Placement which was made effective in November
2006.
In
an
effort to improve the financial position of the Company, in July 2006,
noteholders 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 shall 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 shall 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 shall
be
reduced to $4.40; (ii) the Company shall 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 shall be reduced from $12.00 to $8.00; and (iv)
a new
warrant shall 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. By August 31, 2006 investors
owning $237,500 of the $500,000 of convertible promissory notes had agreed
to
convert the convertible note into shares of the Company’s Common Stock for
consideration described above and investors holding $162,500 of the $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 consideration
described above.
In
September 2006, a new offer was extended to the remaining noteholders to
convert
the convertible note into shares of the Company’s Common Stock in consideration
for which (i) the conversion price per conversion share shall be reduced
to
$4.40; (ii) the exercise price per warrant shall be reduced from $12.00 to
$8.00
and (iii) a new warrant shall 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.
By
December 31, 2006, investors owning $425,000 convertible promissory notes
agreed
to convert the convertible note into shares of the Company’s Common Stock for
consideration described above. The Company issued 107,386 shares of Common
Stock
with a fair value of $692,896. In addition, the Company issued 60,417 warrants
with a fair value of $472,741 for Security holders that agreed to an early
conversion of their convertible promissory notes. The Company also issued
3,693
shares of Common Stock as consideration for extending the term of the
convertible notes, totaling $162,500, for an additional four months with
a fair
value of $21,023. The fair value of this Common Stock has been accounted
for as
interest expense. Amounts in excess of the face value of the convertible
promissory notes and the fair value of the warrants issued as the result
of
early conversion have been accounted for as interest expense. The balance,
$75,000, of convertible promissory notes was paid off in January
2007.
F-12
In
connection with the NS California acquisition, the Company assumed a 6% note
due
to Tom Hirose, a former officer of NS California in the amount of $15,812.
Final
payment was made in January 2008.
On
May
17, 2006, the Company sold an 8% promissory note in the amount of $20,000
due on
demand to Robin Smith, the Company’s then Chairman of the Advisory Board. This
promissory note was paid off on June 2, 2006.
In
July
and August 2007, the Company borrowed an aggregate of $200,000 through the
issuance of short term bridge notes to support operations pending the closing
of
the Company’s August 2007 public offering described in Note 8. These bridge
notes provided that they matured in six months from the date of issuance,
subject to the Company’s right to prepay, and bore interest at a rate of 15% per
annum. Robin L. Smith MD, Chief Executive Officer and Chairman of the Board
of
the Company was issued a bridge note for $125,000. Richard Berman, a member
of
the Board of Directors, was issued a bridge note for $50,000, and a bridge
note
for $25,000 was issued to another NeoStem shareholder. On August 10, 2007,
the
Board authorized the repayment in full of the bridge notes and all outstanding
bridge notes were repaid in full plus accrued interest. For the year ended
December 31, 2007 the Company paid interest of $976 on these notes.
A
summary
of notes payable and convertible debentures is as follows:
|
January
1,
|
|
|
|
Repayments
|
|
Less:
Debt
|
|
December
31,
|
|
|||||||
|
|
|
2007
|
|
Proceeds
|
|
/Conversions
|
|
Discounts
|
|
2007
|
||||||
|
Notes
with Related
|
||||||||||||||||
|
Parties
|
$
|
-
|
200,000
|
(200,000
|
)
|
$
|
-
|
|||||||||
|
Convertible
|
||||||||||||||||
|
Debentures
|
75,000
|
-
|
(75,000
|
)
|
-
|
-
|
||||||||||
|
Total
|
$
|
75,000
|
$
|
200,000
|
$
|
(275,000
|
)
|
$
|
-
|
$
|
-
|
|||||
Note
7 - Series A Mandatorily Redeemable Convertible Preferred
Stock
The
following summarizes the terms of Series A Preferred Stock as more fully
set
forth in the Certificate of Designation. The Series A Preferred Stock has
a
liquidation value of $1 per share, is non-voting and convertible into common
stock of the Company at a price of $5.20 per share. Holders of Series A
Preferred Stock are entitled to receive cumulative cash dividends of $0.07
per
share, per year, payable semi-annually. The Series A Preferred Stock is callable
by the Company at a price of $1.05 per share, plus accrued and unpaid dividends.
In addition, if the closing price of the Company’s common stock exceeds $13.80
per share for a period of 20 consecutive trade days, the Series A Preferred
Stock is callable by the Company at a price equal to $0.01 per share, plus
accrued and unpaid dividends.
The
Certificate of Designation for the Series A Preferred Stock also states that
at
any time after December 1, 1999 the holders of the Series A Preferred Stock
may
require the Company to redeem their shares of Series A Preferred Stock (if
there
are funds with which the Company may do so) at a price of $1.00 per share.
Notwithstanding
any of the foregoing redemption provisions, if any dividends on the Series
A
Preferred Stock are past due, no shares of Series A Preferred Stock may be
redeemed by the Company unless all outstanding shares of Series A Preferred
Stock are simultaneously redeemed.
The
holders of Series A Preferred Stock could convert their Series A Preferred
Stock
into shares of Common Stock of the Company at a price of $5.20 per
share.
On
March
17, 2006, the stockholders of the Company voted to approve an amendment to
the
Certificate of Incorporation which permitted the Company to issue in exchange
for all 681,171 shares of Series A Preferred Stock outstanding and its
obligation to pay $538,498 (or $.79 per share) in accrued dividends thereon,
a
total of 54,494 shares of Common Stock (eight hundredths (.08) shares of
Common
Stock per share of Series A Preferred Stock). Pursuant thereto, as of December
31, 2006, all outstanding shares of Series A Preferred Stock had been cancelled
and converted into Common Stock. Therefore at December 31, 2007 and 2006,
there
were 0 shares of Series A Preferred Stock outstanding.
F-13
Note
8 - Stockholders’ Equity
|
(a)
|
Series
B Convertible Redeemable Preferred
Stock:
|
The
total
authorized shares of Series B Convertible Redeemable Preferred Stock is 825,000.
The following summarizes the terms of the Series B Stock whose terms are
more
fully set forth in the Certificate of Designation. The Series B Stock carries
a
zero coupon and each share of the Series B Stock is convertible into ten
shares
of the Company’s common stock. The holder of a share of the Series B Stock is
entitled to ten times any dividends paid on the common stock and such stock
has
ten votes per share and votes as one class with the common stock.
The
holder of any share of Series B Convertible Redeemable Preferred Stock has
the
right, at such holder’s option (but not if such share is called for redemption),
exercisable after December 31, 2000, to convert such share into one (1) fully
paid and non-assessable share of common stock (the “Conversion Rate”). The
Conversion Rate is subject to adjustment as stipulated in the Agreement.
During
the year ended December 31, 2000, holders of 805,000 shares of the Series
B
Preferred Stock converted their shares into 805,000 shares of the Company’s
common stock.
At
December 31, 2007 and 2006, 10,000 Series B Preferred Shares were issued
and
outstanding.
| (b) |
Common
Stock:
|
At
the
July 2005 annual meeting, the stockholders approved an amendment increasing
the
authorized common stock to 500 million shares from 250 million shares.
In
February 2005, the $100,000 convertible note sold to the Company’s former COO
was converted into 19,608 shares of the Company’s common stock.
For
the
twelve months ended December 31, 2005, the Company issued 10,350 shares of
its
common stock for services performed by outside consultants and advisory board
members. The fair value of these shares was approximately $76,000, which
was
charged to operations.
For
the
twelve months ended December 31, 2005, the Company issued 30,807 shares of
its
common stock to its officers, directors and employees for services in lieu
of
salary. The fair value of these shares was $119,686, which was charged to
operations.
In
2005,
the Company issued 125,929 shares of its common stock to accredited investors
resulting in net proceeds to the Company of $872,000.
In
July
2005, the Company granted 30,000 shares of its common stock to its then
President and CEO. These shares vest 10,000 immediately and 10,000 on each
of
the next two anniversary dates. On June 2, 2006 the Company accelerated the
vesting dates of this stock grant pursuant to a letter agreement outlined
in
Note 11 of these financial statements. The fair value of these shares was
$120,000, which was charged to expense.
On
November 30, 2005, $445,000 of debt was converted into the Company’s common
stock at .17 shares for each one dollar of debt resulting in 75,650 shares
being
issued. On December 30, 2005, an additional $20,000 of debt was converted
into
3,400 shares of the Company’s common stock.
In
January 2006, the Company issued 7,650 shares of its common stock in exchange
for $45,000 of notes payable. In addition, the Company issued 2,500 shares
of
its Common Stock to Westpark as additional compensation for its role as
placement agent in the Westpark Private Placement. The fair value of these
shares was $22,750 which was charged to expense.
F-14
In
January 2006, in connection with the acquisition of certain assets of NS
California, the Company issued 20,000 shares of its common stock to NS
California. An additional 20,000 shares of the Company’s Common stock were held
in escrow pending any potential claims that might have been made in connection
with the NS California transaction to be released one year from the closing
less
any shares reclaimed due to amounts paid in cash in lieu of stock. The Company
issued 10,000 additional shares of its common stock in escrow pending the
approval of the license for the laboratory used for the collection of stem
cells. The agreement called for 167 shares to be forfeited each day the license
was not obtained past February 15, 2006, with a maximum of 10,000 shares
of
common stock subject to forfeiture. The license was obtained in May, 2006
and
therefore the Company notified NS California of the requirement that the
10,000
shares be forfeited to the Company. In January, 2007 the escrow period was
completed and the remaining shares were released to NS California. In connection
with and subsequent to the closing of the NS California transaction, the
Company
issued 20,122 shares of its Common stock in payment of certain obligations
assumed by the Company.
In
2006,
the Company sold 438,832 shares of its common stock to accredited investors
at a
per share price of $4.40 resulting in net proceeds to the Company of $1,827,068.
In connection with these transactions, the Company issued 198,864 common
stock
purchase warrants with a term of five years and per share exercise price
of
$8.00.
In
May
2006, the Company entered into an advisory agreement with Duncan Capital
Group
LLC (“Duncan”). Pursuant to the advisory agreement, Duncan was providing 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 consideration for such role,
Duncan
received a fee of $200,000 in cash and 24,000 shares of restricted common
stock.
On
June
2, 2006 , pursuant to the Duncan Private Placement, the Company sold 472,500
shares of its common stock to seventeen accredited investors at a per share
price of $4.40 resulting in gross proceeds of $ 2,079,000. In connection
with
this transaction, the Company issued 236,250 common stock purchase warrants
to
these seventeen investors. These common stock purchase warrants have a term
of 5
years and exercise price of $8.00 per share. In addition, Dr. Robin Smith
was
paid $100,000 and 10,000 common stock shares were issued to her in connection
with an Advisory Agreement dated September 14, 2005 as amended by the Supplement
to Advisory Agreement dated January 18, 2006 and Dr. Smith’s employment
agreement with the Company dated June 2, 2006.
On
June
2, 2006 certain employees and members of senior management agreed to take
restricted common stock as the net pay on $278,653 of unpaid salary that
dated
back to 2005. This resulted in the issuances of 37,998 shares of common stock,
valued at $167,192, or $4.40 per share, the balance of the unpaid salary
was
used to pay the withholding taxes which are associated with those earnings.
On
June
2, 2006 Dr. Robin Smith was appointed Chairman and CEO of the Company. In
connection with Dr. Smith’s appointment, 20,000 shares of common stock were
issued under the Company’s 2003 Equity Participation Plan, as amended (the “2003
EPP”) to Dr. Smith valued at $88,000 which was reflected as compensation expense
in the year ended December 31, 2006. In addition, Dr. Smith was granted,
under
the 2003 EPP common stock options to purchase 54,000 shares of the Company’s
common stock, which 30,000 option shares vested immediately, 12,000 option
shares vest on the first anniversary of the effective date and 12,000 option
shares vest on the second anniversary of the effective date. The exercise
price
of the options are (i) $5.30 as to the first 10,000 option shares, (ii) $8.00
as
to the second 10,000 option shares, (iii) $10.00 as to the third 10,000 option
shares, (iv) $16.00 as to the next 12,000 option shares, and (v) $25.00 as
to
the balance.
In
2006,
the Company issued an aggregate of 66,458 shares of common stock in conversion
of an aggregate of $308,462 in accounts payable owed to certain vendors.
The per
share conversion price ranged from $4.40 to $6.00.
In
2006,
in connection with the offer to noteholders for early conversion of the
convertible promissory notes the Company issued 107,386 shares of common stock
at a per share price ranging from $5.10 to $9.10.
In
2006,
in connection with the offer to noteholders for the extension of due dates
of
the Convertible Promissory Notes of the WestPark Private Placement, the Company
issued 3,693 shares of common stock with a per share price of
$5.70.
In
November 2006, the Company issued stock grants, under the 2003 EPP, to two
members of the Board of Directors, totaling 60,000 shares of common stock
with a
per share price of $7.00. These shares vest as follows: one-third vesting
upon
grant and one-third on the first and second anniversaries of the grant dates.
The Company recognized $163,334 as director fees in 2006, and the remaining
$256,666 of unearned value will be recognized ratably over the remaining
vesting
periods of which $140,004 was recognized in 2007.
In
December 2006, the Company issued a stock grant, under the 2003 EPP, to an
officer, totaling 30,000 shares of common stock with a per share price of
$6.00.
These shares vest as follows: 10,000 shares vesting upon grant and the remainder
upon the company achieving certain milestones. The Company recognized $65,000
as
compensation expense in 2006, and the remaining $115,000 of unearned value
will
be recognized ratably over the remaining vesting periods of which $ 80,000
was
recognized in 2007.
F-15
In
December 2006, the Company issued stock grants, under the 2003 EPP, to
three
members of management, totaling 20,000 shares of Common stock with a per
share
price of $6.00. At December 31, 2006 the Company recognized $120,000 as
compensation expense.
In
January 2007, the Company issued 12,000 shares of restricted Common Stock
to its
intellectual property acquisition consultant, vesting as to 1,000 shares
per
month commencing January 2007.
In
January 2007, the Company issued an aggregate of 9,000 shares of Common
Stock,
under the 2003 EPP, to a former director and employee pursuant to his agreement
to serve as Chairman of the Company’s Scientific Advisory Board and consultant
to the Company.
In
February 2007, the term of the Company’s financial advisory agreement with
Duncan Capital Group LLC was extended through December 2007, providing
that the
monthly fee be paid entirely in shares of Common Stock, The Company issued
to
Duncan 15,000 shares of restricted Common Stock as an advisory fee payment
vesting monthly through December 2007. 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 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.
In
February 2007, the Company issued 30,000 restricted 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, resulting in a charge to
operations of $165,000.
In
April
2007, the Company issued 3,688 restricted shares of its Common Stock to
a public
relations advisor in connection with public relations services rendered
to the
Company, resulting in a charge to operations of $22,500.
In
May
2007, the Company issued 1,000 restricted shares of its Common Stock to
an
investment relations advisor in connection with investor relations services
rendered to the Company, resulting in a charge to operations of
$4,500.
In
May
2007, the Company issued 15,000 restricted shares of its Common Stock to
an
investor relations advisor in connection with investor relations services
rendered to the Company, resulting in a charge to operations of
$67,500.
In
May
and June 2007, the Company issued an aggregate of 2,151 restricted shares
of its
Common Stock to its sublessor as partial payment for rent expense, resulting
in
charges to operations totaling $9,891.
In
June
2007, the Company issued, 12,000 restricted shares of its Common Stock
to a law
firm in connection with services rendered to the Company, of which 6,000
shares
vested in June 2007 and 1,000 shares vest monthly through December, 2007.
Such
shares had a value of $50,400.
In
June
and July 2007, the Company issued, under the 2003 EPP, 3,000 shares, in
each
month, of its Common Stock to a consultant for certain management services
rendered to the Company, resulting in a charge to operations of $1,410
and
$15,000 respectively. In August 2007, this consultant was hired as an executive
officer of the Company and in connection with this hiring was issued, under
the
2003 EPP, 10,000 shares of its Common Stock as a hiring incentive. One
half of
these shares vested immediately and the remainder vest in one year on the
anniversary date of the hiring date. The issuance of these shares resulted
in a
charge to operations of $27,708.
In
July
2007, the Company issued an aggregate of 909 restricted shares of its Common
Stock to its sublessor as partial payment for rent expense, resulting in
charges
to operations totaling $5,000.
F-16
In
August
2007, the Company issued, under the 2003 EPP, 24,000 shares of its Common
Stock
to a consultant for certain management services rendered to the Company,
18,000
of such shares vest monthly over the next twelve months and the remainder
vest
ratably for three years on the anniversary date of the agreement and resulted
in
a charge to operations of $16,667.
In
August
2007, the Company completed a sale of 1,055,900 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. On August 14, 2007, the
Company
completed a sale of 214,100 units at a price of $5.00 per unit pursuant
to the
same best efforts public offering. The units sold were identical to the
units
sold on August 8, 2007. The aggregate number of units thus 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. 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 $5,619,250.
On
August
8, 2007, the American Stock Exchange accepted for listing the Company’s common
stock, units as described above, and Class A warrants under the symbols
“NBS”,
“NBS.U”, and “NBS.WS” respectively. Trading on the American Stock Exchange
commenced on August 9, 2007.
In
September 2007, the Company issued, under the 2003 EPP, an aggregate of
154,500
shares of its Common Stock to certain employees, including an aggregate
of
125,000 shares to certain of its executive officers. In general, one half
of
these shares issued vested immediately and the remainder vest in one year
on the
anniversary date of the stock issuance. The issuance of these shares resulted
in
a charge to operations of $499,346. In November 2007, an employee that
was a
recipient of 7,000 shares of this award left the Company and forfeited
3,500
shares (one-half of this award). In December 2007, the Company cancelled
10,000
shares issued to an employee who did not satisfy the condition precedent
to
receipt of paying the tax withholding obligation.
In
September 2007, the Company issued, under the 2003 EPP, an aggregate of
135,000
shares of its Common Stock to the independent members of its Board of Directors.
One half of these shares vested immediately and the remainder vest in one
year
on the anniversary date of the stock issuance. The issuance of these shares
resulted in a charge to operations of $445,505.
In
September 2007, the Company issued, under the 2003 EPP, 10,000 shares of
its
Common Stock to a consultant to the Company. One half of these shares issued
vested immediately and the remainder vest in one year on the anniversary
date of
the stock issuance. The issuance of these shares resulted in a charge to
operations of $33,002.
In
September 2007, the Company issued, under the 2003 EPP, 10,000 shares of
its
Common Stock to a consultant to the Company. The issuance of these shares
resulted in a charge to operations of $49,500.
In
October 2007, the Company issued, under the 2003 EPP, 2,500 shares of its
Common
Stock to a consultant to the Company. The issuance of these shares resulted
in a
charge to operations of $11,250.
In
October 2007, the Company issued 15,000 restricted shares of its Common
Stock to
a consulting firm to the Company. The issuance of these shares resulted
in a
charge to operations of $54,750.
In
November 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 "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 with $271,000, in cash, by UTEK
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, par value $0.001 per share for
all the
issued and outstanding common stock of SCTI. The total value of the transaction
is $940,000 and $669,000 has been capitalized as an intangible
asset.
F-17
In
December 2007, the Company issued 75,000 restricted shares of its Common
Stock
to a consultant to the Company. The issuance of these shares resulted in
a
charge to operations of $149,750.
In
December 2007, the Company issued, under the 2003 EPP, 12,353 shares of
its
Common Stock to a consultant to the Company. The issuance of these shares
resulted in a charge to operations of $21,017.
In
December 2007, the Company issued, under the 2003 EPP, 4,902 shares of
its
Common Stock to a consultant to the Company. The issuance of these shares
resulted in a charge to operations of $8,333.
In
December 2007, the Company issued, under the 2003 EPP, 2,778 shares of
its
Common Stock to an employee of the Company as consideration for restructuring
the employee’s compensation. The issuance of these shares resulted in a charge
to operations of $4,723.
In
December 2007, the Company issued, under the 2003 EPP, 15,000 shares of
its
Common Stock to an employee of the Company as a compensatory bonus. The
issuance
of these shares resulted in a charge to operations of $25,500.
In
December 2007, the Company issued, under the 2003 EPP, 10,000 shares of
its
Common Stock to an employee of the Company as a compensatory bonus. The
issuance
of these shares resulted in a charge to operations of $17,000.
| (c) |
Warrants:
|
The
Company has issued common stock purchase warrants from time to time to
investors
in private placements, certain vendors, underwriters, and directors and
officers
of the Company. A total of 1,987,938 shares of common stock are reserved
for
issuance upon exercise of outstanding warrants as of December 31, 2007
at prices
ranging from $4.61 to $12.00 and expiring through June 2014.
In
connection with the September 2003 equity private placement, the Company
issued
a 5 year warrant to purchase 2,825 shares of its common stock at an exercise
price of $12.00 per share to its retained placement agent, Robert M. Cohen
&
Company. The warrant contains piggyback registration rights.
From
August 2004 through March 2005, the Company issued three year warrants
to
purchase a total of 1,500 shares of its Common stock at 5.00 per share
to
Consulting For Strategic Growth, Ltd., the Company’s investor relations firm. In
August 2007, the Company extended the expiration dates of 1,250 of such
warrants
for a period of two years.
On
September 14, 2005, the Company issued 2,400 Common stock purchase warrants
to
its then Chairman of its Advisory Board, Dr. Robin Smith. These warrants
were
scheduled to vest at the rate of 200 per month beginning with September
14,
2005. The vesting of these warrants was accelerated so that they became
immediately vested on June 2, 2006 pursuant to Dr. Smith’s employment agreement.
Each warrant entitles the holder to purchase one share of the Company’s common
stock at a price of $8.00 per share. The warrant expires three years from
issuance.
In
December 2005 and January 2006, the Company issued an aggregate of 91,668
Common
stock purchase warrants to the investors and placement agent. Each warrant
entitles the holder to purchase one share of common stock at a price of
$12.00
per share for a period of three years.
In
March
2006, the Company issued 1,200 Common stock purchase warrants to Healthways
Communications, Inc., the Company’s marketing consultants. These warrants vest
200 per month beginning March 2006 and entitle the holder to purchase one
share
of common stock at a price of $10.00 per share for a period of three years.
In
2006, the Healthways Communications, Inc. agreement was terminated and
400
common stock purchase warrants issued to Healthways Communications, Inc.
were
cancelled.
On
June
2, 2006, pursuant to the Duncan Private Placement, the Company sold 472,500
shares of its common stock to seventeen accredited investors at a per share
price of $4.40 resulting in gross proceeds of $2,079,000. In connection with
this transaction the company issued 236,250 common stock purchase warrants
to
these seventeen investors. These common stock purchase warrants have a
term of 5
years and exercise price of $8.00 per share. The Company’s warrants provide for
certain registration rights and certain penalties if such registration
is not
achieved within 150 days of the initial closing of the Duncan Private Placement.
In August 2006, the Company filed with the SEC a registration statement
registering the resale by the investors of the Duncan Private Placement
of the
shares of common stock underlying the warrants sold in the Duncan Private
Placement.
F-18
In
July
and August 2006, the Company sold an aggregate of 397,727 shares of common
stock
to 34 accredited investors at a per share price of $4.40 resulting in gross
proceeds to the Company of $1,750,000. In connection with this
transaction, the Company issued 198,864 common stock purchase warrants
with a
term of five years and per share exercise price of $8.00.
In
July
and August 2006, in connection with the offer to noteholders for early
conversion of the Convertible Promissory Notes of the Westpark Private
Placement, the Company issued 39,583 warrants. These common stock purchase
warrants have a term of 5 years and exercise price of $8.00 per share.
In
August
2006, the Company issued warrants to purchase an aggregate of 17,000 shares
of
common stock at $8.00 per share to four persons under advisory agreements.
Such
warrants are each exercisable for five years from the date of
issue.
In
September 2006, in connection with the offer to noteholders for early conversion
of the Convertible Promissory Notes of the Westpark Private Placement,
the
Company issued 20,833 warrants. These common stock purchase warrants have
a term
of 5 years and exercise price of $8.00 per share.
In
October 2006, in connection with the offer to noteholders for early conversion
of the Convertible Promissory Notes of the Westpark Private Placement,
the
Company issued 10,417 warrants. These common stock purchase warrants have
a term
of 5 years and exercise price of $8.00 per share.
In
connection with the January 2007 private placement the Company issued
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 the placement
agent 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.
In
March
2007, the Company engaged a marketing and investor relations consultant.
Pursuant to this agreement, the Company issued to the consultant warrants
to
purchase 150,000 shares of its Common Stock at a purchase price of $4.70
per
share. Such warrants 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. During the year December 31, 2007 the Company recognized
$142,158 as consulting expense related to the vesting of these warrants.
In
November, 2007 this agreement was terminated and the warrant as to 100,000
shares related to this agreement were canceled and as result $189,828 of
expense
previously recognized was reversed.
In
May
2007, the Company engaged an investor relations consultant. Pursuant to
this
agreement, the Company issued to the consultant warrants to purchase 10,000
shares of its Common Stock at a purchase price of $4.90 per share. Such
warrants
vested on issuance and during the December 31, 2007 the Company recognized
$37,480 as consulting expense related to these warrants.
In
June
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 4,000 shares of its Common Stock at a purchase
price of $6.10 per share. Such warrants vested on issuance and the Company
recognized $22,512 as marketing expense related to these warrants.
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
the
Company recognized $11,636 as marketing expense related to these
warrants.
Pursuant
to the public offering described under Note 7 (b) Common Stock, above,
the
Company issued five year Class A warrants to purchase 535,000 shares of
common
stock at $6.00 per share. Such Class A warrants became exercisable and
separately tradable from the units on October 12, 2007 and are exercisable
through July 16, 2012. Also 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. Such warrants are exercisable commencing
one year
from the date of issuance through August 14, 2012
F-19
At
December 31, 2007 the outstanding warrants by range of exercise prices
are as
follows:
|
Exercise
Price
|
Number
Outstanding
December
31, 2007
|
Weighted
Average
Remaining
Contractual
Life (years)
|
Number
Exercisable December
31, 2007
|
|||||||
|
$4.61
to $6.09
|
768,011
|
4.51
|
768,011
|
|||||||
|
$6.09
to $7.57
|
99,250
|
4.61
|
4.000
|
|||||||
|
$7.57
to $9.04
|
1,088,678
|
4.50
|
1,088,678
|
|||||||
|
$9.04
to $12.00
|
31,999
|
1.25
|
31,999
|
|||||||
|
1,987,938
|
4.46
|
1,892,688
|
| (d) |
Options:
|
The
Company’s 2003 Equity Participation Plan (the “2003
EPP”)
permits the grant of share options and shares to its employees, Directors,
consultants and advisors for up to 2,500,000 shares of common stock as
stock
compensation. All stock options under the 2003 EPP are generally granted
at the
fair market value of the common stock at the grant date. Employee stock
options
vest ratably over a period determined at time of grant and generally expire
10
years from the grant date.
Effective
January 1, 2006, the Company’s 2003 EPP is accounted for in accordance with the
recognition and measurement provisions of Statement of Financial Accounting
Standards ("FAS") No. 123 (revised 2004), Share-Based Payment ("FAS 123(R)"),
which replaces FAS No. 123, Accounting for Stock-Based Compensation, and
supersedes Accounting Principles Board Opinion ("APB") No. 25, Accounting
for
Stock Issued to Employees, and related interpretations. FAS 123 (R) requires
compensation costs related to share-based payment transactions, including
employee stock options, to be recognized in the financial statements. In
addition, the Company adheres to the guidance set forth within Securities
and
Exchange Commission ("SEC") Staff Accounting Bulletin ("SAB") No. 107,
which
provides the Staff's views regarding the interaction between SFAS No. 123(R)
and
certain SEC rules and regulations and provides interpretations with respect
to
the valuation of share-based payments for public companies.
Prior
to
January 1, 2006, the Company accounted for similar transactions in accordance
with APB No. 25 which employed the intrinsic value method of measuring
compensation cost. Accordingly, compensation expense was not recognized
for
fixed stock options if the exercise price of the option equaled or exceeded
the
fair value of the underlying stock at the grant date.
While
FAS
No. 123 encouraged recognition of the fair value of all stock-based awards
on
the date of grant as expense over the vesting period, companies were permitted
to continue to apply the intrinsic value-based method of accounting prescribed
by APB No. 25 and disclose certain pro-forma amounts as if the fair value
approach of SFAS No. 123 had been applied. In December 2002, FAS No. 148,
Accounting for Stock-Based Compensation-Transition and Disclosure, an amendment
of SFAS No. 123, was issued, which, in addition to providing alternative
methods
of transition for a voluntary change to the fair value method of accounting
for
stock-based employee compensation, required more prominent pro-forma disclosures
in both the annual and interim financial statements. The Company complied
with
these disclosure requirements for all applicable periods prior to January
1,
2006.
In
adopting FAS 123(R), the Company applied the modified prospective approach
to
transition. Under the modified prospective approach, the provisions of
FAS 123
(R) are to be applied to new awards and to awards modified, repurchased,
or
cancelled after the required effective date. Additionally, compensation
cost for
the portion of awards for which the requisite service has not been rendered
that
are outstanding as of the required effective date shall be recognized as
the
requisite service is rendered on or after the required effective date.
The
compensation cost for that portion of awards shall be based on the grant-date
fair value of those awards as calculated for either recognition or pro-forma
disclosures under FAS 123.
As
a
result of the adoption of FAS 123 (R), the Company's results for the twelve
month period ended December 31, 2007 and 2006 include share-based compensation
expense totaling $2,207,816 and $560,465, respectively. Such amounts have
been
included in the consolidated statements of operations within general and
administrative expenses. Stock compensation expense recorded under APB
No. 25 in
the consolidated statements of operations for the year ended December 31,
2005
totaled $0.
F-20
Stock
option compensation expense in 2007 and 2006 is the estimated fair value
of
options granted amortized on a straight-line basis over the requisite service
period for entire portion of the award.
The
weighted average estimated fair value of stock options granted in the years
ended December 31, 2007 and 2006 were $2.27 and $6.30. The weighted average
estimated fair value of stock options granted in year ended December 31,
2005
was $5.00. The fair value of options at the date of grant was estimated
using
the Black-Scholes option pricing model. During 2007 and 2006, the Company
took
into consideration the guidance under SFAS 123(R) and SAB No. 107 when
reviewing
and updating assumptions. The expected volatility is based upon historical
volatility of our stock and other contributing factors. The expected term
is
based upon observation of actual time elapsed between date of grant and
exercise
of options for all employees. Previously such assumptions were determined
based
on historical data.
The
range
of assumptions made in calculating the fair values of options are as
follows:
|
Year
Ended
December
31, 2007
|
Year
Ended
December
31, 2006
|
Year
Ended
December
31, 2005
|
||||||||
|
Expected
term (in years)
|
10
|
10
|
10
|
|||||||
|
Expected
volatility
|
118%
- 346
|
%
|
168%
- 205
|
%
|
200
|
%
|
||||
|
Expected
dividend yield
|
0
|
%
|
0
|
%
|
0
|
%
|
||||
|
Risk-free
interest rate
|
4.06%
- 4.95
|
%
|
5.00
|
%
|
4.50
|
%
|
||||
Stock
option activity under the 2003 Equity Participation Plan is as
follows:
|
|
|
|
|
Weighted
|
|
Weighted
Average
|
|
Average
|
|
|||||||
|
|
|
Number
of
|
|
Range
of
|
|
Average
|
|
Remaining
|
|
Intrinsic
|
|
|||||
|
|
|
Shares
(1)
|
|
Exercise
Price
|
|
Exercise
Price
|
|
Contractual
Term
|
|
Value
|
||||||
|
Balance
at December 31, 2004
|
66,850
|
3.00
- 18.00
|
$
|
8.00
|
||||||||||||
|
Granted
|
112,000
|
.50
-1.00
|
$
|
6.00
|
||||||||||||
|
Exercised
|
-
|
-
|
-
|
|||||||||||||
|
Expired
|
-
|
-
|
-
|
|||||||||||||
|
Cancelled
|
-
|
-
|
-
|
|||||||||||||
|
Balance
at December 31, 2005
|
178,850
|
3.00
- 18.00
|
$
|
7.00
|
||||||||||||
|
Granted
|
270,750
|
4.40
- 25.00
|
$
|
7.60
|
||||||||||||
|
Exercised
|
-
|
-
|
-
|
|||||||||||||
|
Expired
|
-
|
-
|
-
|
|||||||||||||
|
Cancelled
|
(5,000
|
)
|
-
|
$
|
6.00
|
|||||||||||
|
Balance
at December 31, 2006
|
444,600
|
$
|
3.00
- $25.00
|
$
|
7.30
|
|||||||||||
|
Granted
|
696,700
|
$
|
1.70
- $8.00
|
$
|
4.65
|
|||||||||||
|
Exercised
|
-
|
|||||||||||||||
|
Expired
|
-
|
|||||||||||||||
|
Cancelled
|
(27,500
|
)
|
||||||||||||||
|
Balance
at December 31, 2007
|
1,113,800
|
$
|
1.70
- $25.00
|
$
|
5.66
|
8.11
|
$
|
0.04
|
||||||||
|
Vested
and Exercisable at
|
||||||||||||||||
|
December
31, 2007
|
681,132
|
$
|
5.81
|
7.46
|
$
|
0.06
|
||||||||||
(1)
—
All options are
exercisable for a period of ten years.
Options
exercisable at December 31, 2004 - 61,850 at a weighted average exercise
price
of $7.00.
Options
exercisable at December 31, 2005 - 120,850 at a weighted average exercise
price
of $7.00.
Options
exercisable at December 31, 2006 - 242,850 at a weighted average exercise
price
of $6.90.
F-21
|
Exercise
Price
|
Number
Outstanding
December
31, 2007
|
Weighted
Average Remaining
Contractual
Life (years)
|
Number
Exercisable
December
31, 2007
|
|||||||
|
$
1.70 to $ 4.96
|
323,200
|
9.8
|
245,866
|
|||||||
|
$
4.96 to $ 8.22
|
697,750
|
8.8
|
358,416
|
|||||||
|
$
8.22 to $11.48
|
51,750
|
8.0
|
47,750
|
|||||||
|
$11.48
to $14.74
|
3,000
|
6.2
|
3,000
|
|||||||
|
$14.74
to $25.00
|
38,100
|
7.5
|
26,100
|
|||||||
|
1,113,800
|
681,132
|
|||||||||
Options
are usually granted at an exercise price at least equal to the fair value
of the
common stock at the grant date and may be granted to employees, Directors,
consultants and advisors of the Company. As of December 31, 2007, there
was
approximately $2,243,581 of total unrecognized compensation costs related
to
unvested stock option awards which are expected to vest over a weighted
average
life of 1.4 years.
|
Weighted
|
|||||||
|
Average
Grant
|
|||||||
|
Date
Fair
|
|||||||
|
Options
|
Value
|
||||||
|
Non-Vested
at December 31, 2006
|
201,750
|
$
|
6.02
|
||||
|
Issued
|
696,700
|
$
|
4.65
|
||||
|
Canceled
|
(27,500
|
)
|
$
|
-
|
|||
|
Vested
|
(438,282
|
)
|
$
|
5.00
|
|||
|
Non-Vested
at December 31, 2007
|
432,668
|
$
|
4.91
|
||||
The
total
value of shares vested during the year ended December 31, 2007 was
$2,207,816.
On
June
2, 2006 the Company accelerated the vesting dates of 52,500 stock options
granted to certain officers and senior staff of the Company. The Company
also
adopted an Executive Officer Compensation Plan, effective as of June 2,
2006, in
connection with a purchase agreement for the sale of 472,250 shares of
the
Company's Common Stock to seventeen accredited investors, with 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 provide for a reduction by 25% in base salary for each officer
and
the granting of options to purchase shares of Common Stock under the Company's
2003 EPP which become exercisable upon the Company achieving certain revenue
milestones.
In
2006,
the Company recorded $560,465,
as the
prorated compensation expense relating to 58,000 unvested stock options
outstanding at 12/31/2005 and 113,250 stock options issued in 2006 (in
2006 the
Company issued 270,750 stock options however 157,500 vest based on
accomplishment of various business milestones, which were not accomplished
by
12/31/2006, and will not be recognized for compensation purposes until
such
milestones are accomplished).
In
2007,
the Company recorded $2,207,816,
as the prorated compensation expense relating to 201,750 unvested stock
options
outstanding at 12/31/2006 and 446,700 stock options issued in 2007 (in
2007 the
Company issued 696,700 stock options however 250,000 vest based on
accomplishment of various business milestones, which were not accomplished
by
12/31/2007, and will not be recognized for compensation purposes until
such
milestones are accomplished).
F-22
Note
9- Income Taxes
Net
deferred tax assets consisted of the following as of December 31:
|
2007
|
2006
|
2005
|
||||||||
|
Deferred
tax assets:
|
||||||||||
|
Net
operating loss carryforwards
|
$
|
8,100,000
|
$
|
5,427,000
|
$
|
3,807,000
|
||||
|
Stock
option compensation
|
941,000
|
191,000
|
87,000
|
|||||||
|
Non-employee
equity compensation
|
585,000
|
56,000
|
-
|
|||||||
|
Provision
of doubtful of accounts
|
7,000
|
-
|
-
|
|||||||
|
Deferred
revenue
|
1,000
|
1,000
|
9,000
|
|||||||
|
Deferred
legal and other fees
|
23,000
|
72,000
|
-
|
|||||||
|
Deferred
tax assets
|
9,657,000
|
5,747,000
|
3,903,000
|
|||||||
|
Deferred
tax liabilities:
|
||||||||||
|
Amortization
of Goodwill
|
(24,000
|
)
|
(12,000
|
)
|
||||||
|
Depreciation
and amortization
|
(11,000
|
)
|
(2,000
|
)
|
||||||
|
Non-employee
equity compensation
|
(454,000
|
)
|
(97,000
|
)
|
-
|
|||||
|
Deferred
tax liability
|
(489,000
|
)
|
(111,000
|
)
|
-
|
|||||
|
Net
deferred tax assets before valuation allowance
|
9,168,000
|
5,636,000
|
3,903,000
|
|||||||
|
Net
deferred tax asset valuation allowance
|
(9,168,000
|
)
|
(5,636,000
|
)
|
(3,903,000
|
)
|
||||
|
$
|
-
|
$
|
-
|
$
|
-
|
|||||
The
provision for income taxes is different than the amount computed using
the
applicable statutory federal income tax rate with the difference for each
year
summarized below:
|
2007
|
2006
|
2005
|
||||||||
|
Federal
tax benefit at statutory rate
|
(34.0
|
%)
|
(34.0
|
%)
|
(34.0
|
%)
|
||||
|
Change
in valuation allowance
|
34.0
|
%
|
34.0
|
%
|
34.0
|
%
|
||||
|
Provision
for income taxes
|
0.00
|
%
|
0.00
|
%
|
0.00
|
%
|
||||
The
Tax
Reform Act of 1986 enacted a complex set of rules limiting the utilization
of
net operating loss carryforwards to offset future taxable income following
a
corporate ownership change. The Company’s ability to utilize its NOL
carryforwards is limited following a change in ownership in excess of fifty
percentage points during any three-year period.
Upon
receipt of the proceeds from the last foreign purchasers of the Company’s common
stock in January 2000, common stock ownership changed in excess of 50%
during
the three-year period then ended. At December 31, 2007, the Company had
net
operating loss carryforwards of approximately $23,824,000. Included in
the net
operating loss carryforward is approximately $2,121,000 that has been limited
by
the ownership change. The tax loss carryforwards expire at various dates
through
2027. The Company has recorded a full valuation allowance against its net
deferred tax asset because of the uncertainty that the utilization of the
net
operating loss and deferred revenue and fees will be realized.
F-23
Note
10 - Segment Information
Until
April 30, 2001, the Company operated in two segments; as a reinsuror and
as a
seller of extended warranty service contracts through the Internet. The
reinsurance segment has been discontinued and the Company’s remaining revenues
are derived from the run-off of its sale of extended warranties and service
contracts via the Internet. Additionally, the Company established a new
business
in the banking of adult autologous stem cells sector. The Company’s operations
are conducted entirely in the U.S. Although the Company has realized minimal
revenue from the banking of adult autologous stem cells, the Company operated
in
two segments until the "run-off" was completed. As of March 31, 2007 the
run off
of the sale of extended warranties and service contracts was
completed.
Note
11 - Related Party Transactions
On
January 20, 2006, Mr. Robert Aholt, Jr. tendered his resignation as Chief
Operating Officer of the Company. In connection therewith, on March 31,
2006,
the Company and Mr. Aholt entered into a Settlement Agreement and General
Release (the “Settlement Agreement”). Pursuant to the Settlement Agreement, the
Company agreed to pay to Mr. Aholt the aggregate sum of $250,000 (less
applicable Federal and California state and local withholdings and payroll
deductions), payable, initially over a period of two years in biweekly
installments of $4,807.69 commencing on April 7, 2006, except that the
first
payment was in the amount of $9,615.38. In July, 2006 this agreement was
amended
to call for semi-monthly payments of $10,417 for the remaining 21 months.
In the
event the Company breaches its payment obligations under the Settlement
Agreement and such breach remains uncured, the full balance owed shall
become
due. The Company and Mr. Aholt each provided certain general releases.
Mr. Aholt
also agreed to continue to be bound by his obligations not to compete with
the
Company and to maintain the confidentiality of Company proprietary information.
At December 31, 2007 and 2006, $24,022 and $149,439 was due, respectively,
Mr.
Aholt pursuant to the terms of the Settlement Agreement.
In
October 2007, the Company entered into a three month consulting agreement
with
Matthew Henninger pursuant to which he agreed to provide services as a
business
consultant in areas requested by the Company, including financial analysis
projects and acquisition target analysis. As compensation for these services,
pursuant to the agreement he was entitled to receive a cash fee of $8,333
payable each month during the term of the agreement as well as a fee in
the
event a transaction was effected during the term as a result of the performance
of the consultant’s services. In January 2008, the Company and the consultant
entered into an agreement whereby the consultant agreed to accept in
satisfaction of his final payment under the agreement, 4,902 shares of
the
Company’s common stock issued under and pursuant to the terms of the Company’s
2003 Equity Participation Plan based on the fair market value of the common
stock on the date of approval by the Company’s compensation committee. No other
fee was paid. The consultant is currently in an exclusive relationship
with the
Company’s CEO.
Note
12 - Commitments and Contingencies
On
May 26, 2006, the Company entered into an employment agreement with
Dr. Robin L. Smith, pursuant to which Dr. Smith serves as the Chief
Executive Officer of the Company. This agreement was for a period of two
years,
which term could be renewed for successive one-year terms unless otherwise
terminated by Dr. Smith or the Company. The effective date of
Dr. Smith’s employment agreement was June 2, 2006, the date of the
initial closing under the securities purchase agreement for the June 2006
private placement. Under this agreement, Dr. Smith was entitled to receive
a base salary of $180,000 per year, to be increased to $236,000 after the
first
year anniversary of the effective date of her employment agreement. If
the
Company raised an aggregate of $5,000,000 through equity or debt financing
(with
the exception of the financing under the securities purchase agreement),
Dr. Smith’s base salary was to be raised to $275,000. Dr. Smith was
also eligible for an annual bonus determined by the Board and monthly
perquisites that total approximately $2,200 per month. Pursuant to the
employment agreement, Dr. Smith’s advisory agreement with the Company, as
supplemented, was terminated, except that (i) the vesting of the warrant to
purchase 2,400 shares of Common Stock granted thereunder was accelerated
so that
the warrant became fully vested as of the effective date of the employment
agreement, (ii) Dr. Smith received $100,000 in cash and 10,000 shares
upon the initial closing under the June 2006 private placement,
(iii) if an aggregate of at least $3,000,000 was raised and/or other debt
or equity financings prior to August 15, 2006 (as amended, August 31,
2006), Dr. Smith was to receive an additional payment of $50,000,
(iv) a final payment of $3,000 relating to services rendered in connection
with Dr. Smith’s advisory agreement, paid at the closing of the
June 2006 private placement, and (v) all registration rights
provided in the advisory agreement were to continue in effect.
As
of
August 30, 2006, in excess of $3,000,000 had been raised and accordingly,
Dr. Smith was entitled to a payment of $50,000. Dr. Smith elected to
have $30,000 of this amount distributed to certain employees of the Company,
including its Chief Financial Officer and General Counsel, in recognition
of
their efforts on behalf of the Company and retained $20,000. Upon the effective
date of the Employment Agreement, Dr. Smith was awarded 20,000 shares of
Common Stock of the Company, under the Company’s 2003 Equity Participation Plan,
as amended (the “2003 EPP”) and options to purchase 54,000 shares of Common
Stock under the 2003 EPP, which options expire ten years from the date
of
grant.
On
January 26, 2007, in connection with the January 2007 private placement,
the
Company entered into a letter agreement with Dr. Smith, pursuant to which
Dr.
Smith’s employment agreement dated as of May 26, 2006 was amended to provide
that: (a) the term of her employment would be extended to December 31,
2010; (b)
upon the first closings in the January 2007 private placement, Dr. Smith’s base
salary would be increased to $250,000; (c) her base salary would be increased
by
10% on each one year anniversary of the agreement; (d) no cash bonus would
be
paid to Dr. Smith for 2007; and (e) cash bonuses and stock awards under
the
Company’s 2003 EPP would be fixed at the end of 2007 for 2008, in an amount to
be determined. Other than as set forth therein, Dr. Smith’s original employment
agreement and all amendments thereto remain in full force and effect. As
consideration for her agreement to substantially extend her employment
term,
among other agreements contained in this amendment, on January 18, 2007
Dr.
Smith was also granted an option under the Company’s 2003 EPP to purchase 55,000
shares of the Common Stock at a per share exercise price equal to $5.00
vesting
as to (i) 25,000 shares upon the first closings in the January 2007 private
placement; (ii) 15,000 shares on June 30, 2007; and (iii) 15,000 shares
on
December 31, 2007.
F-24
Per
Dr.
Smith’s January 26, 2007 letter agreement with the Company, upon termination
of
Dr. Smith’s employment by the Company without cause or by Dr. Smith with good
reason, the Company shall pay to Dr. Smith her base salary at the time
of
termination for the two year period following such termination. In
addition, per Dr. Smith’s May 26, 2006 employment agreement, upon termination of
Dr. Smith’s employment by the Company without cause or by Dr. Smith for good
reason, Dr. Smith is entitled to: (i) a pro-rata bonus based on the annual
bonus
received for the prior year; (ii) medical insurance for a one year period;
and
(iii) have certain options vest. Upon termination of Dr. Smith’s employment by
the Company for cause or by Dr. Smith without good reason, Dr. Smith is
entitled
to: (i) the payment of all amounts due for services rendered under the
agreement
up until the termination date; and (ii) have certain options vest. Upon
termination for death or disability, Dr. Smith (or her estate) is entitled
to:
(i) the payment of all amounts due for services rendered under the agreement
until the termination date; (ii) family medical insurance for the applicable
term; and (ii) have certain options vest.
Upon
a
change in control of the Company, per Dr. Smith’s May 26, 2006 employment
agreement, Dr. Smith is entitled to: (i) the payment of base salary for
one
year; (ii) a pro-rata bonus based on the annual bonus received for the
prior
year; (iii) medical insurance for a one year period; and (iv) have certain
options vest.
Effective
as of September 27, 2007, the Company entered into a letter agreement with
Dr.
Smith, pursuant to which Dr. Smith's employment agreement dated as of May
26,
2006 and amended as of January 26, 2007, was further amended to provide
that:
(a) Dr. Smith's base salary would be increased to $275,000 (the amount
to which
Dr. Smith would have been entitled under her original employment agreement
prior
to her agreement on January 26, 2007 to accept a reduced salary of $250,000);
(b) her base salary would be increased by 10% on each one year anniversary
of
the agreement; (c) a cash bonus of $187,500 (an amount equal to 75% of
her base
salary) would be paid October 1, 2007; (d) Dr. Smith's bonus for 2008 is
set in
the amount of $250,000 (an amount equal to 100% of her base salary) to
be paid
October 1, 2008; (e) the Company will pay membership and annual fees for
a club
in New York of Dr. Smith's choice for business entertaining and meetings
and (f)
any severance payments will be paid out over 12 months . Other than as
set forth
therein, Dr. Smith's original employment agreement and all amendments thereto
remain in full force and effect. With regard to Dr. Smith’s 2007 bonus she
elected to be paid $118,750, distribute $34,000 to other key staff members
and
to defer payment of the remaining $34,750.
On
February 6, 2003, Mr. Weinreb was appointed President and Chief
Executive Officer of the Company and the Company entered into an employment
agreement with Mr. Weinreb. On June 2, 2006, Mr. Weinreb resigned
as Chief Executive Officer and Chairman of the Board, but will continue
as
President and a director of the Company. Mr. Weinreb’s original employment
agreement had an initial term of three years, with automatic annual extensions
unless earlier terminated by the Company or Mr. Weinreb. Under this
agreement, in addition to base salary he was entitled to an annual bonus
in the
amount of $20,000 for the initial year in the event, and concurrently on
the
date, that the Company received debt and/or equity financing in the aggregate
amount of at least $1,000,000 since the beginning of his service, and $20,000
for each subsequent year of the term, without condition.
On
May 4, 2005, the Board voted to approve an amendment to Mr. Weinreb’s
employment agreement, subject to approval of the stockholders which was
obtained
on July 20, 2005, pursuant to which among other things Mr. Weinreb’s
employment agreement was amended to (a) extend the expiration date thereof
from February 2006 to December 2008; (b) change
Mr. Weinreb’s annual base salary of $217,800 (with an increase of 10% per
annum) to an annual base salary of $250,000 (with no increase per annum);
(c) grant Mr. Weinreb 30,000 shares of common stock, 10,000 shares of
which shall vest on each of the date of grant and the first and second
anniversaries of the date of grant; (d) commencing in August 2006,
increase Mr. Weinreb’s annual bonus from $20,000 to $25,000; and
(e) in 2006, provide for the reimbursement of all premiums in an annual
aggregate amount of up to $18,000 payable by Mr. Weinreb for life and long
term care insurance covering each year during the remainder of the term
of his
employment.
Pursuant
to and as a condition of the closing of the June 2006 private placement,
Mr.
Weinreb entered into a letter agreement with the Company in which he agreed
to
convert $121,532 of accrued salary (after giving effect to employment taxes
which were paid by the Company) into 16,573 shares of Common Stock at a
per
share price equal to $4.40 (the price of the shares being sold in the June
2006
private placement). Mr. Weinreb further agreed to a reduction in his base
salary
by 25% until the achievement by the Company of certain milestones. In
consideration for such compensation concessions,: (i) the remaining vesting
of
the option shares which was scheduled to vest as to 10,000 shares each
on July
20, 2006 and July 20, 2007, was accelerated such that it became fully vested
as
of June 2, 2006, the date of the closing of the June 2006 private placement.
;
and (ii) a restricted stock grant of 20,000 shares of Common Stock which
were
also scheduled to vest as to 10,000 shares on each of July 20, 2006 and
July 20,
2007, was similarly accelerated.
F-25
On
January 26, 2007, the Company entered into a letter agreement with Mr.
Weinreb
pursuant to which Mr. Weinreb’s employment agreement dated as of August 12, 2005
was supplemented with new terms which provide that: (a) upon the first
closings
in the January 2007 private placement, Mr. Weinreb’s base salary would be paid
at the annual rate of $200,000 (an annual rate which is 20% lower than
the
amount to which he was otherwise entitled under his employment agreement);
(b)
he would be entitled to quarterly bonuses of $5,000 commencing March 31,
2007;
(c) he would be entitled to bonuses ranging from $3,000 to $5,000 upon
the
Company achieving certain business milestones; and (d) any other bonuses
would
only be paid upon approval by the Compensation Committee of the Board of
Directors. In consideration of his agreement to a reduction in base salary,
and
in connection with his entering into this agreement, an option to purchase
10,000 shares of Common Stock at $6.00 per share, previously granted to
Mr.
Weinreb on December 5, 2006 and tied to the opening of certain collection
centers, vested upon the execution of the agreement. Other than as set
forth
therein, Mr. Weinreb’s original employment agreement and all amendments thereto
remained in full force and effect. This supplemental agreement was to terminate
upon the Company achieving certain revenue, financing or adult stem cell
collection milestones, or at the discretion of the Compensation Committee
of the
Board of Directors. This supplemental agreement terminated in August, 2007
by
its terms.
Pursuant
to the amendments to Mr. Weinreb’s employment agreement in August 2005, in the
event of termination of Mr. Weinreb’s employment by the Company without cause
(except for certain instances of disability), Mr. Weinreb was entitled
to
receive a lump sum payment equal to his then base salary and automobile
allowance for a period of one year, and to be reimbursed for disability
insurance for Mr. Weinreb and for medical and dental insurance for Mr.
Weinreb
and his family for the remainder of the term (through December 31, 2008).
Per
Mr. Weinreb’s January 26, 2007 letter agreement with the Company, in the event
of termination of his employment, severance will be paid in equal installments
over a 12 month period in accordance with the payroll policies and practices
of
the Company. The January 2007 agreement was to be in effect until the Company
achieved certain adult stem cell collection, revenue or financing milestones,
or
until the Compensation Committee of the Board of Directors determined to
terminate the agreement. This supplemental agreement terminated in August
2007
by its terms. Mr. Weinreb’s original employment agreement provides that in the
event of certain instances of disability, Mr. Weinreb is entitled to receive
his
base salary for three months followed by half his base salary for another
three
months.
Effective
as of September 28, 2007, the Company entered into a letter agreement with
Mr.
Weinreb, pursuant to which Mr. Weinreb's employment agreement dated as
of
February 6, 2005 and amended as of August 12, 2005 and June 1, 2006 (together,
the "Agreement") (such Agreement being supplemented as of January 26, 2007,
the
effectiveness of which supplement has expired by its terms), was further
amended
to provide that: (a) Mr. Weinreb's base salary would be increased from
$200,000
to $210,000; (b) the sole bonus to which he will be entitled shall be a
quarterly bonus of $7,500 payable at the end of each quarterly period during
the
term commencing as of September 30, 2007; (c) in the event of termination
of
employment, any severance to which Mr. Weinreb is entitled under the Agreement
shall equal the lesser of one year of his base salary or his base salary
payable
for the remainder of the term, in each case paid out over a 12 month period
in
accordance with the payroll policies and practices of the Company; and
(d) any
unused vacation to which Mr. Weinreb is entitled under the Agreement in
any
calendar year shall be forfeited without compensation. Other than as set
forth
therein, Mr. Weinreb's Agreement remains in full force and effect.
On
April 20, 2005, the Company entered into a letter agreement with Catherine
M. Vaczy pursuant to which Ms. Vaczy served as the Company’s Vice President
and General Counsel. The term of this original agreement was three years.
In
consideration for Ms. Vaczy’s services under the letter agreement,
Ms. Vaczy was entitled to receive an annual salary of $155,000 during the
first year of the term, a minimum annual salary of $170,500 during the
second
year of the term, and a minimum annual salary of $187,550 during the third
year
of the term. On the date of the letter agreement, Ms. Vaczy was granted
an
option to purchase 1.500 shares of Common Stock pursuant to the Company’s 2003
EPP, with an exercise price equal to $10.00 per share. The option was to
vest
and become exercisable as to 500 shares on each of the first, second and
third
year anniversaries of the date of the agreement and remain exercisable
as to any
vested portion thereof in accordance with the terms of the Company’s 2003 EPP
and the Company’s Incentive Stock Option Agreement. Pursuant to and as a
condition of the closing of the June 2006 private placement, Ms. Vaczy
entered
into a letter agreement with the Company in which she agreed to convert
$44,711
in accrued salary (after giving effect to employment taxes which were paid
by
the Company) into 6,097 shares of Common Stock at a per share price equal
to
$4.40 (the price of the shares being sold in the June 2006 private placement).
Ms. Vaczy further agreed to a reduction in her base salary by 25% until
the
achievement by the Company of certain milestones. In consideration for
such
compensation concessions, the vesting of the option to purchase 8,500 shares
of
Common Stock was accelerated such that it became fully vested as of June
2,
2006, the date of the closing of the June 2006 private placement.
On
January 26, 2007, the Company entered into another letter agreement with
Ms.
Vaczy pursuant to which Ms. Vaczy continues to serve as the Company’s Vice
President and General Counsel. This agreement supersedes Ms. Vaczy’s employment
agreement dated as of April 20, 2005 and all amendments thereto. Subject
to the
terms and conditions of the letter agreement, the term of Ms. Vaczy’s
employment in such capacity will continue through December 31, 2008. In
consideration for her services under the letter agreement, Ms. Vaczy will
be entitled to receive a minimum annual salary of $150,000 during 2007
(such
amount being 20% less than the annual salary to which Ms. Vaczy would have
been
entitled commencing April 20, 2007 pursuant to the terms of her original
employment agreement) and a minimum annual salary of $172,500 during 2008.
In
consideration for such salary concessions and agreement to extension of
her
employment term, Ms. Vaczy is also entitled to receive a cash bonus upon
the
occurrence of certain milestones and shall also be eligible for additional
cash
bonuses in certain circumstances, in each case as may be approved by the
Compensation Committee of the Board of Directors.
F-26
Ms.
Vaczy
is also entitled to payment of certain perquisites and/or reimbursement
of
certain expenses incurred by her in connection with the performance of
her
duties and obligations under the letter agreement, and to participate in
any
incentive and employee benefit plans or programs which may be offered by
the
Company and in all other plans in which the Company executives
participate.
Pursuant
to Ms. Vaczy’s amended employment agreement dated January 26, 2007, in the event
Ms. Vaczy’s employment is terminated prior to the end of the term (December
31, 2008), for any reason, earned but unpaid cash compensation and unreimbursed
expenses due as of the date of such termination will be payable in full.
In
addition, in the event Ms. Vaczy’s employment is terminated prior to the
end of the term for any reason other than by the Company with cause or
Ms. Vaczy without good reason, Ms. Vaczy or her executor of her last
will or the duly authorized administrator of her estate, as applicable,
will be
entitled to receive severance payments equal to $187,500 in the event the
employment termination date is during 2007 and $215,700 in the event the
employment termination date is during 2008, paid in accordance with the
Company’s standard payroll practices for executives. In no event will such
payments exceed the remaining salary payments in the term. In the event
her
employment is terminated prior to the end of the term by the Company without
cause or by Ms. Vaczy for good reason, all options granted by the Company
will
immediately vest and become exercisable in accordance with their terms.
In
connection with the Company’s acquisition of the assets of NS California on
January 19, 2006, the Company entered into an employment agreement with
Larry A. May. Mr. May is the former Chief Executive Officer of NS
California. Pursuant to Mr. May’s employment agreement, he is to serve as
an officer of the Company reporting to the CEO for a term of three years,
subject to earlier termination as provided in the agreement. In return,
Mr. May was to be paid an annual salary of $165,000, payable in
accordance with the Company’s standard payroll practices, and was entitled to
participate in the Company’s benefit plans and perquisites generally available
to other executives. Mr. May was granted, on his commencement date, an
employee
stock option under the Company’s 2003 EPP to purchase 1,500 shares of the
Company’s Common Stock at a per share purchase price equal to $5.00, the closing
price of the Common Stock on the commencement date, which was scheduled
to vest
as to 500 shares of Common Stock on the first, second and third anniversaries
of
the commencement date. Pursuant to and as a condition of the closing of
the June
2006 private placement, Mr. May entered into a letter agreement with the
Company
in which he agreed to convert $12,692 in accrued salary (after giving effect
to
employment taxes which were paid by the Company) into 1,731 shares of Common
Stock at a per share price equal to $4.40 (the price of the shares being
sold in
the June 2006 private placement). Mr. May further agreed to a reduction
in his
base salary by 25% until the achievement by the Company of certain milestones.
In consideration for such compensation concessions, the vesting of the
option to
purchase 1,500 shares of Common Stock was accelerated such that it became
fully
vested as of June 2, 2006, the date of the closing of the June 2006 private
placement.
On
January 26, 2007, in connection with the January 2007 private placement,
the
Company entered into a letter agreement with Mr. May, pursuant to which
Mr.
May’s employment agreement dated as of January 19, 2006 was supplemented with
new terms to provide that: (a) upon the first closings in the January 2007
private placement, Mr. May’s base salary would be paid at the annual rate of
$132,000 (an annual rate which is 20% lower than the amount to which he
was
otherwise entitled under his original employment agreement); and (b) any
bonus
would only be paid upon approval by the Compensation Committee of the Board
of
Directors. Other than as set forth therein, Mr. May’s original employment
agreement and all amendments thereto remained in full force and effect.
This
supplemental agreement was to terminate upon the Company achieving certain
revenue, financing or adult stem cell collection milestones, at the discretion
of the Compensation Committee of the Board of Directors or at such time
as Mr.
May was no longer the Company’s Chief Financial Officer. This supplemental
agreement terminated in August, 2007 by its terms.
Under
Mr.
May’s original employment agreement, upon termination of Mr. May’s employment by
the Company for any reason except a termination for cause, Mr. May is
entitled to receive severance payments equal to one year’s salary, paid
according to the same timing of salary as he is then receiving. No severance
payments shall be made unless and until Mr. May executes and delivers to
the
Company a release of all claims against the Company. No other payments
are to be
made, or benefits provided, except as otherwise required by law.
On
February 21, 2003 the Company began leasing office space in Melville, New
York
at an original annual rental of $18,000. The lease was renewed through
March
2007 with an annual rental of approximately $22,800. This lease was terminated
effective October 1, 2006 which resulted in the loss of the security deposit
of
$3,000 tendered when the lease was originally signed. Rent expense for
this
office approximated $20,400 and $28,900 for the years ended December 31,
2006
and 2005, respectively.
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 of Directors 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 $5,000 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 the employees
will be
spending a majority of their time in Long Island, New York, helping to
launch
the ProHealth Care Associates LLC collection center. The Company believes
this
space should be sufficient for its needs in the short term. 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. 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, effective March 31, 2008 we canceled our space
agreement with Symbion Research International. Rent for these facilities,
for
the twelve months ended December 31, 2007 and 2006, was approximately $215,000
and $79,000,
respectively.
F-27
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. SCTI contains
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 (“SRA”) with the University of Louisville 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 Brown Cancer Center at the University of Louisville. The SRA
calls for
total payments of $375,000 over a two and one-half year period, 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 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 University of Louisville Research
Foundation (“ULRF”) from SCTI, and SCTI is responsible for all payments for
patent filings and related applications. 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. 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.
SCTI was
funded by UTEK in amounts sufficient to pay certain near term costs under
the
SRA and the License Agreement. In consideration for the Acquisition, the
Company
issued to UTEK 400,000 unregistered shares of its common stock, par value
$0.001
per share, for all the issued and outstanding common stock of SCTI. The
value of
the transaction is $940,000 and $669,000 has been capitalized as an intangible
asset.
Note
13 - Subsequent Events
On
January 9, 2008, the Company entered into a letter agreement with Dr. Robin
L.
Smith, its Chairman of the Board and Chief Executive Officer, pursuant
to which
Dr. Smith's employment agreement dated as of May 26, 2006 and amended as
of
January 26, 2007 and September 27, 2007 was further amended to provide
that, in
response to the Company’s efforts to conserve cash, Dr. Smith would be paid
$50,000 of her 2008 salary in shares of the Company’s Common Stock, net of
shares in payment of applicable withholding taxes valued at the closing
price of
the Common Stock on the date of issuance. Accordingly, Dr. Smith was issued
16,574 shares of the Company’s Common Stock pursuant to the Company’s 2003 EPP
which was based on a price per share of $1.70, the closing price of the
Common
Stock on the date of approval by the Compensation Committee of the Board
of
Directors. Her salary for 2008 will be $225,000.
Also
on
January 9, 2008, the Company entered into a letter agreement with Catherine
M.
Vaczy, its Vice President and General Counsel, pursuant to which Ms. Vaczy’s
employment agreement dated as of January 26, 2007 was amended to provide
that,
in response to the Company’s efforts to conserve cash, Ms. Vaczy would be paid
$11,250 of her 2008 salary in shares of the Company’s Common Stock. Accordingly,
Ms. Vaczy was issued 3,729 shares of the Company’s Common Stock pursuant to the
Company’s 2003 EPP which was based on a price per share of $1.70, the closing
price of the Common Stock on the date of approval by the Compensation Committee
of the Board of Directors. Her salary for 2008 will be $161,250.
F-28
Effective
as of January 1, 2008, the Company entered into a one year consulting agreement
with a financial services firm, pursuant to which this firm is providing
consulting services during the term to the Company consisting of (i) reviewing
the Company's financial requirements; (ii) analyzing and assessing alternatives
for the Company's financial requirements; (iii) providing introductions
to
professional analysts and money managers; (iv) assisting the Company in
financing arrangements to be determined and governed by separate and distinct
financing agreements; (v) providing analysis of the Company's industry
and
competitors in the form of general industry reports provided directly to
Company; and (vi) assisting the Company in developing corporate partnering
relationships. As consideration for these services, on February 15, 2008
the
Company issued to this consultant (i) 50,000 shares of restricted Company
common
stock; and (ii) two warrants to purchase an aggregate of 120,000 shares
of
restricted 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,
over one year, so long as services continue to be provided under the consulting
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.
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 restricted 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 is paying a retainer
fee of
$30,000 and 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 engagement
agreement. 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 the Company issued to this financial advisor the initial payments
in
stock under the agreement, totaling 9,516 restricted shares. Additional
fees are
payable in the event of the consummation of a transaction pursuant to the
agreement.
On
February 20, 2008, the Company entered into a six month advisory services
agreement with a financial securities firm whereby this firm is providing
financial consulting services and advice to the Company pertaining to its
business affairs. In consideration for such services, the Company has agreed
to
issue 150,000 shares of restricted common stock that shall vest over the
term of
the advisory services agreement, provided that the advisory services agreement
continues to be in effect. The issuance of such securities was subject
to the
approval of the American Stock Exchange, which 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 restricted
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 consulting agreement, the Company agreed to issue to the advisor
an
aggregate of 50,000 shares of restricted common stock. 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 these shares were
issued.
F-29
EXHIBIT
21.1
SUBSIDIARIES
OF NEOSTEM, INC.
NeoStem
Therapies, Inc., a Delaware corporation.
Stem
Cell
Technologies, Inc., a Florida corporation
We
hereby
consent to the incorporation by reference into the Registration Statements
on
Form S-8 (Registration No. 333-107438 and Registration No. 333-144265) and
Registration Statement on Form S-3 (Registration No. 333-145988) of NeoStem,
Inc. of our report dated March 19, 2008 with respect to the consolidated
financial statements of NeoStem, Inc. and Subsidiaries appearing in this Annual
Report on Form 10-K of NeoStem, Inc. for the year ended December 31, 2007.
|
/s/
Holtz Rubenstein Reminick LLP
|
||
|
Holtz
Rubenstein Reminick LLP
Melville,
New York
March
28, 2008
|
||
I,
Robin
L. Smith, certify that:
1.
I have
reviewed this Annual Report on Form 10-K of NeoStem, Inc.;
2.
Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4.
The
registrant's other certifying officer and I are responsible for establishing
and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the
registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect,
the
registrant's internal control over financial reporting; and
5.
The
registrant's other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a)
All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b)
Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant's internal control over financial
reporting.
|
Date:
March 28, 2008
|
/s/ Robin L. Smith | |
|
Name: Robin L. Smith M.D. |
||
|
Title:
Chief Executive Officer
(Principal
Executive Officer)
|
||
A
signed
original of this written statement required by Section 302 has been provided
to
the Corporation and will be retained by the Corporation and furnished to the
Securities and Exchange Commission or its staff upon request.
EXHIBIT
31.2
I,
Larry
A. May, certify that:
1.
I have
reviewed this Annual Report on Form 10-K of NeoStem, Inc.;
2.
Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made,
in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3.
Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4.
The
registrant's other certifying officer and I are responsible for establishing
and
maintaining disclosure controls and procedures (as defined in Exchange Act
Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for
the
registrant and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect,
the
registrant's internal control over financial reporting; and
5.
The
registrant's other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a)
All
significant deficiencies and material weaknesses in the design or operation
of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b)
Any
fraud, whether or not material, that involves management or other employees
who
have a significant role in the registrant's internal control over financial
reporting.
| Date: March 28, 2008 | /s/ Larry A. May | |
|
Name: Larry A. May |
||
|
Title:
Chief Financial Officer
(Principal
Financial Officer)
|
||
A
signed
original of this written statement required by Section 302 has been provided
to
the Corporation and will be retained by the Corporation and furnished to the
Securities and Exchange Commission or its staff upon request.
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In
connection with the Annual Report on Form 10-K (the "Report") of NeoStem, Inc.
(the "Corporation") for the year ended December 31, 2007, as filed with the
Securities and Exchange Commission on the date hereof, I, Robin L. Smith, Chief
Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
to
my knowledge, that:
(1)
The
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2)
The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the
Corporation.
|
Dated:
March 28, 2008
|
/s/ Robin L. Smith | |
|
Robin
L. Smith M.D.
|
||
|
Chief
Executive Officer
|
||
The
foregoing certification is being furnished solely pursuant to Section 906 of
the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter
63
of Title 18, United States Code) and is not being filed as part of the Report
or
as a separate disclosure document.
A
signed
original of this written statement required by Section 906, or other document
authenticating, acknowledging, or otherwise adopting the signature that appears
in typed form within the electronic version of this written statement required
by Section 906, has been provided to the Corporation and will be retained by
the
Corporation and furnished to the Securities and Exchange Commission or its
staff
upon request.
EXHIBIT
32.2
18
U.S.C. SECTION 1350,
AS
ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF
2002
In
connection with the Annual Report on Form 10-K (the "Report") of NeoStem, Inc.
(the "Corporation") for the year ended December 31, 2007, as filed with the
Securities and Exchange Commission on the date hereof, I, Larry A. May, Chief
Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
to
my knowledge, that:
(1)
The
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2)
The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Corporation.
| Dated: March 28, 2008 | /s/ Larry A. May | |
|
Larry
A. May
Chief
Financial Officer
|
||
The
foregoing certification is being furnished solely pursuant to Section 906 of
the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter
63
of Title 18, United States Code) and is not being filed as part of the Report
or
as a separate disclosure document.
A
signed
original of this written statement required by Section 906, or other document
authenticating, acknowledging, or otherwise adopting the signature that appears
in typed form within the electronic version of this written statement required
by Section 906, has been provided to the Corporation and will be retained by
the
Corporation and furnished to the Securities and Exchange Commission or its
staff
upon request.