SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x QUARTERLY
REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR
THE
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2008
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
|
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22-2343568
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(State or other jurisdiction of
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(I.R.S. Employer
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incorporation or organization)
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|
Identification No.)
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420 LEXINGTON AVE, SUITE 450 NEW YORK, NEW YORK
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10170
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(Address of principal executive offices)
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(zip
code)
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Issuer's
telephone number, including area code: 212-584-4180
(Former
name, former address and former fiscal year, if changed since last
report)
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. Yes x
No
o
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
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
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|
Accelerated
filer o
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|
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|
Non-accelerated
filer o
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(Do
not check if a smaller reporting company)
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Smaller
reporting company x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o
No x
7,315,006
SHARES, $.001 PAR VALUE, AS OF November 14, 2008
(Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date)
I
N D E X
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Page
No.
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Part
I - Financial Information:
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Item
1.
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Consolidated
Financial Statements (Unaudited):
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|
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Consolidated
Balance Sheets At September 30, 2008 and December 31, 2007
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3
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Consolidated
Statements of Operations for the three months and nine months ended
September 30, 2008 and 2007
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4
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Consolidated
Statements of Cash Flows for the nine months ended September 30,
2008 and
2007
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5
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|
|
|
|
|
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Notes
to Unaudited Consolidated Financial Statements
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6-19
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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19-23
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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24
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Item
4T.
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Controls
and Procedures
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24
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Part
II - Other Information:
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Item
1.
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Legal
Proceedings
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25
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Item
1A.
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Risk
Factors
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25
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|
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Item
2.
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Unregistered
Sales of Equity Securities and Use of
|
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Proceeds
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27
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Item
3.
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Defaults
Upon Senior Securities
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27
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Item
4.
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Submission
of Matters to a Vote of Securityholders
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27
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Item
5.
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Other
Information
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27
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Item
6.
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Exhibits
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28
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Signatures
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29
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PART
I. FINANCIAL INFORMATION
Item
1. Consolidated Financial Statements
NEOSTEM,
INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(Unaudited)
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|
September 30,
2008
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|
December 31,
2007
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ASSETS
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Current assets:
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Cash
and cash equivalents
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$
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794,367
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$
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2,304,227
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Accounts
receivable, net of allowance for doubtful accounts of $41,000, and
$19,500, respectively
|
|
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11,518
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24,605
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Prepaid
expenses and other current assets
|
|
|
113,542
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46,248
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|
|
|
|
|
|
|
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|
Total
current assets
|
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|
919,427
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2,375,080
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|
|
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Property
and equipment, net
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118,490
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164,122
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Goodwill
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558,169
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558,169
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Intangible
Asset
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669,000
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|
669,000
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Other
assets
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22,779
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8,778
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|
|
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$
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2,287,865
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$
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3,775,149
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LIABILITIES
AND STOCKHOLDERS' EQUITY |
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Current
liabilities:
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Accounts
payable
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$
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343,168
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$
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158,453
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Accrued
liabilities
|
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77,877
|
|
|
228,726
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|
Note
payable, due related party – current portion
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|
|
-
|
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24,022
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|
Notes
payable
|
|
|
10,345
|
|
|
4,720
|
|
Unearned
revenues
|
|
|
5,153
|
|
|
2,902
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|
Capitalized
lease obligations – current portion
|
|
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21,559
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25,406
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Total
current liabilities
|
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458,102
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444,229
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Capitalized
lease obligations
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|
-
|
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14,726
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|
|
|
|
|
|
|
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Total
Liabilities
|
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|
458,102
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|
458,955
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Stockholders’
Equity:
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Preferred
stock; authorized, 5,000,000 shares Series
B convertible redeemable preferred stock, liquidation value 10
shares of
common stock per share; $0.01 par value; authorized, 825,000 shares;
issued and outstanding, 10,000 shares
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100
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|
100
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Common
stock, $.001 par value; authorized,
500,000,000
shares; issued and outstanding, 7,130,006 September 30, 2008
and 4,826,055
December 31, 2007
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7,130
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4,826
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Additional
paid-in capital
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39,439,706
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34,802,309
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Unearned
compensation
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|
(54,259
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)
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(738,803
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)
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Accumulated
deficit
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(37,562,914
|
)
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|
(30,752,238
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)
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Total
stockholders’ equity
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1,829,763
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3,316,194
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$
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2,287,865
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$
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3,775,149
|
|
See
accompanying notes to consolidated financial statements
NEOSTEM,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(Unaudited)
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|
Three Months Ended September 30,
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|
Nine Months Ended September 30,
|
|
|
|
2008
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|
2007
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|
2008
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|
2007
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Earned
revenues
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$
|
25,248
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|
$
|
12,559
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|
$
|
49,469
|
|
$
|
74,471
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|
Direct
costs
|
|
|
(8,839
|
)
|
|
(6,775
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)
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|
(12,747
|
)
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|
(10,378
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)
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Gross
profit
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16,409
|
|
|
5,784
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36,722
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64,093
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|
Selling,
general and administrative
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1,935,743
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|
4,327,512
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6,839,461
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8,163,257
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Operating
loss
|
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|
(1,919,334
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)
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|
(4,321,728
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)
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(6,802,739
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)
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(8,099,164
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)
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Other
income (expense):
|
|
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|
|
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Interest
income
|
|
|
686
|
|
|
-
|
|
|
2,398
|
|
|
15,224
|
|
Interest
expense
|
|
|
(3,066
|
)
|
|
(5,917
|
)
|
|
(10,335
|
)
|
|
(18,301
|
)
|
|
|
|
|
|
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|
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|
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Net
loss
|
|
$
|
(1,921,714
|
)
|
$
|
(4,327,645
|
)
|
$
|
(6,810,676
|
)
|
$
|
(8,102,241
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
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Net
loss per common share
|
|
|
($0.30
|
)
|
|
($1.26
|
)
|
|
($1.22
|
)
|
|
($2.84
|
)
|
Weighted
average common shares outstanding
|
|
|
6,381,588
|
|
|
3,440,282
|
|
|
5,594,701
|
|
|
2,857,066
|
|
See
accompanying notes to consolidated financial statements
NEOSTEM,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
For the Nine Months Ended September 30,
|
|
|
|
|
|
|
|
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|
2008
|
|
2007
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
Net
loss
|
|
$
|
(6,810,676
|
)
|
$
|
(8,102,241
|
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Common
shares issued and stock options granted for services rendered
and interest expense
|
|
|
3,175,610
|
|
|
3,976,450
|
|
Depreciation
|
|
|
58,928
|
|
|
31,013
|
|
Bad
debt provision
|
|
|
21,500
|
|
|
—
|
|
Deferred
acquisition costs
|
|
|
—
|
|
|
1,253
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
Prepaid
expenses and other current assets
|
|
|
(67,295
|
)
|
|
33,338
|
|
Accounts
receivable
|
|
|
(8,413
|
)
|
|
(36,419
|
)
|
Unearned
revenues
|
|
|
2,251
|
|
|
(1,289
|
)
|
Accounts
payable, accrued expenses, and other current liabilities
|
|
|
9,845
|
|
|
(450,592
|
)
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(3,618,250
|
)
|
|
(4,548,487
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
Acquisition
property and equipment
|
|
|
(7,296
|
)
|
|
(66,723
|
)
|
Security
Deposit
|
|
|
(20,000
|
)
|
|
—
|
|
Net
cash used in investing activities
|
|
|
(27,296
|
)
|
|
(66,723
|
)
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
Net
proceeds from issuance of common stock
|
|
|
2,148,635
|
|
|
7,899,377
|
|
Proceeds
from advances on notes payable
|
|
|
131,617
|
|
|
338,432
|
|
Payments
of capitalized lease obligations
|
|
|
(18,574
|
)
|
|
(15,228
|
)
|
Repayments
of notes payable
|
|
|
(125,992
|
)
|
|
(395,194
|
)
|
Net
cash provided by financing activities
|
|
|
2,135,686
|
|
|
7,827,387
|
|
|
|
|
|
|
|
|
|
Net
(decrease)/increase in cash and cash equivalents
|
|
|
(1,509,860
|
)
|
|
3,212,177
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of period
|
|
|
2,304,227
|
|
|
436,659
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of period
|
|
$
|
794,367
|
|
$
|
3,648,836
|
|
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
Interest
|
|
$
|
10,335
|
|
$
|
18,301
|
|
|
|
|
|
|
|
|
|
Supplemental
Schedule of Non-cash Financing Activities:
|
|
|
|
|
|
|
|
Issuance
of common stock for capital commitment
|
|
|
-
|
|
|
165,000
|
|
Issuance
of restricted common stock for services
|
|
|
-
|
|
|
464,400
|
|
Issuance
of common stock for services rendered
|
|
|
500,284
|
|
|
115,704
|
|
Issuance
of restricted common stock for compensation
|
|
|
-
|
|
|
1,485,525
|
|
Forfeiture
of restricted common stock for compensation
|
|
|
(8,021
|
)
|
|
-
|
|
Issuance
of common stock for compensation
|
|
|
132,534 |
|
|
55,410 |
|
Issuance
of warrants for services
|
|
|
345,403
|
|
|
309,017
|
|
Issuance
of common stock for payment of debt
|
|
|
5,646
|
|
|
-
|
|
Compensatory
element of stock options
|
|
|
1,466,835
|
|
|
2,045,400
|
|
Vesting
of restricted common stock during period
|
|
|
732,929
|
|
|
1,285,919
|
|
See
accompanying notes to consolidated financial statements.
NEOSTEM,
INC. AND SUBSIDIARIES
NOTES
TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
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 network of adult stem cell collection centers in major
metropolitan areas of the United States. We have also 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 9, 2007.
Note
2 - Summary of Significant Accounting Policies
The
accompanying unaudited consolidated financial statements have been prepared
in
accordance with accounting principles generally accepted in the United States
of
America for interim financial information and with the instructions for Form
10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all
of
the information and footnotes required by accounting principles generally
accepted in the United States of America for complete financial statements.
In
the opinion of management, the statements contain all adjustments (consisting
only of normal recurring accruals) necessary to present fairly the financial
position as of September 30, 2008 and December 31, 2007, the results of
operations for the three and nine months ended September 30, 2008 and 2007
and
the cash flows for the nine months ended September 30, 2008 and 2007. The
results of operations for the three and nine months ended September 30, 2008
are
not necessarily indicative of the results to be expected for the full year.
The
December 31, 2007 consolidated balance sheet has been derived from the audited
consolidated financial statements at that date included in the Company's Annual
Report on Form 10-K. These unaudited consolidated financial statements should
be
read in conjunction with the consolidated financial statements and notes thereto
included in the Company's Annual Report on Form 10-K.
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.
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. The Company determines value of stock options by the Black-Scholes
option pricing model. The value of options issued during 2008 and 2007 or that
were unvested at January 1, 2007 are being recognized as an operating expense
ratably on a monthly basis over the vesting period of each option.
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.
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 generally in consideration of the Company providing access to the Company’s
know how, procedures and trademarks and in certain cases establishing a service
territory for the physician. Start up fees are recognized once the agreement
has
been signed and the physician has been qualified by the Company’s credentialing
committee. If there are any deliverables associated with the startup of a
physician practice that portion of the start up fee will be deferred until
such
deliverable is completed.
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. Recognition
of Revenue related to this line of business ended March 31, 2007.
Note
3 - Notes Payable
In
connection with the NS California acquisition, the Company assumed a 6% note
payable due a former officer of NS California in the amount of $15,812. As
of
December 31, 2007, $1,313 remained unpaid. Final payment was made in January,
2008.
The
Company has financed certain insurance polices and has notes payable at
September 30, 2008 in the amount of $131,617 related to these policies. These
notes require monthly payments and mature in less than one year.
Note
4 - Other Obligations
In
November 2007, the Company acquired the exclusive, worldwide rights to very
small embryonic like (VSEL) technology developed by researchers at the
University of Louisville. These rights were acquired through the Company’s
acquisition of Stem Cell Technologies, Inc., the licensee to a license agreement
(the “License Agreement”) with the University of Louisville. Concurrent with
acquiring these rights, the Company entered into a sponsored research agreement
(the "Sponsored Research Agreement" or "SRA") with the University of Louisville
Research Foundation (“ULRF”) under which the Company 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. 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. 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 SRA requires periodic and milestone
payments. All payments required to be made to date have been made. Under the
License Agreement, upon the commencement of the research (which has not yet
occurred pending receipt of IRB approvals and collection of the appropriate
samples), the Company will be required to make payments of $66,000 in license
issue fees and prepayment of patent costs and will be responsible for additional
patent-related costs. Thereafter, an annual license maintenance fee of $10,000
will be required upon the issuance of a licensed patent and royalties will
be
payable based upon the sale of certain licensed products. Under the Sponsored
Research Agreement, the Company agreed to support the research as set forth
in a
research plan in an amount of $375,000. 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 the term of the SRA, the first payment of $100,000
(for which there was originally a $50,000 credit) being due upon the
commencement of the research. In October 2008, the SRA was amended to provide
for certain additional research to be conducted as work preliminary to the
first
research aim under the SRA, for which approximately one-half of the $50,000
credit was utilized to pay the fee. We will require additional research and
development capacity and access to funds to meet our development obligations
under the License Agreement and develop the VSEL technology. The Company has
applied for Small Business Innovation Research (SBIR) grants and may also seek
to obtain funds through applications for other State and Federal grants, direct
investments, sublicensing arrangements as well as other funding sources to
help
offset all or a portion of these costs We are seeking to develop increased
internal research capability and sufficient laboratory facilities or establish
relationships with third parties to provide such research capability and
facilities. In this regard, in July 2008 the Company hired a Director of Stem
Cell Research and Laboratory Operations.
Note
5 - Stockholders’ Equity
Common
Stock:
Effective
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 the
Company; and (vi) assisting the Company in developing corporate partnering
relationships. As consideration for these services, in February 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. This
issuance of this stock resulted in a charge to operations for the nine months
ended September 30, 2008 of $80,000 and $95,234 for the vested portion of the
two warrants for the nine months ended September 30, 2008 . The issuance of
such
securities was subject to the approval of the American Stock Exchange, which
approval was obtained in February 2008. This issuance of securities was approved
by the Board of Directors.
In
January 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, $50,000 of her 2008 salary
would be paid in shares of the Company’s Common Stock, the number of shares to
be issued was reduced by the amount of cash required to pay the withholding
taxes associated with this amount of salary. Accordingly, Dr. Smith was issued
16,574 shares of the Company’s Common Stock pursuant to the Company’s 2003
Equity Participation Plan (the “2003 EPP”) resulting in a charge to operations
of $28,176. This issuance of shares was approved by the Compensation Committee
of the Board of Directors.
In
January 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, the number
of shares to be issued was reduced by the amount of cash required to pay the
withholding taxes associated with this amount of salary. Accordingly, Ms. Vaczy
was issued 3,729 shares of the Company’s Common Stock pursuant to the 2003 EPP
resulting in a charge to operations of $6,339. This issuance of shares was
approved by the Compensation Committee of the Board of Directors.
In
January 2008, the Company terminated an agreement with a consultant to the
Company. In connection with the cancellation of this agreement, 5,000 shares
of
Common Stock of the Company, previously issued, were surrendered by the
consultant.
In
January 2008, the Company issued 7,500 shares of the Company’s Common Stock to a
consultant to the Company pursuant to the 2003 EPP resulting in a charge to
operations of $13,475. This issuance of shares was approved by the Compensation
Committee of the Board of Directors.
In
February 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 in March 2008, and following this
approval the shares were issued. The shares issued in connection with this
agreement had a value of $72,800 which is being recognized as an operating
expense over the term of the agreement, and has resulted in a charge to
operations for the nine months ended September 30, 2008 of $48,533. This
issuance of shares was approved by the Board of Directors.
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, in the United States 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 in March 2008, and following that approval the Company
has
issued to the financial advisor, through September 30, 2008, payments in stock
under the agreement totaling 38,861 shares resulting in a charge to operations
of $ 45,650. This issuance of shares was approved by the Board of Directors.
In
February 2008, the Company issued 20,000 shares of the Company’s Common Stock to
the Company’s Director of Government Affairs pursuant to the 2003 EPP resulting
in a charge to operations of $32,000. The issuance of the shares was in lieu
of
salary payable in connection with such individual serving as the vice president
of the Stem for Life Foundation (“SFLF”), a not for profit corporation which the
Company participated in founding. In April 2008, this individual resigned
from her position as Director, Government Affairs with the Company and VP of
SFLF. This issuance of shares was approved by the Compensation Committee of
the
Board of Directors.
In
February 2008, the Company issued 5,325 shares of the Company’s Common Stock to
a consultant to the Company pursuant to the 2003 EPP. This issuance of shares
was approved by the Compensation Committee of the Board of Directors resulting
in a charge to operations of $8,646.
In
February 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 common stock that shall be issued 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 shares. Through
September 30, 2008 a total of 90,000 shares have been issued, resulting in
a
charge to operations of $141,200. This issuance of shares was approved by the
Board of Directors. The Company has terminated this Agreement and the remaining
60,000 shares will not be issued.
In
February 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 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, resulting in a charge to operations of $85,000. This
issuance of shares was approved by the Board of Directors.
In
April
2008, the Company entered into a one month non-exclusive investment banking
agreement in connection with the possible issuances by the Company of equity,
debt and/or convertible securities. In partial consideration for such services,
the Company agreed to issue 9,146 shares of common stock as a retainer. The
term
of this agreement was extended. The issuance of the securities under
this agreement was subject to the approval of the American Stock Exchange,
which approval was obtained and on May 21, 2008 the 9,146 retainer shares were
issued. This bank participated in the May 2008 private placement (as described
below). The value of this stock is $7,400. This issuance of shares was approved
by the Board of Directors.
In
May
2008, the Company completed a private placement of securities pursuant to which
$900,000 in gross proceeds were raised (the “May 2008 private placement”). On
May 20 and May 21, 2008, the Company entered into Subscription Agreements (the
"Subscription Agreements") with 16 accredited investors (the "Investors").
Pursuant to the Subscription Agreements, the Company issued to each Investor
units (the "Units") comprised of one share of its common stock, par value $.001
per share (the "Common Stock") and one redeemable five-year warrant to purchase
one share of Common Stock at a purchase price of $1.75 per share (the
"Warrants"), at a per-Unit price of $1.20. The Warrants are not exercisable
for
a period of six months and are redeemable by the Company if the Common Stock
trades at a price equal to or in excess of $2.40 for a specified period of
time.
In the May 2008 private placement, the Company issued an aggregate of 750,006
Units to Investors consisting of 750,006 shares of Common Stock and 750,006
redeemable Warrants, for an aggregate purchase price of $900,000. Dr. Robin
L.
Smith, the Company’s Chairman and Chief Executive Officer, purchased 16,667
Units for a purchase price of $20,000 and Catherine M. Vaczy, the Company’s Vice
President and General Counsel, purchased 7,500 Units for a purchase price of
$9,000. New England Cryogenic Center, Inc. (“NECC”), one of the largest
full-service cryogenic laboratories in the world and a strategic partner of
the
Company since October 2007, also participated in the offering. Pursuant to
the
terms of the Subscription Agreements, the Company was required to prepare and
file (and did so on a timely basis) no later than forty-five days (with certain
exceptions) after the closing of the May 2008 private placement, a Registration
Statement with the SEC to register the resale of the shares of Common Stock
issued to Investors and the shares of Common Stock underlying the Warrants,
which was filed on July 1, 2008. In connection with the May 2008 private
placement, the Company paid as finders’ fees to accredited investors, cash in
the amount of $3,240 and issued five year warrants to purchase an aggregate
of
35,703 shares of Common Stock (see “Warrants,” below). Cash in the amount of 4%
of the proceeds received by the Company from the future exercise of 30,000
of
the Investor Warrants is also payable to one of the finders.
In
May
2008, the Company entered into a two month agreement with a sales and marketing
consultant pursuant to which the consultant will provide consultation services
to the Company relating to business development, operations and staffing
matters. In consideration for such services, the Company agreed to issue to
the
Consultant pursuant to the 2003 EPP: (i) 20,000 shares of Common Stock which
shall vest as to 10,000 shares on the last day of each 30 day period during
the
term of the consulting agreement; and (ii) an option to purchase 20,000 shares
of Common Stock at a per share purchase price equal to the closing price of
the
Common Stock on the date of grant that shall vest and become exercisable as
to
10,000 shares of Common Stock on the last day of each 30 day period during
the
term of the consulting agreement, subject in each case to the continued
effectiveness of the agreement. All of such shares are subject to a six month
period during which Consultant has agreed none of these shares will be sold.
The
issuance of the equities resulted in a charge to operations of $27,600 for
the
Common Stock that was issued and $22,870 for the stock options. This issuance
of
securities was approved by the Compensation Committee of the Board of Directors.
In July 2008, the Company entered into a two month extension of this agreement
pursuant to which the consultant will continue to provide consultation services
to the Company relating to business development, operations and staffing
matters. In consideration for such services, the Company has agreed to issue
to
the Consultant pursuant to the 2003 EPP (i) 20,000 shares of Common Stock which
shall vest as to 10,000 shares on the last day of each 30 day period during
the
term of the extended consulting agreement; and (ii) an option to purchase 20,000
shares of Common Stock at a per share purchase price equal to the closing price
of the Common Stock on the date of execution of the extended agreement that
shall vest and become exercisable as to 10,000 shares of Common Stock on the
last day of each 30 day period during the extended term of the consulting
agreement, subject in each case to the continued effectiveness of the extended
agreement. In the event of full time employment of the consultant this vesting
will be accelerated. All of such shares are subject to a six month period during
which Consultant has agreed none of these shares will be sold. This issuance
of
shares was approved by the Compensation Committee of the Board of Directors.
The
issuance of these shares has resulted in a charge to operations of $16,400
and
the issuance of the options resulted in a charge to operations of
$13,926.
In
May
2008, the Company entered into a two month agreement with a consultant pursuant
to which the consultant will provide services to the Company relating to
government affairs and related areas. In consideration for such services, the
Company agreed to issue to the Consultant pursuant to the 2003 EPP: (i) 20,000
shares of Common Stock which shall vest as to 10,000 shares on the last day
of
each 30 day period during the term of the consulting agreement; and (ii) an
option to purchase 20,000 shares of Common Stock at a per share purchase price
equal to the closing price of the Common Stock on the date of grant that shall
vest and become exercisable as to 10,000 shares of Common Stock on the last
day
of each 30 day period during the term of the consulting agreement, subject
in
each case to the continued effectiveness of the agreement. All of such shares
are subject to a six month period during which Consultant has agreed none of
the
shares will be sold. The issuance of these equities resulted in a charge to
operations of $26,000 for the Common Stock that was issued and $23,620 for
the
stock options. This issuance of securities was approved by the Compensation
Committee of the Board of Directors.
In
May
2008, the Company issued to a business development consultant for services
previously rendered, 1,000 shares of Common Stock under the 2003 EPP which
vested immediately. The issuance of these shares resulted in a charge to
operations of $960. This issuance of shares was approved by the Compensation
Committee of the Board of Directors.
In
May
2008, the Company entered into a three month consulting agreement with a public
relations and communications consultant focusing on specific consumer
demographics. As partial consideration for these services, the Company agreed
to
issue: (i) 20,000 shares of Common Stock on each of (a) the date of execution
of
the agreement (the “Execution Date”), (b) thirty days after the Execution Date,
and (c) sixty days after the Execution Date; and (ii) a five year warrant to
purchase up to 30,000 shares of Common Stock (as described under “Warrants,”
below), exercisable as to 10,000 shares each at $3.00, $4.00 and $5.00,
respectively. The issuance of the securities under this agreement was subject
to
the approval of the American Stock Exchange, which approval was obtained on
September 20, 2008 and the initial payments in Common Stock and the Warrant
were
issued. Through September 30, 2008, the Company issued 40,000 shares of the
Company’s common stock resulting in a charge to operations of $36,800. This
issuance of securities was approved by the Board of Directors. On July 26,
2008,
the Company terminated this Agreement and the final 20,000 shares will not
be
issued.
In
June
2008, the Company entered into a six month consulting agreement with an investor
relations advisor. As consideration for these services, the Company issued
(i)
50,000 shares of the Company’s common stock, vesting as to 25,000 shares on the
date of execution of the consulting agreement and 25,000 shares 91 days
thereafter, which resulted in a charge to operations of $42,500 and (ii) a
five
year warrant to purchase an aggregate of 250,000 shares of Common Stock (as
described under “Warrants” below). The issuance of such securities was subject
to the approval of the American Stock Exchange, which approval was obtained
on
June 20, 2008 and the initial payment in Common Stock and the Warrant were
issued. This issuance of securities was approved by the Board of Directors.
Pursuant to the terms of the agreement, the Company was required to prepare
and
file (and did so on a timely basis) no later than July 3, 2008, a Registration
Statement with the SEC to register the resale of the shares of Common Stock
issued to the consultant and the shares of Common Stock underlying the warrant.
On
August
29, 2008, the Company entered into letter agreements with Dr. Robin L. Smith,
its Chairman of the Board and Chief Executive Officer, Larry A. May, its Chief
Financial Officer and Catherine M. Vaczy, its Vice President and General
Counsel, as well as two additional employees, pursuant to which, in response
to
the Company’s efforts to conserve cash, each of such persons agreed to accept
shares of the Company’s Common Stock in lieu of unpaid accrued salary. Dr. Smith
agreed to accept in lieu of $24,437.50 in unpaid salary accrued during the
period July 15, 2008 through August 31, 2008, 33,941 shares of the Company's
Common Stock. Mr. May agreed to accept in lieu of $10,687.50 in unpaid salary
accrued during the period July 15, 2008 through August 31, 2008, 14,844 shares
of the Company's Common Stock. Ms. Vaczy agreed to accept in lieu of $10,578.50
in unpaid salary accrued during the period July 15, 2008 through August 31,
2008, 14,692 shares of the Company's Common Stock. The two other employees
agreed to accept in lieu of an aggregate of $12,250 in unpaid salary accrued
during the period July 15, 2008 through August 31, 2008, an aggregate of 17,014
shares of the Company’s Common Stock. The number of shares so issued to each
such person was based on the closing price of the Common Stock on August 27,
2008, $.72, for which the Company agreed to pay total withholding taxes. All
such shares were issued under the 2003 EPP. The Compensation Committee of the
Board of Directors approved these arrangements on August 28, 2008. In addition,
the vesting of an aggregate of 47,500 shares of the Company’s Common Stock
granted to such persons under the 2003 EPP on September 27, 2007 was accelerated
from September 27, 2008 to August 28, 2008, which arrangements were also
approved by the Compensation Committee of the Board of Directors on August
28,
2008.
On
September 2, 2008, the Company completed a private placement of securities
pursuant to which $1,250,000 in gross proceeds was raised (the “September 2008
private placement”). On September 2, 2008, the Company entered into a
Subscription Agreement (the "Subscription Agreement") with RimAsia Capital
Partners, L.P., a pan-Asia private equity firm (the "Investor"). Pursuant to
the
Subscription Agreement, the Company issued to the Investor one million units
(the "Units") at a per-unit price of $1.25, each Unit comprised of one share
of
its common stock, par value $.001 per share (the "Common Stock") and one
redeemable five-year warrant to purchase one share of Common Stock at a purchase
price of $1.75 per share (the "Warrants"). The Warrants are not exercisable
for
a period of six months and are redeemable by the Company if the Common Stock
trades at a price equal to or in excess of $3.50 for a specified period of
time
or the dollar value of the trading volume of the Common Stock for each day
during a specified period of time equals or exceeds $100,000. In the September
2008 private placement, the Company thus issued 1,000,000 Units to the Investor
consisting of 1,000,000 shares of Common Stock and 1,000,000 redeemable
Warrants, for an aggregate purchase price of $1,250,000. Pursuant
to the terms of the Subscription Agreement, the Company is required to prepare
and file no later than one hundred and eighty (180) days after the closing
of
the September 2008 private placement, a Registration Statement with the SEC
to
register the resale of the shares of Common Stock issued to Investor and the
shares of Common Stock underlying the Warrants.
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 4,770,997 shares of common stock are reserved for
issuance upon exercise of outstanding warrants as of September 30, 2008 at
prices ranging from $0.71 to $14.54 and expiring through September 2014.
In
January 2008, the Company entered into a one year consulting agreement with
a
financial services firm (as described under “Common Stock” above). As
consideration for these services, in February 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,
resulting in a charge to operations of $95,234 for the nine months ended
September 30, 2008. The issuance of such securities was subject to the approval
of the American Stock Exchange, which approval was obtained in February 2008.
In
May
2008, the Company completed a private placement of securities pursuant to which
$900,000 in gross proceeds were raised (as described under “Common Stock,”
above). Pursuant to the May 2008 private placement, the Company issued to each
Investor units comprised of one share of Common Stock and one redeemable
five-year warrant to purchase one share of Common Stock at a purchase price
of
$1.75 per share (the "Warrants"), at a per-Unit price of $1.20. The Warrants
are
not exercisable for a period of six months and thereafter are exercisable
through May 19, 2013, and are redeemable by the Company if the Common Stock
trades at a price equal to or in excess of $2.40 for a specified period of
time.
The Investors received certain registration rights for the shares of Common
Stock underlying the Warrants, as described under “Common Stock,” above, and in
July 2008 the Company timely filed a registration statement relating thereto.
The warrants issued in connection with offering have a fair value of $518,000.
As also described, the Company issued warrants to purchase an aggregate of
35,705 shares of Common Stock in partial payment of finder’s fees (the “Finder’s
Warrants”), which Finder’s Warrants contain generally the same terms as the
Warrants except they contain a cashless exercise feature and have piggyback
registration rights for the resale of the shares underlying the Finder’s
Warrants. The Finder Warrants have a fair value of $23,500.
In
May
2008, the Company entered into a three month consulting agreement with a public
relations and communications consultant focusing on specific consumer
demographics (as described under “Common Stock,” above). As partial
consideration for these services, the Company issued a five year warrant to
purchase up to 30,000 shares of Common Stock, exercisable as to 10,000 shares
each at $3.00, $4.00 and $5.00, respectively, all as set forth in the Warrant.
The issuance of the securities under this agreement was subject to the approval
of the American Stock Exchange, which approval was obtained on June 20,
2008 and the initial payments in Common Stock and the Warrant were issued.
The
Warrant is exercisable through June 19, 2013. This issuance of securities was
approved by the Board of Directors. The issuance of the Warrant resulted in
a
charge to operations of $19,828.
In
June
2008, the Company entered into a six month consulting agreement with an investor
relations advisor (as described under “Common Stock,” above). As partial
consideration for these services, the Company issued to the advisor, a five
year
warrant (the “Warrant”) to purchase up to 250,000 shares of Common Stock,
vesting as to 41,667 shares on the date of execution of the consulting agreement
(the “Execution Date”) and each of the first, second, third, fourth and fifth
monthly anniversaries of the Execution Date (each, a “Vesting Date”) (except it
shall vest as to 41,666 shares on the fourth and fifth anniversaries); provided,
that on each Vesting Date the consulting agreement shall continue to be in
effect, at an exercise price per share as follows: (a) as to 50,000 shares
at an
exercise price of $1.00 per share, (b) as to an additional 50,000 shares at
an
exercise price of $1.30 per share, (c) as to an additional 50,000 shares at
an
exercise price of $1.75 per share; (d) as to an additional 50,000 shares at
an
exercise price of $2.00 per share, and (e) as to an additional 50,000 shares
at
an exercise price of $3.00 per share, all as set forth in the Warrant. The
issuance of the securities under this agreement was subject to the approval
of the American Stock Exchange, which approval was obtained in June 2008
and the initial payments in Common Stock and the Warrant were issued. The
Warrant is exercisable until June 19, 2013. Pursuant to the terms of the
agreement, and as described under “Common Stock,” above, the Company was
required to prepare and file (and did so on a timely basis) no later than July
3, 2008, a Registration Statement with the SEC to register the resale of the
shares of Common Stock issued to the consultant and the shares of Common Stock
underlying the Warrant. The issuance of the Warrant resulted in a charge to
operations of $145,430 for the nine months ended September 30, 2008.
In
July,
2008, in furtherance of the Company’s desire to increase its presence in the
health and wellness industry, the Company entered into a two year consulting
agreement with Margula Company LLC (“Margula”), pursuant to which Margula will
provide various promotional services to the Company, including various speaking
engagements (the “Margula Consulting Agreement”). These services will be
primarily provided through Suzanne Somers. In consideration therefor, the
Company issued to Margula a five year warrant (the “Warrant”) to purchase up to
an aggregate of 600,000 shares of Common Stock at $0.78 per share (the closing
price of the Common Stock on the American Stock Exchange on the commencement
date of the agreement) (the “Commencement Date”), which shall vest and become
exercisable as to: (i) 200,000 shares upon the completion of a stated milestone;
(ii) 100,000 shares upon the earlier of the completion of a stated milestone
(which milestone was achieved on October 13, 2008 and on that date the Warrant
vested as to such 100,000 shares) and December 31, 2008; (iii) 100,000 shares
upon the earlier of the completion of an additional stated milestone and
December 31, 2008; (iv) 100,000 shares upon the earlier of the completion of
a
stated milestone and September 30, 2009; and (v) 4,167 shares on each monthly
anniversary of the Commencement Date through July 28, 2010 (with the final
monthly vesting being 4,159), so long as on the respective vesting date the
Margula Consulting Agreement shall not have been terminated. The effectiveness
of the Warrant was subject to the prior approval of the American Stock Exchange,
which approval was obtained on September 2, 2008. Pursuant to the terms of
the
Warrant, the Company is required to prepare and file no later than February
1,
2009, a Registration Statement with the SEC to register the resale of the shares
of Common Stock underlying the Warrant. This issuance of securities was approved
by the Board of Directors. The value of these warrants is $421,260 and resulted
in a charge to operations of $84,912.
On
September 2, 2008, the Company completed a private placement of securities
pursuant to which $1,250,000 in gross proceeds was raised (as described under
“Common Stock” above). Pursuant to the September 2008 private placement , the
Company issued to the Investor one million Units at a per-unit price of $1.25,
each Unit comprised of one share Common Stock and one redeemable five-year
warrant to purchase one share of Common Stock at a purchase price of $1.75
per
share (the "Warrants"). The Warrants are not exercisable for a period of six
months and are redeemable by the Company if the Common Stock trades at a price
equal to or in excess of $3.50 for a specified period of time or the dollar
value of the trading volume of the Common Stock for each day during a specified
period of time equals or exceeds $100,000. The Investor received certain
registration rights for the shares underlying the Warrants, as described under
“Common Stock” above. These warrants have a value of approximately $583,000.
In
the
Company’s August 2007 public offering, units were issued comprised of shares of
the Company’s Common Stock and Class A warrants to purchase an aggregate of
635,000 shares of Common Stock. The Company also issued to its underwriter
group
warrants (the “Underwriter Warrants”) to purchase an aggregate of 95,250 shares
of Common Stock. The Class A Warrants were issued pursuant to the terms of
a
Restated Warrant Agreement made as of August 14, 2007 between the Company and
the Class A Warrant agent. The Underwriter Warrants were issued individually
to
each member of the underwriting group. The Underwriter Warrants had a higher
exercise price ($6.50) than that of the Class A Warrants, and unlike the Class
A
Warrants, could not be exercised for a period of one year from the date of
issuance and contained provisions for cashless exercise. In
September, 2008 the Company made the determination that certain of the
Underwriter Warrants, exercisable for an aggregate of 86,865 shares of Common
Stock, should be accounted for as a derivative liability and reported on our
balance sheet as such commencing as of September 30, 2008. For information
purposes, upon the closing of our August 2007 public offering the fair value
and
thus the derivative liability value of these certain Underwriter Warrants was
$195,551 and in the table below are the derivative liability values of these
Underwriter Warrants at end of each quarter since the closing of our August
2007
public offering:
Date
|
|
Derivative
Liability Value
|
|
9/30/2007
|
|
$
|
107,713
|
|
12/31/2007
|
|
$
|
4,344
|
|
3/31/2008
|
|
$
|
5,212
|
|
6/30/2008
|
|
$
|
35
|
|
9/30/2008
|
|
$
|
13
|
|
At
September 30, 2008 all of our outstanding warrants by range of exercise prices
are as follows:
|
|
Number
Outstanding
|
|
Weighted Average
Remaining
|
|
Number
Exercisable
|
|
Exercise Price
|
|
September 30, 2008
|
|
Contractual Life (years)
|
|
September 30, 2008
|
|
$
0.71 to $ 4.17
|
|
|
2,675,709
|
|
|
4.79
|
|
|
1,077,379
|
|
$
4.17 to $ 7.63
|
|
|
977,011
|
|
|
3.83
|
|
|
943,675
|
|
$
7.63 to $ 11.08
|
|
|
1,086,278
|
|
|
3.68
|
|
|
1,086,278
|
|
$11.08
to $ 14.54
|
|
|
31,999
|
|
|
.03
|
|
|
31,999
|
|
|
|
|
4,770,997
|
|
|
|
|
|
3,139,331
|
|
Options:
The
Company’s 2003 Equity Participation Plan 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.
The
Company's results included share-based compensation expense of $323,424 and
$1,471,505 for the three months ended September 30, 2008 and 2007, respectively
and $1,525,649 and
$2,045,400
for
the
nine months ended September 30, 2008 and 2007, respectively. Such amounts have
been included in the consolidated statements of operations within general and
administrative expenses.
Stock
option compensation expense is the estimated fair value of options granted
amortized on a straight-line basis over the requisite service period for the
entire portion of the award.
The
range
of assumptions made in calculating the fair values of options are as follows:
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
Expected
term (in years)
|
|
|
10
|
|
|
10
|
|
|
10
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
volatility
|
|
|
119%
to 158%
|
|
|
343%
to 346%
|
|
|
100%
to 158%
|
|
|
133%
to 346%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
dividend yield
|
|
|
0%
|
|
|
0%
|
|
|
0%
|
|
|
0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free
interest rate
|
|
|
3.64%
to 4.09%
|
|
|
4.58%
to 4.95%
|
|
|
3.64%
to 4.19%
|
|
|
4.51%
to 4.95%
|
|
Stock
option activity under the 2003 Equity Participation Plan is as
follows:
|
|
Number of
Shares (1)
|
|
Range of
Exercise Price
|
|
Weighted
Average
Exercise Price
|
|
Weighted Average
Remaining
Contractual Term
|
|
Aggregate
Intrinsic
Value
|
|
Balance at December 31,
2007
|
|
|
1,113,800
|
|
$
|
1.70
- $25.00
|
|
$
|
5.66
|
|
|
|
|
|
|
|
Granted
|
|
|
893,000
|
|
$
|
0.71
- $1.67
|
|
$
|
1.53
|
|
|
|
|
|
|
|
Exercised
|
|
|
(2,500
|
)
|
|
-
|
|
$
|
0.75
|
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(304,000
|
)
|
|
-
|
|
$
|
2.87
|
|
|
|
|
|
|
|
Balance
at September 30, 2008
|
|
|
1,700,300
|
|
$
|
0.71
- $25.00
|
|
$
|
4.00
|
|
|
8.21
|
|
$
|
9,425
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
and Exercisable at September 30, 2008
|
|
|
1,127,050
|
|
|
|
|
$
|
4.43
|
|
|
7.75
|
|
$
|
7,363
|
|
(1) |
—
All options are exercisable for a period of ten
years.
|
|
|
Number Outstanding
|
|
Weighted Average
Remaining
|
|
Number
Exercisable
|
|
Exercise Price
|
|
September 30, 2008
|
|
Contractual Life (years)
|
|
September 30, 2008
|
|
$0.71 to
$ 4.17
|
|
|
807,000
|
|
|
9.32
|
|
|
472,750
|
|
$4.17
to $ 7.63
|
|
|
802,200
|
|
|
8.33
|
|
|
571,200
|
|
$
7.63 to $ 11.08
|
|
|
50,000
|
|
|
7.20
|
|
|
42,000
|
|
$11.08
to $14.54
|
|
|
3,000
|
|
|
5.42
|
|
|
3,000
|
|
$14.54
to $25.00
|
|
|
38,100
|
|
|
6.77
|
|
|
38,100
|
|
|
|
|
1,700,300
|
|
|
|
|
|
1,124,050
|
|
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
September 30, 2008, there was approximately $1,655,900 of total unrecognized
compensation costs related to unvested stock option awards of which $236,000
of
unrecognized compensation expense is related to stock options that vest over
a
weighted average life of .5 years. The balance of $1,419,900 of unrecognized
compensation costs is related to stock options that vest based on the
accomplishment of business milestones.
|
|
Options
|
|
Weighted
Average Grant
Date Fair
Value
|
|
Non-Vested
at December 31, 2007
|
|
|
432,668
|
|
$
|
4.94
|
|
Issued
|
|
|
893,000
|
|
|
1.46
|
|
Canceled
|
|
|
(304,000
|
)
|
|
2.77
|
|
Vested
|
|
|
(445,918
|
)
|
|
1.98
|
|
Exercised
|
|
|
(2,500
|
)
|
|
|
|
Non-Vested
at September 30, 2008
|
|
|
573,250
|
|
$
|
3.18
|
|
The
total
value of shares vested during the nine months ended September 30, 2008 was
$1,525,649.
Note
6 - 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 was
operating 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
7 - 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. 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, $24,022 was due Mr. Aholt pursuant to the terms of the
Settlement Agreement which was paid, in full, in the quarter ending March 31,
2008.
Note
8 - Subsequent Events
October
2008 Private Placement
On
October 23, 2008, the Company completed a private placement of securities
pursuant to which $250,000 in gross proceeds was raised (the “October 2008
private placement”). On October 15, 2008, the Company entered into a
Subscription Agreement (the "Subscription Agreement") with an accredited
investor listed therein (the "Investor"). Pursuant to the Subscription
Agreement, the Company issued to the Investor 200,000 units (the "Units") at
a
per-unit price of $1.25, each Unit comprised of one share of its Common Stock
and one five-year warrant to purchase one share of Common Stock at a purchase
price of $1.75 per share (the "Warrants"). The Warrants are not exercisable
for
a period of six months. In the October 2008 private placement, the Company
thus
issued 200,000 Units to the Investor consisting of 200,000 shares of Common
Stock and 200,000 Warrants, for an aggregate purchase price of $250,000. The
issuance of the Units was subject to the prior approval of the American Stock
Exchange, which approval was obtained on October 23, 2008, and on that date
the
Units were issued. Pursuant to the terms of the Subscription Agreement, the
Company is required to prepare and file no later than one hundred and eighty
(180) days after the final closing of the October 2008 private placement, a
Registration Statement with the SEC to register the resale of the shares of
Common Stock issued to the Investor and the shares of Common Stock underlying
the Warrants.
Agreement
and Plan of Merger
On
November 2, 2008, the Company entered into an Agreement and Plan of Merger
(the
“Merger Agreement”), with China Biopharmaceuticals Holdings, Inc., a Delaware
corporation ("CBH"), China Biopharmaceuticals Corp., a British Virgin Islands
corporation and wholly-owned subsidiary of CBH ("CBC"), and CBH Acquisition
LLC,
a Delaware limited liability company and wholly-owned subsidiary of NeoStem
("Merger Sub"). The Merger Agreement contemplates the merger of CBH with and
into Merger Sub, with Merger Sub as the surviving entity (the “Merger”);
provided, that prior to the consummation of the Merger, CBH will spin off all
of
its shares of capital stock of CBC to CBH’s stockholders in a liquidating
distribution so that the only material assets of CBH following such spin-off
(the "Spin-off") will be CBH's 51% ownership interest in Suzhou Erye
Pharmaceuticals Company Ltd. (“Erye”), a Sino-foreign joint venture with limited
liability organized under the laws of the People’s Republic of China (the
"PRC"), plus net cash which shall not be less than $550,000. Erye specializes
in
research and development, production and sales of pharmaceutical products,
as
well as chemicals used in pharmaceutical products. Erye, which has been in
business for more than 50 years, currently manufactures over 100 drugs on seven
Good Manufacturing Practices (GMP) lines, including small molecule drugs.
Pursuant
to the terms and subject to the conditions set forth in the Merger Agreement,
all of the shares of common stock, par value $.01 per share, of CBH ("CBH Common
Stock"), issued and outstanding immediately prior to the effective time of
the
Merger (the "Effective Time") will be converted into the right to receive,
in
the aggregate, 7,500,000 shares of NeoStem Common Stock (of which 150,000 shares
will be held in escrow pursuant to the terms of an escrow agreement to be
entered into between CBH and NeoStem). Subject to the cancellation of
outstanding warrants to purchase shares of CBH Common Stock held by RimAsia
Capital Partners, L.P. ("RimAsia"), a current holder of approximately 14% of
the
outstanding shares of NeoStem Common Stock and the sole holder of shares of
Series B Convertible Preferred Stock, par value $0.01 per share, of CBH (the
"CBH Series B Preferred Stock"), all of the shares of CBH Series B Preferred
Stock issued and outstanding immediately prior to the Effective Time will be
converted into (i) 5,383,009 shares of NeoStem Common Stock, (ii) 6,977,512
shares of Series C Convertible Preferred Stock, without par value, of NeoStem,
each with a liquidation preference of $1.125 per share and convertible into
shares of NeoStem Common Stock at a conversion price of $.90 per share, and
(iii) warrants to purchase 2,400,000 shares of NeoStem Common Stock at an
exercise price of $0.80 per share.
At
the
Effective Time, in exchange for cancellation of all of the outstanding shares
of
Series A Convertible Preferred Stock, par value $.01 per share, of CBH (the
"CBH
Series A Preferred Stock") held by Stephen Globus, a director of CBH, and/or
related persons, NeoStem will issue to Mr. Globus and/or related persons an
aggregate of 50,000 shares of NeoStem Common Stock. NeoStem also will issue
60,000 shares of NeoStem Common Stock to Mr. Globus and 40,000 shares of NeoStem
Common Stock to Chris Peng Mao, the Chief Executive Officer of CBH, in exchange
for the cancellation and the satisfaction in full of indebtedness in the
aggregate principal amount of $90,000, plus any and all accrued but unpaid
interest thereon, and other obligations of CBH to Globus and Mao. NeoStem will
bear 50% of up to $450,000 of CBH's expenses post-merger, and satisfaction
of
the liabilities of Messrs. Globus and Mao will count toward that obligation.
NeoStem also will issue 200,000 shares to CBC to be held in escrow, payable
if
NeoStem successfully consummates its previously announced acquisition of control
of Shandong New Medicine Research Institute of Integrated Traditional and
Western Medicine Limited Liability Company and there are no further liabilities
above $450,000.
Also
at
the Effective Time, subject to acceptance by the holders of all of the
outstanding warrants to purchase shares of CBH Common Stock (other than warrants
held by RimAsia), such warrants shall be canceled and the holders thereof shall
receive warrants to purchase up to an aggregate of up to 2,012,097 shares of
NeoStem Common Stock at an exercise price of $2.50 per share.
Upon
consummation of the transactions contemplated by the Merger, NeoStem will own
51% of the ownership interests in Erye, and Suzhou Erye Economy and Trading
Co.
Ltd., a limited liability company organized under the laws of the PRC ("EET"),
will own the remaining 49% ownership interest. In connection with the execution
of the Merger Agreement, NeoStem, Merger Sub and EET have negotiated a revised
joint venture agreement (the "Joint Venture Agreement"), which, subject to
finalization and approval by the requisite PRC governmental authorities, will
become effective and will govern the rights and obligations with respect to
their respective ownership interests in Erye. Pursuant to the terms and
conditions of the Joint Venture Agreement, dividend distributions to EET and
NeoStem will be made in proportion to their respective ownership interests
in
Erye; provided, however, that for the three-year period commencing on the first
day of the first fiscal quarter after the Joint Venture Agreement becomes
effective, (i) 49% of undistributed profits (after tax) will be distributed
to
EET and lent back to Erye by EET for use by Erye in connection with the
construction of a new plant for Erye; (ii) 45% of the net profit (after tax)
will be provided to Erye as part of the new plant construction fund, which
will
be characterized as paid-in capital for NeoStem's 51% interest in Erye; and
(iii) 6% of the net profit will be distributed to NeoStem directly for NeoStem’s
operating expenses. In the event of the sale of all of the assets of Erye or
liquidation of Erye, NeoStem will be entitled to receive the return of such
additional paid-in capital before distribution of Eyre’s assets is made based
upon the ownership percentages of NeoStem and EET, and upon an initial public
offering of Erye which raises at least 50,000,000 RMB (or approximately U.S.
$7,100,000), NeoStem will be entitled to receive the return of such additional
paid-in capital.
Pursuant
to the Merger Agreement, NeoStem has agreed to use its reasonable best efforts
to cause the members of NeoStem's Board of Directors to consist of the following
five members promptly following the Effective Time: Robin L. Smith (Chairman),
current Chairman of the Board and Chief Executive Officer of NeoStem; Madam
Zhang Jian, the Chairman and Chief Financial Officer of CBH, the General Manager
of Erye and a 10% holder of EET, and Richard Berman, Steven S. Myers and Joseph
Zuckerman, each a director of NeoStem (the latter three to be independent
directors, as defined under the American Stock Exchange listing standards).
Within four months following the Effective Time, NeoStem’s Board of Directors
will, in accordance with NeoStem’s bylaws, as amended, cause the number of
members constituting the Board of Directors of NeoStem to be increased from
five
to seven and to fill the two vacancies created thereby with a designee of
RimAsia, who will initially be Eric Wei, and with an independent director (as
defined under the American Stock Exchange listing standards) to be selected
by a
nominating committee of the Board of Directors of NeoStem. NeoStem has started
to identify candidates for the independent director positions to contribute
to
the new direction of NeoStem.
In
connection with the Merger, NeoStem intends to file with the Securities and
Exchange Commission (the “SEC”) a combined registration statement and proxy
statement on Form S-4 (including any amendments, supplements and exhibits
thereto, the “Proxy Statement/Registration Statement”) with respect to, among
other things, the shares of NeoStem Common Stock to be issued in the Merger
(the
"Issuance") and a proposed amendment to NeoStem’s certificate of incorporation
to effect an increase in NeoStem’s authorized shares of preferred stock, without
par value, that may be necessary to consummate the transactions contemplated
by
the Merger Agreement (the “Charter Amendment"). The Merger has been approved by
the NeoStem Board of Directors. The Issuance and Charter Amendment contemplated
by the Merger Agreement are subject to approval by the stockholders of NeoStem
and the Merger, the Spin-Off and the other transactions contemplated by the
Merger Agreement are subject to approval by the stockholders of CBH.
In
connection with execution of the Merger Agreement, each of the officers and
directors of CBH, RimAsia, Erye and EET have entered into a lock-up and voting
agreement, pursuant to which they have agreed to vote their shares of CBH Common
Stock in favor of the Merger and to the other transactions contemplated by
the
Merger Agreement and are prohibited from selling their CBH Common Stock and/or
NeoStem Common Stock from November 2, 2008 through the expiration of the
six-month period immediately following the consummation of the transactions
contemplated by the Merger Agreement (the "Lock-Up Period"). Similarly, the
officers and directors of NeoStem have entered into a lock-up and voting
agreement, pursuant to which they have agreed to vote their shares of NeoStem
Common Stock in favor of the Issuance and are prohibited from selling their
NeoStem Common Stock during the Lock-Up Period.
The
transactions contemplated by the Merger Agreement are subject to the
authorization for listing on the American Stock Exchange (or any other stock
exchange on which shares of NeoStem Common Stock are listed) of the shares
to be
issued in connection with the Merger, shareholder approval, approval of
NeoStem's acquisition of 51% ownership interest in Erye by relevant PRC
governmental authorities, receipt of a fairness opinion and other customary
closing conditions set forth in the Merger Agreement. The Merger currently
is
expected to be consummated in the first quarter of 2009.
The
foregoing description of the Merger Agreement is not complete and is qualified
in its entirety by reference to the Merger Agreement, which is incorporated
as
Exhibit 2.1 hereto.
Share
Exchange
On
November 2, 2008, the Company entered into a Share Exchange Agreement (the
“Share Exchange Agreement”), with China StemCell Medical Holding Limited, a Hong
Kong company (the "HK Entity"), Shandong New Medicine Research Institute of
Integrated Traditional and Western Medicine Limited Liability Company, a China
limited liability company ("Shandong"), Beijing HuaMeiTai Bio-technology Limited
Liability Company (“WFOE”) and Zhao Shuwei, the sole shareholder of the HK
Entity (“HK Shareholder”), pursuant to which NeoStem agreed to acquire from the
HK Entity all of the outstanding interests in the HK Entity, and through a
series of contractual arrangements described below, establish control over
Shandong. Shandong is
engaged
in the business (the "Shandong Business") of research, development
popularization and transference of regenerative medicine technology (except
for
those items for which it does not have special approval) in the PRC.
The
HK
Shareholder owns 100% of the ownership interests in the HK Entity, and the
HK
Entity owns 100% of ownership interests in the WFOE. The WFOE has established
control over Shandong through a series of contractual arrangements memorialized
through several documents known as variable interest entity documents
(collectively, the “VIE Documents”). The relevant VIE Documents, to which the
WFOE, Shandong and the founder of Shandong, Dr. Wang Taihua, are parties,
include a power of attorney, an exclusive technical and consulting service
agreement, a loan agreement, a share pledge agreement and an exclusive option
agreement.
Pursuant
to the terms and subject to the conditions set forth in the Share Exchange
Agreement, NeoStem will acquire all of the outstanding shares of capital stock
of the HK Entity (the "HK Shares"), in exchange (the "Share Exchange") for
up to
5,000,000 shares (the “Exchange Shares”) of NeoStem Common Stock. The Exchange
Shares will be issuable at the closing of the transactions contemplated by
the
Share Exchange Agreement (the "Closing") as follows: (i) 4,000,000 shares of
NeoStem Common Stock will be issued to the HK Shareholder and (ii) 1,000,000
shares of NeoStem Common Stock will be issued to the HK Shareholder in escrow
(the "Escrow Shares"), the certificates for which will be held pursuant to
the
terms of an escrow agreement to be entered into between NeoStem and the HK
Shareholder. Subject to the terms and conditions of the escrow agreement,
500,000 Escrow Shares will be released from escrow within 30 days after the
first 50,000,000 RMB (or approximately U.S. $7,100,000) sales revenue are
achieved in the PRC by Shandong (the "Revenue Milestone") and 500,000 Escrow
Shares will be released within 30 days after the last of three collection and
storage banks in three provinces in the PRC (i.e.,
one
such bank in each such province) is established by Shandong (the "Storage Bank
Milestone"). 500,000 Escrow Shares will revert to NeoStem if the Revenue
Milestone is not met on or before December 31, 2009 and 500,000 Escrow Shares
will revert to NeoStem if the Storage Bank Milestone is not met on or before
the
date of the second anniversary of the Closing.
In
connection with the Share Exchange, NeoStem intends to file with the SEC the
combined Proxy Statement/Registration Statement referred to under Agreement
and
Plan of Merger (above), to, among other things, seek stockholder approval of
the
Share Exchange. The Share Exchange has been approved by the NeoStem Board of
Directors, subject to approval by the stockholders of NeoStem.
The
transactions contemplated by the Share Exchange Agreement are subject to the
authorization for listing on the American Stock Exchange (or any other stock
exchange on which shares of NeoStem Common Stock are listed or quoted) of the
Exchange Shares, stockholder approval, regulatory approval and other customary
closing conditions set forth in the Share Exchange Agreement. The Share Exchange
currently is expected to close in the first quarter of 2009.
The
foregoing description of the Share Exchange Agreement is not complete and is
qualified in its entirety by reference to the Share Exchange Agreement, which
is
incorporated as Exhibit 2.2 hereto.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF
OPERATIONS
This
Quarterly Report on Form 10-Q and the documents incorporated herein contain
"forward-looking statements" within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements involve known
and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements of the Company, or industry results, to
be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. When used in this
Quarterly Report, statements that are not statements of current or historical
fact may be deemed to be forward-looking statements. Without limiting the
foregoing, the words "plan", "intend," "may," "will," "expect," "believe",
"could," "anticipate," "estimate," or "continue" or similar expressions or
other
variations or comparable terminology are intended to identify such
forward-looking statements. Forward-looking statements may not be realized
due
to a variety of factors, including, without limitation, (i) the Company’s
ability to manage the business despite continuing operating losses and cash
outflows; (ii) the Company’s ability to obtain sufficient capital or a strategic
business arrangement to fund its operations; (iii) the Company’s ability to
build the management and human resources and infrastructure necessary to support
the growth of the business; (iv) competitive factors and developments beyond
the
Company’s control; (v) scientific and medical developments beyond the
Company’s control; (vi) the Company’s inability to obtain appropriate
governmental licenses or any other adverse effect or limitations caused by
government regulation of the business; (vii) whether any of the Company’s
current or future patent applications result in issued patents; and (viii)
the
other factors listed under “Risk Factors” in our annual report on Form 10-K for
the year ended December 31, 2007 filed with the SEC on March 28, 2008, as
amended by Amendment No. 1 on Form 10-K/A filed with the SEC on April 29, 2008
(collectively, the “NeoStem Form 10-K) and other reports that we file with the
Securities and Exchange Commission. Additional risks and uncertainties relate
to
the proposed Merger and proposed Share Exchange that may cause actual future
experience and results to differ materially from those discussed in these
forward-looking statements. Important factors related to the proposed Merger
that might cause such a difference include, but are not limited to, costs
related to the Merger; failure of NeoStem's or CBH’s stockholders to approve the
Merger; NeoStem's or CBH's inability to satisfy the conditions of the Merger;
NeoStem's inability to maintain its American Stock Exchange listing; the
inability to integrate NeoStem’s and CBH's businesses successfully; the need for
outside financing to meet capital requirements; failure to have an effective
Joint Venture Agreement satisfactory to the parties and regulatory authorities
and other events and factors disclosed herein under Part II, Item 1A, Risk
Factors, and previously and from time to time in NeoStem’s filings with the SEC,
including the NeoStem Form 10-K, and the Proxy Statement/Registration Statement.
Important factors related to the Share Exchange that might cause such a
difference include, but are not limited to, costs related to the Share Exchange;
failure of NeoStem’s stockholders to approve the Share Exchange; an inability to
satisfy the conditions of the Share Exchange; NeoStem's inability to maintain
its American Stock Exchange listing; the inability to integrate NeoStem’s and
Shandong's businesses successfully; the need for outside financing to meet
capital requirements; and other events and factors disclosed herein under Part
II, Item 1A, Risk Factors, and previously and from time to time in NeoStem’s
filings with the SEC, including the NeoStem Form 10-K, and to be disclosed
in
the Proxy Statement/Registration Statement. The Company’s filings with the
Securities and Exchange Commission are available for review at www.sec.gov
under
“Search for Company Filings.” Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. Except as required by law, the Company undertakes no obligation to
update any forward-looking statements, whether as a result of new information,
future events or otherwise.
GENERAL
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 network of adult stem cell collection centers in major
metropolitan areas of the United States. We have also 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.
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.
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
major metropolitan areas. Toward this end, the Company signed an agreement
in
June 2008 for a New York City stem cell collection center and this facility
will
become operational by the end of 2008. In July 2008, the Company signed an
agreement for a Santa Monica, California based stem cell collection center
to be
opened by Stem Collect of Santa Monica LLC at The Hall Center. This facility
became operational in the fall of 2008. Additionally, the Company signed an
agreement with Celvida LLC pursuant to which a Southern Florida stem cell
collection center located in Coral Gables, a suburb of Miami, became operational
in September 2008. The Company is considering whether to continue to keep the
single-physician Pennsylvania center active given poor performance of the center
and the failure of the center to comply with certain financial obligations
under
its collection center agreement.
RESULTS
OF OPERATIONS
Three
Months Ended September 30, 2008 Compared to Three Months Ended September
30, 2007
For
the
three months ended September 30, 2008, total revenues were $25,200 compared
to
$12,600 for the three months ended September 30, 2007. The revenues generated
in
the three months ended September 30, 2008 are a combination of revenues from
start up fees collected from physicians in the Company’s physician’s network,
stem cell collection fees and monthly stem cell storage fees and the revenues
generated in the three months ended September 30, 2007 were principally derived
from stem cell collections in the period.
Selling,
general and administration expenses for the three months ended September 30,
2008 has decreased by $2,392,000 or 55% over the three months ended September
30, 2007, from $4,328,000 to $1,936,000. This decrease in operating expense
is
the result of management decisions to reduce various operating expenses to
conserve cash and reduce our operating loss. During the last two years the
Company has used a variety of equity instruments to pay for services in an
effort to minimize its use of cash to incentivize staff and consultants and
in
the quarter ending September 30, 2008 the reduced use of equity instruments
was
the primary source of decrease in operating expenses. The reduced use of equity
instruments to pay for staff compensation and director fees decreased our
operating expenses by $1,856,000, or 73%. Operating expenses funded by cash
were
$1,253,000 for the three months ended September 30, 2008 compared with $1,789,00
in cash funded expenses for the three months ended September 30, 2007, a
decrease of $536,000 or 30%. The decrease in cash expenses was primarily related
to a decrease in salary and benefits of $150,000, investor relations activities
of $222,000, travel and entertainment expenses of $69,000, rent expense of
$32,000, validation expenses required for New York licensing of $64,000, and
consulting fees of $71,000. These expense decreases were offset by an increase
in marketing expense of $39,000, accounting fees of $30,000 and a reduction
in a
variety of other expenses that resulted in a net expense increase of $3,000.
For
the
reasons cited above the net loss for the three months ended September 30, 2008
was reduced to $1,922,000 from $4,328,000 for the three months ended September
30, 2007.
Nine
Months Ended September 30, 2008 Compared to Nine Months Ended September 30,
2007
For
the
nine months ended September 30, 2008, total revenues were $49,500 compared
to
$74,500 for the nine months ended September 30, 2007. The revenues generated
in
the nine months ended September 30, 2008 are a combination of revenues from
start up fees collected from physicians in the Company’s physician’s network,
stem cell collection fees and monthly stem cell storage fees and the revenues
generated in the nine months ended September 30, 2007 were principally a
combination of revenues from start up fees collected from physicians in the
Company’s physician’s network, stem cell collection fees and monthly stem cell
storage fees. The reduction in revenues was due primarily to a reduction in
fees
collected from physicians in the Company’s physician’s network. The Company has
reduced its activity in recruiting physicians and is concentrating its efforts
on recruiting clients into the existing network in the Greater New York area,
Southern California and Coral Gables.
Selling,
general and administration expenses for the nine months ended September 30,
2008
has been reduced, by $1,324,000 or 16% over the nine months ended September
30,
2007, from $8,163,000 to $6,839,000. This decrease in operating expense is
the
result of management decisions to reduce various operating expenses to conserve
cash and reduce our operating loss. During the last two years the Company has
used a variety of equity instruments to pay for services in an effort to
minimize its use of cash to incentivize staff and consultants and in the nine
months ended September 30, 2008 the reduced use of equity instruments was the
primary source of decrease in operating expenses.. The reduced use of equity
instruments to pay for staff compensation and director fees decreased our
operating expenses by $843,000, or 21%. Operating expenses funded by cash were
$3,706,000 for the nine months ended September 30, 2008 compared with $4,185,000
in cash funded expenses for the nine months ended September 30, 2007, a decrease
of $479,000 or 11%. The decrease in cash funded operating expenses was primarily
related to a decrease in legal expense of $273,000, investor relations expense
of $230,000, consulting fees of $62,000, validation expenses required for New
York licensing of $55,000, stock exchange fees of $37,000, laboratory expenses
of $17,000 and travel and entertainment expenses of $69,000, which decreases
were offset by increases in salary and benefits of $63,000, marketing expenses
of $81,000, accounting fees of $36,000, research and development fees primarily
related to fees due the University of Louisville in connection with our VSEL
license of $54,000, investment banking fees of $25,000 and a variety of other
expenses that resulted in a net expense increase of $5,000.
For
the
reasons cited above the net loss for the nine months ended September 30, 2008
decreased to $6,811,000 from $8,102,000 for the nine months ended September
30,
2007.
LIQUIDITY
AND CAPITAL RESOURCES
General
At
September 30, 2008, the Company had working capital of $461,000. The Company
generates revenues from its adult stem cell collection activities. To date,
our
revenues generated from such activities have not been significant and we had
minimal adult stem cell collection activity in the first nine months of
2008.
The
Company has met its immediate cash requirements through an offering of common
stock and warrants completed in May 2008 in the amount of $900,000 and September
2008 of $1,250,000. In addition to the $250,000 raised in October 2008 through
an offering of common stock and warrants, the Company currently intends to
meet
its cash requirements in the near term through further financing activities.
In
the event these activities are not successful, the Company would need to curtail
its operations. The Company had been exploring acquisition opportunities of
revenue generating businesses. The Company recently entered into the Merger
Agreement to acquire the 51% interest in Erye, which has been in business for
more than 50 years and currently manufactures over 100 drugs on seven Good
Manufacturing Practices (GMP) lines, including small molecule drugs. Erye
specializes in research and development, production and sales of pharmaceutical
products, as well as chemicals used in pharmaceutical products. The Company
also
recently entered into the Share Exchange Agreement to establish control over
Shandong, which is engaged in the business of research, development
popularization and transference of regenerative medicine technology (except
for
those items for which it does not have special approval) in the
PRC.
The
following chart represents the net funds provided by or used in operating,
financing and investment activities for each period indicated:
|
|
Nine Months Ended
|
|
|
|
September 30, 2008
|
|
September 30, 2007
|
|
Cash
(used) in Operating activities
|
|
$
|
(3,618,000
|
)
|
$
|
(4,548,000
|
)
|
Cash
(used) in investing activities
|
|
$
|
(27,000
|
)
|
$
|
(67,000
|
)
|
Cash
provided by financing activities
|
|
$
|
2,136,000
|
|
$
|
7,827,000
|
|
At
September 30, 2008 the Company had a cash balance of $794,000, working capital
of $461,000 and a stockholders’ equity of $1,830,000. The Company incurred a net
loss of $6,811,000 for the nine months ended September 30, 2008. 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 $3,176,000, depreciation of $59,000 and bad debt expense of $22,000 which
was
offset by cash settlements of various accounts payable, notes payable, accrued
liabilities and increases in prepaid insurance expenses of $67, 000, resulted
in
cash used in operations totaling $3,618,000 for the period ended September
30,
2008. 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 requirements for the three and nine months ended September 30, 2008,
the Company relied on offerings of common stock and warrants completed in each
of May 2008 and September 2008 in the aggregate amount of $2,150,000 and
its
existing cash balances. Under
the
Company’s
current
business plan it
is
generating revenues
from its platform business of adult stem cell collection activities which to
date
have
not
been significant,
having
had only
two
collections
during
the third quarter of 2008. The Company currently intends to meet its cash
requirements in the near term through financing activities, other collaborative
arrangements and government awards and anticipates
that
with
the opening of collection
centers in New York City, Miami
and
Santa Monica revenues may
start
to increase.
Furthermore, the Company has been included in the Department of Defense Fiscal
Year 2009 Appropriations Bill in the amount of $800,000 and the Company
continues to make application for other awards through the Small Business
Innovative Research (“SBIR”) Program, although it has received no notice of any
SBIR award to date.
On
November 2, 2008, the Company signed the Merger Agreement to acquire the 51%
interest in Erye and the Share Exchange Agreement to establish control over
Shandong. In order to maximize the potential
of
Shandong,
a
capital infusion into the company will be needed
to,
among other things, build
a
laboratory and develop its regenerative medicine business. Erye is in the middle
of its expansion through relocation of the pharmaceutical manufacturing facility
which is planned to be completed
over the
next three years. To date this activity has been self funded by Erye
and
minority shareholders of Erye and it is anticipated that they will continue
to
fund this project. In
the
event Erye is unable to raise the remaining funds needed for the relocation
of
its pharmaceutical manufacturing facility it
could
become incumbent on the Company to assist in this effort.
Erye’s revenues for the year ended December 31, 2007 were approximately $32
million and for the six months ended June 30, 2008 were approximately $24
million. NeoStem
has
agreed to reinvest 45% of its 51% interest in Erye into the company for
its relocation pursuant to Erye’s joint venture agreement
for a
period of three years.
NeoStem’s
6%
of net
profit will be distributed to it.
In
the
event either or both of the acquisitions does not close, the Company would
also
need to raise substantial additional funds to fund its platform business and/or
acquire a revenue generating business. Additionally, even if either or
both of the acquisitions closes, the closings will likely not occur until the
end of the first quarter of 2009 and the Company will need to fund its platform
business as well as the large costs associated with the acquisition transactions
until such time. The Company’s history of losses and liquidity
problems may make it difficult to raise additional funding. There can be no
assurance that the Company will be able to obtain additional funding on terms
acceptable to the Company. Any equity financing may be dilutive to stockholders
and debt financing, if available, may involve significant restrictive
covenants.
In
November 2007, the Company acquired the exclusive, worldwide rights to very
small embryonic like (VSEL) technology developed by researchers at the
University of Louisville. These rights were acquired through the Company’s
acquisition of Stem Cell Technologies, Inc., the licensee to a license agreement
(the “License Agreement”) with the University of Louisville. Concurrent with
acquiring these rights, the Company entered into a sponsored research agreement
(the "Sponsored Research Agreement" or "SRA") with the University of Louisville
Research Foundation (“ULRF”) under which the Company 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. 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. 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 SRA requires periodic and milestone
payments. All payments required to be made to date have been made. Under the
License Agreement, upon the commencement of the research (which has not yet
occurred pending receipt of IRB approvals and collection of the appropriate
samples), the Company will be required to make payments of $66,000 in license
issue fees and prepayment of patent costs and will be responsible for additional
patent-related costs. Thereafter, an annual license maintenance fee of $10,000
will be required upon the issuance of a licensed patent and royalties will
be
payable based upon the sale of certain licensed products. Under the Sponsored
Research Agreement, the Company agreed to support the research as set forth
in a
research plan in an amount of $375,000. 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 the term of the SRA, the first payment of $100,000
(for which there was originally a $50,000 credit) being due upon the
commencement of the research. In October 2008, the SRA was amended to provide
for certain additional research to be conducted as work preliminary to the
first
research aim under the SRA, for which approximately one-half of the $50,000
credit was utilized to pay the fee. We will require additional research and
development capacity and access to funds to meet our development obligations
under the License Agreement and develop the VSEL technology. The Company has
applied for Small Business Innovation Research (SBIR) grants and may also seek
to obtain funds through applications for other State and Federal grants, direct
investments, sublicensing arrangements as well as other funding sources to
help
offset all or a portion of these costs. We are seeking to develop increased
internal research capability and sufficient laboratory facilities or establish
relationships with third parties to provide such research capability and
facilities. In this regard, in July 2008 the Company hired a Director of Stem
Cell Research and Laboratory Operations.
In
October 2007, the Company entered into a development agreement with Stem Collect
LLC (“Stem Collect”) to act as a developer of collection centers to join the
Company’s network. Stem Collect agreed to make certain upfront payments of which
$30,000 were paid through December 31, 2007. 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. After discussions between the
parties, the original development agreement was terminated, and the Company
may
discuss the terms of a new development agreement with Stem Collect. Pursuant
to
the original development agreement, a center agreement had been entered into
with Stem Collect of Beverly Hills, LLC which has been replaced by a center
agreement entered into in July 2008 with Stem Collect of Santa Monica, LLC
for a
center on the premises of The Hall Center in Santa Monica,
California.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.
Not
applicable.
ITEM
4T. CONTROLS AND PROCEDURES
Evaluation
of 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 third fiscal quarter ended September 30, 2008 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 were
effective to reasonably ensure 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 and is accumulated and communicated
to
management, including the Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required disclosure. 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.
Changes
in Internal Controls 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 quarter ended September 30, 2008 that have materially affected,
or
are reasonably likely to materially affect, the Company's internal control
over
financial reporting.
NEOSTEM,
INC.
PART
II
OTHER
INFORMATION
ITEM
1. LEGAL PROCEEDINGS
None
ITEM
1A. RISK FACTORS
Risk
Factors Relating to the Merger
You
are
urged to read all relevant documents filed with the SEC, including, without
limitation, the Proxy Statement/Registration Statement, because they will
contain important information about NeoStem and the proposed Merger, including
risk factors relating thereto. Set forth below are certain risk factors relating
to the proposed Merger of which you should be aware. More complete risk factors
relating to the proposed Merger will be included in the Proxy
Statement/Registration Statement.
The
consummation of the transactions contemplated by the Merger Agreement are
dependent upon NeoStem's obtaining all relevant and necessary governmental
approvals from the relevant PRC government
authorities.
Pursuant
to the Merger Agreement, NeoStem will acquire, indirectly through NeoStem's
ownership in Merger Sub, a
51%
ownership interest in Erye, with EET owning the remaining 49% ownership interest
in Erye. NeoStem, Merger Sub and EET must enter into a Joint Venture Agreement
to govern the rights and obligations of NeoStem, Merger Sub and EET with respect
to their ownership in Erye. The Joint Venture Agreement, together with the
articles of incorporation of Erye, must be delivered to the relevant PRC
governmental organizations for inspection and approval, and the closing of
the
transactions contemplated by the Merger Agreement are contingent upon, among
other things, obtaining all relevant and necessary governmental approvals from
the relevant PRC government authorities of the Joint Venture Agreement, the
articles of incorporation and the transactions contemplated thereby. There
can
be no assurance that NeoStem will be able to obtain all such relevant and
necessary governmental approvals from the relevant PRC government authorities
on
a timely basis or at all.
NeoStem
has incurred, and expects to continue to incur, significant costs and expenses
in connection with the proposed Merger. Any failure to obtain, or delay in
obtaining, the necessary PRC government approvals would prevent NeoStem from
being able to consummate, or delay the consummation of, the transactions
contemplated by the Merger Agreement, which could materially adversely affect
its business, financial condition and results of operations.
Following
the Merger, a substantial portion of NeoStem's assets will be located in the
PRC
and a substantial portion of NeoStem's revenue will be derived from operations
in the PRC. Since this is one of NeoStem's first ventures into the Chinese
market, NeoStem's operations may be subject to additional risks and
uncertainties.
Because
NeoStem does not have any experience in doing business in the PRC, the company’s
directors, officers, managers, and employees will be encountering for the first
time the economic, political, and legal climate that is unique to the PRC,
which
may present risk and uncertainties to NeoStem's operations. Although in recent
years the PRC’s government has implemented measures emphasizing the use of
market forces for economic reform, the reduction of state ownership of
productive assets and the establishment of sound corporate governance in
business enterprises, a substantial portion of productive assets in the PRC
is
still owned by the PRC’s government. In addition, the PRC’s government continues
to play a significant role in regulating industry development by imposing
industrial policies. It also exercises significant control over the PRC’s
economic growth through the allocation of resources, controlling payment of
foreign currency-denominated obligations, setting monetary policy and providing
preferential treatment to particular industries or companies.
There
can
be no assurance that the PRC’s economic, political or legal systems will not
develop in a way that becomes detrimental to our business, results of operations
and prospects. NeoStem's activities may be materially and adversely affected
by
changes in the PRC’s economic and social conditions and by changes in the
policies of the PRC’s government, such as measures to control inflation, changes
in the rates or method of taxation and the imposition of additional restrictions
on currency conversion.
Additional
factors that NeoStem may experience in connection with having operations in
the
PRC that may adversely affect NeoStem's business and results of operations
include the following:
|
· |
NeoStem
may not be able to enforce or obtain a remedy under any material
agreements.
|
|
· |
PRC
restrictions on foreign investment could severely impair NeoStem's
ability
to conduct its business or acquire or contract with other entities
in the
future.
|
|
· |
Restrictions
on currency exchange may limit NeoStem's ability to use cash flow
most
effectively and fluctuations in currency values could adversely affect
operating results.
|
|
· |
Cultural
and managerial differences may result in the reduction of our overall
performance.
|
|
· |
Political
instability in the PRC could harm NeoStem's
business.
|
Risk
Factors Relating to the Share Exchange
You
are
urged to read all relevant documents filed with the Securities and Exchange
Commission, including, without limitation, the Proxy Statement/Registration
Statement, because they will contain important information about NeoStem and
the
proposed Share Exchange, including risk factors relating thereto. Set forth
below are certain risk factors relating to the proposed Share Exchange of which
you should be aware. More complete risk factors relating to the proposed Share
Exchange will be included in the Proxy Statement/Registration Statement.
If
the government of the PRC determines that the arrangements that establish the
structure for operating the Shandong Business do not comply with PRC government
restrictions on foreign investment in the relevant industry, NeoStem may be
subject to severe consequences and penalties.
Pursuant
to the Share Exchange Agreement, NeoStem will acquire the HK Entity, which
owns
the WFOE, and the WFOE has established control over Shandong through the VIE
Documents. As a Delaware corporation, NeoStem is classified as a foreign
enterprise under PRC law, and the WFOE is classified as a foreign-invested
enterprise. Because various regulations in China currently restrict or prevent
foreign-invested entities from holding certain licenses and controlling
businesses in certain industries, NeoStem must rely on the contractual
relationships memorialized in the VIE Documents to control the business,
personnel, and financial affairs of Shandong.
The
PRC
laws and regulations governing business entities are often vague and uncertain.
There is a particular lack of clarity in the PRC law applicable to the
arrangements establishing the operating structure. Despite the uncertain
application of PRC law, the structure of the WFOE, together with the contractual
arrangements under the VIE Documents, has been implemented successfully where
foreign-invested entities have participated in controlling PRC entities engaged
in restricted businesses. However, PRC law is more vague on the subject of
utilizing such structure in the context of prohibited businesses in which
Shandong may engage. Given this lack of clarity in PRC law, if NeoStem is found
to be in violation of any existing or future PRC laws, regulations, and/or
circulars, the relevant regulatory authorities would have broad discretion
in
dealing with such violation, including levying fines, confiscating NeoStem's
income, revoking business and/or operating licenses, requiring NeoStem to
restructure the relevant ownership structure or operations, and requiring
NeoStem to discontinue all or any portion of its operations in the PRC. Any
of
these actions could cause significant disruption to NeoStem's business
operations and may materially and adversely affect NeoStem's business, financial
condition and results of operations. There can be no assurance that NeoStem
will
not be found in violation of any current or future PRC laws, regulations, and/or
circulars.
The
WFOE’s contractual arrangements with Shandong and its equity owners as
memorialized in the VIE documents may not be as effective in providing control
over Shandong as direct ownership of Shandong.
NeoStem
intends to conduct substantially all of the Shandong Business in the PRC and
generate substantially all of its revenues from the Shandong Business vis-à-vis
the WFOE and Shandong, through contractual arrangements with Shandong and its
equity owners that provide NeoStem with effective control over Shandong. NeoStem
will depend on Shandong to hold and maintain certain licenses and other relevant
government approvals necessary for its business activities. Shandong also owns
certain assets relating to its business and operations, and employs the
personnel necessary to carry out such business and operations. NeoStem will
have
no ownership interest in Shandong. The contractual arrangements as embodied
in
the VIE Documents may not be as effective in providing NeoStem with control
over
Shandong as direct ownership of Shandong. In addition, Shandong or its equity
owners may breach the contractual arrangements.
Employees
and/or officers of Shandong may encounter conflicts of interest between their
duties to NeoStem and to Shandong. There can be no assurance that when conflicts
of interest arise, the ultimate equity owners of Shandong will act completely
in
NeoStem's interests or that conflicts of interest will be resolved in NeoStem's
favor. These ultimate equity owners could violate any applicable non-competition
or employment agreements or their legal duties by diverting business
opportunities from NeoStem to others. In any event, we would have to rely on
legal remedies under PRC law. These remedies may not always be effective in
vindicating our rights, particularly in light of the uncertainties of the PRC
legal system.
Following
the Share Exchange, a substantial portion of NeoStem's assets will be located
in
the PRC and a substantial portion of NeoStem's revenue will be derived from
operations in the PRC. Since this is one of NeoStem's first ventures into the
Chinese market, NeoStem's operations may be subject to additional risks and
uncertainties.
See
Risk
Factors Relating to the Merger (above).
For
additional factors that NeoStem may experience in connection with having
operations in the PRC that may adversely affect NeoStem's business and results
of operations, see Risk Factors Relating to the Merger (above).
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
Previously
reported on the Company’s Current Reports on Form 8-K dated March 20, 2008, May
20, 2008, July 24, 2008, August 28, 2008 and October 15, 2008, respectively.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM
5. OTHER INFORMATION
None
ITEM
6. EXHIBITS
(a) Exhibits
2.1
Agreement and Plan of Merger among NeoStem, Inc., China Biopharmaceuticals
Holdings, Inc., China Biopharmaceuticals Corp., and CBH Acquisition LLC.
(1)
2.2
Share
Exchange Agreement among NeoStem, Inc., China StemCell Medical Holding Limited,
Shandong New Medicine Research Institute of Integrated Traditional and Western
Medicine Limited Liability Company, Beijing HuaMeiTai Bio-technology Limited
Liability Company and Zhao Shuwei. (2)
10.1
Form
of Subscription Agreement among NeoStem, Inc. and RimAsia Capital Partners,
L.P.
(3)
10.2
Form
of Redeemable Warrant to Purchase Shares of Common Stock of NeoStem, Inc. issued
to RimAsia Capital Partners, L.P.(3)
10.3
Form
of Warrant Clarification Agreement between NeoStem, Inc. and Continental Stock
Transfer and Trust Company*
10.4
Form
of Underwriter Warrant Clarification Agreement among NeoStem, Inc. and certain
members of its Underwriting Group*
31.1
Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
31.2
Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*
32.1
Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.**
32.2
Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.**
|
(1) |
Filed
as Exhibit 2.1 to the Current Report of the Company on Form 8-K,
dated
November 2, 2008, which exhibit is incorporated here by
reference.
|
|
(2) |
Filed
as Exhibit 2.1 to the second Current Report of the Company on Form
8-K,
dated November 2, 2008, which exhibit is incorporated here by
reference.
|
|
(3) |
Filed
as an exhibit, numbered as indicated above, to the Current Report
of the
Company on Form 8-K, dated August 28, 2008, which exhibit is incorporated
here by reference.
|
*
Filed
herewith
**
Furnished herewith
SIGNATURES
Pursuant
to the requirements 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.
NEOSTEM,
INC. (Registrant)
By:
|
/s/
Robin Smith MD
|
|
Robin
Smith MD, Chief Executive Officer
|
|
|
Date:
November 14, 2008
|
|
|
By:
|
/s/
Larry A. May
|
|
Larry
A. May, Chief Financial Officer
|
|
|
Date:
November 14, 2008 |
WARRANT
CLARIFICATION AGREEMENT
This
Warrant Clarification Agreement (this “Agreement”), dated as of __________,
2008, to the Restated Warrant Agreement, made as of August 14, 2007 (the
“Warrant Agreement”) is made and entered into by and between NeoStem, Inc., a
Delaware corporation with offices at 420 Lexington Avenue, New York, New York
10170 (“Company”) and Continental Stock Transfer & Trust Company, a New York
corporation, with offices at 17 Battery Place, New York, New York 10004
(“Warrant Agent”).
WHEREAS,
Section
3.3.2 of the Warrant Agreement provides that Company shall not be obligated
to
deliver any securities pursuant to the exercise of a Warrant unless a
registration statement under the Securities Act of 1933, as amended
(‘‘Securities Act’’), with respect to the Common Stock is
effective.
WHEREAS,
the
Warrant Agreement does not contain any provisions granting registered holders
of
Warrants the right to receive any cash or other consideration or otherwise
“net
cash settle” the Warrants in the event securities cannot be issued upon exercise
of the Warrants.
WHEREAS,
in
furtherance of the foregoing, the Company’s final prospectus, dated July 16,
2007, indicated that (i) for a warrant holder to be able to exercise their
warrant, the shares of common stock underlying the warrant must be covered
by an
effective and current registration statement and qualify or be exempt under
the
securities laws of the state or other jurisdiction in which the holder lives,
(ii) the Company cannot assure prospective warrant holders that it will continue
to maintain a current registration statement relating to the shares of common
stock underlying the warrants or that an exemption from registration or
qualification will be available throughout their term, and (iii) this may have
an adverse effect on demand for the warrants and the prices that could be
obtained from reselling them.
WHEREAS,
as a
result of certain questions that have arisen regarding the accounting treatment
applicable to the warrants, the parties hereto deem it necessary and desirable
to amend the Warrant Agreement to clarify and confirm that the registered
holders do not have the right to receive a net cash settlement in the event
the
Company does not maintain a current prospectus relating to the common stock
issuable upon exercise of the warrants at the time such warrants are
exercisable.
NOW,
THEREFORE,
in
consideration of the mutual agreements contained herein and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereto
agree
to amend the Warrant Agreement as set forth herein.
1. Warrant
Agreement.
The
Warrant Agreement is hereby amended by adding the following sentence as the
penultimate sentence of Section 3.3.2:
‘‘Furthermore,
if the Company is unable to deliver any securities pursuant to the exercise
of a
Warrant as a result of the foregoing situation, the Company will have no
obligation to pay such registered holder any cash or other consideration or
otherwise ‘‘net cash-settle’’ the Warrant.’’
2. Miscellaneous.
(a) Governing
Law.
The
validity, interpretation, and performance of this Agreement and of the Warrants
shall be governed in all respects by the laws of the State of New York, without
giving effect to conflicts of law principles that would result in the
application of the substantive laws of another jurisdiction. The Company hereby
agrees that any action, proceeding or claim against it arising out of or
relating in any way to this Agreement shall be brought and enforced in the
courts of the State of New York or the United States District Court for the
Southern District of New York, and irrevocably submits to such jurisdiction,
which jurisdiction shall be exclusive. The Company hereby waives any objection
to such exclusive jurisdiction and that such courts represent an inconvenient
forum. Any such process or summons to be served upon the Company may be served
by transmitting a copy thereof by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address set forth in Section
9.2 of the Warrant Agreement. Such mailing shall be deemed personal service
and
shall be legal and binding upon the Company in any action, proceeding or
claim.
(b) Binding
Effect.
This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and to their respective successors and assigns.
(c) Entire
Agreement.
This
Agreement sets forth the entire agreement and understanding between the parties
as to the subject matter thereof and merges and supersedes all prior
discussions, agreements and understandings of any and every nature among them.
Except as set forth in this Agreement, provisions of the Warrant Agreement
which
are not inconsistent with this Agreement shall remain in full force and effect.
This Agreement may be executed in counterparts.
(d) Severability.
This Agreement shall be deemed severable, and the invalidity or unenforceability
of any term or provision hereof shall not affect the validity or enforceability
of this Agreement or of any other term or provision hereof. Furthermore, in
lieu
of any such invalid or unenforceable term or provision, the parties hereto
intend that there shall be added as part of this Agreement a provision as
similar in terms to such invalid or unenforceable provision as may be possible
and be valid and enforceable.
IN
WITNESS WHEREOF, the parties hereto have executed this Warrant Clarification
Agreement as of the date first written above.
NEOSTEM,
INC.
|
|
|
By:
|
|
|
Robin
L. Smith, Chief Executive Officer
|
|
|
CONTINENTAL
STOCK TRANSFER &
TRUST
COMPANY
|
|
|
By:
|
|
UNDERWRITER
WARRANT CLARIFICATION AGREEMENT
This
Underwriter Warrant Clarification Agreement (this “Agreement”), dated as of
______ ____, 2008, to the Underwriter Warrants issued as of August 14, 2007
(the
“Underwriter Warrants”) is made and entered into by and between NeoStem, Inc., a
Delaware corporation with offices at 420 Lexington Avenue, New York, New York
10170 (“Company”) and the holders of Underwriter Warrant numbers UW-1, UW-2,
UW-3, UW-4, and UW-5, being all of the holders of the Underwriter Warrants
issued in connection with the Company’s August 2007 public offering (each, a
“Holder”), with each
Holder acting with respect to the Underwriter Warrant issued to it.
WHEREAS,
the
Underwriter Warrants do not contain any provisions granting registered holders
of Underwriter Warrants the right to receive any cash or other consideration
or
otherwise “net cash settle” the Underwriter Warrants in the event securities
cannot be issued upon exercise of the Underwriter Warrants because a
registration statement is not effective.
WHEREAS,
as a
result of certain questions that have arisen regarding the accounting treatment
applicable to the Underwriter Warrants, the parties hereto deem it necessary
and
desirable to amend the Underwriter Warrants to clarify and confirm that the
registered holders do not have the right to receive a net cash settlement in
the
event the Company does not maintain a current prospectus relating to the common
stock issuable upon exercise of the Underwriter Warrants at the time such
Underwriter Warrants are exercisable.
NOW,
THEREFORE,
in
consideration of the mutual agreements contained herein and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, and intending to be legally bound hereby, the parties hereto
agree
to amend the Underwriter Warrants as set forth herein (each Holder acting with
respect to the Underwriter Warrant issued to it).
1. Underwriter
Warrants:
Each
Underwriter Warrant is hereby amended by adding the following sentence as the
penultimate sentence of Section 2.3.3:
‘‘Furthermore,
if the Company is unable to deliver any securities pursuant to the exercise
of
an Underwriter Warrant as a result of the foregoing situation, the Company
will
have no obligation to pay such registered holder any cash or other consideration
or otherwise ‘‘net cash-settle’’ the Underwriter Warrant.’’
420
Lexington Avenue, Suite 450, New York, NY 10170 212.584.4180 main 646.514.7787
fax
2. Miscellaneous.
(a) Governing
Law.
The
validity, interpretation, and performance of this Agreement and of the
Underwriter Warrants shall be governed in all respects by the laws of the State
of New York, without giving effect to conflicts of law principles that would
result in the application of the substantive laws of another jurisdiction.
The
Company hereby agrees that any action, proceeding or claim against it arising
out of or relating in any way to this Agreement shall be brought and enforced
in
the courts of the State of New York or the United States District Court for
the
Southern District of New York, and irrevocably submits to such jurisdiction,
which jurisdiction shall be exclusive. The Company hereby waives any objection
to such exclusive jurisdiction and that such courts represent an inconvenient
forum. Any such process or summons to be served upon the Company may be served
by transmitting a copy thereof by registered or certified mail, return receipt
requested, postage prepaid, addressed to it at the address set forth in Section
7.3 of the Underwriter Warrants. Such mailing shall be deemed personal service
and shall be legal and binding upon the Company in any action, proceeding or
claim.
(b) Binding
Effect.
This
Agreement shall be binding upon and inure to the benefit of the parties hereto
and to their respective successors and assigns.
(c) Entire
Agreement.
This
Agreement sets forth the entire agreement and understanding between the parties
as to the subject matter thereof and merges and supersedes all prior
discussions, agreements and understandings of any and every nature among them.
Except as set forth in this Agreement, provisions of the Underwriter Warrants
which are not inconsistent with this Agreement shall remain in full force and
effect. This Agreement may be executed in counterparts.
(d) Severability.
This Agreement shall be deemed severable, and the invalidity or unenforceability
of any term or provision hereof shall not affect the validity or enforceability
of this Agreement or of any other term or provision hereof. Furthermore, in
lieu
of any such invalid or unenforceable term or provision, the parties hereto
intend that there shall be added as part of this Agreement a provision as
similar in terms to such invalid or unenforceable provision as may be possible
and be valid and enforceable.
IN
WITNESS WHEREOF, the parties hereto have executed this Underwriter Warrant
Clarification Agreement as of the date first written above.
|
|
NEOSTEM,
INC.
|
|
|
|
|
|
|
By:
|
|
|
|
|
Robin
L. Smith, Chief Executive Officer
|
|
|
|
|
Holder
of UW-1:
|
|
|
|
|
|
By:
|
|
|
|
|
|
Holder
of UW-2:
|
|
By:
|
|
|
|
|
|
Holder
of UW-3
|
|
By:
|
|
|
|
|
|
Holder
of UW-4:
|
|
|
|
|
|
By:
|
|
|
|
|
|
Holder
of UW-5:
|
|
|
|
|
|
By:
|
|
Exhibit
31.1
CERTIFICATION
I,
Robin
Smith, MD, certify that:
1.
I have
reviewed this Quarterly Report on Form 10-Q of NeoStem, Inc.;
2.
Based
on my knowledge, this quarterly 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 quarterly
report;
3.
Based
on my knowledge, the financial statements, and other financial information
included in this quarterly 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 quarterly 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 quarterly 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 quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this quarterly report based on such evaluation;
and
d)
disclosed in this quarterly 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;
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:
November 14, 2008
/s/
Robin Smith MD
|
Name:
Robin Smith, MD
|
Title:
Chief Executive Officer of NeoStem,
Inc.
|
A
signed
original of this written statement required by Section 302 has been provided
to
NeoStem, Inc. and will be retained by NeoStem, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
Exhibit
31.2
CERTIFICATION
I,
Larry
A. May, certify that:
1.
I have
reviewed this Quarterly Report on Form 10-Q of NeoStem, Inc.;
2.
Based
on my knowledge, this quarterly 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 quarterly
report;
3.
Based
on my knowledge, the financial statements, and other financial information
included in this quarterly 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 quarterly 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 quarterly 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 quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the
period covered by this quarterly report based on such evaluation;
and
d)
disclosed in this quarterly 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;
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):
|
b) |
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:
November 14, 2008
/s/
Larry A. May
|
Name:
Larry A. May
|
Title:
Chief Financial Officer of NeoStem,
Inc.
|
A
signed
original of this written statement required by Section 302 has been provided
to
NeoStem, Inc. and will be retained by NeoStem, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.
Exhibit
32.1
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 Quarterly Report of NeoStem, Inc. (the “Company”) on Form
10-Q for the period ended September 30, 2008 filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, Robin Smith MD, Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) |
The
Report fully complies with the requirements of Section 13(a) or 15(d)
of
the Securities Exchange Act of 1934 as amended;
and
|
(2) |
The
information contained in the Report fairly presents, in all material
respects, the financial condition of the Company as of the dates
presented
and the results of operations of the Company for the periods
presented.
|
Dated:
November 14, 2008
/s/
Robin Smith MD
|
Robin
Smith, MD
|
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 Form
10-Q
or as a separate disclosure document.
A
signed
original of this written statement required by Section 906 has been provided
to
NeoStem, Inc. and will be retained by NeoStem, Inc. and furnished to the
Securities and Exchange Commission or its staff upon
request.
Exhibit
32.2
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 Quarterly Report of NeoStem, Inc. (the “Company”) on Form
10-Q for the period ended September 30, 2008 filed with the Securities and
Exchange Commission on the date hereof (the “Report”), I, Larry A. May, Chief
Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:
(1) |
The
Report fully complies with the requirements of Section 13(a) or 15(d)
of
the Securities Exchange Act of 1934 as amended ;
and
|
(2) |
The
information contained in the Report fairly presents, in all material
respects, the financial condition of the Company as of the dates
presented
and the results of operations of the Company for the periods
presented.
|
Dated:
November 14, 2008
|
|
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 Form
10-Q
or as a separate disclosure document.
A
signed
original of this written statement required by Section 906 has been provided
to
NeoStem, Inc. and will be retained by NeoStem, Inc. and furnished to the
Securities and Exchange Commission or its staff upon
request.