UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended December 31, 2009
OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from ________ to ________
Commission
file number: 0-10909
NEOSTEM,
INC.
(Exact
name of registrant as specified in its charter)
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Delaware
(State
or other jurisdiction of
incorporation
or organization)
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22-2343568
(I.R.S.
Employer Identification No.)
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420
Lexington Avenue
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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Registrant’s
telephone number, including area code:
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(212)
584-4180
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Securities
Registered Pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name
of Each Exchange
On Which Registered
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Common
Stock, par value $0.001 per share
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NYSE
Amex
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Class
A Common Stock Purchase Warrants
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NYSE
Amex
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. o
Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934.
o
Yes x No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. xYes oNo
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). o Yes o No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this Chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. 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 definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o
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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). o
Yes x No
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2009 (the last business day of
the most recently completed second fiscal quarter) was approximately
$11,724,108, computed by reference to the closing sales price of $1.90 for the
common stock on the NYSE Amex reported for such date. (For purposes
of determining this amount, only directors, executive officers, and 10% or
greater holders of our common stock have been deemed affiliates).
On March
24, 2010, 43,946,031 shares of the registrant's common stock, par value $0.001
per share, were outstanding.
Documents
incorporated by reference: Portions of the registrant’s definitive Proxy
Statement for the 2010 Annual Meeting of Stockholders, to be filed with the
Commission not later than 120 days after the close of the registrant’s
fiscal year, have been incorporated by reference, in whole or in part, into
Part III, Items 10, 11, 12, 13 and 14 of this Annual Report on
Form 10-K.
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TABLE
OF CONTENTS
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
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4
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PART
I
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5
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ITEM
1. BUSINESS
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5
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ITEM
1A. RISK FACTORS
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19
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ITEM
1B. UNRESOLVED STAFF COMMENTS
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39
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ITEM
2. PROPERTIES
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39
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ITEM
3. LEGAL PROCEEDINGS
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39
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ITEM
4. (REMOVED AND RESERVED)
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40
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PART
II
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40
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ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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40
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ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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44
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ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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56
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ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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58
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ITEM
9A. CONTROLS AND PROCEDURES
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58
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ITEM
9B. OTHER INFORMATION
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60
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PART
III
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61
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ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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61
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ITEM
11. EXECUTIVE COMPENSATION
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61
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ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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61
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ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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61
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ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
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61
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PART
IV
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61
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ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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61
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This
Annual Report on Form 10-K includes “forward-looking” statements within the
meaning of the Private Securities Litigation Reform Act of 1995, as well as
historical information. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements, or industry results, to be materially
different from anticipated results, performance or achievements expressed or
implied by such forward-looking statements. When used in this Annual Report on
Form 10-K, 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. Additionally, statements concerning our ability to
successfully develop the adult stem cell business at home and abroad, the future
of regenerative medicine and the role of adult stem cells in that future, the
future use of adult stem cells as a treatment option and the role of VSELTM
technology in that future, and the potential revenue growth of such business are
forward-looking statements. Our future operating results are dependent upon many
factors, and our further development is highly dependent on future medical and
research developments and market acceptance, which is outside its control.
Forward-looking statements may not be realized due to a variety of factors,
including, without limitation, (i) our ability to manage the business despite
continuing operating losses and cash outflows; (ii) our ability to obtain
sufficient capital or a strategic business arrangement to fund our operations
and expansion plans, including meeting our financial obligations under various
licensing and other strategic arrangements and the successful commercialization
of the relevant technology; (iii) our ability to build the management and human
resources and infrastructure necessary to support the growth of the business and
expansion into China; (iv) competitive factors and developments beyond our
control; (v) scientific and medical developments beyond our control; (vi) our
inability to obtain appropriate governmental licenses or any other adverse
effect or limitations caused by government regulation of the business; (vii)
whether any of our current or future patent applications result in issued
patents and our ability to obtain and maintain other rights to technology
required or desirable for the conduct of our business; (viii) whether any
potential strategic benefits of various licensing transactions will be realized
and whether any potential benefits from the acquisition of these new licensed
technologies will be realized; (ix) whether we can obtain the consents we may
require to sublicensing arrangements from technology licensors in connection
with technology development; (x) our ability to maintain our NYSE Amex listing;
(xi) factors regarding our business in China and, generally, regarding doing
business in China, including through our variable interest entity structure; and
(xii) the other factors discussed in “Risk Factors” and elsewhere in this Annual
Report on Form 10-K and in other periodic Company filings with the SEC. The
Company’s filings with the Securities and Exchange Commission are available for
review at www.sec.gov under
“Search for Company Filings.”
All
forward-looking statements attributable to us are expressly qualified in their
entirety by these and other factors. 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.
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PART
I
ITEM
1. BUSINESS
Overview
NeoStem,
Inc. (“we,” “us,” “NeoStem” or “the Company”) was incorporated under the
laws of the State of Delaware in September 1980 under the name Fidelity Medical
Services, Inc. and commenced operations in our current line of business in
January 2006.
In 2009,
through our expansion efforts within the People’s Republic of China (“China” or
“PRC”) and with the acquisition of a controlling interest in Suzhou Erye
Pharmaceuticals Company Ltd., or Erye, we transitioned into a multi-dimensional
international biopharmaceutical company with product and service revenues,
global research and development capabilities and operations in three distinct
business units: (i) U.S. adult stem cells, (ii) China adult stem cells, and
(iii) China pharmaceuticals, primarily antibiotics. These business units are
expected to provide platforms for the accelerated development and
commercialization of innovative technologies and products in both the U.S. and
China.
In the
U.S. we are a leading provider of adult stem cell collection, processing and
storage services enabling healthy individuals to donate and store their stem
cells for personal therapeutic use. Similar to the banking of cord blood,
pre-donating cells at a younger age helps to ensure a supply of one’s own stem
cells should they be needed for future medical treatment. Our current network of
U.S. adult stem cell collection centers is focused primarily on the Southern
California and Northeast markets and during 2010 we have begun to enter into new
agreements for collection centers with the goal of expanding our coverage to ten
centers by the end of 2010. In addition to our services, we are conducting
research and development activities on our own at our new laboratory facility in
Cambridge, MA and through collaborations in pursuit of diagnostic and
therapeutic applications using autologous adult stem cells, including
applications using our VSELTM
technology, with regard to very small embryonic-like stem cells, which we
license from the University of Louisville.
In 2009,
we began several China-based, adult stem cell initiatives including: (i)
creating a separate China-based stem cell operation, (ii) constructing a stem
cell research and development laboratory and processing facility in Beijing,
(iii) establishing relationships with hospitals to provide stem cell-based
therapies, and (iv) obtaining product licenses covering several adult stem cell
therapeutics focused on regenerative medicine. In 2010, we expect to begin
offering stem cell banking services and certain stem cell therapies to patients
in China, as well as to foreigners traveling to China seeking medical treatments
that are either unavailable or cost prohibitive in their home
countries.
The
cornerstone of our China pharmaceuticals business is the 51% ownership interest
we acquired in Erye in October 2009. Erye was founded more than 50 years ago and
represents an established, vertically-integrated pharmaceutical business.
Historically, Erye has concentrated its efforts on the manufacturing and
distribution of generic antibiotic products and has received more than 160
production certificates from the State Food and Drug Administration of China, or
SFDA, covering both antibiotic prescription drugs and active pharmaceutical
intermediates (APIs) Erye’s revenue for 2009 was approximately $61
million.
Our three
business units are expected to provide platforms for accelerated development and
commercialization of innovative technologies and products in both the U.S. and
China.
Adult
Stem Cell Business in the U.S.
Stem
cells are very primitive and undifferentiated cells that have the unique ability
to transform into many different cells, such as white blood cells, nerve cells
or heart muscle cells. We only work with adult (and not embryonic) stem cells.
Adult stem cells are found in the bone marrow, in peripheral blood and in
umbilical cord blood. For over 40 years physicians have been using adult stem
cells to treat various blood cancers, but only recently has the promise of using
adult stem cells to treat a myriad of other diseases begun to be
realized.
Within
the adult stem cell classification, the use of cells is either autologous,
meaning donor and patient are the same, or allogeneic, meaning donor and patient
are different. The use of allogeneic stem cells requires the identification of a
matching donor, which can result in added costs, critical time delays or may
never occur. Even if a matching donor is identified, the use of allogeneic stem
cells introduces the risk of “graft vs. host disease” requiring
immunosuppression drugs for extended periods following transplantation.
Accordingly, our current stem cell programs are based exclusively on adult stem
cells for autologous use as we believe that adult stem cells hold the greatest
promise for therapeutic innovation.
We are
developing our business in the adult stem cell field to capitalize on the
increasing importance that adult stem cells may have in regenerative medicine,
with an initial focus on the delivery of therapies for cardiac, orthopedic,
wound, cosmetic and dermatologic indications.
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Collection,
Processing and Storage Services
We are a
leading provider of adult stem cell collection, processing and storage services
in the U.S., enabling healthy individuals to donate and store their stem cells
for personal therapeutic use. Similar to the banking of cord blood, pre-donating
cells at a younger age helps to ensure a supply of autologous stem cells should
they be needed for future medical treatment. Our current network of U.S. adult
stem cell collection centers is primarily focused on the Southern California and
Northeast markets and during 2010 we have begun to enter into new agreements for
collection centers with the goal of expanding our coverage to ten centers by the
end of 2010. Commercial stem cell processing and storage services are provided
to us nationally, on an exclusive basis, by Progenitor Cell Therapy LLC, or PCT,
utilizing current good manufacturing practices, or cGMP standards.
Our
process for collecting adult stem cells for autologous use involves the
administration of a mobilizing agent prior to collection, allowing the migration
of stem cells from bone marrow to peripheral blood. Once the stem cells have
reached the bloodstream, an individual goes through a safe and
minimally-invasive procedure called “apheresis,” similar to donating platelets,
at one of the collection centers in our network. Then, the stem cells are
processed and stored under cGMP standards. Our proprietary process does not
change or alter the underlying cells and does not require expansion
technology.
We
believe that individuals will view the ability to pre-donate and store
autologous adult stem cells for future personal therapeutic use as a valuable
part of a “bio-insurance” program. The benefits of pre-donation include: having
a known supply of autologous stem cells rather than an uncertain supply of
compatible allogeneic stem cells; autologous stem cells may be compromised once
a patient becomes sick; and the quantity and quality of stem cells generally
diminish with age. This perceived value of pre-donation should increase as
additional indications for stem cell-based therapies are developed.
We have
initiated a marketing and sales campaign, individually and through
collaborations, for the purpose of educating physicians and potential clients on
the benefits of adult stem cell collection and storage. Our strategy is to work
with our established collection centers to market in their communities and to
build new alliances and partnerships. Utilizing our new laboratory facility in
Cambridge, MA, we also will have on premises an adult stem cell collection
center, scheduled to be launched in the second quarter of 2010. We
continue to build awareness with Boston-area academic institutions that are
researching and treating with adult stem cells.
Our stem
cell banking services generate revenue from a combination of fees paid upfront
and over time, by both collection centers and individual clients. We plan to
grow the client base at each of our centers, and add new centers in other
strategic metropolitan areas. Additional initiatives to drive private sector
revenue growth include:
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collaborations
with high profile medical centers and academic institutions involved in
research and clinical trials relating to adult stem
cells;
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•
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services
in the U.S. targeted for “medical tourism” designed to access stem cell
therapies available outside the
U.S.;
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partnerships
with executive health programs, wellness physicians, concierge medical
programs, medical spas and first responder
groups;
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initiatives
with cord blood companies, tissue banks and pharmaceutical
companies;
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support
for The Stem for Life
Foundation, which promotes public awareness, funds research and
development and subsidizes stem cell collection and storage
programs;
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storage
of excess stem cells collected from bone marrow transplant donors;
and
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•
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processing
and isolation of adult stem cells for research and diagnostic
use.
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While
many individuals could potentially benefit from having a supply of their stem
cells available for personal therapeutic use, our initial targeted customer
niches include:
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•
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individuals
with a family history of serious
diseases;
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•
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individuals
at high risk for burns, wounds and other trauma, such as first responders
and military personnel;
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•
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individuals
at occupational risk from prolonged radiation or chemical exposure, such
as healthcare providers, laboratory personnel and nuclear power plant
workers;
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wellness,
cosmetic and anti-aging focused individuals;
and
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athletes
and others who could benefit from regenerative
therapies.
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To
further drive our stem cell initiatives, we will continue targeting key
governmental agencies, congressional committees and not-for-profit organizations
to contribute funds for our research and development programs. In October 2008,
we were advised that we would receive federal funding from the Department of
Defense to evaluate the potential use of adult stem cell-based therapy for wound
healing, currently anticipated to be in the approximate net amount of $681,000,
and in September 2009, we were notified of an award of a Grand Opportunities
grant in the amount of $108,746 from the National Institutes of Health which we
expect to receive in the second quarter of 2010.
VSELTM
Technology and Other Therapeutic Technologies
We are
engaged in research and development of new therapies based on very small
embryonic-like stem cells, or the VSELTM
technology, with the University of Louisville Research Foundation, or ULRF, and
have a worldwide exclusive license to the VSELTM
technology. Research by a group headed by Dr. Mariusz Ratajczak, M.D., Ph.D.,
who is the head of the Stem Cell Biology Program at the James Graham Brown
Cancer Center at the University of Louisville and co-inventor of the VSELTM
technology, and others, provides compelling evidence that bone marrow contains a
heterogeneous population of stem cells that have properties similar to those of
an embryonic stem cell. These cells are referred to as very small embryonic-like
stem cells. This finding opens the possibility of achieving the positive
benefits associated with embryonic stem cells without the ethical or moral
dilemmas or certain of the potential negative effects associated with embryonic
stem cells. Of even greater potential is the ability to obtain these stem cells
for autologous use.
We have a
sponsored research agreement, or an SRA, with ULRF, pursuant to which we agree
to support further research in the laboratory of Dr. Ratajczak. In return for
supporting additional research relating to the VSELTM
technology to be carried out in the laboratory of Dr. Ratajczak as principal
investigator, we will receive the exclusive first option to negotiate a license
covering the research results.
Recent
studies conducted by us in collaboration with the University of Louisville have
confirmed that significant quantities of very small embryonic-like stem cells
can be obtained from the peripheral blood of humans following stimulation with
granulocyte-colony stimulating factor, commonly known as Neupogen ®.Dr.
Ratajczak’s group at the University of Louisville has published preliminary work
that would indicate that these stem cells have a role in cardiac regeneration
and may help identify those at risk for cardiovascular disease. In addition,
very small embryonic-like stem cells have been shown to increase in numbers in
the peripheral circulation following acute myocardial infarction, stroke and
other stress inducing events in experimental animals and in humans. Thus, very
small embryonic-like stem cells may have significant potential to repair
degenerated, damaged or diseased tissue, or the three “Ds” of aging. With our
existing banking network, we have the ability to collect and store very small
embryonic-like stem cells, along with other stem cell populations, from
individual donors, setting the stage for their future use in personalized
regenerative medicine.
In
addition to the research we are funding in Dr. Ratajczak’s laboratory at the
University of Louisville, we are funding research at the University of Michigan
in the laboratory of Dr. Russell Taichman to evaluate bone defect repair through
the proceeds of a $108,746 Grand Opportunities grant from the National
Institutes of Health. We are also in discussions with other
researchers to generate data relating to other clinical applications of very
small embryonic-like stem cells, that could include neural, cardiac, and
ophthalmic disease, to expand our research efforts and maximize the value of
this technology.
To
facilitate our independent research and development efforts, we opened an 8,000
square foot, state-of-the-art facility at the Riverside Technology Center in
Cambridge, Massachusetts, or the Cambridge Laboratory. In the near term, our
efforts will focus on expanding the current VSELTM
technology know-how and working with other adult stem cell technologies by
performing detailed purification, characterization and expansion of stem cells.
Furthermore, at the Cambridge Laboratory we are characterizing and developing
various adult stem cells, including VSELTM
technology, for therapeutic and diagnostic purposes. Specifically, the use of
stem cells as a diagnostic tool to understand aging has not been sufficiently
explored as a means to improve current therapies and to test new therapies. To
address this unmet need, we intend to create a stem cell screening panel, known
as a biomarker screening panel. This antibody-based test would simultaneously
quantify several important stem cell populations that are known to be
circulating in peripheral blood, including very small embryonic-like stem cells.
This biomarker screening panel would enable researchers to assess the relative
wellness of an individual by comparing his or her existing stem cell profile to
an age-adjusted reference of expected, or normal, stem cell levels. The
Cambridge Laboratory will also support the planned development of a commercial
process that we expect will facilitate the separation of very small
embryonic-like stem cells from blood, enabling us to create high-throughput,
cell-based assays for use in pharmaceutical and nutraceutical
research.
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We also
are engaged in licensing new adult stem cell-based therapies that we plan to use
to commercialize innovative therapeutic applications. Several recent
examples include:
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•
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In
February 2009, we entered into a License Agreement with Vincent Giampapa,
M.D., F.A.C.S. pursuant to which we acquired a world-wide, exclusive
license to certain innovative stem cell technology and applications for
cosmetic, facial and body procedures and skin
rejuvenation.
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In
April 2009, we entered into a License Agreement with Vincent Falanga,
M.D., pursuant to which we acquired a world-wide, exclusive license to
certain innovative stem cell technology and applications for wound
healing.
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In
May 2009, we entered into a License and Referral agreement with Promethean
Corporation, or Promethean, through its subsidiary, Ceres Living, Inc., or
Ceres, to use certain Company marks and publications in connection with
certain sales and marketing activities relating to its nutritional
supplement known as AIO Premium Cellular Health, a liquid nutritional
supplement based on certain nutraceuticals which have been shown to
optimize stem cell functions. Under the agreement, Ceres will
pay to the Company or the Stem for Life
Foundation specified fees for each unit of the product sold; and
Ceres is engaging in a referral service with respect to the Company’s
adult stem cell collection and processing activities. Ceres is
paid a referral fee by us for adult stem collections generated by Ceres’
referral network.
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Adult
Stem Cell Business in China
We
believe that, in China, we can accelerate research, the development of stem
cell-based therapies, and the creation of intellectual property positions in the
stem cell field because of China’s regulatory and scientific environment and its
culture, which are more readily accepting of stem cell-based therapies.
Additionally, China has a large population with a rapidly growing middle and
upper class who are interested in regenerative medicine and can afford such
services. Accordingly, in 2009, we expanded our operations and markets to
include China through the creation of a separate stem cell business
unit.
Our China
stem cell-based initiatives will be led by U.S. researchers and physicians in
collaboration with experts in China for each clinical application to be pursued.
We believe that this collaborative approach, and our expansion into China, will
create commercial, financial and scientific opportunities that, ultimately, will
generate increased revenues for us.
Our
current stem cell-based initiatives in China include:
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•
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developing
a pipeline of regenerative medicine therapies, initially focused on
orthopedic conditions;
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developing
wellness, cosmetic and anti-aging
applications;
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participating
in the medical tourism market for regenerative medical
treatments;
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establishing
a network of collection, processing and storage facilities;
and
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engaging
in research and development designed to improve and expand our service and
product offerings both in the U.S. and in
China.
|
Because
certain PRC regulations currently restrict foreign entities from holding certain
licenses and controlling certain businesses in China, we have created a wholly
foreign-owned entity, or WFOE, NeoStem (China), Inc., or NeoStem (China), to
implement our expansion initiatives in China. Additionally, to comply with
China’s foreign investment regulations with respect to stem cell-related
activities, these business initiatives in China are conducted via two Chinese
domestic entities, Qingdao Niao Bio-Technology Ltd., or Qingdao Niao, and
Beijing Ruijieao Bio-Technology Ltd., or Beijing Ruijieao, that are controlled
by the WFOE through various contractual arrangements. See “PRC Corporate Legal
Structure” below.
Orthopedic
Therapies
In order
to advance our regenerative medicine business in China, in March 2009, we
acquired an exclusive license for Asia to use an innovative process that expands
a patient’s own adult stem cells to treat a variety of musculoskeletal diseases.
The licensed procedure, RegenexxTM, has
been developed by a Colorado-based company, Regenerative Sciences, Inc., or RSI.
The RegenexxTM
procedure uses autologous mesenchymal stem cells extracted from bone marrow for
the treatment of various orthopedic conditions, including osteoarthritis,
meniscus tears of the knee, avascular necrosis and bulging lumbar discs. In
addition, our agreement with RSI includes consulting services to be provided by
RSI to us in the area of stem cell-based orthopedic therapies for the Asia
market. We believe that the integration of our peripheral blood collection
process into the RegenexxTM
procedure will enhance its marketability.
- 8
- -
To
provide orthopedic-related stem cell-based services, we intend to establish a
network of hospitals to offer these orthopedic treatments in China. We recently
established a collaboration with Shandong Wendeng Orthopedic Hospital, or
Wendeng Hospital, which will be the first of such hospitals. In June 2009,
Qingdao Niao entered into a five-year cooperation agreement with Wendeng
Hospital to treat patients and conduct clinical research regarding the
application of autologous stem cells for the treatment of a variety of
orthopedic conditions. Wendeng Hospital is considered to be one of the leading
speciality orthopedic hospitals in China, with close to 90% of its inpatient
capacity dedicated to orthopedic cases. Physician and laboratory personnel have
completed training at RSI, operations began at Wengdeng Hospital in the first
quarter of 2010 and it is anticipated that revenues will start to be generated
in the second quarter of 2010.
Wellness,
Cosmetic & Anti-Aging Applications
We are
developing a program that includes products and therapies, including stem
cell-based therapies and health supplements, that we intend to offer for
wellness, cosmetic and anti-aging applications. One of the key initial therapies
is anticipated to be the autologous adult stem cell-based skin rejuvenation
therapy that we in-licensed from Vincent Giampapa, M.D., in February
2009.
The
license agreement with Dr. Giampapa is intended to advance our regenerative
medicine business in the U.S. and China by our acquisition of a world-wide,
exclusive license to certain innovative stem cell technology and applications
for cosmetic facial and body procedures and skin rejuvenation. This supplements
a three-year agreement that Dr. Giampapa entered into with us in January 2009
where he agreed to provide us with consulting services in the anti-aging area.
In collaboration with Dr. Giampapa, we intend to develop and launch a range of
cosmetic and anti-aging applications in China.
These
therapeutic applications were anticipated to be provided, initially, by Qingdao
Niao at the facilities at the Qingdao Second Sanatorium of Jinan Military
Command, or the Second Sanatorium, pursuant to a three-year cooperation
agreement entered into in June 2009. Second Sanitorium is a leading
comprehensive hospital within the military’s healthcare network and one of the
principal healthcare centers in charge of ensuring the well-being of senior and
retired military officials in China. A section of the hospital is
undergoing renovations to allow for stem cell based thereapies in anti-aging and
such renovations are behind schedule. To avoid delay to our program
we are considering alternative locations for initially commencing these
activities.
Consulting
and Royalty Agreement
In June
2009, we signed an agreement, or the Network Agreement, with Enhance BioMedical
Holdings Limited, or Enhance BioMedical, a Shanghai corporation and subsidiary
of Enhance Holding Corporation, a multinational conglomerate with businesses in
various market sectors including healthcare. Pursuant to the Network Agreement,
Enhance Biomedical will help us develop an adult stem cell collection and
treatment network using our proprietary stem cell technologies in Shanghai and
Taiwan as well as the Chinese provinces of Jiangsu, Zhejiang, Fujian, Anhui and
Jiangxi, or the Network Territory. Enhance BioMedical has healthcare provider
relationships with numerous hospitals and doctors in the Network Territory. It
also operates the Anti-Aging and Prevention Medical Center in Taipei, Taiwan,
with facilities focused on stem cell research and development and anti-aging
therapies. As of March 15, 2010, Enhance BioMedical was the beneficial owner of
approximately 16.7% of our common stock.
The
Network Agreement is a ten-year, exclusive, royalty bearing agreement pursuant
to which we will provide Enhance BioMedical with the training, technical, and
other assistance required for it to offer stem cell-based therapies. Subject to
certain terms and conditions, the Network Agreement is renewable for a
subsequent ten-year term at the option of Enhance BioMedical. This agreement
also gives us the option, until June 2014, to acquire up to a 20% fully diluted
equity interest in Enhance BioMedical. We will receive certain
milestone payments as well as be entitled to a stated royalty on Enhance
BioMedical’s revenues derived from these stem cell-based therapies. Under the
Network Agreement, Enhance BioMedical has the exclusive right to utilize our
proprietary adult stem cell technologies identified by us to provide adult stem
cell services and therapies in the Network Territory.
In the
second quarter of 2010 we expect Enhance Biomedical to launch adult stem cell
collection and storage activities to enable them to launch the application
of cosmetic and anti-aging therapies in Taiwan during the summer of
2010 under our Network Agreement.
Medical
Tourism
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“Medical
tourism” is defined as the process of travelling from home for treatment abroad
or elsewhere domestically. A large segment of the individuals participating in
medical tourism seek access to medical therapies not currently available or
affordable in their home countries. The World Bank estimates that medical
tourism will be a $10 billion industry by 2011. In 2007 alone, 750,000 Americans
traveled outside the U.S. to obtain medical treatment, a number which is
expected to increase to 6 million by 2010.
Since our
inception, we have been building relationships with physicians in the U.S. and
abroad who have developed advanced therapies using autologous stem cells. China,
specifically, is fast emerging as a desirable destination for individuals
seeking medical care in a wide range of medical specialties, including
cardiology, neurology, orthopedics and others. As a result, a number of leading
private and government hospitals in major Chinese cities have established
medical tourism departments to provide treatment to international patients using
advanced Western medical technology and techniques, including stem cell-based
therapies. In addition to capitalizing on this trend as a potential driver for
our collection and storage business, we plan to work with specialty hospitals
and physicians in China and elsewhere to make stem cell-based therapies
available for these medical tourism patients.
Research
and Development
In May
2009, Qingdao Niao leased space from Beijing Zhongguancum Life Science Park
Development Corp., Ltd. to be used for a world-class storage facility in
Beijing, China or the Beijing Facility, that will be equipped to provide
comprehensive adult stem cell collection, processing and storage capabilities,
and a laboratory to support a number of our therapeutic programs, including the
orthopedic program at Wengdeng Hospital.
In
addition to supporting the processing and storage activities, the laboratory
will provide a state-of-the-art venue for expanded adult stem cell-related
research and development activities in China. We are collaborating with experts
in China to expand our intellectual property positions in the stem cell field
and develop adult stem cell-based therapies for the U.S. and broader China
markets. These efforts will be dedicated to the research and development of our
stem cell technology and its application to a number of therapeutic programs,
initially including diabetes, anti-aging and cardiac
disease. We are also in discussions with other researchers to
generate data relating to other clinical applications of very small
embryonic-like stem cells, that could include neural, cardiac, and ophthalmic
disease, to expand our research efforts and maximize the value of this
technology. In this regard, letters of intent have been executed between our
Chinese consultant, Shandong Life Science and Technology Research Institute, or
SLSI, and Peking University Diabetes Center, Beijing Institute of Geriatrics,
the Ministry of Health and Shandong University.
In July
2009, NeoStem (China) entered into a cooperation agreement with our Chinese
consultant, SLSI, to assist in the formation of a not-for-profit organization as
required under PRC law, to organize and conduct various stem cell-based clinical
trials in collaboration with specialty hospitals. This initiative was funded by
NeoStem (China) in the amount of approximately $730,000 and an additional
$500,000 is anticipated to be funded by NeoStem (China) over the next several
months.
In order
to implement the establishment of the Beijing Facility, as of December 31, 2009,
our Company, our WFOE subsidiary NeoStem (China), and Progenitor Cell
Therapy, LLC, a Delaware limited liability company, or PCT, entered into an
agreement, or the PCT Agreement, whereby NeoStem and NeoStem (China) engaged PCT
to perform the services necessary (1) to construct the Beijing Facility,
consisting of a clean room for adult stem cell clinical trial processing and
other stem cell collections which will have the processing capacity on an annual
basis sufficient for at least 10,000 samples, research and development
laboratory space, collection and stem cell storage area and offices, together
with the furnishings and equipment, and (2) to effect the installation of
quality control systems consisting of materials management, equipment
maintenance and calibration, environmental monitoring and compliance and adult
stem cell processing and preservation which comply with cGMP standards and
regulatory standards that would be applicable in the United States under GTP
standards, as well as all regulatory requirements applicable to the program
under the laws of the PRC.
Pursuant
to the terms of the PCT Agreement, the Beijing Facility is to be located at the
Life Science Innovation Center, Life Science Park,
Zhongguancum, Beijing. PCT is to complete the project on a “turn-key” basis.
Once the project has begun, our Company has the option to terminate the PCT
Agreement without cause upon providing no less than 60 days written notice to
PCT, subject to our obligation to pay for any services performed up to the date
of termination and certain costs and expenses incurred by PCT.
The
aggregate cost of the program, including the Phase 1 equipment purchases, is
expected to be approximately $3,000,000. The project will commence on April 1,
2010, and is anticipated to take approximately seven months to complete. PCT has
agreed to provide at least 90 days of support services to our Company for an
additional fee after completion of the project, which is renewable at the
request of our Company for an additional 90 days.
Pharmaceutical
Business in China — Erye
We
believe that China currently affords a unique opportunity to grow our revenues
on an accelerated basis. In order to enter this market, we completed the merger
with China Biopharmaceuticals Holdings, Inc., or the Merger, on October 30,
2009, the net effect of which was the acquisition by us of a 51% ownership
interest in Erye. Our current senior executive management team at Erye, Mr. Shi,
Chairman, and Madame Zhang, General Manager, joined Erye in 1998, who in
conjunction with others bought it from the PRC government in 2003 and, in the
years that followed, transformed it into a profitable private enterprise. Erye
had approximately 739 employees as of December 31, 2009, of which approximately
536 were full-time.
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Erye was
founded more than 50 years ago and represents an established,
vertically-integrated pharmaceutical business, focused primarily on the
manufacturing and sale of antibiotics. Historically, Erye has concentrated its
efforts on the manufacturing and distribution of generic antibiotic products and
has received more than 160 production certificates from the SFDA covering both
antibiotic prescription drugs and active pharmaceutical intermediates, or APIs.
Erye’s revenue for 2009 was approximately $61.
Industry
China has
a large population with a rapidly growing demand for pharmaceutical drugs and
has committed to providing increased governmental insurance to provide a larger
segment of the population greater access to pharmaceuticals. The antibiotics
market in China was approximately $8.8 billion in 2007, with an annual average
growth rate of approximately 24 percent for the previous three years. The
overall pharmaceuticals market is forecasted to triple in size by 2013, becoming
the third largest drug market in the world behind the U.S. and
Japan.
In early
2009, the PRC government announced that improving healthcare for its citizens
would be a major priority and China’s State Council approved the spending of
$124 billion on its healthcare system between 2009 and 2011. This spending
initiative, coupled with a population approaching 1.4 billion, makes China a
large market opportunity for pharmaceutical drugs. As part of this initiative,
China has created the New Rural and Urban Cooperative Medical Insurance System.
More than 60% of the drugs produced by Erye are covered under this new medical
insurance system.
Products
Erye
offers a broad portfolio of anti-infective drugs, with no single product
accounting for more than 10% of total revenues. In 2008, seven of the top 20
antibiotics used in Chinese hospitals were products offered by Erye. Erye’s top
five products, by revenue, for the first nine months of 2009, are set forth in
the following table:
|
Product
Name
|
Product
Type
|
Approximate
Revenue
|
||
|
|
|
(In
Millions)
|
||
|
Acetylspiramycin
|
API
|
$4.0
|
||
|
Oxacillin
Sodium
|
API
|
$3.2
|
||
|
Mezlocillin
Sodium
|
Injectible
Finished Product
|
$3.1
|
||
|
Amoxicillin/Sulbactum
Sodium
|
Injectible
Finished Product
|
$3.0
|
||
|
Cefoperazone/Sulbactum
Sodium
|
Injectible
Finished Product
|
$2.4
|
Erye is
currently focused on bringing more differentiated and higher-margin product
offerings to its portfolio.
Distribution/Customers
In China,
consumers generally receive prescription drugs through hospitals. Antibiotics
are distributed almost exclusively through hospitals. Since pharmaceutical
manufacturers in China are not permitted to sell directly to hospitals, it is
essential to have an effective and extensive distributor network. Erye’s
distributor network covers all of mainland China’s provinces and municipalities
and generates sales principally through three channels:
|
•
|
exclusive
distributors of prescription drugs, referred to as “co-sales teams”: this
distribution channel handles the clinical promotion and distribution of
differentiated, higher-margin product lines, within exclusive
province-based and municipality-based
territories;
|
|
•
|
non-exclusive
distributors of prescription drugs: this distribution channel is devoted
to selling established product lines that require little, if any, clinical
promotion; and
|
|
•
|
exclusive
distributors of APIs: this distribution channel is devoted to selling APIs
to large pharmaceutical manufacturers
nationwide.
|
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Erye has
an internal sales and marketing team of more than 40 individuals that supervise
the distributor network, assist with clinical promotions and manage hospital
relationships. Many of Erye’s sales executives have long-term experience in
pharmaceutical sales and previously held sales positions with state-owned
pharmaceutical companies, where they established long-standing relationships
with large distribution centers in several key regions nationwide and, in
particular, within the Yangzi River Triangle.
Production
Facilities
Erye
currently operates a production facility in the City of Suzhou, containing
approximately 33,490 square meters of offices, dormitories, a food court,
warehouse and production facilities, including eight (cGMP) production lines
certified by the SFDA, workshops and laboratory areas.
In 2005,
the PRC government issued a mandate requiring the relocation of many of Erye’s
existing manufacturing facilities. The government mandate did not require Erye
to relocate by any specific date. In order to comply with this mandate and to
meet the growing demands of its business, Erye acquired land use rights to
approximately 27 acres in the Xiangcheng District of Suzhou and, in 2007,
commenced the construction of a new, state-of-the-art production facility. This
new campus-style facility includes 12 buildings containing a total of
approximately 49,436 square meters of space, for which the external building
construction has been completed and manufacturing equipment is being assembled
and tested. The land use rights end in January of 2058.
Erye
began transferring its operations in January 2010. The relocation will continue
as the new production lines are completed and receive cGMP certification through
2011. In January 2010, Erye received notification that the SFDA has approved
Erye’s application for cGMP certification to manufacture solvent crystallization
sterile penicillin and freeze dried raw sterile penicillin at the new facility,
which provides 50% and 100% greater manufacturing capacity, respectively, than
its existing facility. Historically, these two lines have accounted for
approximately 20% of Erye’s sales.
Once Erye
has completed the transfer of operations to the new facilities, and its new
production lines are fully operational, it will have substantially increased
capacity from the current plant, with the goal of becoming among the largest
antibiotics producers in Eastern China. This dominant market position would
allow us to take advantage of the expected growth and spending in this segment
of the market. Our U.S. based management team intends to work closely with the
management of Erye to identify new pharmaceutical product candidates to further
accelerate revenue growth. We believe that our ownership in Erye, and the
expansion of our stem cell business into China, will create commercial,
financial and scientific opportunities to significantly grow our
business.
The total
cost of the new facility is estimated to be approximately $30 million, of which
approximately $16 million has been paid for through December 31, 2009. The
remaining $14 million is expected to be funded from a combination of proceeds
from the Company’s February 2010 common stock offering in which it
raised net proceeds of approximately $7.1 million, the proceeds from the
exercise by RimAsia in March 2010 of a warrant to purchase 1,000,000 shares of
Common Stock at a per share purchase price of $1.75 resulting in gross proceeds
to the Company of $1,750,000 (in each of the prior two cases such funding would
be in the form of a loan from the Company), an Erye line of credit and Erye’s
operating cash flow. To this end, the owners of Erye have agreed to reinvest a
substantial portion of their respective shares of the earnings of Erye to pay
the costs associated with the completion of, and Erye’s relocation to, the new
production facility.
Research
and Development — Product Pipeline
Erye
provides a well-established and capable platform and network for the
introduction of pharmaceuticals, and other health-related products, to the vast
domestic patient and consumer markets in China.
Currently,
Erye has seven new drug candidates in its pipeline, at varying stages of the
development and commercialization process. Applications for production
certificates for four of these drug candidates have been submitted to and are
pending approval by the SFDA, including Adefovir capsules, Cloxacillin Sodium
(API), Clindamycin Phosphate for injection, and Omeprazole capsules (approved
November 2009). Erye also has three candidates in clinical trials that could be
considered “new drugs” in China, including Faropenem sodium (API), Faropenem
tablets, a broad spectrum antibiotic, and Tiopronin enteric-coated capsules,
used to prevent kidney stones.
Erye’s
recent track record for obtaining SFDA production certificates includes seven
certificates in 2007, four certificates in 2008 and four certificates in 2009
(including Omeprazole capsules).
In
addition to research and development regarding new prescription drugs, we plan
to expand Erye’s product pipeline with health supplements and nutraceutical
products. We believe that the expansive markets in China present opportunities
for these products and that Erye already has extensive capabilities to
accelerate product distribution.
PRC
Corporate Legal Structure
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We
conduct our operations in the PRC through two distinct business units: (i) our
China pharmaceutical business unit which we conduct though our 51% ownership
interest in Erye; and (ii) our China adult stem cell business unit which we
conduct through contractual arrangements that our wholly foreign-owned entity,
or WFOE, NeoStem (China) has with two variable interest entities, or VIEs,
Qingdao Niao Bio-Technology Ltd. and Beijing Ruijieao Biotechnology
Ltd.
China
Pharmaceutical Business
On
October 30, 2009, we completed the Merger with China Biopharmaceuticals
Holdings, Inc., or CBH, through a wholly-owned subsidiary of ours with our
subsidiary as the surviving entity. As a result of the Merger, we acquired a
controlling interest in Suzhou Erye Pharmaceuticals Company Ltd., or Erye, a
Sino-foreign joint venture with limited liability organized under the laws of
the PRC. Suzhou Erye Economy and Trading Co. Ltd., or EET, owns the remaining
49% ownership interest in Erye. An amended joint venture agreement and articles
of association of Erye, the effectiveness of which was subject to approval by
the requisite PRC government authorities, was prepared and approval obtained in
principle on December 28, 2009 from Jiangsu Bureau of Foreign Economic and
Trade. Notwithstanding this approval, we cannot be certain that all
provisions, especially those provisions relating to the distribution and
liquidation preference in the joint venture contract, are in full compliance
with or fully enforceable under PRC law.
China
Adult Stem Cell Business
Because
certain PRC regulations currently restrict or prohibit foreign-invested entities
from holding certain licenses and controlling businesses in certain industries
in China, we created the WFOE, NeoStem (China), to implement our expansion
objectives in China. NeoStem (China) may engage in the research and development,
transfer and technological consultation service of bio-technology, regenerative
medical technology and anti-aging technology, excluding the development or
application of human stem cell, gene diagnosis and treatment technologies;
consultation of economic information; import, export and wholesaling of
machinery and equipment (the import and export do not involve the goods
specifically stipulated in/by state-operated trade, import and export quota
license, export quota bidding, export permit, etc.). To comply with China’s
foreign investment prohibition on stem cell research and development, clinical
trials and related activities, this business is conducted via two VIEs: Qingdao
Niao and Beijing Ruijieao, each a Chinese domestic company controlled by NeoStem
(China) through the VIE documents. Under the VIE documents, the shareholders of
the VIEs are required to transfer their ownership interests in these entities to
NeoStem (China) in China in the event Chinese laws and regulations allow foreign
investors to hold ownership interests in the VIEs, or to our designees at any
time for the amount of, to the extent permitted by Chinese laws, the outstanding
loans to the VIE shareholders. The shareholders of the VIEs have entrusted us to
appoint the directors and senior management personnel of the VIEs on their
behalf. Through NeoStem (China), we have entered into exclusive technical and
management service agreements and other service agreements with the VIEs, under
which NeoStem (China) is providing technical and management services to the VIEs
in exchange for substantially all net income of the VIEs. In addition,
shareholders of the VIEs have pledged their equity interests in the VIEs to
NeoStem (China) as collateral for non-payment of loans or for fees on technical
and management services due to us.
The
capital investment in these VIEs is funded by us through the WFOE and recorded
as interest-free loans to the shareholders of Qingdao Niao and Beijing Ruijieao.
To date, the WFOE has been capitalized in the total amount of approximately $2.9
million with an additional $1,000,000 anticipated in the second quarter of 2010.
As of December 31, 2009, the total amount of interest-free loans to these
shareholders of the VIEs listed as above was approximately 5,500,000 RMB
(approximately $805,000). We expect that the WFOE will require
substantial additional funding in order for us to continue the current expansion
plans in China associated with our stem cell business.
In
December, 2009, in order to facilitate working capital requirements in China,
NeoStem (China) issued a promissory note to the Bank of Rizhao Qingdao Branch
in the amount of 4,400,000 RMB (approximately
$643,700). The note is due on June 21, 2010 and bears an interest rate of 4.05%.
The loan is collateralized by cash in a restricted bank account totaling
5,189,400 RMB (approximately $759,200). In addition, in January, 2010 NeoStem
(China) entered into a pledge agreement with the bank pledging all of its
interest in its VIEs as additional collateral for the loan.
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We expect
to receive benefits, to the extent permitted by PRC laws, through various VIE
contractual agreements in the form of authorized sharing of the ownership of the
know-how and other intellectual property rights derived from the clinical trials
and research and development, and in the form of financial benefits on a basis
of profit sharing mechanisms with participating partner hospitals from the
commercialization of regeneration medical treatments developed successfully from
the clinical trials.
Pursuant
to certain opinions regarding Administration of Not-for-profit Research
Institutions (Trial), or the Opinions, which were promulgated and became
effective on December 19, 2000, not-for-profit research institutions shall have
independent legal person status, and shall operate independently under the
guidance and supervision of corresponding government authorities. Not-for-profit
research institutions shall conduct science, research, technical consulting and
technical service mainly for the purpose of social benefits, and shall not be
operated for profit. No person or institution shall obtain any investment return
from not-for-profit research institutions in any manner, and all of the income
generated by not-for-profit research institutions during their provision of
for-profit services to society, and which is permitted to be kept by the
not-for-profit research institution pursuant to relevant rules, shall be used
for the development of the not-for-profit research institution.
Accordingly,
we are cooperating, through NeoStem (China) with our China consultant, SLSI,
with regard to the formation of a not-for-profit organization under PRC law, to
organize and conduct various clinical trials in China. We have provided funding
through a contractual arrangement with SLSI, and SLSI has taken responsibility
for establishing and structuring clinical trials with third parties, other
research institutes and a number of partner hospitals. Through various VIE or
other contractual agreements, we expect to obtain, directly or indirectly, part
of the management and operation rights and benefits from SLSI. However, if this
contractual arrangement is regarded as breaching any clause in the Opinions, the
contractual agreements we have with SLSI will need to be terminated or modified,
and we may not obtain or continue to obtain benefits, directly or indirectly,
from SLSI as expected.
Further,
pursuant to the Interim Measures for the Administration of Human Genetic
Resources, or the Measures, which was promulgated and took effect on June 10,
1998, China adopted a reporting and registration system on important pedigrees
and genetic resources in specified regions. Whoever is engaged in activities in
China such as sampling, collecting, researching, developing, trading or
exporting human genetic resources or taking such resources outside China shall
abide by the Measures. The term “human genetic resources” in the Measures refers
to the genetic materials such as human organs, tissues, cells, blood specimens,
preparations of any types or recombinant DNA constructs, which contain human
genome, genes or gene products as well as to the information related to such
genetic materials. It is possible that the research and development operations
conducted by SLSI may be regarded by corresponding government authorities in
China as human genetic resources research and development activities, and thus,
the Measures may apply. If the Measures apply to the cooperation between the Lab
and/or the SLSI, and us, such cooperation is subject to approval of competent
government authorities in China. The sharing of patents or other corresponding
intellectual property rights derived from such research and development
operations is also subject to various restriction and approval requirements
established under the Measures. If we are unable to obtain corresponding
approvals on a timely basis, or at all, our operation in China will be
materially adversely affected.
One VIE
will be devoted to adult stem cell related research and development activities
and the other will be devoted to the commercialization of stem cell-based
therapies in collaboration with hospitals.
Intellectual
Property
We are
seeking patent protection for our technology. We acquired and are prosecuting
one pending U.S. patent application which had been filed by our predecessor, NS
California. This patent application is intended to cover the process by which
stem cells from the bone marrow are mobilized, isolated from adult peripheral
blood and stored. In addition, we have filed a patent application covering
low-dose, short course, cytokine induction of stem cell mobilization and patent
applications claiming methods of purifying stem cells. The Company also has
filed two additional U.S. patent applications claiming methods of isolating
adult stem cells using various proprietary techniques.
Pursuant
to our license agreement covering the VSELTM
technology, we acquired the exclusive, world-wide license to patent applications
and know-how relating to very small embryonic-like stem cells. Patent
applications regarding this technology are pending in the U.S., China and
Europe. These patent applications relate specifically to a method of isolating
and using very small embryonic-like stem cells. Under the license for the
VSELTM
technology, we have the right to unpatented inventions and discoveries contained
in certain manuscripts relating to transplantation and mobilization of these
cells in certain circumstances, which has been pursued in subsequently filed
provisional patent applications.
Pursuant
to our license agreement with Vincent Giampapa, M.D., F.A.C.S., we have an
exclusive, world-wide license to a granted U.S. patent, patent applications and
know-how relating to methods and compositions for the restoration of age-related
tissue loss.
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Pursuant
to our license agreement with Vincent Falanga, M.D., F.A.C.P., we have an
exclusive, world-wide license to a U.S. provisional patent application and
corresponding PCT application and know-how relating to the use of autologous
mesenchymal stem cells to treat wounds.
Pursuant
to our license agreement with RSI, we have an exclusive license for Asia to a
patent application pending in Hong Kong and the right to file additional patent
applications throughout Asia, as well as an exclusive license to know-how, all
relating to the isolation and use of mesenchymal stem cells in orthopedic
indications.
There can
be no assurance that any of our patent applications will issue as patents or
should patents issue that they will not be found invalid. The patent position of
biotechnology companies generally is highly uncertain and involves complex
legal, scientific and factual questions.
The
government approval procedure in China for the filing, consideration and
approval of new patent applications is as follows: The applicant prepares
documentation and sends the application to State Intellectual Property Office of
China, or SIPO, usually through patent application agencies. The application is
then examined by SIPO. If the application is approved, SIPO issues and releases
a patent illustration book for challenges by competing claimants. Once the
illustration book is issued, the patent is protected. Within a three-year
period, depending on different categories of the patent, if there are no
challenges against the patent, then SIPO will issue a patent license to the
applicant.
Competition
Pharmaceutical
operations in China are still at an early stage of development due to heavy
state involvement in the past. However, competition from China-based drug
manufacturing companies is growing rapidly. Our direct competitors are domestic
pharmaceutical companies and new drug research and development institutes such
as Harbin Pharmaceutical Group Holding Co., Ltd., Shanghai Asia Pioneer
Pharmaceutical Co., Ltd, Shandong Lukang Pharmaceutical Co., Ltd., Shandong
Luoxin Pharmacy Stock Co. Ltd., China Pharma Holdings, China Biologic Products,
China Sky One Medical, Sinovac Biotech and Tianyin Pharma. We also face
competition from foreign companies who have strong proprietary pipelines and
strong financial resources.
Historically
in the U.S., we have faced competition from other established operators of stem
cell preservation businesses and providers of stem cell storage services. Today,
there is an established and growing market for cord blood stem cell banking. We
are also aware of another company with established stem cell banking services
that processes and stores stem cells collected from adipose, or fat, tissue.
This type of stem cell banking requires harvesting fat by a liposuction
procedure. Embryonic stem cells represent yet another alternative to pre-donated
and stored adult stem cells. As techniques for expanding stem cells improve,
thereby allowing therapeutic doses, the use of embryonic stem cells and other
collection techniques of adult stem cells could increase and compete with our
services. Finally, we are aware that other technologies are being developed to
turn skin cells into cells that behave like embryonic stem cells or to harvest
stem cells from the pulp of baby teeth. While these and other approaches remain
in early stages of development, they may one day be competitive.
In
addition, cord blood banks such as ViaCord or LifebankUSA easily could enter the
field of adult stem cell collection because of their processing labs, storage
facilities and customer lists. We estimate that there are approximately 43 cord
blood banks in the U.S., approximately 28 of which are autologous, meaning that
the donor and recipient are the same, and approximately 15 of which are
allogeneic, meaning that the donor and recipient are not the same. Hospitals
that have transplant centers to serve cancer patients may elect to provide some
or all of the services that we provide. We estimate that there are approximately
162 hospitals in the U.S. with stem cell transplant centers. These competitors
may have better experience and access to greater financial resources than we do.
In addition, other established companies may enter our markets and compete with
us.
The
provision of stem cell-based therapies and banking services in China is a
nascent industry, with most participants engaging through single facilities on a
small scale. Many of these treatment centers rely on technology taken from
domestic universities, although a few more advanced competitors use technology
licensed from overseas. These small facilities are typically focused on
delivering stem cell treatments in one specific treatment area, such as central
nervous system diseases, ischemia, and cosmetics, with the majority treating
central nervous system diseases. Given limited stem cell operations in China,
the market remains significantly underserved.
Of the
field of stem cell-based therapies and banking services in China, the only
competitor of note of which we are aware is Beike Biotechnology Co Ltd., or
Beike, headquartered in Shenzhen, Guangzhou province, which provides stem
cell-based treatments through collaborations with a network of approximately 20
hospitals. In 2008, Beike established a stem cell storage facility in Jiangsu
province, recently broke ground on an expanded facility and has disclosed that
it plans to eventually house induced pluripotent stem cells (iPS) extraction on
a commercial scale.
Governmental
Regulation
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As we
expand into China, we expect to rely upon the experience of Erye as well as
certain of our other PRC advisors and consultants with the Drug Administration
Law of China, which governs the licensing, manufacturing, marketing and
distribution of pharmaceutical products in China. Additionally, our operations
are subject to various PRC regulations and permit systems.
The
application and approval procedure in China for a newly-developed drug product
is nearly as detailed and lengthy as that for U.S. new drug applicants,
requiring the documentation of pharmacological studies, toxicity studies and
pharmacokinetics and drug metabolism (PKDM) studies and new drug samples.
Documentation and samples are then submitted to a provincial food and drug
administration, or the provincial FDA. The provincial FDA sends its officials to
the applicant to check the applicant’s research and development facilities and
to arrange a new drug examination committee meeting for approval deliberations.
This process usually takes three months. After the documentation and samples are
approved by the provincial FDA, the provincial FDA will submit the approved
documentation and samples to the SFDA. The SFDA examines the documentation and
tests the samples and arranges a new drug examination committee meeting for
approval deliberations. If the application is approved by the SFDA, the SFDA
will issue a clinical trial license to the applicant allowing the applicant to
conduct human clinical trials. The clinical trial license approval typically
takes one year. The applicant completes the clinical trial process and prepares
documentation and files submitted to the SFDA for new drug approval. The
clinical trial process usually takes one or two years depending on the category
and class of the new drug. The SFDA examines the documentation and gives final
approval for the new drug and issues the new drug license to the applicant. This
process usually takes 8 months. As a result, the entire process for new drug
approval, from start to finish, usually takes three to four years.
The PRC
government is in the process of reviewing its industry policies relating to the
pharmaceutical industry and, as a part of this review, has been reviewing drug
permits and licenses that have been issued. As of now, Erye maintains good
standing of its drug permits and licenses. Although the PRC government has
published regulations regarding stem cell clinical applications, there is
currently not implemented guidance. Without guidance, it is difficult
to definitively know how the regulations are to be implemented.
The PRC
Antitrust Law was promulgated on August 30, 2007 and became effective on August
1, 2008. The government authorities in charge of antitrust matters in China are
the Antitrust Commission and other antitrust authorities under the State
Council. The PRC Antitrust Law regulates: (i) monopoly agreements, including
decisions or actions in concert that preclude or impede competition, entered
into by business operators; (ii) abuse of dominant market position by business
operators; and (iii) concentration of business operators that may have the
effect of precluding or impeding competition. Except for the exemptions set
forth under Article 15 of the PRC Antitrust Law, competing business operators
are prohibited from entering into monopoly agreements that fix or change
commodity prices, restrict the production volume or sales volume of commodities,
divide markets for sales or procurement of raw materials, restrict procurement
of new technologies or new equipment or development of new technologies or new
equipment, result in joint boycott of transactions or constitute monopoly
agreements as determined by the antitrust authority.
In
addition, business operators with the ability to control the price or quantity
of commodities or other trading conditions or those with the ability to block or
affect other business operators into the relevant markets are prohibited from
engaging in certain business conducts that would result in abuse of their
dominant market position.
Moreover,
concentration of business operators refers to: (i) merger with other business
operators; (ii) gaining control over other business operators through
acquisition of equity interest or assets of other business operators; and (iii)
gaining control over other business operators through exerting influence on
other business operators through contracts or other means. In the event of
occurrence of any concentration of business operators and to the extent required
by the Antitrust Law, the relevant business operators must file with the
antitrust authority under the State Council prior to conducting the contemplated
business concentration. If the antitrust authority decides not to further
investigate whether the contemplated business concentration has the effect of
precluding or impeding competition or fails to make a decision within 30 days
from receipt of relevant materials, the relevant business operators may proceed
to consummate the contemplated business concentration.
It is
widely expected that a set of detailed implementing rules of the PRC Antitrust
Law will be issued by the PRC government. We are now in the process of reviewing
our current business model and business operation against the PRC Antitrust Law.
However, before the promulgation of such implementing rules, we are unable to
determine whether we might be in violation of any aspects of the PRC Antitrust
Law.
The
services that we provide to individuals are relatively new. Our adult stem cell
collection, processing and storage service is not a medical treatment, although
it involves medical procedures. Our stem cell-related business is not addressed
by many of the regulations applicable to our field and as a result, there is
often considerable uncertainty as to the applicability of regulatory
requirements. Although we have devoted significant resources to ensuring
compliance with those laws that we believe to be applicable, it is possible that
regulators may disagree with our interpretations, prompting additional
compliance requirements or even enforcement actions.
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We
believe that the adult stem cells collected, processed and stored through our
collection services are properly classified under the FDA’s human cells, tissues
and cellular- and tissue-based products, or HCT/P, regulatory paradigm and
should not be classified as a medical device, biologic or drug.
Relationships
with licensed professionals such as physicians may be subject to state and
federal laws restricting the referral of business, prohibiting certain payments
to physicians, or otherwise limiting such collaborations. If our services become
approved for reimbursement by government or private insurers, we could be
subject to additional regulation and perhaps additional limitations on our
ability to structure relationships with physicians. Additionally, state
regulators may impose restrictions on the business activities and relationships
of licensed physicians or other licensed professionals. For example, many states
restrict or prohibit the employment of licensed physicians by for-profit
corporations, or the “corporate practice of medicine.” If we fail to structure
our relationships with physicians in accordance with applicable laws or other
regulatory requirements it could have a material adverse effect on our business.
Even if we do enter into these arrangements, we may not be able to maintain
these relationships or establish new ones in the future on acceptable
terms.
Some
states also impose additional regulation and oversight of clinical laboratories
operating within their borders and impose regulatory compliance obligations on
out-of-state laboratories providing services to their residents. Many of the
states in which we, our strategic partners or members of our collection network
engage in collection, processing or storage activities have licensing
requirements that must be complied with. Additionally, there may be state
regulations impacting the use of blood products that would impact our business.
There can be no assurance that we, our strategic partners or members of our
collection center network will be able to obtain or maintain any necessary
licenses required to conduct business in any states or that the cost of
compliance will not materially and adversely affect our ability to market or
perform our services or our ability to do so profitably. Certain licensing
requirements require employment of medical directors and others with certain
training and technical backgrounds and there can be no assurance that such
individuals can be retained or will remain retained or that the cost of
retaining such individuals will not materially and adversely affect our ability
to market or perform our services or our ability to do so
profitably. The Cambridge laboratory has established a quality
program based on Occupational Safety and Health Administration (“OSHA”)
laboratory safety standards and American Association of Blood Bank (“AABB”)
standards
Since
January of 2004, registration with the FDA is required by facilities engaged in
the recovery, processing, storage, labeling, packaging or distribution of any
HCT/Ps, or the screening or testing of a donor. Any third party retained by us
to process our samples must be similarly registered with the FDA and comply with
HCT/P regulations. The FDA also adopted rules in May 2005 that regulate current
Good Tissues Practices, or cGTP. Additionally, adverse events in the field of
stem cell therapy that may occur could result in greater governmental regulation
of our business, creating increased expenses and potential delays relating to
the approval or licensing of any or all of the processes and facilities involved
in our stem cell collection and storage services.
In the
U.S., our planned stem cell biomarker screening panels may be subject to
regulation as a medical device by the FDA under the Federal Food, Drug and
Cosmetic Act. These domestic regulations govern many of the commercial
activities we plan to perform, including the purposes for which our proposed
immunodiagnostic assays can be used, the development, testing, labeling, storage
and use of our proposed assays with other products, and the manufacturing,
advertising, promotion, sales and distribution of our proposed assays for the
approved purposes. Compliance with these regulations could prove expensive and
time-consuming and render such panels commercially impractical.
We are
subject to state and federal privacy laws related to the protection of our
customers’ personal health information and state and federal laws related to the
security of such personal health information and other personal data to which we
would have access through the provision of our services. Currently, we are
obligated to comply with privacy and security standards adopted under HIPAA.
Certain of these regulatory obligations will be changing over the next year as a
result of amendments to HIPAA under the American Recovery and Reinvestment Act
of 2009. Consequently, our compliance burden will increase, and we will be
subject to audit and enforcement by the federal government and, in some cases,
enforcement by state authorities. We will also be obligated to publicly disclose
wrongful disclosures or losses of personal health information. We may be
required to spend substantial amounts of time and money to comply with these
requirements, any regulations and licensing requirements, as well as any future
legislative and regulatory initiatives. Failure by us or our business partners
to comply with these or other applicable regulatory requirements or any delay in
compliance may result in, among other things, injunctions, operating
restrictions, and civil fines and criminal prosecution, a material adverse
effect on the marketing and sales of our services and impair our ability to
operate profitably or at all.
We
also are subject to state and federal laws regulating the proper disposal of
biohazardous materials. Accordingly, we are subject to and seek to comply with,
applicable regulations under federal, state and local laws regarding employee
safety, environmental protection and hazardous substance control. We have made
and will continue to make expenditures for environmental compliance,
environmental protection and employee safety. Such expenditures have not had,
and in the opinion of management are not expected to have, a material effect on
our financial position, results of operation, capital expenditures or
competitive position. However, these laws may change, our processes may change,
or other facts may emerge which could affect our operations, business or assets
and therefore the amount and timing of expenditures in the future may vary
substantially from those currently anticipated.
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As the
stem cell therapy industry is at an early stage of development in China, new
laws and regulations may be adopted in the future to address new issues that
arise from time to time. As a result, substantial uncertainties exist regarding
the interpretation and implementation of current and any future PRC laws and
regulations applicable to the stem cell therapy industry. There is no way to
predict the content or scope of future Chinese stem cell regulation. There can
be no assurance that the PRC government authorities will not issue new laws or
regulations that impose conditions or requirements with which we cannot comply.
Noncompliance could materially and adversely affect our business, results of
operations and financial condition.
The
Chinese Ministry of Commerce, or MOFCOM, and Ministry of Science and Technology
of China, or MOST, jointly publish the Catalogue of Technologies the Export of
which from China is Prohibited or Restricted, and the Catalogue of Technologies
the Import of which into China Prohibited or Restricted. Stem cell-related
technologies are not listed in the current versions of these catalogues, and
therefore their import or export should not be forbidden or require the approval
of MOFCOM and MOST. However, these catalogues are subject to revision and, as
the PRC authorities develop policies concerning stem cell technologies, it is
possible that the categories would be amended or updated should the PRC
government want to regulate the export or import of stem cell related
technologies to protect material state interests or for other reasons. Should
the catalogues be updated so as to bring any activities of the planned stem cell
processing, storage and manufacturing operation in Beijing and related research
and development activities under their purview, any such limitations or
restrictions imposed on the operations and related activities could materially
and adversely affect our business, financial condition and results of
operations.
Employees
As of
December 31, 2009, NeoStem had 25 full-time, and 3 part-time employees in the
U.S., and 2 employees in China. None of our employees is covered by a collective
bargaining agreement, and we believe our employee relations are good. Erye has
739 employees, of which 536 are full-time employees, all of whom are
located in Jiangsu Province, China. Although a significant number of Erye’s
employees have employment contracts, none of the employees are covered by a
collective bargaining agreement, and employee relations are believed to be
good. It is anticipated with the relocation of the Erye plant, there
will be some attrition of employees though it will not have a significant impact
on Erye.
Former
Business Operations and Corporate Information
NeoStem
was incorporated under the laws of the State of Delaware in September 1980
under the name Fidelity Medical Services, Inc. Under prior management it
engaged in various businesses, including the development and sale of medical
imaging products, the retail sale and wholesale distribution of stationery and
related office products in the United Kingdom, operation of a property and
casualty insurance business, and ultimately through June 2002 the sale of
extended warranties and service contracts over the Internet covering automotive,
home, office, personal electronics, home appliances, computers and garden
equipment. In June 2002, management determined, in light of continuing
operating losses, to discontinue its warranty and service contract business and
to seek new business opportunities for NeoStem. NeoStem entered a new line of
business where it provided capital and guidance to companies in multiple sectors
of the healthcare and life science industries, in return for a percentage of
revenues, royalty fees, licensing fees and other product sales of the target
companies. In addition to such activities, since June 2002 NeoStem
continued to “run off” the sale of its warranties and service contracts. This
run off was completed in March 2007.
We
commenced operations in our adult stem cell business in January 2006. On October
30, 2009, we completed a merger with China Biopharmaceuticals Holdings, Inc., or
CBH, the former owner of the 51% interest in Erye. Our principal executive
offices are located at 420 Lexington Avenue, Suite 450, New York, New York
10170, and our telephone number is (212) 584-4180. We maintain a corporate
website at www.neostem.com. The contents of our website are not part of this
Annual Report on Form 10-K and should not be relied upon in connection
herewith.
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ITEM
1A. RISK FACTORS
THE RISKS DESCRIBED BELOW ARE NOT THE
ONLY RISKS FACING THE COMPANY. ADDITIONAL RISKS THAT WE DO NOT YET KNOW OF OR
THAT WE CURRENTLY THINK ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS.
THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY, IN ADDITION TO THE OTHER INFORMATION
CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED
HEREIN BY REFERENCE. THE STATEMENTS CONTAINED IN OR INCORPORATED BY REFERENCE
INTO THIS ANNUAL REPORT ON FORM 10-K THAT ARE NOT HISTORIC FACTS ARE
FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN OR
IMPLIED BY FORWARD-LOOKING STATEMENTS. IF ANY OF THE RISKS OCCUR, OUR
BUSINESS STRATEGY, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE ADVERSELY
AFFECTED.
Risks
Related to Our Business and Financial Condition
We
are a company with a limited operating history and have incurred substantial
losses and negative cash flow from operations in the past, and we expect to
continue to incur losses and negative cash flow for the near term.
We are a
company with a limited operating history, limited capital, and limited sources
of revenue. Since our inception in 1980, we have incurred net losses of
approximately $71 million through December 31, 2009. We incurred net losses of
approximately $25.0 million for the year ended December 31, 2009 and
approximately $9.2 million for the year ended December 31, 2008, and we expect
to incur additional operating losses and negative cash flow in the future. The
revenues from our adult stem cell collection, processing and storage business
are not sufficient to cover costs attributable to that business. We expect to
incur losses and negative cash flow for the foreseeable future as a result of
our activities under license and sponsored research agreements relating to our
VSELTM
technology and other research and development efforts to advance stem cell and
other therapeutics, both in the U.S. and China. We also expect to continue to
incur significant expenses related to sales, marketing, general and
administrative and product research and development in connection with the
development of our business.
Although
Suzhou Erye Pharmaceuticals Company Ltd., or Erye, a Chinese pharmaceutical
company in which we recently acquired a 51% interest, earned $12.3 million in
net income for the year ended December 31, 2009, it has only a limited history
of earnings. Moreover, Erye is expected to incur significant expenses in the
near term due to: (1) costs related to stabilizing and streamlining its
operations; (2) costs related to the relocation of its production operations to
a new facility currently under construction; (3) research and development costs
related to new drug projects; and (4) costs related to expanding its existing
sales network for new drug distribution. Pursuant to the current joint venture
agreement that governs the ownership and management of Erye, or the Joint
Venture Agreement, which is subject to PRC government approval, for the next
three years (i) 49% of undistributed profits, after tax, will be distributed to
Suzhou Erye Economy and Trading co. Ltd., or EET, which owns the remaining 49%
of Erye, and loaned back to Erye for use in connection with its construction of
the new Erye facility; (ii) 45% of the net profit after tax will be provided to
Erye as part of the new facility construction fund, which will be characterized
as paid-in capital for our 51% interest in Erye; and (iii) only 6% of the net
profit will be distributed to us directly for our operating expenses. As a
result, we will not be able to supplement our cash flow fully from the
operations and income expected to be generated by Erye.
We
will need substantial additional capital to continue operations and additional
capital may not be available on acceptable terms, or at all.
We will
require substantial additional capital to fund our business plan, including
additional research and development activities related to our adult stem cell
technologies and drug development efforts, and to support marketing efforts in
the U.S. and China. Our actual cash requirements may differ materially from
those currently estimated.
At
December 31, 2009, we had a cash balance of $7,159,369. The trading volume of
our common stock, coupled with our history of operating losses and liquidity
problems, may make it difficult for us to raise capital on acceptable terms or
at all. The demand for the equity and debt of small cap biopharmaceutical
companies like ours is dependent upon many factors, including the general state
of the financial markets. As demonstrated over the last year, during times of
extreme market volatility, capital may not be available on favorable terms, if
at all. Our inability to obtain such additional capital on acceptable terms
could materially and adversely affect our business operations and ability to
continue as a going concern.
If
we are unable to manage the growth of our business, our prospects may be limited
and the results of our operations and ability to continue as a going concern may
be materially and adversely affected.
We intend
to expand our sales and marketing programs, manufacturing capacity, and
portfolios of pharmaceutical products and innovative stem cell-based therapies
to meet future demand in the U.S. and China. Any significant expansion may
strain our managerial, financial and other resources. If we are unable to manage
our growth, our business, operating results and financial condition could be
materially adversely affected. We will need to continually improve our
operations, financial and other internal systems to manage our growth
effectively, and any failure to do so may result in slower growth, diminished
operating results and a failure to achieve profitability, which would materially
and adversely affect our ability to continue as a going concern.
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All
acquisitions intended to grow our business may expose us to additional
risks.
We will
continue to review acquisition prospects that could complement our current
business, increase the size and geographic scope of our operations or otherwise
offer revenue generating or other growth opportunities. Any increase in debt in
connection with an acquisition could result in increased interest expense.
Additionally, acquisitions may dilute the interests of our stockholders, place
additional constraints on our available cash and entail other risks, including:
difficulties in assimilating acquired operations, technologies or products; the
loss of key employees from acquired businesses; diversion of management’s
attention from our core business; risks of successor liability for unknown
claims; and risks of entering markets, including international markets, in which
we have limited or no prior experience.
Risks
Related to the Stem Cell Business
The
University of Louisville has the ability to exercise significant influence over
the future development of our VSELTM
technology.
The terms
of our exclusive license of the VSELTM
technology from the University of Louisville provide for a collaborative
approach on development decisions. For example, should we seek to collaborate
with a third party on the VSELTM
technology programs, prior approval of the University of Louisville would be
required for any sublicensing agreement. There can be no assurance they would
grant approval for decisions requiring their consent. In addition, we entered
into a sponsored research agreement with the University of Louisville, pursuant
to which they perform certain research activities for us. Accordingly, although
we have recently begun our own independent research and development activities
with respect to the VSELTM
technology and have entered into an additional sponsored research agreement with
the University of Michigan, we are highly dependent on the University’s
cooperation and performance in developing the VSELTM
technology. Further, the VSELTM
technology 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 VSELTM
technology. The sponsored research agreement requires other periodic payments.
Our failure to meet our financial or other obligations under the license or
sponsored research agreement in a timely manner could result in the loss of some
or all of our rights to proprietary technology, such as the loss of exclusive
rights or even termination of the agreements, and/or we could lose our right to
have the University of Louisville conduct research and development efforts on
our behalf.
We
have a very limited history of conducting our own research and development
activities.
To
support our own research and development capabilities for our VSELTM
technology and other stem cell technologies, in September 2009 we signed a lease
for approximately 8,000 square feet of office and laboratory space in Cambridge,
Massachusetts that serves as our research and development headquarters. To
pursue our business strategy, we must increase our internal research
capabilities, which we are endeavoring to accomplish at this facility, and by
establishing relationships with third parties. There can be no assurance that we
will be successful in these efforts. Our additional research and development
capacity also will require adequate sources of funding. There can be no
assurance that any of these development efforts will produce a successful
product or technology. Our failure to develop new products would have a material
adverse effect on our business, operating results and financial
condition.
Even
if we are successful in developing a therapeutic application using our VSELTM
technology or other potential stem cell technologies, we still may be
unsuccessful in creating a commercially viable and profitable
business.
The
commercial viability of our VSELTM
technology and other stem cell technologies may depend upon our ability to
successfully expand the number of stem cells collected through adult stem cell
collection processes in order to achieve a therapeutically-viable dose. Today,
the number of very small embryonic-like stem cells that can be isolated from the
peripheral blood of an adult donor is relatively small and this volume of cells
may not be sufficient for therapeutic applications. A critical component of our
adult stem cell collection, processing and storage services relating to the
VSELTM
technology and other potential stem cell technologies could therefore be the
utilization of stem cell expansion processes. There are many biotechnology
laboratories attempting to develop stem cell expansion technology, but to date
stem cell expansion techniques remain very inefficient. There can be no
assurance that such technology will be effective or available at all. The
failure of cost effective and reliable expansion technologies to become
available could severely limit the commercial opportunities of our VSELTM
technology programs and other potential stem cell technologies and limit our
business prospects, which could have a material adverse effect on our business,
operating results and financial condition.
Moreover,
stem cell collection techniques are rapidly developing and could undergo
significant change in the future. Such rapid technological development could
result in our technologies, becoming obsolete. Successful biotechnology
development in general is highly uncertain and is dependent on numerous factors,
many of which are beyond our control. While our VSELTM
technology and other stem cell technologies appear promising, such technologies
may fail to be successfully commercialized for numerous reasons, including, but
not limited to, competing technologies for the same indication. There can be no
assurance that we will be able to develop a commercially successful therapeutic
application for this technology or other potential stem cell
technologies.
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Our
research and development activities using adult stem cells in therapeutic
indications present additional risks.
Our
research and development activities relating to our VSELTM
technology and other populations of adult stem cells are subject to many of the
same risks as our adult stem cell collection, processing and storage business,
and additional risks related to requirements for preclinical and clinical
testing by regulatory authorities including the United States Food and Drug
Administration, or FDA, to demonstrate the safety and efficacy of the underlying
therapy. The development of new drugs and therapies is often a long, expensive
and difficult process and most attempts fail. Our VSELTM
technology is in the very early stages of development and will require many
steps, tests and processes before we will be able to commence clinical testing
in humans. There can be no assurance that a biologics license application, or
BLA, with the FDA will not be required for our VSELTM
technology or our other stem cell technologies. The approval process for a BLA
can take years, require human clinical trials and cost several million dollars.
There also can be no assurance that we independently, or through collaborations,
will successfully develop, commercialize or market our VSELTM
technology or other stem cells for any therapeutic indication. Should we fail to
develop our VSELTM
technology or other adult stem cell technologies pursued by us, our business
prospects, operating results and financial condition will be materially and
adversely affected.
Technological
and medical developments or improvements in conventional therapies could render
the use of stem cells and our services and planned products
obsolete.
Advances
in other treatment methods or in disease prevention techniques could
significantly reduce or entirely eliminate the need for our stem cell services,
planned products and therapeutic efforts. Additionally, technological or medical
developments may materially alter the commercial viability of our technology or
services, and require us to incur significant costs to replace or modify
equipment in which we have a substantial investment. In either event, we may
experience a material adverse effect on our business, operating result and
financial condition.
If
safety problems are encountered by us or others developing new stem cell-based
therapies, our stem cell initiatives could be materially and adversely
affected.
The use
of stem cells for therapeutic indications is still in the very early stages of
development. If an adverse event occurs during clinical trials related to one of
our product candidates or those of others, the FDA and other regulatory
authorities may halt our clinical trials or require additional studies. The
occurrence of any of these events would delay, and increase the cost of, our
product development and may render the commercialization of our product
candidates impractical or impossible.
Future
therapies using adult stem cells may not develop, and demand for adult stem cell
collection, processing and storage may never develop.
The value
of our stem cell collection, processing and storage business and our development
programs could be significantly impaired, and our ability to become profitable
and continue our business could be materially and adversely affected, if adult
stem cell therapies under development by us or by others to treat disease are
not proven effective, demonstrate unacceptable risks or side effects or, where
required, fail to receive regulatory approval. The therapeutic application of
stem cells to treat serious diseases is currently being explored using adult
stem cells like those that are the focus of our business, as well as embryonic
stem cells. Cells collected and used for the same individual are referred to as
autologous cells and those collected from an individual who is not the user of
the cells are referred to as allogeneic cells. To our knowledge, the only
allowed therapeutic use of stem cells in the U.S., other than in connection with
clinical trials, involves hematopoietic stem cell transplants to treat certain
types of blood-based cancers (hematopoietic stem cells are the stem cells from
which all blood cells are made). No other stem cell therapeutic products have
received regulatory approval for sale in the U.S. While stem cell-based therapy
has been reported to be susceptible to various risks, including some undesirable
side effects and immune system responses, these problems have been primarily
associated with allogeneic use. Inadequate therapeutic efficacy also is a risk
that may prevent or limit approval or commercial use of adult stem cells,
whether for autologous use or allogeneic use. In addition, the time and cost
necessary to complete the clinical development and to obtain regulatory approval
of new therapies using stems cells are expected to be significant.
Side
effects or limitations of our stem cell collection process or a failure in the
performance of the cryopreservation storage facility or systems of our service
providers could harm our reputation and business.
Customers
may experience adverse outcomes from our adult stem cell collection and storage
process. These include: (i) the possibility of an infection acquired from the
aphereis process, which is the process of extracting stem cells from a patient’s
whole blood and it is an integral part of our collection process; (ii)
collection of insufficient quantities of stem cells for therapeutic
applications; (iii) failure of the equipment supporting our cryopreservation
storage service to function properly and thus maintain a supply of usable adult
stem cells; and (iv) specimen damage, including contamination or loss in transit
to us. Should any of these events occur, our reputation could be harmed, our
operations could be adversely affected and litigation could be filed against us.
Our systems and operations are vulnerable to damage or interruption from fire,
flood, equipment failure, break-ins, tornadoes and similar events for which we
do not have redundant systems or a formal disaster recovery plan. Any claim of
adverse side effects or limitations or material disruption in our ability to
maintain continued uninterrupted storage systems could have a material adverse
effect on our business, operating results and financial condition.
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State
and other requirements may impact our ability to conduct a profitable
collection, processing and storage business for adult stem cells.
Some
states impose additional regulation and oversight of clinical laboratories
operating within their borders and impose regulatory compliance obligations on
out-of-state laboratories providing services to their residents. Many of the
states in which we, our strategic partners or members of our collection network
engage in collection, processing or storage activities have licensing
requirements that must be complied with. Additionally, there may be state
regulations impacting the use of blood products that would impact our business.
Certain licensing requirements require employment of medical directors and
others with certain training and technical backgrounds and there can be no
assurance that such individuals can be retained or will remain retained or that
the cost of retaining such individuals will not materially and adversely affect
our ability to market or perform our services or our ability to do so
profitably. There can be no assurance that we, our strategic partners or members
of our collection center network will be able to obtain or maintain any
necessary licenses required to conduct business in any states or that the cost
of compliance will not materially and adversely affect our ability to market or
perform our services or our ability to do so profitably.
Our
adult stem cell collection, processing and storage business was not contemplated
by many existing laws and regulations, and our ongoing compliance, therefore, is
subject to interpretation and risk.
Our adult
stem cell collection, processing and storage service is not a medical treatment,
although it involves medical procedures. Our stem cell-related business is
relatively new and is not addressed by many of the regulations applicable to our
field. As a result, there is often considerable uncertainty as to the
applicability of regulatory requirements. Although we have devoted significant
resources to ensuring compliance with those laws that we believe to be
applicable, it is possible that regulators may disagree with our
interpretations, prompting additional compliance requirements or even
enforcement actions.
We
believe that the adult stem cells collected, processed and stored through our
collection services are properly classified under the FDA’s human cells, tissues
and cellular- and tissue-based products, or HCT/P, regulatory paradigm and
should not be classified as a medical device, biologic or drug. There can be no
assurance that the FDA will not reclassify the adult stem cells collected,
processed and stored through our collection services. Any such reclassification
could have adverse consequences for us and make it more difficult or expensive
for us to conduct our business by requiring regulatory clearance, approval
and/or compliance with additional regulatory requirements.
The costs
of compliance with such additional requirements or such enforcement may have a
material adverse effect on our operations or may require restructuring of our
operations or impair our ability to operate profitably.
We
may need to obtain regulatory approval before we can market and sell stem cell
biomarker screening panels in the U.S.
In the
U.S., our planned stem cell biomarker screening panels may be subject to
regulation as a medical device by the FDA under the Federal Food, Drug and
Cosmetic Act. These domestic regulations govern many of the commercial
activities we plan to perform, including the purposes for which our proposed
immunodiagnostic assays can be used, the development, testing, labeling, storage
and use of our proposed assays with other products, and the manufacturing,
advertising, promotion, sales and distribution of our proposed assays for the
approved purposes. Compliance with these regulations could prove expensive and
time-consuming and render such panels commercially impractical.
Ethical
and other concerns surrounding the use of stem cell therapy may negatively
impact the public perception of our stem cell services, thereby suppressing
demand for our services.
Although
our stem cell business pertains to adult stem cells only, and does not involve
the more controversial use of embryonic stem cells, the use of adult human stem
cells for therapy could give rise to similar ethical, legal and social issues as
those associated with embryonic stem cells, which could adversely affect its
acceptance by consumers and medical practitioners. Additionally, it is possible
that our business could be negatively impacted by any stigma associated with the
use of embryonic stem cells if the public fails to appreciate the distinction
between adult and embryonic stem cells. Delays in achieving public acceptance
may materially and adversely affect the results of our operations and
profitability.
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The
market for services related to the preservation and expansion of stem cells has
become increasingly competitive.
Historically,
we have faced competition from other established operators of stem cell
preservation businesses and providers of stem cell storage services. Today,
there is an established and growing market for cord blood stem cell banking. We
are also aware of another company with established stem cell banking services
that processes and stores stem cells collected from adipose, or fat, tissue.
This type of stem cell banking requires harvesting fat by a liposuction
procedure. Embryonic stem cells represent yet another alternative to pre-donated
and stored adult stem cells. As techniques for expanding stem cells improve,
thereby allowing therapeutic doses, the use of embryonic stem cells and other
collection techniques of adult stem cells could increase and compete with our
services. Finally, we are aware that other technologies are being developed to
turn skin cells into cells that behave like embryonic stem cells or to harvest
stem cells from the pulp of baby teeth. While these and other approaches remain
in early stages of development, they may one day be competitive.
In
addition, cord blood banks such as ViaCord or LifebankUSA easily could enter the
field of adult stem cell collection because of their processing labs, storage
facilities and customer lists. We estimate that there are approximately 43 cord
blood banks in the U.S., approximately 28 of which are autologous, meaning that
the donor and recipient are the same, and approximately 15 of which are
allogeneic, meaning that the donor and recipient are not the same. Hospitals
that have transplant centers to serve cancer patients may elect to provide some
or all of the services that we provide. We estimate that there are approximately
162 hospitals in the U.S. with stem cell transplant centers. These competitors
may have better experience and greater financial marketing, technical and
research resources, name recognition, and market presence than we do. In
addition, other established companies may enter our markets and compete with us.
There can be no assurance that we will be able to compete
successfully.
Building
market acceptance of our U.S. autologous adult stem cell collection, processing
and storage services, may be more costly and take longer than we
expect.
The
success of our U.S. autologous adult stem cell business depends on continuing
and growing market acceptance of our collection, processing and storage services
as well as stem cell therapy generally. Increasing the awareness and demand for
our services requires expenditures for marketing and education of consumers and
medical practitioners who, under present law, must order stem cell collection
and treatment on behalf of a potential customer. The time and expense required
to educate and to build awareness of our services and their potential benefits
and about stem cell therapy in general could significantly delay market
acceptance and our ultimate profitability. The successful commercialization of
our services will also require that we satisfactorily address the concerns of
medical practitioners in order to avoid resistance to recommendations for our
services and ultimately reach our potential consumers. No assurances can be
given that our business plan and marketing efforts will be successful, that we
will be able to commercialize our services, or that there will be market or
clinical acceptance of our services by potential customers or physicians,
respectively, sufficient to generate any material revenues for us. To date, only
a minimal number of collections have been performed at the collection centers in
our network.
We
operate in a highly regulated environment and may be unable to comply with
applicable federal regulations, registrations and approvals.
Since
January of 2004, registration with the FDA is required by facilities engaged in
the recovery, processing, storage, labeling, packaging or distribution of any
HCT/Ps, or the screening or testing of a donor. Any third party retained by us
to process our samples must be similarly registered with the FDA and comply with
HCT/P regulations. If we, or any third party processors, fail to register or
update registration information in a timely way, we will be out of compliance
with FDA regulations which could adversely affect our business. The FDA also
adopted rules in May 2005 that regulate current Good Tissues Practices, or cGTP.
Additionally, adverse events in the field of stem cell therapy that may occur
could result in greater governmental regulation of our business, creating
increased expenses and potential delays relating to the approval or licensing of
any or all of the processes and facilities involved in our stem cell collection
and storage services.
We also
are subject to state and federal laws regulating the proper disposal of
biohazardous materials. Although we believe we are currently in compliance with
all such applicable laws, a violation of such laws, or the future enactment of
more stringent laws or regulations, could subject us to liability for
noncompliance and may require us to incur significant costs.
There can
be no assurance that we will be able, or have the resources, to continue to
comply with regulations that govern our operations currently, or that we will be
able to comply with new regulations that govern our operations, or that the cost
of compliance will not materially and adversely affect our ability to market or
perform our services or our ability to do so profitably.
The
Health Insurance Portability and Accountability Act of 1996, or HIPAA, requires
that our business comply with state and federal privacy laws which increase the
cost and administrative burden of providing stem cell banking
services.
We are
subject to state and federal privacy laws related to the protection of our
customers’ personal health information and state and federal laws related to the
security of such personal health information and other personal data to which we
would have access through the provision of our services. Currently, we are
obligated to comply with privacy and security standards adopted under HIPAA.
Certain of these regulatory obligations will be changing over the next year as a
result of amendments to HIPAA under the American Recovery and Reinvestment Act
of 2009. Consequently, our compliance burden will increase, and we will be
subject to audit and enforcement by the federal government and, in some cases,
enforcement by state authorities. We will also be obligated to publicly disclose
wrongful disclosures or losses of personal health information. We may be
required to spend substantial amounts of time and money to comply with these
requirements, any regulations and licensing requirements, as well as any future
legislative and regulatory initiatives. Failure by us or our business partners
to comply with these or other applicable regulatory requirements or any delay in
compliance may result in, among other things, injunctions, operating
restrictions, and civil fines and criminal prosecution, a material adverse
effect on the marketing and sales of our services and impair our ability to
operate profitably or at all.
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Our
success in developing future stem cell therapies will depend in part on
establishing and maintaining effective strategic partnerships and
collaborations, which may impose restrictions on our business and subject us to
additional regulation.
A key
aspect of our business strategy is to establish strategic relationships in order
to gain access to critical supplies, to expand or complement our research and
development or commercialization capabilities, and to reduce the cost of
research and development. There can be no assurance that we will enter into such
relationships, that the arrangements will be on favorable terms or that such
relationships will be successful. If any of our research partners terminate
their relationship with us or fail to perform their obligations in a timely
manner, our research and development activities or commercialization of our
services may be substantially impaired or delayed.
Relationships
with licensed professionals such as physicians may be subject to state and
federal laws restricting the referral of business, prohibiting certain payments
to physicians, or otherwise limiting such collaborations. If our services become
approved for reimbursement by government or private insurers, we could be
subject to additional regulation and perhaps additional limitations on our
ability to structure relationships with physicians. Additionally, state
regulators may impose restrictions on the business activities and relationships
of licensed physicians or other licensed professionals. For example, many states
restrict or prohibit the employment of licensed physicians by for-profit
corporations, or the “corporate practice of medicine.” If we fail to structure
our relationships with physicians in accordance with applicable laws or other
regulatory requirements it could have a material adverse effect on our business.
Even if we do enter into these arrangements, we may not be able to maintain
these relationships or establish new ones in the future on acceptable
terms.
We
are dependent on relationships with third parties to conduct our
business.
Apheresis
is the process through which stem cells are extracted from a patient’s whole
blood and it is an integral part of our collection process. Our process involves
the injection of a “mobilizing agent” which causes the stem cells to migrate
from the bone marrow into the blood stream. The injection of this mobilizing
agent is an integral part of the collection process. There is currently only one
supplier of this mobilizing agent, called Neupogen®. Although we continue to
explore alternative mobilizing agents and methods of stem cell collection, there
can be no assurance that any alternative mobilizing agents will be available or
alternative methods will prove to be successful. In the event that our supplier
is unable or unwilling to continue to supply the mobilizing agent to us on
commercially reasonable terms, and we are unable to identify alternative methods
or find substitute suppliers on commercially reasonable terms, we may not be
able to successfully commercialize our business. In addition, we are currently
using only one outside apheresis provider though we are currently pursuing other
opportunities. Although other third parties, including the centers themselves,
subject to appropriate licensure, are capable of providing apheresis services,
any disruption in the provision of this service would cause a delay in the
delivery of our services. Our failure to maintain relationships with these third
parties or the failure of such parties to provide quality contracted services
would have a material adverse impact on our business.
We
are dependent upon our management, scientific and medical personnel and we may
have difficulty attracting or retaining qualified personnel.
Our
performance and success are dependent upon the efforts and abilities of our
management, and medical and scientific personnel. Furthermore, our growth will
require hiring a significant number of qualified technical, commercial, business
and administrative personnel. If we are unable to attract and retain the
qualified personnel necessary to develop our business, perform contractual
obligations under our University of Louisville and other license agreements and
maintain appropriate licensure, on acceptable terms, we may not be able to
sustain our operations or achieve our commercialization and other business
objectives and we may fail to grow or sustain our business as a going
concern.
There
is significant uncertainty about the validity and permissible scope of patents
in the biotechnological industry and we may not be able to obtain patent
protection.
We own or
hold exclusive rights to one patent and own or hold exclusive rights to fourteen
filed patent applications related to our products and technologies. Given the
nature of our therapeutic programs, our patents cover methods of isolating,
storing and using stem cells, including very small embryonic stem cells. There
can be no assurance that the patent applications to which we hold rights will
result in the issuance of patents, or that any patents issued or licensed to us
will not be challenged and held to be invalid or of a scope of coverage that is
different from what we believe the patent’s scope to be. Our success will
depend, in part, on whether we can: obtain patents to protect our own products
and technologies; obtain licenses to use the technologies of third parties if
necessary, which may be protected by patents; and protect our trade secrets and
know-how. Our inability to obtain and rely upon patents essential to our
business may have a material adverse effect on our business, operating results
and financial condition.
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We
may be unable to protect our intellectual property from infringement by third
parties.
Despite
our efforts to protect our intellectual property, third parties may infringe or
misappropriate our intellectual property. Our competitors may also independently
develop similar technology, duplicate our processes or services or design around
our intellectual property rights. We may have to litigate to enforce and protect
our intellectual property rights to determine their scope, validity or
enforceability. Intellectual property litigation is costly, time-consuming,
diverts the attention of management and technical personnel and could result in
substantial uncertainty regarding our future viability. The loss of intellectual
property protection or the inability to secure or enforce intellectual property
protection would limit our ability to develop or market our services in the
future. This would also likely have an adverse effect on the revenues generated
by any sale or license of such intellectual property. Furthermore, any public
announcements related to such litigation or regulatory proceedings could
adversely affect the price of our common stock.
Third
parties may claim that we infringe on their intellectual property.
We may be
subject to costly litigation in the event our technology is claimed to infringe
upon the proprietary rights of others. Third parties may have, or may eventually
be issued, patents that would be infringed by our technology. Any of these third
parties could make a claim of infringement against us with respect to our
technology. We may also be subject to claims by third parties for breach of
copyright, trademark or license usage rights. Litigation and patent interference
proceedings could result in substantial expense to us and significant diversion
of efforts by our technical and management personnel. An adverse determination
in any such proceeding or in patent litigation could subject us to significant
liabilities to third parties or require us to seek licenses from third parties.
Such licenses may not be available on acceptable terms or at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent us from commercializing our products, which
would have a material adverse affect on our business, operating results and
financial condition.
We
may be unable to maintain our licenses, patents or other intellectual property
and could lose important protections that are material to continuing our
operations and growth and our ability to achieve profitability.
Our
license agreement with the University of Louisville and other license agreements
require us to pay license fees, royalties and milestone payments and fees for
patent filings and applications. Obtaining and maintaining patent protection and
licensing rights also depends, in part, on our ability to pay the applicable
filing and maintenance fees. Our failure to meet financial obligations under our
license agreements in a timely manner or our non-payment or delay in payment of
our patent fees, could result in the loss of some or all of our rights to
proprietary technology or the inability to secure or enforce intellectual
property protection. Additionally, our license agreements require us to meet
certain diligence obligations in the development of the licensed
products. Our failure to meet these diligence obligations under our
license agreements could result in the loss of some or all of our rights under
the license agreements. The loss of any or all of our intellectual
property rights could materially limit our ability to develop and/or market our
services, which would materially and adversely affect our business, operating
results and financial condition.
Our
inability to obtain reimbursement for our therapies from private or governmental
insurers, could negatively impact demand for our services.
Successful
sales of health care services and products generally depends, in part, upon the
availability and amounts of reimbursement from third party healthcare payor
organizations, including government agencies, private healthcare insurers and
other healthcare payors, such as health maintenance organizations and
self-insured employee plans. Uncertainty exists as to the availability of
reimbursement for new therapies such as stem cell-based therapies. There can be
no assurance that such reimbursement will be available in the future at all or
without substantial delay or, if such reimbursement is provided, that the
approved reimbursement amounts will be sufficient to support demand for our
services at a level that will be profitable.
Our
insurance may not be adequate to cover all claims or losses.
We expect
to have insurance coverage against operating risks, including product liability
claims and personal injury claims related to our products and services, but no
assurance can be given that the nature and amount of that insurance will be
sufficient to fully indemnify us against liabilities arising out of pending and
future claims and litigation or available on terms acceptable to us. This
insurance has deductibles or self-insured retentions and contains certain
coverage exclusions. The insurance may not provide complete protection against
losses and risks, and our results of operations and financial condition could be
materially and adversely affected by unexpected claims not covered by
insurance.
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We
have received an informal request for documents in connection with an SEC
investigation of a third party matter, and there is no assurance that the SEC
will not take action against us.
In
connection with the SEC’s investigation of a matter regarding an unaffiliated
third party, we have received an informal request from the SEC, dated December
23, 2008, for the voluntary production of documents and information concerning
the issuance, distribution, registration, purchase, sale and/or offer to sell
our securities from January 1, 2007. The third party served as the lead
underwriter of our public offering that was consummated in August 2007. We are
cooperating fully with the SEC’s request. There has been no indication to date
that we are a target of the investigation. The SEC letter stated that the
request should not be construed as an indication by the SEC or its staff that
any violation of the federal securities laws has occurred, nor should it be
considered a reflection upon any person, entity or security, but that there is
no assurance that the SEC will not take any action against us. A determination
by the SEC to take action against us could be costly and time consuming, could
divert the efforts and attention of our directors, officers and employees from
the operation of our business and could result in sanctions against us, any or
all of which could have a material adverse effect on our business and operating
results.
Risks
Related to the Acquisition of Our Interest in Erye
Erye
has a limited history of earnings.
Erye’s
continued growth and profitability depends on stabilizing and streamlining its
operations, relocating to a new factory that is now under construction,
continuing research and development for new drug products and expanding its
sales network for drug distribution. The failure of Erye to be profitable could
materially and adversely affect its and our operating results, financial
condition and ability to continue as a going concern.
We
may not be able to successfully integrate Erye into our business.
Our U.S.
based management team has limited experience in purchasing and integrating new
businesses in China. Our failure to successfully complete the integration of
Erye could have a material adverse affect on our business, operating results and
financial condition by reason of our failure to realize a sufficient benefit and
financial return on capital expended in connection with the
acquisition.
We expect
to realize increased revenues and market penetration in Erye’s product areas as
a result of the acquisition of our interest in Erye. Achievement of these
expected benefits will depend, in part, on how we manage the integration of the
Erye business into our operations. If we are unsuccessful in integrating the
Erye business in a cost-effective manner, we may not realize the expected
benefits of the acquisition and our business, operating results and financial
condition may be materially and adversely affected.
CBH
and/or its affiliates may have had unknown liabilities that now may be deemed to
be liabilities of NeoStem or its merger subsidiary as a result of the
Merger.
There may
have been liabilities of CBH and/or its affiliates that were unknown at the time
of the Merger. As a result of the Merger, any such unknown liabilities may be
deemed to be liabilities of NeoStem or our merger subsidiary. In the event any
such liability becomes known, it may lead to claims against us or our subsidiary
including, but not limited to, lawsuits, administrative proceedings, and other
claims. Any such liabilities may subject us to increased expenses for attorneys’
fees, fines and litigation and expenses associated with any subsequent
settlements or judgments. There can be no assurance that such unknown
liabilities do not exist. To the extent that such liabilities become known, any
such liability-related expenses may materially and adversely affect our
profitability, operating results and financial condition.
Erye,
and we as the owner of a controlling ownership interest in Erye, may be subject
to tax liability as a result of the transfer of real estate assets from Erye to
EET.
Prior to
the closing of the Merger, CBH was required to cause Erye to transfer certain
real estate assets to EET, or the Split with a leaseback to Erye, the transfer
of which may be deemed a taxable event under PRC tax laws. EET has agreed to
indemnify Erye and us against any tax liability that may result from such
transfer of real estate assets. However, should such transfer of real estate
assets be ultimately determined to be taxable, there is a risk that if EET will
be unable or unwilling to pay the resultant tax liability pursuant to EET’s
indemnification obligations, we would bear the liability to pay such tax
liability, which could materially and adversely affect our business operating
results and financial condition.
Demand
for Erye’s existing pharmaceutical products may not experience significant
growth and new product candidates and technologies we may develop or license may
fail to obtain regulatory approval and market acceptance.
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We cannot
accurately predict the future growth rate or the size of the markets for our
pharmaceutical products and technologies in China. The expansion of these
markets depends on a number of factors, such as:
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the
cost, performance and reliability of the products and technologies being
offered, as compared to the products/technologies offered by
competitors;
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customers’
perceptions regarding the benefits of the products and
technologies;
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public
perceptions regarding the use of the products and
technologies;
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customers’
satisfaction with the products and technologies; and
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marketing
efforts and publicity regarding the products and
technologies.
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The
acquisition of our interest in Erye is intended to provide us with a stable yet
growing business from which to launch new pharmaceutical drugs and other
products in China. Should Erye fail to perform as expected, our business and
results of operations will be materially and adversely affected and our ability
to raise capital and continue as a going concern will be impaired.
Our
ability to manage Erye’s business will be limited.
Pursuant
to the Joint Venture Agreement, Erye’s board of directors is comprised of two
individuals designated by EET and three individuals designated by us; provided,
however, that one of the positions designated by us is to be the member of our
board of directors designated by EET. The affirmative vote of at least 75% of
all of the Erye board of directors is required for all major decisions,
including decisions related to corporate transactions, changes in capital
structure, and the material business strategy, operations and development of
Erye. In addition, under PRC law, an affirmative vote of 100% of Erye’s board of
directors is required to approve certain material matters of Erye such as the
increase or decrease of its registered capital, a merger or spinoff of Erye, any
amendment to its articles of association, and the termination and dissolution of
Erye. We currently own only a 51% interest in Erye. Accordingly, in view of
these provisions, we may have limited ability to exercise control over Erye’s
business strategy, operations and development. Since many of Erye’s officers
will reside in China and most of our executive officers reside in the U.S.,
Erye’s officers will manage the day-to-day operations of Erye with only limited
participation from our executive officers.
Some
terms of the Joint Venture Agreement limit our ability to consummate future
acquisitions and investments in chemical drug manufacturing companies, which
could limit our growth.
Pursuant
to the terms of the Erye Joint Venture Agreement, prior to making an investment
in any other chemical drug manufacturing company that competes directly with the
business of Erye, we must obtain Eyre’s approval. In addition, we are obligated
to consult with Erye prior to introducing any new small molecule drug in China
to determine whether it can be produced less expensively or more efficiently by
Erye. There can be no assurance that Erye will provide such approvals for
acquisitions or new products, which could materially and adversely affect the
growth of our business in China, our operating results and our financial
condition.
An
amendment to the Joint Venture Agreement may be required for a
loan to Erye, and the effectiveness of which is subject to approval
by PRC government authorities.
If we
make a loan to Erye or the joint venture for the purpose of funding a portion of
the cost to complete equipping and Erye’s relocation to Erye’s new production
facility, an amendment to the Joint Venture Agreement may be required in order
to provide for the use and repayment of such funds. The amendment cannot become
effective until it is approved by Jiangsin Provincial Bureau of Foreign Trade
and Economic Cooperation and by any other PRC governmental authority approving
the Joint Venture Agreement. Any delay in obtaining such approval(s) or material
amendments to the terms of the amendment to the Joint Venture Agreement, or
taxes or other payments imposed by the PRC government authorities as a condition
to approval may delay or diminish our realization of benefits of such funding,
which could delay Erye’s relocation and have a material adverse effect on our
business, operating results and financial condition.
The
transactions related to the Merger may not have received all necessary PRC
governmental approvals.
Prior to
the closing of the Merger, CBH was required to cause Erye to transfer certain
real estate assets to EET, or the Split.The Split has been approved by Jiangsin
Provincial Bureau of Foreign Trade and Economic Cooperation, or the JPBFTEC, and
the amended Articles of Association and the amended Joint Venture Agreement have
also been approved by the JPBFTSC in principle. While we believe that we have
complied with applicable PRC laws and sought all requisite approvals with
respect to the transactions related to the Merger (including, but not limited
to, the Split and the amendments to both the Articles of Association and the
Joint Venture Agreement), in light of the uncertainty of PRC laws in this area,
no assurance can be given that all required filings have been made or
that PRC authorities will not take a contrary view, any of which events could
have a material adverse effect on our business, operating results and financial
condition.
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Eyre’s
success is dependent upon its ability to establish and maintain its intellectual
property rights.
Erye’s
success depends, in part, on its ability to protect its current and future
technologies and products and to defend its intellectual property rights. If it
fails to protect its intellectual property adequately, competitors may
manufacture and market products similar to Erye’s. Some patent applications in
China are maintained in secrecy until the patent is issued. Because the
publication of discoveries tends to follow their actual discovery by many
months, Erye may not be the first to invent, or file patent applications on any
of its discoveries. Patents may not be issued with respect to any of Erye’s
patent applications and existing or future patents issued to or licensed by Erye
may not provide competitive advantages for its products. Patents that are issued
may be challenged, invalidated or circumvented by its competitors. Furthermore,
Erye’s patent rights may not prevent its competitors from developing, using or
commercializing products that are similar or functionally equivalent to Erye’s
products.
Erye also
relies on trade secrets, non-patented proprietary expertise and continuing
technological innovation that it seeks to protect, in part, by entering into
confidentiality agreements with licensees, suppliers, employees and consultants.
These agreements may be breached and there may not be adequate remedies in the
event of a breach. Disputes may arise concerning the ownership of intellectual
property or the applicability of confidentiality agreements. Moreover, Erye’s
trade secrets and proprietary technology may otherwise become known or be
independently developed by its competitors. If patents are not issued with
respect to products arising from research, Erye may not be able to maintain the
confidentiality of information relating to these products.
In the
PRC, there has been substantial litigation in the pharmaceutical industry with
respect to the manufacturing, use and sale of new products. These lawsuits
relate to the validity and infringement of patents or proprietary rights of
third parties. Erye may be required to commence or defend against charges
relating to the infringement of patent or proprietary rights. Any such
litigation could: (i) require Erye to incur substantial expense, even if it is
insured or successful in the litigation; (ii) require Erye to divert significant
time and effort of its technical and management personnel; (iii) result in the
loss of its rights to develop or make certain products; and (iv) require Erye to
pay substantial monetary damages or royalties in order to license proprietary
rights from third parties.
An
adverse determination in a judicial or administrative proceeding or a failure to
obtain necessary licenses could prevent Erye from manufacturing and selling some
of its products or increase its costs to market these products, which could have
a material adverse affect on its and our business, operating results and
financial condition.
In
addition, when seeking regulatory approval for some of its products, Erye is
required to certify to regulatory authorities, including the SFDA, that such
products do not infringe upon third party patent rights. Filing a certification
against a patent gives the patent holder the right to bring a patent
infringement lawsuit against Erye. Any lawsuit regarding a particular product
could delay, or result in a denial of, regulatory approval by the SFDA. A claim
of infringement and the resulting delay could result in substantial expenses and
even prevent Erye from manufacturing and selling certain of its products, which
also could have a material adverse effect on its and our business, operating
results and financial condition.
Erye’s
launch of a product prior to a final court decision or the expiration of a
patent held by a third party can expose Erye to a claim of substantial damages.
Depending upon the circumstances, a court may award the patent holder damages
equal to three times its loss of income. If Erye is found to have infringed a
patent held by a third party and become subject to such treble damages, these
damages could have a material adverse effect on its and our operating results
and financial condition.
Erye’s
insurance may not cover all risks or losses related to its drugs, products and
services.
Any of
Erye’s products or services may be defective, ineffective or cause dangerous
side effects and, in certain cases, even fatality, and lead to claims in excess
of the insurance maintained by Erye and us. Uninsured losses could materially
and adversely affect our operating results and financial condition.
The
business of Erye is conducted in a highly competitive industry.
Erye’s
pharmaceutical products consist primarily of prescription antibiotics and active
pharmaceutical intermediates, or APIs, which are chemicals used to manufacture
pharmaceutical products. The market in China for these products is highly
competitive and subject to regulation by the SFDA.
Erye
competes in a large market with many competitors, particularly in the area of
oral antibiotics. Many of its competitors are more established than Erye, and
have significantly greater financial, technical, marketing and other resources
Erye. Some of Erye’s competitors have greater name recognition and a larger
customer base. These competitors may be able to respond more quickly to new or
changing opportunities and customer requirements and may be able to undertake
more extensive promotional activities, offer more attractive terms to customers,
and adopt more aggressive pricing policies. There can be no assurances that Erye
will be able to compete successfully.
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Many
of Erye’s current products are prescription antibiotics that it sells through
distributors, in many cases to state-controlled and private
hospitals.
State-controlled
and private hospitals are the primary users for many of Erye’s current products.
The prices paid by such hospitals and the timing of payment for products
purchased are, to a large extent, dependent on government policy, which is
susceptible to change. Accordingly, there can be no assurance that Erye’s
pricing structure for many of its products or the timing of the revenues from
the sales of those products will continue. A change in government policy
resulting in a reduction to the prices for any of Erye’s injectible antibiotics,
or the timing of payment for products purchased, could have a material adverse
effect on Erye’s, and our, results of operations and financial condition.
Despite the above, payment is typically received by Erye at the time of sale to
the distributor.
Price
control regulations may decrease our profitability.
The list
of medications eligible for reimbursement as well as the prices at which they
are reimbursed are controlled by the PRC government, and are subject to control
by the relevant state or provincial price administration authorities. In
practice, price control with respect to these medicines sets a ceiling on their
retail price. The actual price of such medicines set by manufacturers,
wholesalers and retailers cannot historically exceed the price ceiling imposed
by applicable government price control regulations. Although, as a general
matter, government price control regulations have resulted in drug prices
tending to decline over time, there has been no predictable pattern for such
decreases. Such price controls, especially downward price adjustment, may
negatively affect the revenue and profitability of Erye and, consequently, our
revenue and profitability.
The
bidding process with respect to the purchase of pharmaceutical products may lead
to reduced revenue.
PRC
regulations require non-profit medical organizations established in China to
implement bidding procedures for the purchase of drugs. It is intended that the
implementation of a bidding purchase system will be extended gradually and will
cover, among other drugs, those drugs consumed in large volume and commonly used
for clinical uses. Pharmaceutical wholesalers must have the due authorization of
the pharmaceutical manufacturers in order to participate in the bidding process.
If, for the purpose of reducing the bidding price, pharmaceutical manufacturers
participate in the bidding process on their own and enter into purchase and
sales contracts with medical organizations directly without authorizing a
pharmaceutical distributor, the revenue of Erye may be adversely
affected.
Erye’s
activities related to research, development and marketing new drugs have
inherent risks.
Part of
Erye’s strategy is to expand its portfolio of drugs and therapies. Our U.S.
management team is working with Erye to identify appropriate drug candidates for
the Chinese market. The development of a new drug or therapy requires time,
financial resources and drug development expertise. There is always a risk that
such development efforts will prove unsuccessful. There also is a risk that any
new drugs and technologies developed by Erye may not be compatible with market
needs, may be too expensive or may face competition. Because markets for drugs
differ geographically within China, Erye must develop and manufacture its
products to target specific markets to ensure product sales. Erye’s growth and
survival will depend on its ability to develop and commercialize new products
and effectively market those products. If its efforts are unsuccessful, its and
our business, operating results and financial conditions will be materially and
adversely affected.
Erye’s
success depends on its ability to retain key personnel and manage its
growth.
Erye’s
business is dependent on certain of their key management and technological
personnel. The departure of any of such key personnel may seriously disrupt and
harm Erye’s operations, business and the implementation of Erye’s business plan.
There can be no assurance that Erye can be successful in retaining them or
replacing any personnel without delay in the event of a departure. Given Eyre’s
plans for growth, it will need to attract and retain new executives. The
inability to achieve, maintain and manage growth could have a material adverse
effect on Eyre’s and our business, operating results and financial condition and
our ability to continue as a going concern.
Risks
Related to Doing Business in China
Our
operations are subject to risks associated with emerging markets.
The
Chinese economy is not well established and is only recently emerging and
growing as a significant market for consumer goods and services. Accordingly,
there is no assurance that the market will continue to grow. Perceived risks
associated with investing in China, or a general disruption in the development
of China’s markets could materially and adversely affect the business, operating
results and financial condition of Erye and us.
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A
significant portion of our assets is located in the PRC, and investors may not
be able to enforce federal securities laws or their other legal
rights.
A
substantial portion of our assets is located in the PRC. As a result, it may be
difficult for investors in the U.S. to enforce their legal rights, to effect
service of process upon certain of our directors or officers or to enforce
judgments of U.S. courts predicated upon civil liabilities and criminal
penalties against our directors and officers located outside of the
U.S.
The
PRC government has the ability to exercise significant influence and control
over our operations in China.
In recent
years, the PRC government has implemented measures for economic reform, the
reduction of state ownership of productive assets and the establishment of
corporate governance practices in business enterprises. However, many productive
assets in China are still owned by the PRC government. In addition, the
government continues to play a significant role in regulating industrial
development by imposing business regulations. It also exercises significant
control over the country’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 China’s economic, political or legal systems will not
develop in a way that becomes detrimental to our business, results of operations
and financial condition. Our activities may be materially and adversely affected
by changes in China’s economic and social conditions and by changes in the
policies of the 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 we may experience in connection with having operations in China
that may adversely affect our business and results of operations
include:
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our
inability to enforce or obtain a remedy under any material
agreements;
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PRC
restrictions on foreign investment that could impair our ability to
conduct our business or acquire or contract with other entities in the
future;
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restrictions
on currency exchange that may limit our ability to use cash flow most
effectively or to repatriate our investment;
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restrictions
on currency exchange that may limit our ability to use cash flow most
effectively or to repatriate our investment;
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fluctuations
in currency values;
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cultural,
language and managerial differences that may reduce our overall
performance; and
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political
instability in China.
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Cultural,
language and managerial differences may adversely affect of our overall
performance.
While
Chinese mergers and acquisitions activity is increasing in frequency,
assimilating cultural, language and managerial differences remains problematic.
Personnel issues may develop as we endeavor to consolidate management teams from
different cultural backgrounds. In addition, errors arising through language
translations may cause miscommunications relating to material information. These
factors may make the management of our operations in China more difficult.
Should we be unable to coordinate the efforts of our U.S.-based management team
with our China-based management team, our business, operating results and
financial condition could be materially and adversely affected.
We
may not be able to enforce our rights in China.
China’s
legal and judicial system may negatively impact foreign investors. The legal
system in China is evolving rapidly, and enforcement of laws is inconsistent. It
may be impossible to obtain swift and equitable enforcement of laws or
enforcement of the judgment of one court by a court of another jurisdiction.
China’s legal system is based on civil law or written statutes and a decision by
one judge does not set a legal precedent that must be followed by judges in
other cases. In addition, the interpretation of Chinese laws may vary to reflect
domestic political changes.
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There are
substantial uncertainties regarding the interpretation and application to our
business of PRC laws and regulations, since many of the rules and regulations
that companies face in China are not made public. The effectiveness of newly
enacted laws, regulations or amendments may be delayed, resulting in detrimental
reliance by foreign investors. New laws and regulations that apply to future
businesses may be applied retroactively to existing businesses. We cannot
predict what effect the interpretation of existing or new PRC laws or
regulations may have on our business.
The laws
of China are likely to govern many of our material agreements, including,
without limitation the Joint Venture Agreement. We cannot assure you that we
will be able to enforce our interests or our material agreements or that
expected remedies will be available. The inability to enforce or obtain a remedy
under any of our future agreements may have a material adverse impact on our
operations.
Our
businesses in China are subject to government regulation that limit or prohibit
direct foreign investment, limiting our ability to control these businesses, as
well as our ability to pursue new ventures and expand further into the Chinese
market.
The PRC
government has imposed regulations in various industries, including medical
research and the stem cell business, that limit foreign investors’ equity
ownership or prohibit foreign investments altogether in companies that operate
in such industries. As a result, our ability to control our existing China-based
businesses as well as pursue new ventures and expand further into the Chinese
market may be limited.
If new
laws or regulations or policies forbid foreign investment in industries in which
we want to expand or complete a business combination, they could severely impair
our ability to grow our business. Additionally, if the relevant Chinese
authorities find us or such business combination to be in violation of any laws
or regulations, they would have broad discretion in dealing with such violation,
including, without limitation: (i) levying fines; (ii) revoking our business and
other licenses; (iii) requiring that we restructure our ownership or operations;
and (iv) requiring that we discontinue any portion or all of our business.
Accordingly, any of these regulations or violations could have a material
adverse effect on our business, operating results and financial
condition.
The
import into China or export from China of technology relating to stem cell
therapy may be prohibited or restricted.
The
Chinese Ministry of Commerce, or MOFCOM, and Ministry of Science and Technology
of China, or MOST, jointly publish the Catalogue of Technologies the Export of
which from China is Prohibited or Restricted, and the Catalogue of Technologies
the Import of which into China Prohibited or Restricted. Stem cell-related
technologies are not listed in the current versions of these catalogues, and
therefore their import or export should not be forbidden or require the approval
of MOFCOM and MOST. However, these catalogues are subject to revision and, as
the PRC authorities develop policies concerning stem cell technologies, it is
possible that the categories would be amended or updated should the PRC
government want to regulate the export or import of stem cell related
technologies to protect material state interests or for other reasons. Should
the catalogues be updated so as to bring any activities of the planned stem cell
processing, storage and manufacturing operation in Beijing and related research
and development activities under their purview, any such limitations or
restrictions imposed on the operations and related activities could materially
and adversely affect our business, financial condition and results of
operations.
Our
business in China may be adversely affected by inaccurate claims about our
technology.
We
recently learned of an effort by a principal of Shandong New Medicine Research
Institute of Integrated Traditional and Western Medicine Limited Liability
Company, or Shandong New Medicine, to promote our VSELTM
technology as his own in China. While we have no reason to believe that Shandong
New Medicine or such person has any VSELTM
technology or has access to or use of any of our proprietary information, we are
analyzing the available facts and circumstances and have initiated and are
reviewing additional appropriate legal remedies in the U.S. and abroad. We
cannot determine at this time what effect, if any, such actions by Shandong New
Medicine or its principal will have on our reputation in China.
The
PRC government does not permit direct foreign investment in stem cell research
and development businesses. Accordingly, we operate these businesses through
local companies with which we have contractual relationships but in which we do
not have controlling equity ownership.
PRC
regulations prevent foreign companies from directly engaging in stem
cell-related research, development and commercial applications in China.
Therefore, to perform these activities, we operate our current stem cell-related
business in China through two domestic variable interest entities, or VIEs:
Qingdao Niao Bio-Technology Ltd., or Qingdao Niao, and Beijing Ruijieao
Bio-Technology Ltd., or Beijing Ruijieao, each a Chinese domestic company
controlled by the Chinese employees of NeoStem (China), Inc., our wholly
foreign-owned entity, or the WFOE, through various business agreements, referred
to, collectively, as the VIE documents. We control these companies and operate
these businesses through contractual arrangements with the companies and their
individual owners, but we have no direct equity ownership or control over these
companies. Our contractual arrangements may not be as effective in providing
control over these entities as direct ownership. For example, the VIEs could
fail to take actions required for our business or fail to conduct business in
the manner we desire despite their contractual obligation to do so. These
companies are able to transact business with parties not affiliated with us. If
these companies fail to perform under their agreements with us, we may have to
rely on legal remedies under PRC law, which may not be effective. In addition,
we cannot be certain that the individual equity owners of the VIEs would always
act in our best interests, especially if they have no other relationship with
us.
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Although
other foreign companies have used WFOEs and VIE structures similar to ours and
such arrangements are not uncommon in connection with business operations of
foreign companies in China in industry sectors in which foreign direct
investments are limited or prohibited, the application of a VIE structure to
control companies in a sector in which foreign direct investment is specifically
prohibited carries increased risks.
For
example, if our structure is deemed in violation of PRC law, the PRC government
could revoke the business license of the WFOE, require us to discontinue or
restrict our operations, restrict our right to collect revenues, require us to
restructure our business, corporate structure or operations, impose additional
conditions or requirements with which we may not be able to comply, impose
restrictions on our business operations or on our customers, or take other
regulatory or enforcement actions against us. We may also encounter difficulties
in enforcing related contracts. Any of these events could materially and
adversely affect our business, operating results and financial
condition.
Due
to the relationship between the WFOE and the VIEs, the PRC tax authorities may
challenge our VIE structure, including the transfer prices used for related
party transactions among our entities in China.
Substantially
all profits generated from the VIEs will be paid to the WFOE in China through
related party transactions under contractual agreements. We believe that the
terms of these contractual agreements are in compliance with the laws in China.
However, the tax authorities in China have not examined these contractual
agreements. Due to the uncertainties surrounding the interpretation of the
transfer pricing rules relating to related party transactions in China, it is
possible that the tax authorities in China could challenge the transfer prices
that we will use for related party transactions among our entities in China and
this could increase our tax liabilities and diminish the profitability of our
business in China, which would materially and adversely affect our operating
results and financial condition.
We
expect to rely, in part, on dividends paid by our WFOE and/or Erye to supply
cash flow for our U.S. business, and statutory or contractual restrictions may
limit their ability to pay dividends to us.
We expect
to rely partly on dividends paid to us under the Joint Venture Agreement,
attributable to our 51% ownership interest in Erye, to meet our future cash
needs. However, there can be no assurance that the WFOE in China will receive
payments uninterrupted or at all as arranged under our contracts with the VIEs.
In addition, pursuant to the Joint Venture Agreement that governs the ownership
and management of Erye, for the next three years: (i) 49% of undistributed
profits (after tax) will be distributed to EET and loaned back to Erye for use
in connection with its construction of the new Erye facility; (ii) 45% of the
net profit after tax will be provided to Erye as part of the new facility
construction fund, which will be characterized as paid-in capital for our 51%
interest in Erye; and (iii) only 6% of the net profit will be distributed to us
directly for our operating expenses.
The
payment of dividends by entities organized under PRC law to non-PRC entities is
subject to limitations. Regulations in the PRC currently permit payment of
dividends by our WFOE and Erye only out of accumulated distributable earnings,
if any, as determined in accordance with accounting standards and regulations in
China. Moreover, our WFOE and Erye will be required to set aside a certain
percentage of their accumulated after-tax profit each year, if any, to fund
certain mandated reserve funds (for our WFOE, such percentage is at least 10%
each year until its reserves have reached at least 50% of its registered
capital), and these reserves are not payable or distributable as cash dividends.
In addition, Erye is also required to reserve a portion of its after-tax profits
for its employee welfare and bonus fund, the amount of which is subject to the
discretion of the Erye board of directors. In addition, if Erye incurs debt on
its own behalf in the future, the instruments governing the debt may restrict
Erye’s or the joint venture’s ability to pay dividends or make other
distributions to us. This may diminish the cash flow we receive from Erye’s
operations, which would have a material adverse effect on our business,
operating results and financial condition.
Restrictions
on currency exchange may limit our ability to utilize our cash flow
effectively.
Our
interests in China will be subject to China’s rules and regulations on currency
conversion. In particular, the initial capitalization and operating expenses of
the two VIEs are funded by our WFOE. In China, the State Administration for
Foreign Exchange, or the SAFE, regulates the conversion of the Chinese Renminbi
into foreign currencies. Currently, foreign investment enterprises are required
to apply to the SAFE for Foreign Exchange Registration Certificates, or IC Cards
of Enterprises with Foreign Investment. Foreign investment enterprises holding
such registration certificates, which must be renewed annually, are allowed to
open foreign currency accounts including a “basic account” and “capital
account.” Currency translation within the scope of the “basic account,” such as
remittance of foreign currencies for payment of dividends, can be effected
without requiring the approval of the SAFE. However, conversion of currency in
the “capital account,” including capital items such as direct investments,
loans, and securities, require approval of the SAFE. According to the Notice of the General Affairs
Department of the State Administration of Foreign Exchange on the Relevant
Operating Issues Concerning the Improvement of the Administration of Payment and
Settlement of Foreign Currency Capital of Foreign-invested
Enterprises promulgated on August
29, 2008, or the SAFE Notice 142, to apply to a bank for settlement of foreign
currency capital, a foreign invested enterprise shall submit the documents
certifying the uses of the RMB funds from the settlement of foreign currency
capital and a detailed checklist on use of the RMB funds from the last
settlement of foreign currency capital. It is stipulated that only if the funds
for the settlement of foreign currency capital are of an amount not more than
US$50,000 and are to be used for enterprise reserve, the above documents may be
exempted by the bank. This SAFE Notice 142, along with the recent practice of
Chinese banks of restricting foreign currency conversion for fear of “hot money”
going into China, have limited and may continue to limit our ability to channel
funds to the two VIE entities for their operation. We are exploring options with
our PRC counsels and banking institutions in China as to acceptable methods of
funding the operation of the two VIEs, including advances from Erye, but there
can be no assurance that acceptable funding alternatives will be identified.
Further, even if we find an acceptable funding alternative, there can be no
assurance that the PRC regulatory authorities will not impose further
restrictions on the convertibility of the Chinese currency. Future restrictions
on currency exchanges may limit our ability to use our cash flow for the
distribution of dividends to our stockholders or to fund operations we may have
outside of China, which could materially adversely effect our business and
operating results.
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Fluctuations
in the value of the Renminbi relative to the U.S. dollar could affect our
operating results.
We
prepare our financial statements in U.S. dollars, while our underlying
businesses operate in two currencies, U.S. dollars and Chinese Renminbi. It is
anticipated that our Chinese operations will conduct their operations primarily
in Renminbi and our U.S. operations will conduct their operations in dollars. At
the present time we do not expect to have significant cross currency
transactions that will be at risk to foreign currency exchange rates.
Nevertheless, the conversion of financial information using a functional
currency of Renminbi will be subject to risks related to foreign currency
exchange rate fluctuations. The value of Renminbi against the U.S. dollar and
other currencies may fluctuate and is affected by, among other things, changes
in China’s political and economic conditions and supply and demand in local
markets. As we have significant operations in China, and will rely principally
on revenues earned in China, any significant revaluation of the Renminbi could
materially and adversely affect our financial results. For example, to the
extent that we need to convert U.S. dollars we receive from an offering of our
securities into Renminbi for our operations, appreciation of the Renminbi
against the U.S. dollar could have a material adverse effect on our business,
financial condition and results of operations.
Beginning
in July of 2005, the PRC government changed its policy of pegging the value of
Renminbi to the U.S. dollar. Under the new policy, the value of the Renminbi has
fluctuated within a narrow and managed band against a basket of certain foreign
currencies. However, the Chinese government has come under increasing U.S. and
international pressure to revalue the Renminbi or to permit it to trade in a
wider band, which many observers believe would lead to substantial appreciation
of the Renminbi against the U.S. dollar and other major currencies. There can be
no assurance that Renminbi will be stable against the U.S. dollar.
If
China imposes economic restrictions to reduce inflation, future economic growth
in China could be severely curtailed, reducing the profitability of our
operations in China.
Rapid
economic growth can lead to growth in the supply of money and rising inflation.
If prices for any products or services in China are unable, for any reason, to
increase at a rate that is sufficient to compensate for any increase in the
costs of supplies, materials or labor, it may have an adverse effect on the
profitability of Erye and our operations in China would be adversely affected.
In order to control inflation in the past, China has imposed controls on bank
credits, limits on loans for fixed assets and restrictions on state bank lending
and could adopt additional measures to further combat inflation. Such measures
could harm the economy generally and hurt our business by (i) limiting the
income of our customers available to spend on our products and services, (ii)
forcing us to lower our profit margins, and (iii) limiting our ability to obtain
credit or other financing to pursue our expansion plans or maintain our
business. We cannot predict with any certainty the degree to which our business
will be adversely affected by slower economic growth in China.
Erye’s
manufacturing operations in China may be adversely affected by changes in PRC
government policies regarding ownership of assets and allocation of resources to
various industries and companies.
While the
PRC government has implemented economic and market reforms, a substantial
portion of productive assets in China are still owned by the PRC government. The
PRC government also exercises significant control over China’s economic growth
through the allocation of resources, controlling payment of foreign currency and
providing preferential treatment to particular industries or companies. Should
the PRC government change its policies regarding economic growth and private
ownership of manufacturing and other assets of Erye, we may be unable to execute
our business plan, we may lose rights to certain business assets and our
business, operating results and financial condition may be materially
harmed.
If
there are any adverse public health developments in China, our business and
operations may be disrupted and medical tourism in China may decline, which
could delay the launch of our stem cell therapies in China.
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Any
prolonged occurrence of avian flu, severe acute respiratory syndrome, or SARS,
or other adverse public health developments in China or other regions where we
operate could disrupt our business and have a material adverse effect on our
business and operating results. These could include the ability of our personnel
to travel or to promote our services within China or in other regions where we
operate, as well as temporary closure of our facilities.
Any
closures or travel or other operational restrictions would severely disrupt our
business operations and adversely affect our results of operations.
If
the anticipated growth of medical tourism in China does not occur, or if fewer
people travel abroad for the purpose of cosmetic or medical therapies for any
reason, including limitations imposed by governmental authorities, we may not
achieve our revenue and profit expectations.
One part
of our business plan involves launching innovative, safe, and effective adult
stem cell-based therapies in China that have not yet been approved in the U.S.,
to generate sales revenues in advance of obtaining U.S. regulatory approvals.
Different countries have different regulatory requirements and pathways
resulting in the availability of therapeutics in one market prior to another.
This phenomenon has led to the growth of an industry called “medical tourism”
where patients travel to foreign locations and receive treatments that have not
yet been approved in their home countries.
If the
anticipated growth of medical tourism in China does not occur, or if fewer
people travel abroad for the purpose of cosmetic or medical therapies for any
reason, including limitations imposed by governmental authorities,we may not
achieve our revenue and profit expectations. Any setbacks to the implementation
of our business plan could materially and adversely affect our business,
operating results and financial condition.
China
is a developing nation governed by a one-party communist government and
susceptible to political, economic, and social upheaval that could disrupt the
economy.
China is
a developing country governed by a one-party government. China is also a country
with an extremely large population, wide income gaps between rich and poor and
between urban and rural residents, minority ethnic and religious populations,
and growing access to information about the different social, economic, and
political systems found in other countries. China has also experienced extremely
rapid economic growth over the last decade, and its legal and regulatory systems
have had to change rapidly to accommodate this growth. If China experiences
political or economic upheaval, labor disruptions or other organized protests,
nationalization of private businesses, civil strife, strikes, acts of war and
insurrections, this may disrupt China’s economy and could materially and
adversely affect our financial performance.
If
political relations between China and the U.S. deteriorate, our business in
China may be materially and adversely affected.
The
relationship between China and the U.S. is subject to periodic tension.
Relations may also be compromised if the U.S. becomes a more active advocate of
Taiwan or pressures the PRC government regarding its monetary, economic or
social policies. Changes in political conditions in China and changes in the
state of Sino-U.S. relations are difficult to predict and could adversely affect
our operations or financial condition. In addition, because of our involvement
in the Chinese market, any deterioration in political relations might cause a
public perception in the U.S. or elsewhere that might cause the goods or
services we may offer to become less attractive. If any of these events were to
occur, it could materially and adversely affect our business, operating results
and financial condition.
China’s
State Food and Drug Administration’s regulations may limit our ability to
develop, license, manufacture and market our products and services.
Some or
all of our operations in China will be subject to oversight and regulation by
the SFDA. Government regulations, among other things, cover the inspection of
and controls over testing, manufacturing, safety and environmental
considerations, efficacy, labeling, advertising, promotion, record keeping and
sale and distribution of pharmaceutical products. Such government regulations
may increase our costs and prevent or delay the licensing, manufacturing and
marketing of any of our products or services. In the event we seek to license,
manufacture, sell or distribute new products or services, we likely will need
approvals from certain government agencies such as the SFDA. The future growth
and profitability of any operations in China would be contingent on obtaining
the requisite approvals. There can be no assurance that we will obtain such
approvals.
In 2004,
the SFDA implemented new guidelines for the licensing of pharmaceutical
products. All existing manufacturers with licenses were required to apply for
the Good Manufacturing Practices, or cGMP, certifications. Erye has received the
requisite certifications. However, should Erye fail to maintain its cGMP
certifications or fail to obtain cGMP and other certifications for its new
production facilities, this would have a material adverse effect on Erye’s and
our business, results of operations and financial condition.
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In
addition, delays, product recalls or failures to receive approval may be
encountered based upon additional government regulation, legislative changes,
administrative action or changes in governmental policy and interpretation
applicable to the Chinese pharmaceutical industry. Our pharmaceutical activities
also may subject us to government regulations with respect to product prices and
other marketing and promotional related activities. Government regulations may
substantially increase our costs for developing, licensing, manufacturing and
marketing any products or services, which could have a material adverse effect
on our business, operating results and financial condition.
The SFDA
and other regulatory authorities in China have implemented a series of new
punitive and stringent measures regarding the pharmaceuticals industry to
redress certain past misconducts in the industry and certain deficiencies in
public health reform policies. Given the nature and extent of such new
enforcement measures, the aggressive manner in which such enforcement is being
conducted and the fact that newly-constituted local level branches are
encouraged to issue such punishments and fines, there is the possibility of
large scale and significant penalties being levied on manufacturers. These new
measures may include fines, restriction and suspension of operations and
marketing and other unspecified penalties. This new regulatory environment has
added significantly to the risks of our businesses in China and may have a
material adverse effect on our business, operating results and financial
condition.
In
China, we plan to conduct research and development activities related to stem
cells in cooperation with two domestic Chinese companies. If these activities
are regarded by PRC government authorities as “human genetic resources research
and development activities,” additional approvals by PRC government authorities
will be required.
Our
research and development activities in adult stem cells in China are conducted
in cooperation with the Beijing Stem Cell Research Center, or Lab, and a
consultant, the Shandong Life Science Institute and Technology Research, or
SLSI. Pursuant to the Interim Measures for the Administration of Human Genetic
Resources, or the Measures, that took effect on June 10, 1998, China maintains a
reporting and registration system on important pedigrees and genetic resources
in specified regions. All entities and individuals involved in sampling,
collecting, researching, developing, trading or exporting human genetic
resources or taking such resources outside China must abide by the Measures.
“Human genetic resources” refers to genetic materials such as human organs,
tissues, cells, blood specimens, preparations or any type of recombinant DNA
constructs, which contain human genome, genes or gene products as well as to the
information related to such genetic materials.
It is
possible that our research and development activities conducted by the Lab or
SLSI in cooperation with us in China may be regarded by PRC government
authorities as human genetic resources research and development activities, and
thus will be subject to approval by PRC government authorities. The sharing of
patents or other corresponding intellectual property rights derived from such
research and development operations is also subject to various restrictions and
approval requirements established under the Measures.
With
regard to the ownership of intellectual property rights derived from human
genetic resources research and development, the Measures provide that the
China-based research and development institution shall have priority access to
information about the human genetic resources within China, particularly the
important pedigrees and genetic resources in the specified regions and the
relevant data, information and specimens and any transfer of such human genetic
resources to other institutions shall be prohibited without obtaining
corresponding approval from the Human Genetic Resource Administration Office of
China, among other governmental authorities or agencies. No foreign
collaborating institution or individual that has access to the above-mentioned
information may publicize, publish, apply for patent rights or disclose it by
any other means without obtaining government approval. In a collaborative
research and development project involving human genetic resources of China
between any Chinese and foreign institutions, intellectual property rights shall
be allocated according to the following principles: (i) patent rights shall be
jointly applied for by both parties and the resulting patent rights shall be
owned by both parties if an achievement resulting from the collaboration is
patentable; (ii) either party has the right to exploit such patent separately or
jointly in its own country, subject to the terms of the collaboration; however,
the transfer of such patent to any third party or authorizing any third party to
implement such patent shall be carried out upon agreement of both parties, and
the benefits obtained thereof shall be shared in accordance with their
respective contributions; and (iii) the right of utilizing, transferring and
sharing any other scientific achievement resulted from the collaboration shall
be specified in the collaborative contract or agreement signed by both parties.
Both parties are equally entitled to make use of the achievement which is not
specified in the collaborative contract or agreement; however, the transfer of
such achievement to any third party shall be carried out upon agreement of both
parties, and the benefits obtained thereof shall be shared in accordance with
their respective contributions.
If the
research and development operations conducted by the Lab or SLSI in cooperation
with us in China are regarded by PRC government authorities as human genetic
resources research and development activities, we may be required to obtain
approval from PRC governmental authorities to continue such operations and the
Measures may adversely affect our rights to intellectual property developed from
such operations. Our inability to access intellectual property, or our inability
to obtain required on a timely basis, or at all, could materially and adversely
affect our operations in China, and our operating results and financial
condition.
Erye
will lose certain preferential tax concessions, which may cause our tax
liabilities to increase and its profitability to decline.
The
National People’s Congress of China enacted a new PRC Enterprise Income Tax Law,
or the EIT Law, that went into effect on January 1, 2008. Domestic-invested
enterprises and foreign-invested entities now are subject to enterprise income
tax at a uniform rate of 25% unless they qualify for limited exceptions. During
the transition period for enterprises established before March 16, 2007, the tax
rate will gradually increase starting in 2008 and will be equal to the new tax
rate in 2012. As a result, Erye will lose its preferential tax
rates.
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- -
Because
of the EIT Law, we expect that the tax liabilities of Erye will increase. Any
future increase in the enterprise income tax rate applicable to Erye or other
adverse tax treatments could increase Erye’s tax liabilities and reduce its net
income, which could have a material adverse effect on Erye’s and our results of
operations and financial condition.
Some
of the laws and regulations governing our business in China are vague and
subject to risks of interpretation.
Some of
the PRC laws and regulations governing our business operations in China are
vague and their official interpretation and enforcement may involve substantial
uncertainty. These include, but are not limited to, laws and regulations
governing our business and the enforcement and performance of our contractual
arrangements in the event of the imposition of statutory liens, death,
bankruptcy and criminal proceedings. Despite their uncertainty, we will be
required to comply.
New laws
and regulations that affect existing and proposed businesses may be applied
retroactively. Accordingly, the effectiveness of newly enacted laws, regulations
or amendments may not be clear. We cannot predict what effect the interpretation
of existing or new PRC laws or regulations may have on our
business.
In
addition, pursuant to China’s Administrative Measures on the Foreign Investment
in Commercial Sector, foreign enterprises are permitted to establish or invest
in wholly foreign-owned enterprises or joint ventures that engage in wholesale
or retail sales of pharmaceuticals in China subject to the implementation of
relevant regulations. However, no specific regulations in this regard have been
promulgated to date, which creates uncertainty. If specific regulations are not
promulgated, or if any promulgated regulations contain clauses that cause an
adverse impact to our operations in China, then our business, operating results
and financial condition could be materially and adversely affected.
The
laws and regulations governing the therapeutic use of stem cells in China are
evolving. New PRC laws and regulations may impose conditions or requirements
with which could materially and adversely affect our business.
As the
stem cell therapy industry is at an early stage of development in China, new
laws and regulations may be adopted in the future to address new issues that
arise from time to time. As a result, substantial uncertainties exist regarding
the interpretation and implementation of current and any future PRC laws and
regulations applicable to the stem cell therapy industry. There is no way to
predict the content or scope of future Chinese stem cell regulation. There can
be no assurance that the PRC government authorities will not issue new laws or
regulations that impose conditions or requirements with which we cannot comply.
Noncompliance could materially and adversely affect our business, results of
operations and financial condition.
Until
implementing rules are issued with regard to the PRC Antitrust Law, we are
unable to determine whether our operations comply.
It is
expected that a set of detailed implementing rules of the PRC Antitrust Law will
be issued by the PRC government. We are now in the process of reviewing our
current business model and business operation against the current PRC Antitrust
Law. However, before the promulgation of such implementing rules, we are unable
to determine whether we might be in violation of any aspects of the PRC
Antitrust Law. A violation of the PRC Antitrust law could subject our operations
to sanctions, fines and other governmental enforcement action any of which could
have a material adverse effect on our business, results of operations and
financial condition.
We
may be subject to fines and legal sanctions imposed by the SAFE or other PRC
government authorities if we or our PRC employees fail to comply with recent PRC
regulations relating to employee stock options granted by offshore listed
companies to PRC citizens.
On April
6, 2007, the SAFE issued the “Operating Procedures for
Administration of Domestic Individuals Participating in the Employee Stock
Ownership Plan or Stock Option Plan of An Overseas Listed Company,”
referred to as Circular 78. It is not clear whether Circular 78 covers all forms
of equity compensation plans or only those which provide for the granting of
stock options. For any plans which are so covered and are adopted by a non-PRC
listed company after April 6, 2007, Circular 78 requires all participants who
are PRC citizens to register with and obtain approvals from the SAFE prior to
their participation in the plan. In addition, Circular 78 also requires PRC
citizens to register with the SAFE and make the necessary applications and
filings if they participated in an overseas listed company’s covered equity
compensation plan prior to April 6, 2007. The 2009 Non-U.S. Plan authorizes the
grant of certain equity awards to our officers, directors and employees, some of
whom are PRC citizens. Circular 78 may require our officers, directors and
employees who receive option grants and are PRC citizens to register with the
SAFE. We believe that the registration and approval requirements contemplated in
Circular 78 will be burdensome and time consuming. If it is determined that any
of our equity compensation plans are subject to Circular 78, failure to comply
with such provisions may subject us and participants of our equity incentive
plan who are PRC citizens to fines and legal sanctions and prevent us from being
able to grant equity compensation to our PRC employees. In that case, our
ability to compensate our officers, directors and employees through equity
compensation would be hindered and our business operations may be adversely
affected.
- 36
- -
Failure
to comply with the U.S. Foreign Corrupt Practices Act could subject us to
penalties and other adverse consequences.
We are
subject to the U.S. Foreign Corrupt Practices Act, which generally prohibits
U.S. companies from engaging in bribery or other prohibited payments to foreign
officials for the purpose of obtaining or retaining business. Foreign companies,
including some that may compete with us, are not subject to these prohibitions.
Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices
occur from time-to-time in the PRC. There can be no assurance, however, that our
employees or other agents will not engage in such conduct for which we might be
held responsible. If our employees or other agents are found to have engaged in
such practices, we could suffer severe penalties and other consequences that may
have a material adverse effect on our business, financial condition and results
of operations.
Under
the EIT Law, we may be classified as a “resident enterprise” of the PRC, which
could result in unfavorable tax consequences to us and to non-PRC
stockholders.
Under the
EIT Law, an enterprise established outside of China with “de facto management
bodies” within China is considered a “resident enterprise,” meaning that it can
be treated in a manner similar to a Chinese enterprise for enterprise income tax
purposes, although the dividends paid to one resident enterprise from another
may qualify as “tax-exempt income.” The implementing rules of the EIT Law define
de facto management as “substantial and overall management and control over the
production and operations, personnel, accounting, and properties” of the
enterprise. The EIT Law and its implementing rules are relatively new and
ambiguous in terms of some definitions, requirements and detailed procedures,
and currently no official interpretation or application of this new “resident
enterprise” classification, other than for enterprises established outside of
China whose main holding investor/s is/are enterprise/s established in China, is
available; therefore, it is unclear how tax authorities will determine tax
residency based on the facts of each case.
If the
PRC tax authorities determine that we are a “resident enterprise” for PRC
enterprise income tax purposes, the PRC could impose a 10% PRC tax on dividends
we pay to our non-PRC stockholders and gains derived by our non-PRC stockholders
from transferring our shares, if such income is considered PRC-sourced income by
the relevant PRC authorities. In addition, we could be subject to a number of
unfavorable PRC tax consequences, including: (a) we could be subject to
enterprise income tax at a rate of 25% on our worldwide taxable income, as well
as PRC enterprise income tax reporting obligations; and (b) although under the
EIT Law and its implementing rules, dividends paid to us from our PRC
subsidiaries through our sub-holding companies may qualify as “tax-exempt
income,” we cannot guarantee that such dividends will not be subject to
withholding tax. Any increase in the taxation of our PRC-based revenues could
materially and adversely affect our business, operating results and financial
condition.
Taxing
authorities in the PRC may attempt to impose a capital gains tax on the transfer
of the ownership of the 51% ownership interest in Erye.
Transactions
involving the Merger of two non-PRC companies, but that result in the change in
ownership of joint venture interests in the PRC, historically have not been
taxed by the taxing authorities in the PRC. However, recently the taxing
authorities in the PRC have levied capital gains tax at the rate of
approximately 10% of the gain on a few real estate and mining transactions that
resulted in a change in ownership in joint ventures located in the PRC. There
can be no assurance that the PRC taxing authorities will not impose a capital
gains tax of approximately 10% of the gain on the transfer to us of ownership of
the 51% equity interests in Erye.
Risks
Related to Our Securities
Our
common stock has had limited trading volume.
Our
common stock is currently listed on the NYSE Amex and has had limited trading
volume since its listing on August 9, 2007. Low volumes can result in
fluctuating prices and downward pressure on the price per share should there
develop an imbalance between the shares available for sale and the number of
shares sought to be purchased. We cannot assure you that the liquidity of our
common stock will improve or that it will not decline from current levels. Our
Class A Warrants also trade on the NYSE Amex, but have had very limited trading
volume. Investors holding our common stock may find it difficult to dispose of
such shares.
Our
stock price has been and may continue to be volatile.
The price
of our common stock has fluctuated widely in the past and may be more volatile
in the future. In addition to our low stock trading volume, some of the other
factors contributing to our stock’s price volatility include announcements of
government regulation, new products or services introduced by us or by our
competition, healthcare legislation, trends in health insurance, litigation,
fluctuations in operating results, our success in commercializing our business,
market conditions for healthcare stocks in general as well as economic
recession. Any of these factors could have a significant impact on the price of
our common stock.
- 37
- -
Failure
to maintain effective internal control over financial reporting in accordance
with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect
on our business and stock price.
CBH
reported several material weaknesses in its internal control over financial
reporting and concluded that it did not have effective internal control over
financial reporting as of December 31, 2008 and September 30, 2009. If we fail
to (1) remediate the material weaknesses identified in CBH’s internal control
over financial reporting that are continuing with regard to Erye, and integrate
CBH’s internal control over financial reporting pertaining to Erye with ours, or
(2) we fail to maintain the adequacy of internal control over our financial
reporting with regard to the financial condition and results of operations of
Erye, we may not be able to ensure that we can conclude on an ongoing basis that
we have effective internal control over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act, as such standards are modified,
supplemented or amended from time to time.
During
the course of testing our disclosure controls and procedures and internal
control over financial reporting, we may identify and disclose material
weaknesses or significant deficiencies in internal control over financial
reporting that will have to be remedied. Implementing any appropriate changes to
our internal control may require specific compliance training of our directors,
officers and employees, entail substantial costs in order to modify our existing
accounting systems, and take a significant period of time to complete. Such
changes may not, however, be effective in maintaining the adequacy of our
internal control over financial reporting, and any failure to maintain that
adequacy or inability to produce accurate financial statements on a timely basis
could result in our financial statements being unreliable, increase our
operating costs and materially impair our ability to operate our
business.
Failure
to achieve and maintain effective internal control over financial reporting
could result in a loss of investor confidence in our financial reports and could
have a material adverse effect on our stock price. Additionally, failure to
maintain effective internal control over our financial reporting could result in
government investigation or sanctions by regulatory
authorities. Please see Item 9A – Management’s Annual Report in
Internal Control Over Financial Reporting for a discussion of material
weaknesses and the Company’s remediation efforts.
We
have a significant number of securities convertible into, or allowing the
purchase of our common stock. Investors could be subject to increased dilution.
Also, the issuance of additional shares as a result of such conversion or
purchase, or their subsequent sale, could adversely affect the price of our
common stock.
Investors
in our company will be subject to increased dilution upon conversion of our
preferred stock and upon the exercise of outstanding stock options and warrants.
There were 43,946,031 shares of our common stock outstanding as of March 24,
2010. As of that date, preferred stock outstanding could be converted into
9,086,124 shares of our common stock and stock options and warrants outstanding
that are exercisable represented an additional 19,838,802 shares of our
common stock that could be issued (for which cash would need to be remitted to
us for exercise) in the future. Most of the outstanding shares of our common
stock, as well as the vast majority of the shares of our common stock that may
be issued under our outstanding options and warrants, are not restricted from
trading or have the contractual right to be registered.
Any
significant increase in the number of shares offered for sale could cause the
supply of our common stock available for purchase in the market to exceed the
purchase demand for our common stock. Such supply in excess of demand could
cause the market price of our common stock to decline.
Actual
and beneficial ownership of large quantities of our common stock by our
executive officers, directors, and other substantial stockholders, may
substantially reduce the influence of other stockholders.
As of
March 15, 2010, our executive officers, directors, and 5%-or-more stockholders
collectively beneficially owned 35,763,482 shares of our common stock. These
beneficial holdings represent 58.7% of our common stock on a fully-diluted
basis. As a result, such persons may have the ability to exercise enhanced
control over the approval process for actions that require stockholder approval,
including: the election of our directors and the approval of mergers, sales of
assets or other significant corporate transactions or other matters submitted
for stockholder approval. Because of the beneficial ownership position of these
persons and entities, other stockholders may have less influence over matters
submitted for stockholder approval. Furthermore, at certain times the interests
of our substantial stockholders may conflict with the interests of our other
stockholders.
Some of our
directors and officers have positions of responsibility with other entities, and
therefore have loyalties and fiduciary obligations to both our company and such
other entities. These dual positions subject such persons to conflicts of
interest in related party transactions which may cause such related party
transactions to have consequences to the our company that are less favorable
than those which our Company could have attained in comparable transactions with
unaffiliated entities.
Eric H.C.
Wei, a member of our Board of Directors, is also the Managing Partner of RimAsia
Capital Partners, L.P., or RimAsia. RimAsia, a substantial stockholder of our
company, beneficially owns 46.3% of our common stock as of March 15, 2010. Shi
Mingsheng (who became a director of our company in March 2010) and Madam Zhang
Jian (the General Manager of Erye), together with certain other persons, have
shared voting and dispositive power over the shares of our common stock held by
Fullbright Finance Limited, or Fullbright. Fullbright is a substantial
stockholder of our company, beneficially owning 9.9% of our common stock as of
March 15, 2010. These relationships create, or, at a minimum, appear to create
potential conflicts of interest when members of our company’s senior management
are faced with decisions that could have different implications for our company
and the other entities with which our directors or officers are
associated.
- 38
- -
Although
our company has established procedures designed to ensure that material related
party transactions are fair to the company, no assurance can be given as to how
potentially conflicted board members or officers will evaluate their fiduciary
duties to our company and to other entities that they may owe fiduciary duties,
respectively, or how such individuals will act in such circumstances.
Furthermore, the appearance of conflicts, even if such conflicts ultimately do
not harm our company, might adversely affect the public’s perception of our
business, as well as its relationship with its existing customers, licensors,
licensees and service providers and its ability to enter into new relationships
in the future.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
2. PROPERTIES
Effective
April 1, 2009, we leased executive offices at 420 Lexington Avenue, New York, NY
10170, which serve as our headquarters. The lease has a current term that
extends through June 2013 and is believed to be sufficient space for the
foreseeable future.
In
September 2009, we leased office and laboratory space at 840 Memorial Drive,
Cambridge, Massachusetts for approximately three years, or the Cambridge Space.
The Cambridge Space will be used for general office, research and development,
and laboratory purposes (inclusive of an adult stem cell collection center). The
base rent under the Cambridge Lease is $283,850 for the first year, $356,840 for
the second year and $369,005 for the third year.
The
current operations of Erye are located in Suzhou City. All buildings are fully
occupied and used by Erye. The ages of all buildings are over 25 years. The land
on which the facilities are situated is located at the heart of city and is
restricted by government regulation from any new building development. In 2005,
the government issued a mandate requiring the relocation of many of Suzhou’s
existing manufacturing facilities. To comply with this mandate, and to meet the
growing demands of its business, Erye acquired land use rights to approximately
27 acres in the Xiangcheng District of Suzhou for $1.8 million and, in 2007,
commenced the construction of a new, state-of-the-art production facility. This
new campus-style facility includes 12 buildings containing a total of
approximately 49,436 square meters, for which the external building construction
has been completed. Portions of the new facility are expected to be operational
in the first quarter of 2010 and the relocation is expected to be completed by
the end of 2011. The land use rights end in January of 2058.
The total
cost of the new facility is estimated to be approximately $30 million, of which
approximately $16 million has been paid for through December 31, 2009. The
remaining $14 million is expected to be funded from a combination of proceeds
from the Company’s February 2010 public offering in which it raised net proceeds
of approximately $7.1 million, the proceeds from the exercise by RimAsia in
March 2010 of a warrant to purchase 1,000,000 shares of Common Stock at a per
share purchase price of $1.75 resulting in gross proceeds to the
Company of $1,750,000 (in each of the prior two cases such funding would be in
the form of a loan from the Company), an Erye line of credit and Erye’s
operating cash flow. To this end, the owners of Erye have agreed to reinvest a
substantial portion of their respective shares of the earnings of Erye to pay
the costs associated with the completion of, and Erye’s relocation to, the new
production facility.
In 2008,
CBH, the then 51% owner of Erye, and EET, as the owner of the remaining 49% of
Erye, and RimAsia, entered into a Memorandum of Understanding, or MOU, which
established, among other things, certain terms and conditions concerning the
operation and relocation of Erye. The MOU calls for all proceeds associated with
the relocation of the current facility in which Erye manufactures product to be
sold, to the new facilities currently under construction, to be paid to EET. In
September 2009, Erye agreed to transfer the land and building for its principal
manufacturing facility to a new joint venture beneficially owned by EET.
Erye and the new joint venture, which was approved by the Jiangsu Provincial
Bureau of Commerce on December 28, 2009, have agreed to Erye’s continued
use of the land and buildings for a nominal fee until the construction of the
new plant and Erye’s relocation are completed.
ITEM
3. LEGAL PROCEEDINGS
We
may be subject to litigation in the ordinary course. Currently, we are not a
party to any litigation that could have a material adverse effect on our
financial condition.
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- -
ITEM
4. REMOVED AND RESERVED
ITEM
5(a). MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET
FOR OUR COMMON EQUITY
Our
Common Stock is presently traded on the NYSE Amex (previously known as the
American Stock Exchange) under the trading symbol “NBS.” From August
31, 2006 to August 8, 2007, it traded on the Over-the-Counter Bulletin Board
(OTC.BB) under the symbol “NEOI” and from July 24, 2003 to
August 30, 2006 traded under the symbol “PHSM.” The prices, as
presented below, represent the highest and lowest intra-day prices for our
common stock as quoted on the OTC.BB through August 8, 2007 and the high and low
sales prices on the NYSE Amex thereafter. The OTC.BB market quotations may
reflect inter-dealer prices without retail mark-up, mark-down, or commission,
and may not necessarily represent actual transactions. On March 26, 2010, as
reported on the NYSE Amex, the last sale price of our common stock was $1.68 per
share, and the high and low sale prices of our common stock were $1.72 and $1.66
, respectively.
|
2009
|
High
|
Low
|
||||||
|
First
Quarter
|
$
|
1.08
|
$
|
0.43
|
||||
|
Second
Quarter
|
2.72
|
0.80
|
||||||
|
Third
Quarter
|
2.33
|
1.40
|
||||||
|
Fourth
Quarter
|
2.50
|
1.28
|
||||||
|
2008
|
High
|
Low
|
||||||
|
First
Quarter
|
$
|
2.24
|
$
|
1.18
|
||||
|
Second
Quarter
|
1.48
|
0.41
|
||||||
|
Third
Quarter
|
1.80
|
0.70
|
||||||
|
Fourth
Quarter
|
2.15
|
0.41
|
||||||
|
2007
|
High
|
Low
|
||||||
|
First
Quarter
|
$
|
8.00
|
$
|
2.50
|
||||
|
Second
Quarter
|
6.40
|
3.70
|
||||||
|
Third
Quarter
|
7.65
|
3.65
|
||||||
|
Fourth
Quarter
|
4.75
|
1.28
|
||||||
HOLDERS
As of
March 15, 2010, there were approximately 1,476 holders of record of our common
stock which does not include beneficial owners for whom Cede & Co. or others
act as nominees.
DIVIDENDS
AND DIVIDEND POLICY
Holders
of our common stock are entitled to dividends when, as, and if declared by our
Board of Directors out of funds legally available therefore. We have never paid
any cash dividends on our capital stock and do not anticipate paying any cash
dividends in the foreseeable future. We currently intend to retain
any future earnings to fund the development and growth of our business. Future
dividend policy is subject to the discretion of our Board of Directors, subject
to certain qualifications described below.
As long
as any shares of our Series C Preferred Stock are outstanding, no dividend may
be declared or paid or set apart for payment on any junior stock, unless there
has been declared and paid or set apart for payment on the shares of Series C
Preferred Stock, all accrued and unpaid annual dividends; provided, however,
that the foregoing does not apply to (i) dividends payable solely in shares of
any class or series of junior stock, or (ii) the purchase, redemption or
conversion of shares of any junior stock, in exchange solely for shares of
junior stock.
Furthermore,
we rely on dividend payments from our subsidiaries, NeoStem (China), Inc., or
NeoStem (China) and CBH Acquisition LLC, or Merger Sub, now China
Biopharmaceuticals Holdings, Inc., that is the holder of our 51% interest in
Erye, which may, from time to time, be subject to certain additional
restrictions on their ability make distributions to us. PRC accounting standards
and regulations currently permit payment of dividends only out of accumulated
profits, a portion of which must be set aside to fund certain reserve funds. Our
inability to receive all of the revenues from NeoStem (China) and Merger Sub may
in turn provide an additional obstacle to our ability to pay dividends on our
common stock in the future. Additionally, because the PRC government imposes
controls on the convertibility of RMB into foreign currencies and, in certain
cases, the remittance of currency out of the PRC, shortages in the availability
of foreign currency may occur, which could restrict our ability to remit
sufficient foreign currency to pay dividends.
- 40
- -
Finally,
any distributions we may receive by reason of our ownership of a 51% interest in
Erye will be subject to the provisions of the Joint Venture Agreement, which
presently provides that, for the next three years, we will receive annual
distributions of only six percent of Erye’s net profit.
EQUITY
COMPENSATION PLAN INFORMATION
The
following table gives information about our common stock that may be issued upon
the exercise of options, warrants and rights under our equity compensation
plans. In the following table, the equity compensation plans approved by
stockholders include the NeoStem, Inc. 2003 Equity Participation Plan (the “2003
Plan”), the NeoStem, Inc. 2009 Equity Compensation Plan (the “2009 Plan”) and
the NeoStem, Inc. 2009 Non-U.S. Based Equity Compensation Plan (the “2009
Non-U.S. Plan”) as of December 31, 2009. These plans were our only
equity compensation plans in existence as of December 31, 2009.
|
Plan
Category
|
(a)
Number
of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
and Rights
|
(b)
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights
|
(c)
Number
of Securities Remaining Available For Future Issuance Under Equity
Compensation Plans (Excluding Securities Reflected In Column
(a))
|
|||||||||
|
Equity
Compensation Plans Approved by Security Holders
|
9,990,574
|
$
|
1.95
|
3,955,970
|
||||||||
|
Equity
Compensation Plans Not Approved by Security Holders
|
0
|
0
|
0
|
|||||||||
|
TOTAL
|
9,990,574
|
$
|
1.95
|
3,955,970
|
||||||||
Effective
as of October 9, 2009, the Company entered into an agreement with a financial
advisor who has previously provided services to the Company, pursuant to which
this advisor was retained to provide additional financial advisory services for
a two month period. In consideration for providing services under this
agreement, the Company agreed to issue to the consultant an aggregate of 50,000
shares of restricted Common Stock, to vest as to one-half of the shares at the
end of each monthly period during the term, and a five year warrant to purchase
25,000 shares of restricted Common Stock at a per share exercise price of $2.10
(with cashless exercise provisions), to vest in its entirety at the end of the
term. The issuance of such securities is subject to the approval of the NYSE
Amex, which approval was obtained in December 2009.
Effective
as of November 20, 2009, the Company entered into an agreement with a consultant
who has previously provided services to the Company, pursuant to which this
consultant was retained to provide additional consulting services for a three
month period. In consideration for providing services under this agreement, the
Company agreed to issue to the consultant an aggregate of 50,000 shares of
restricted common stock, to vest as to one-third of the shares at the end of
each monthly period during the term. The issuance of such securities is subject
to the approval of the NYSE Amex, which approval was obtained in December
2009.
Effective
as of January 4, 2010 the Company entered into a one-year agreement with a
consultant to provide investor relations services to the Company. In
consideration for providing services under this agreement, the Company agreed to
pay a retainer of $8,000 per month, at the beginning of the month and each month
thereafter during the primary term of the agreement and issue to the consultant
a five year warrant to purchase 200,000 shares of restricted common stock at a
per share exercise price of $2.00 to vest 50,000 each of the last day of each of
the fiscal quarters. The issuance of such securities is subject to the approval
of the NYSE Amex, which approval was obtained in January 2010.
- 41
- -
Effective
as of February 26, 2010, the Company entered into an agreement with a consultant
to provide to the Company necessary information for designing a successful
marketing plan and product list for the penetration (Phase II) of Federal, State
and local government markets. In consideration for providing the
services, the Company agreed to pay a retainer of $20,000 each month and a five
year warrant in the Company's standard form to purchase 275,000 shares of Common
Stock which shall have a per share exercise price $1.42 and shall vest and
become exercisable in its entirety on such date after the Effective Date that
certain milestones in performance have been achieved; provided that if such date
is prior to May 14, 2010 then the warrant shall vest on May 14,
2010. The issuance of such securities is subject to the approval of
the NYSE Amex.
Effective
as of March 11, 2010, the Company entered into an agreement with a law firm
which has been providing legal services to the Company since 2006, pursuant to
which this firm was retained to provide additional legal services with regard to
negotiation, drafting and finalization of contracts; in the development of
strategic plans; with regard to funding from various agencies of the State of
New Jersey and the Federal government. In consideration for providing
the services, the Company agreed to issue a five year warrant to purchase 52,000
shares of restricted Common Stock at a per share exercise price of $1.42,
vesting as to one-half of the shares on June 30, 2010 and one-half of the shares
on December 31, 2010. The issuance of such securities is subject to
the approval of the NYSE Amex.
- 42
- -
Not
applicable.
ITEM
5(c) REPURCHASES OF EQUITY SECURITIES
There
were no repurchases of equity securities by or on behalf of the Company or any
affiliated purchaser during the fourth quarter of the fiscal year ended December
31, 2009 as to which information is required to be
furnished.
- 43
- -
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
The following Management’s
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth under “Cautionary Note Regarding Forward-Looking Statements” and under
“Risk Factors” and elsewhere in this annual report. The following discussion
should be read in conjunction with our consolidated financial statements and
related notes thereto included elsewhere in this annual
report.
The
Merger
As
reported on our Current Report on Form 8-K dated November 6, 2008, on November
2, 2008 we entered into the Merger Agreement with CBH. On October 30, 2009, the
Merger was consummated, the effect of which was our acquisition of CBH’s 51%
ownership interest in Erye. In connection with the Merger we established a
wholly owned subsidiary through which we acquired our interest in
Erye.
Erye was
founded more than 50 years ago and represents an established,
vertically-integrated pharmaceutical business, focused primarily on antibiotics.
Suzhou Erye Economy and Trading Co. Ltd., or EET, owns the remaining 49%
ownership interest in Erye. We and EET have negotiated a revised joint venture
agreement, or the Joint Venture Agreement and will govern our ownership of
Erye.
Pursuant
to the terms and conditions of the Joint Venture Agreement, dividend
distributions to EET and Merger Sub 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 distributions will be made as
follows: (i) the 49% of undistributed profits (after tax) of the joint venture
due EET will be distributed to EET and lent back to Erye to help finance costs
in connection with their construction of and relocation to a new facility and;
(ii) of the net profit (after tax) of the joint venture due Merger Sub, 45% will
be provided to Erye as part of the new facility construction fund and will be
characterized as paid-in capital for Merger Sub’s 51% interest in Erye, and 6%
will be distributed to Merger Sub directly. In 2009 and as of
December 31, 2009 distributions totaling approximately $7,158,000 had been
deferred and EET has received and lent back approximately
$7,688,000.
The
Overview
In 2009,
through our expansion efforts within China and with the acquisition of a
controlling interest in Suzhou Erye Pharmaceuticals Ltd., or Erye, we
transitioned into a multi-dimensional international biopharmaceutical company
with product and service revenues, global research and development capabilities
and operations in three distinct business units: (i) U.S. adult stem cells, (ii)
China adult stem cells, and (iii) China pharmaceuticals. These business units
are expected to provide platforms for the accelerated development and
commercialization of innovative technologies and products in both the U.S. and
China.
|
•
|
U.S.
adult stem cells — We will continue to focus on growing our stem
cell collection, processing and storage business and expanding our
research and development activities for diagnostic and therapeutic
applications.
|
|
•
|
China
adult stem cells — We are in the process of launching several
stem cell-focused initiatives which include therapeutic applications, as
well as related collection, processing and
storage.
|
|
•
|
China
pharmaceuticals — Our ownership interest in Erye, a leading
antibiotics producer in China, positions us to take advantage of China’s
growth in healthcare spending through Erye’s existing pharmaceutical
product portfolio, as well as from products we may develop or
license.
|
NeoStem — Critical
Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts of NeoStem, Inc. (a
Delaware corporation) and its wholly-owned and partially owned subsidiaries as
listed below:
- 44
- -
|
Entity
|
Percentage
of Ownership
|
Location
|
||
|
NeoStem
Inc.
|
Parent Company
|
United
States of America
|
||
|
NeoStem
Technologies, Inc.
|
100%
|
United
States of America
|
||
|
Stem
Cell Technologies, Inc.
|
100%
|
United
States of America
|
||
|
NeoStem
(China) Inc.
|
100%
|
People’s
Republic of China
|
||
|
Qingdao
Niao Bio-Technology Ltd.*
|
*
|
People’s
Republic of China
|
||
|
Beijing
Ruijiao Bio-Technology Ltd.*
|
*
|
People’s
Republic of China
|
||
|
China
Biopharmaceuticals Holdings, Inc. (Merger Sub)
|
100%
|
United
States of America
|
||
|
Suzhou
Erye Pharmaceuticals Company Ltd.
|
51%
owned by Merger Sub
|
People’s
Republic of China
|
||
* Because certain PRC regulations
currently restrict foreign entities from holding certain licenses and
controlling certain businesses in China, we have created a wholly
foreign-owned entity, or WFOE, NeoStem (China), to implement our expansion
initiatives in China. To comply with China’s foreign investment
regulations with respect to stem cell-related activities, these business
initiatives in China are conducted via two Chinese domestic entities, Qingdao
Niao Bio-Technology Ltd., or Qingdao Niao, and Beijing Ruijieao Bio-Technology
Ltd., or Beijing Ruijieao, that are controlled by the WFOE through various
contractual arrangements
and under the principles of consolidation we consolidate 100% of their
operations.
Noncontrolling
interests:
Effective January 1, 2009, the Company adopted Financial Accounting Standard
Board (“FASB”) accounting standard regarding non-controlling interest in
consolidated financial statements. Certain provisions of this accounting
standard are required to be adopted retrospectively for all periods presented.
Such provisions include a requirement that the carrying value of non-controlling
interests (previously referred to as minority interests) be removed from the
mezzanine section of the balance sheet and reclassified as equity. Further, as a
result of adoption this accounting standard, net income attributable to
non-controlling interests is now excluded from the determination of consolidated
net income.
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.
Concentrations of Risk:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash. Cash includes cash on
hand and demand deposits in accounts maintained with banks within the People’s
Republic of China and the United States. The Company places its cash accounts
with high credit quality financial institutions, which at times may be in excess
of the FDIC insurance limit. Total cash in these banks at December 31, 2009 and
2008 amounted to $7,159,369 and $430,786 of which $431,717 and $27,740 deposits
are federally-insured, respectively of which $296,989 and 28,955 are covered by
such insurance. The Company has not experienced any losses in such
accounts and believes it is not exposed to any risks on its cash in bank
accounts. At December 31, 2009 the Company had invested approximately $1,031,000
in money market accounts
As of
October 31, 2009 the Company was selling pharmaceutical products to pharmacies
and hospitals. There is no sales concentration risk for the Company since there
are no sales to one customer individually accounting for more than 10% of the
total sales revenue for the twelve months ended December 31, 2009 and the two
months ended December 31, 2009.
For the
two months ended December 31, 2009 as a result of the acquisition of CBH, two
major suppliers provided approximately 23.0% of the Company’s purchases of raw
materials with each supplier individually accounting for 12% and 11%,
respectively. As of December 31, 2009, the total accounts payable to the two
major suppliers was $789,000, 10% of the total accounts payable.
For the
twelve months ended December 31, 2008 there were no suppliers which supplied
more than 10% of the Company’s supplies or raw materials.
Restricted Cash: Restricted cash represents
cash required to be deposited with banks for the balance of bank notes payable
but are subject to withdrawal with restrictions according to the agreement with
the bank and saving accounts. The required deposit rate is approximately 30-50%
of the notes payable. Given the nature of the restricted cash, it is
reclassified as a financing activity in Statement of Cash Flows.
Accounts Receivable: Accounts receivable are
carried at original invoice amount less an estimate made for doubtful
receivables. Management’s judgment and estimates are made in connection with
establishing the allowance for doubtful accounts. Specifically, the Company
analyzes the aging of accounts receivables balances, historical bad debts,
customer concentration and credit-worthiness, current economic trends and
changes in the Company’s customer payment terms. Significant changes in customer
concentrations or payment terms, deterioration of customer credit-worthiness or
weakening economic trends could have a significant impact on the collectability
of the receivables and the Company’s operating results. If the financial
condition of the Company’s customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowance may be
required. Management regularly reviews aging of receivables and changes in
payment trends by its customers, and records a reserve when they believe
collection of amounts due are at risk. There were allowance for doubtful
accounts necessary at December 31, 2009 and 2008 in the amount of $273,600 and
$0 respectively.
- 45
- -
Inventories: Inventories are stated
at the lower of cost or market using the first-in, first-out basis. The Company
reviews its inventory periodically for possible obsolescence or to determine if
any reserves are necessary.
Property and Equipment: The
cost of property and equipment is depreciated over the estimated useful lives of
the related assets of 3 to 10 years. The cost of computer software programs are
amortized over their estimated useful lives of five years. Depreciation is
computed on the straight-line method. Repairs and maintenance expenditures that
do not extend original asset lives are charged to expense as
incurred.
Income Taxes: The Company, in
accordance with ASC 740-10 (formerly SFAS 109, “Accounting for Income Taxes,”)
recognizes (a) the amount of taxes payable or refundable for the current year
and (b) deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in an enterprise’s financial statement or tax
returns. We continue to evaluate under guidance provided by the ASC, the
accounting for uncertainty in tax positions. The guidance requires
companies to recognize in their financial statements the impact of a tax
position if the position is more likely than not of being sustained on audit.
The position ascertained inherently requires judgment and estimates by
management. For the twelve months ended December 31, 2009 and 2008,
we do not believe we have any material uncertain tax positions that
would require us to measure and reflect the potential lack of
sustainability of a position on audit in our financial statements. We will
continue to evaluate our tax positions in future periods to determine if
measurement and recognition in our financial statements.
- 46
- -
Goodwill: Goodwill represents
the excess of the purchase price over the fair value of the net assets acquired
in a business combination. The Company reviews recorded goodwill for potential
impairment annually or upon the occurrence of an impairment indicator. The
Company performed its annual impairment tests as of December 31, 2009 and
determined no impairment exists. The Company will perform its future annual
impairment as of the end of each fiscal year, or earlier if circumstances would
indicate. Below is a recap of the changes in Goodwill for the twelve months
ended 12/31/2009:
|
Balance
12/31/2008
|
$ | 558,169 | ||
|
Increase
in Goodwill due to Acquisition of CBH
|
29,303,954 | |||
|
Balance
12/31/2009
|
$ | 29,862,123 |
Accounting for Stock Based
Compensation: In December 2004, the FASB issued ASC 718-10, 718-20 and
505-50 formerly, (SFAS No. 123(R), "Share-Based Payment" ("SFAS No. 123(R)")).
ASC 718-10, 718-20 and 505-50 establish 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.
ASC 718-10, 718-20 and 505-50 requires that the fair value of such equity
instruments be recognized as an expense in the historical financial statements
as services are performed. Prior to ASC 718-10, 718-20 and 505-50, only certain
pro forma disclosures of fair value were required. The Company has adopted ASC
718-10, 718-20 and 505-50 effective January 1, 2006. The Company determines
value of stock options by the Black-Scholes option pricing model. The value of
options issued since January 1, 2006 or that were unvested at January 1, 2006
are being recognized as an operating expense ratably on a monthly basis over the
vesting period of each option. With regard to stock options and warrants issued
to non-employees the Company has adopted ASC 505-50 formerly (EITF 96-18
“Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring or in Conjunction with Selling Goods and Services.”)
- 47
- -
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 earns revenue, in the form of license fees, from physicians seeking to
establish autologous adult stem cell collection centers. These license fees are
typically billed upon signing of the collection center agreement and
qualification of the physician by the Company’s credentialing committee and at
various times during the term of license agreement based on the terms of the
specific agreement. During the quarter ended June 30, 2009, the Company modified
its revenue recognition policy relative to these license fees to recognize such
fees as revenues ratably over the appropriate period of time to which the
revenue element relates. Previously these license fees were recognized in full
when agreements were signed and the physician had been qualified by the
Company’s credentialing committee. This modification of our revenue recognition
policy did not have a material impact on our results of operations. The Company
also receives licensing fees from a licensee for use of our technology and
knowledge to operate an adult stem cell banking operation in China, which
licensing fees are recognized as revenues ratably over the appropriate period of
time to which the revenue element relates. In addition, the Company earns
royalties for the use of its name and scientific information in connection with
its License and Referral Agreement with Promethean Corporation (see “Related
Party Transactions” below), which royalties are recognized as revenue when they
are received.
The
Company recognizes revenue from product sales when title has passed, the risks
and rewards of ownership have been transferred to the customer, the fee is fixed
and determinable, and the collection of the related receivable is probable which
is generally at the time of shipment.
Revenue
was made up of the following product categories.
|
For
the year ended
|
||||||||||||
|
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenue
|
||||||||||||
|
Prescription
drugs and intermediary pharmaceutical products
|
$ | 11,347,949 | $ | - | $ | - | ||||||
|
Stem
Cell Revenues
|
172,078 | 83,541 | 231,664 | |||||||||
|
Other
Revenues
|
45,091 | - | - | |||||||||
| $ | 11,565,118 | $ | 83,541 | $ | 231,664 | |||||||
Fair Value
Measurements: We follow the provisions of ASC 820, Fair Value Measurements and
Disclosures related to financial assets and liabilities that are being
measured and reported on a fair value basis. Fair value is the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the principal market at the
measurement date (exit price). We are required to classify fair value
measurements in one of the following categories:
Level 1
inputs which are defined as quoted prices (unadjusted) in active markets for
identical assets or liabilities that the reporting entity has the ability to
access at the measurement date.
Level 2
inputs which are defined as inputs other than quoted prices included within
Level 1 that are observable for the assets or liabilities, either directly or
indirectly.
- 48
- -
Level 3
inputs are defined as unobservable inputs for the assets or
liabilities. Financial assets and liabilities are classified based on the
lowest level of input that is significant to the fair value measurement. Our
assessment of the significance of a particular input to the fair value
measurement requires judgment, and may effect the valuation of the fair value of
assets and liabilities and their placement within the fair value hierarchy
levels.
The
Company determined the fair value of funds invested in short term investments,
which are available for sale and included in prepaid and other current assets on
the balance sheet at December 31, 2009, to be level 1 inputs measured
by quoted prices of the securities in active markets. The Company determined the
fair value of funds invested in money market funds to be level 2 inputs, which
does not entail material subjectivity because the methodology employed does not
necessitate significant judgment, and the pricing inputs are observed from
actively quoted markets. The following table sets forth by level within the fair
value hierarchy our financial assets and liabilities that were accounted for at
fair value on a recurring basis as of December 31, 2009.
|
Carrying
Value
|
Fair
Value Measurements Using Fair Value Hierarchy
|
|||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||||
|
Money
Market Funds
|
$ | 1,030,980 | $ | - | 1,030,980 | - | ||||||||||
|
Short
term investments
|
$ | 287,333 | $ | 287,333 | - | - | ||||||||||
Foreign Currency
Translation: As the Company’s Chinese
pharmaceutical business is a self-contained and integrated entity, and the
Company’s Chinese stem cell business’ future cash flow is expected to be
sufficient to service its additional financing requirements, the Chinese
subsidiaries’ functional currency is the Renminbi (“RMB”), and the Company’s
reporting currency is the US dollar. Results of foreign operations
are translated at the average exchange rates during the period, assets and
liabilities are translated at the unified exchange rate as quoted by the
People’s Bank of China at the end of each reporting period. Cash flows are also
translated at average translation rates for the period, therefore, amounts
reported on the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheet.
This
quotation of the exchange rates does not imply free convertibility of RMB to
other foreign currencies. All foreign exchange transactions continue to take
place either through the People’s Bank of China or other banks authorized to buy
and sell foreign currencies at the exchange rate quoted by the People’s Bank of
China.
Translation
adjustments resulting from this process are included in accumulated other
comprehensive income in the consolidated statement of shareholders’ equity and
amounted to $67,917 and $0 as of December 31, 2009 and 2008, respectively.
Assets and liabilities at December 31, 2009 were translated at 6.826 RMB to 1 US
dollar. The average translation rates applied to income statement accounts and
the statement of cash flows for the two months ended December 31, 2009 were
6.818 RMB to 1 US dollar.
Economic and Political
Risks: The
Company faces a number of risks and challenges since a significant amount of its
assets are located in China and its revenues are derived primarily from its
operations in China. China is a developing country with a young economic market
system overshadowed by the state. Its political and economic systems are very
different from the more developed countries and are still in the stage of
change. China also faces many social, economic and political challenges that may
produce major shocks and instabilities and even crises, in both its domestic
arena and its relationship with other countries, including but not limited to
the United States. Such shocks, instabilities and crises may in turn
significantly and negatively affect the Company’s performance.
Research and Development
Costs: Research and development
(“R&D”) expenses include salaries, benefits, and other headcount related
costs, clinical trial and related clinical manufacturing costs, contract and
other outside service fees, and facilities and overhead costs. R&D costs are
expensed when incurred.
Under the
guidance of the FASB’s accounting standard regarding research and development
costs, the Company expenses the costs associated with the research and
development activities when incurred.
Results
of Operations
Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008
Revenue
- 49
- -
For
the year ended December 31, 2009, total revenues were $11,565,100 compared to
$83,500 for the year ended December 31, 2008. Revenues for 2009 were comprised
of $11,386,700 of pharmaceutical product sales and $178,400 related to stem cell
collections, license fees and royalties. The pharmaceutical product sales of
$11,386,700 represents two months’ sales generated by Erye given the Merger
closed on October 30, 2009. The stem cell revenues generated in the
years ended December 31, 2009 and 2008 were derived from a combination of
revenues from the collection of autologous adult stem cells and license fees
collected from collection centers in our collection center network. For the year
ended December 31, 2009, we earned $143,700 from the collection and storage of
autologous adult stem cells and $34,700 of license fees. For the year ended
December 31, 2008, we earned $51,900 from the collection and storage of
autologous adult stem cells and $31,000 from license fees. The increase in stem
cell collection and storage revenue in 2009 compared to 2008 was due primarily
to our efforts on recruiting clients into the existing network in the Northeast
and Southern California. Cost of Sales is comprised of Cost of Goods sold of
$7,474,300 related to the sale of our pharmaceutical products, and $112,900 of
direct costs related to the cost of collecting autologous stem cells from
clients.
Gross
margin totaled $3,978,000 of which 98% is attributable to the sale of
pharmaceutical products and the balance is attributable to our stem cell
collection operations.
Operating
Expenses
For the
year ended December 31, 2009 operating expenses totaled $27,778,400 compared to
$9,285,000 for the year ended December 31, 2008, representing an increase of
$18,493,400 or 199%.
Historically,
to minimize our use of cash, we have used a variety of equity and equity-linked
instruments to pay for services and to incentivize employees, consultants
and other service providers. The use of these instruments has resulted in
significant charges to the results of operations. In general, these equity and
equity-linked instruments were used to pay for employee and consultant
compensation, director fees, marketing services, investor relations and other
activities. For the year ended December 31, 2009 the use of equity and
equity-linked instruments to pay for such expenses resulted in charges to
selling, general, administrative and research expenses of $12,324,000
representing an increase of $8,434,800 over the year ended December 31,
2008.
The
composition of our charges for the use of equity and equity linked instruments
are as follows:
|
·
|
$6,263,600
relate to nonrecurring expenses associated with the vesting of stock
options and issuance of common and restricted stock related to employees,
directors and consultants which were tied to the completion of the Merger
and related events;
|
|
·
|
$4,230,400
relate to recurring expenses associated with options issued to employees
and consultants that vest over
time;
|
|
·
|
$102,800
relate to expenses associated with options issued to employees and
consultants that vest upon achievement of certain business
milestones;
|
|
·
|
$1,458,100
relate to expenses associated with the issuance of common stock and the
vesting of restricted stock to consultants for providing services;
and
|
|
·
|
$269,100
relate to expenses associated with warrants issued to consultants for the
payment of business services.
|
For the
year ended December 31, 2009, our selling, general, administrative were
$23,459,600 compared to $8,492,800 for the year ended December 31, 2008,
representing an increase of $14,966,800, which was the result of:
|
•
|
The
activities related to our merger with CBH totaled $1,578,000 and increased
our expenses by $771,900 primarily from the legal and professional
services utilized to prepare for public filings and stockholder approval
of our merger and related matters.
|
|
•
|
Our
efforts to establish a stem cell operation in China to provide advanced
therapies, related processing and storage, as well as research and
development capabilities totaled $5,209,500. Such expenses included
expenditures for the rental of laboratory space, legal expenses associated
with establishing our subsidiary company and related operations in China,
consultants retained to support our implementation and introduction of
advanced therapies in China, recruiting fees for identifying senior
managers for our operation in China and travel. In addition these
operating expenses reflect charges resulting from issuing various equity
instruments to incentivize staff members and consultants totaling
$2,163,900.
|
- 50
- -
|
•
|
Administrative
expenses increased by approximately $8,213,600 Approximately $850,000 of
this increased operating expense was the result of the Merger with Erye
and the attendant operating expenses of this operation and
amortization costs associated with amortizing intangible assets that were
capitalized as part of accounting for the Merger. The
Company’s US administrative operating expenses increased by
$7,363,200. The use of equity instruments to incentivize staff ,
compensate directors and pay for services totaled $7,521,700, an increase
of $4,404,200 over 2008. Salaries and wages increased by $1,586,900 as the
result of increased staffing levels required to absorb the acquisition of
Erye, contractual salary increases and tax payments and tax withholdings
we paid on behalf of certain executive and other staff members in
connection with common stock grants made during year. Professional fees,
including legal and accounting fees increased by $603,500 as the result of
our expanded operations in China and related professional services
required to evaluate the Company’s internal controls and preparation work
for the common stock offering that closed in February 2010. Investor
relations services increased by $165,300, fees for preparing documents for
various SEC filings and production of reports and materials needed
for shareholder meetings in connection with the
Merger together increased operating expenses by
$212,900. Additionally, travel and entertainment increased by
$121,900 primarily as a result of the Company’s expanded operations in
China, rent increased by $22,700 as a result of the leasing of office
space in New York , franchise taxes increased $155,000 and the
majority of the balance of the increase in administrative expense resulted
from increases and decreases in office expenses, insurance and other
expenses.
Sales
and marketing expenses increased by $772,000 over 2008. Approximately
$373,300 of this increased operating expense was the result of the Merger
with Erye and the attendant sales and marketing expenses of the
Erye operation. The use of equity instruments to incentivize
staff, and pay for services totaled $897,700 an increase of $360,900 over
2008 and other US sales and marketing costs increased by
approximately $37,800.
For
the year ended December 31,2009, our research and development expenses
totaled $4,318,800 compared to $792,200 for the year ended
December 31, 2008, representing an increase of $3,526,600, which was the
result of:
The
use of equity instruments to incentivize research staff totaled
$1,374,300, an increase of $1,138,000 over 2008. Research related to our
VSELTM
technology increased operating expenses by $1,376,500. In particular, the
operation of our Cambridge research laboratory and related staff increased
operating expenses by $859,300, fees paid to consultants to support our
research efforts increased VSELTM technology
research expense by $168,000, clinical studies initiated during the period
increased our operating expenses by $162,000, patents and other legal
expenses increased our research expense by $159,000, and increases in a
variety of other areas increased our research expenses by $28,200.
During 2009 we initiated efforts to create a research facility in
China and incurred fees and expenses totaling $773,000 related to this
effort. Our acquisition of Erye added $132,000 of research and development
expense to our operating expenses. The balance of the increase in research
and development expense is related to costs associated with our wound
healing research.
|
Dividends on Convertible Redeemable
Series C Preferred Stock.
In
connection with the Merger, the Company issued 8,177,512 shares of Convertible
Redeemable Series C Preferred Stock (“Series C Preferred Stock”) which calls for
annual dividend of 5% based on the stated value of the preferred stock. For the
year 2009 we recorded a dividend of $69,500 as the prorated dividend due at
December 31, 2009. In addition in connection with the issuance of the Series C
Preferred Stock a dividend of $5,542,500 was recognized as the value of the
beneficial conversion feature of the Series C Preferred Stock. The conversion
feature does not require any minimum holding period or vesting before the
preferred stock is converted. Because the preferred shareholder is not required
to hold the preferred stock for any length of time before conversion we have
accreted the value of the beneficial conversion feature as a dividend of
$5,542,500.
Non-Controlling
Interests
When the
Company acquired China Biopharmaceutical Holdings, Inc it acquired a 51%
interest in Erye Pharmaceutical Co. Ltd.(“Erye”). In preparing our
financial statements the full operations of Erye are reflected in
these results as of October 30, 2009. We account for the 49% minority
shareholder share of Erye’s net income with a charge to Non-Controlling
Interests. For the year ended December 31, 2009 Erye’s minority shareholders’
share of net income (for the two months ended December 31, 2009) totaled
$1,088,700.
Other
Income and Expense
Interest
expense increased $79,600 primarily due accrued interest on dividends paid to
Erye’s minority shareholder in 2009 which were loaned back to Erye to provide
funds to continue the construction of Erye’s new production facility. This loan
calls for interest to accrue at rate of 5% annually and at December 31, 2009
this loan totaled approximately $7,954,443, including accrued interest. Interest
accrued on this loan was offset by capitalization of interest on construction of
approximately $61,000
- 51
- -
Provision
for taxes
The
provision for taxes of $344,200 represents income taxes due on income of Erye
for the two months ended December 31, 2009.
Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007
For the
year ended December 31, 2008, total revenues were $83,500 compared to $232,000
for the year ended December 31, 2007. The revenues generated in the years ended
December 31, 2008 and 2007 were derived from a combination of revenues from the
collection of autologous adult stem cells, license fees collected from
collection centers in our collection center network and additionally, for the
year ended December 31, 2007, the recognition of fees received in prior years
from the sale of extended warranties and service contracts via the Internet,
which were deferred and recognized over the life of such contracts. For the year
ended December 31, 2008, we earned $52,500 relating to the collection and
storage of autologous adult stem cells and $31,000 of license fees. For the year
ended December 31, 2007, we earned $41,000 from the collection and storage of
autologous adult stem cells and $189,000 from start-up fees. The reduction in
start-up fees from 2007 to 2008 was due primarily to reduced activity in
establishing collection centers and a concentration of our efforts on recruiting
clients into the existing network in the Greater New York area, Southern
California and Coral Gables, Florida. In addition, license fees were reduced
because we opted to help support the launch of our new centers by waiving or
reducing start-up fees. We recognized revenues from the sale of extended
warranties and service contracts via the Internet of $1,700 for the year ended
December 31, 2007. Since we had not been in the business of offering extended
warranties since 2002, this revenue source declined and the recognition of these
revenues ended in March 2007.
Direct
costs are comprised of the cost of collecting autologous stem cells from clients
and, as it relates to the prior business of offering extended warranties, the
pro-rated cost of reinsurance purchased at the time an extended contract was
sold to underwrite the potential obligations associated with such warranties.
For the year ended December 31, 2008, the direct costs of collecting autologous
stem cells were $32,000. For the year ended December 31, 2007, the direct costs
of collecting autologous stem cells were $24,000 and $1,000 was associated with
the pro-rata cost of reinsurance purchased for associated extended
warranties.
Our
selling, general and administration expenses for the year ended December 31,
2008 decreased by $2,153,200 or 20% over the year ended December 31, 2007, from
$10,646,000 to $8,492,800. The decrease in selling, general and administrative
expenses was primarily due to an overall decrease in operating expenses as we
made a concerted effort to reduce staff and trim expenses.
In an
effort to preserve cash in 2008 and 2007, we continued to utilize our common
stock, common stock options and warrants to pay for certain services. In 2008,
we incurred $3,654,400 of expense related to the use of various equity and
equity-linked instruments compared to 2007 when we incurred $4,619,000 of
expense from such use, an overall reduction of $964,400. Equity and
equity-linked instruments have been used for compensation purposes for
management and other staff, consultants and directors and to pay for investment
banking fees, investor relations, marketing expenses as well as other expenses.
The compensatory element of the vesting of stock options and common stock
granted to staff and directors was reduced by $1,553,400 in 2008 principally
because the fair value of the options and common stock vesting in 2008 was
significantly lower in comparison to 2007. Our use of equity and equity-linked
instruments to pay for investment banking fees, investor relations, marketing
expense as well as other expenses increased by $589,000. Other selling, general
and administrative expenses decreased $1,191,400, or 11%, when compared to 2007.
The decrease in selling, general and administrative expenses funded by cash in
2008 was primarily related to a decrease in legal expense of $646,000, investor
relations expense of $312,000, consulting fees of $326,800, salary and benefits
of $338,000, travel and entertainment of $108,000, validation expenses required
for New York licensing of $60,000, the conclusion of severance payments to a
former staff member of $54,000, stock exchange fees, filing fees and other
related fees of $42,800, reduced attendance at conferences of $29,500 and
laboratory expenses of $14,000. These decreases were offset by increases in
expenses and activities associated with the Merger of $806,000 changes in other
expenses resulted in an overall reduction of $66,300.
In 2007
we licensed our VSELTM
technology from the University of Louisville. As a result we started a Research
and development initiative to develop this technology. Overall for
2008 our research and development expenditures
totaled $792,100. There were no similar efforts in
2007. The use of equity instruments to incentivize staff totaled
$236,200, salary and benefits were $237,400 and consulting fees totaled
$143,400. Expenditures related to fees due the University of Louisville in
connection with our VSELTM
technology license totaled $50,000 and expenses for applying for scientific
grants and other activities to support VSELTM
technology research totaled $18,000 and expenses for rent,
intangible asset amortization, and laboratory expenses account for the balance
of research and development expenses in 2008.
NeoStem — Liquidity
and Capital Resources
At
December 31, 2009 we had a cash balance of $7,159,369, working capital of
$6,305,658 and stockholders’ equity of $24,800,051.
- 52
- -
Twelve
months ended December 31, 2009
We
incurred a net loss of $24,183,850 for the twelve months ended December 31,
2009. The following chart represents the net funds provided by or used in
operating, financing and investment activities for each period
indicated:
|
The
Twelve Moths Ended
|
||||||||
|
|
December
31, 2009
|
December
31, 2008
|
||||||
|
Cash
(used) in operating activities
|
$
|
(8,648,022
|
)
|
$
|
(4,732,165
|
)
|
||
|
Cash
provided/(used) in investing activities
|
$
|
(1,691,099
|
)
|
$
|
(9,785
|
)
|
||
|
Cash
provided by financing activities
|
$
|
17,067,704
|
$
|
2,868,509
|
||||
Operating
Activities
Our cash
used for operating activities in the twelve months December 31, 2009 totaled
$8,648,022, which is the sum of (i) our net loss, adjusted for non-cash expenses
totaling $12,901,040 which includes common stock, common stock options and
common stock purchase warrants issued for services rendered in the amount of
$12,323,997 and depreciation and amortization of $577,043; (ii) an increase in
cash provided from unearned revenue from advance payments from customers and
licensees of $1,991,816, increases in accounts payable and accrued expenses of
$1,274,621, a reduction in accounts receivable of $571,689, a reduction in
prepaid and other current assets $1,796,691; (iii) cash used for payments of
other assets of $238,941 and increases in inventory of $2,427,095.
In
November 2007, we acquired the exclusive, worldwide rights to the VSELTM
technology developed by researchers at the University of Louisville. Concurrent
with acquiring these rights, we also entered into a sponsored research
agreement, or SRA, with the University of Louisville Research Foundation, or
ULRF, which has been amended from time to time. Under the license agreement, we
agreed to engage in a diligent program to develop the VSELTM
technology. Certain license fees, milestone payments and royalties, and
specified payments in the event of sublicensing are to be paid to ULRF, and we
are responsible for all payments for patent filings and related applications.
Under the SRA, NeoStem will support additional research relating to the
VSELTM
technology to be carried out in the laboratory of Mariusz Ratajczak, M.D.,
Ph.D., a co-inventor of the VSELTM
technology and head of the Stem Cell Biology Program at the James Graham Brown
Cancer Center at the University of Louisville. In return, NeoStem will receive
the exclusive first option to negotiate a license to the research results. The
cost of the research to NeoStem is $120,859, although we are receiving a credit
towards these costs in the amount of approximately $25,000. NeoStem is also
supporting the costs of a post doctoral fellow in the laboratory of Dr.
Ratajczak. Through December 31, 2009, we have paid a total of $181,337 under the
license agreement and the SRA.
Investing
Activities
In 2009,
we opened a research laboratory in Cambridge, MA to support the research and
development requirements of our VSELTM
technology as well as our other research efforts regarding adult stem cells. The
outfitting of this laboratory required us to purchase approximately $592,700 of
laboratory equipment during the period. As development projects expand, the need
for additional capital expenditures for our research laboratory will increase.
Erye is building a new production facility and during the two months ended
December 31, 2009 $1,057,000 was spent on construction. This plant is
expected to be fully operational in 2011. Our expansion into China also resulted
in the purchase of several specialized medical instruments and office equipment
totaling approximately $82,600 of capital expenditures that will be used to
deliver advanced therapies in China. The balance of our capital expenditures was
spent on scaling the company’s internal infrastructure to accommodate the CBH
acquisition and integration of the additional offices in China and
Boston.
Financing
Activities
During
the year ended December 31, 2009, we met our immediate cash requirements through
existing cash balances, short-term loans, the Funding Agreement with RimAsia and
offerings of preferred stock and warrants, in addition to the use of equity and
equity-linked instruments to pay for services and compensation.
During
the first quarter of 2009, we issued promissory notes to RimAsia, or the RimAsia
Notes, which aggregated $1,150,000. In April 2009, we completed a private
placement financing totaling $11 million, or the April 2009 Private Placement,
of which approximately $1,162,000 was used to repay the RimAsia Notes and
accrued interest. The April 2009 Private Placement consisted of the issuance of
880,000 units priced at $12.50 per unit, with each unit consisting of one share
of our Series D Convertible Redeemable Preferred Stock, or Series D Stock
(convertible into 10 shares of our common stock) and ten warrants, or the Series
D Warrants, with each Series D Warrant to purchase one share of our common
stock. In June 2009, and with a final closing on July 6, 2009, we completed an
additional private placement financing with net proceeds of $4,679,220, or the
June 2009 Private Placement. The June 2009 Private Placement consisted of the
issuance of 400,280 Series D Units priced at $12.50 per unit. A total of 400,280
Series D Preferred Stock and 4,002,800 Series D Warrants were issued. We paid
$324,280 in fees and issued 12,971 Series D Units to agents that facilitated the
June 2009 Private Placement. The Series D Units issued to the selling agents
were comprised of 12,971 shares of Series D Stock and 129,712 Series D Warrants.
In total, in the April 2009 and June 2009 Private Placements, the number of
shares of Series D Stock issued was 1,293,251 and the number of Series D
Warrants issued was 12,932,512. Upon the affirmative vote of holders of a
majority of the voting power of our common stock, the Series D Stock was
automatically converted into 12,932,510 shares of our common stock at a
conversion price of $1.25 per share. The Series D Warrants have a per share
exercise price equal to $2.50 and are callable by us if our common stock trades
at a price greater than or equal to $3.50 for a specified period of time. Upon
the affirmative vote of our stockholders and in accordance with the rules of the
NYSE Amex, the Series D Warrants became exercisable for five years.
- 53
- -
In July
of 2009, in order to facilitate working capital requirements in China, NeoStem
(China) issued a promissory note to China Xingye Bank in the amount of RMB
1,000,000, or $146,700. The note is due on January 1, 2010 and bears an interest
rate of 4.86%. The note was paid off in December 2009 and replaced with a
promissory note to the Bank of Rizhao Qingdao Branch in the amount of RMB
4,400,000 ($643,700). The note is due on June 21, 2010 and bears an interest
rate of 4.05%. The loan is collateralized by cash in a restricted bank account
totaling 5,189,400 RMB (approximately $759,200).
Pursuant
to the terms and conditions of the Joint Venture Agreement, dividend
distributions to EET and Merger Sub 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 distributions will be made as
follows: (i) the 49% of undistributed profits (after tax) of the joint venture
due EET will be distributed to EET and lent back to Erye to help finance costs
in connection with their construction of and relocation to a new facility and;
(ii) of the net profit (after tax) of the joint venture due Merger Sub, 45% will
be provided to Erye as part of the new facility construction fund and will be
characterized as paid-in capital for Merger Sub’s 51% interest in Erye, and 6%
will be distributed to Merger Sub directly and at December 31, 2009 this loan
totaled approximately $7,954,443, including accrued interest.
The
Company’s subsidiary Erye has 62,457,000 RMB ($9,793,700) of notes payables as
of December 31, 2009. Notes are payable to the banks who issue bank notes to
Erye’s creditors. Notes payable are interest free and usually mature after a
three to six months period. In order to issue notes payable on behalf
of the Company, the banks required collateral, such as cash deposit which was
approximately 30%-50% of notes to be issued, or properties owned by companies.
At December 31, 2009, 26,999,300 RMB (approximately $3,955,400) of restricted
cash were put up for collateral for the balance of notes payable, respectively,
which was approximately 40.0% of the notes payable the Company issued, and the
remaining of the notes payable is collateralized by pledging the land use right
the Company owns. The use of notes payable to pay creditors is a feature of the
money and banking system of China and we expect these types of notes to be a
continuing feature of Erye’s capital structure.
Liquidity
and Capital Requirements Outlook
With our
acquisition of a controlling interest in Erye and expansion into China, we have
transitioned from being a one-dimensional U.S. service provider with nominal
revenues to being a multi-dimensional international biopharmaceutical company
with current revenues and operations in three distinct business
units — U.S. adult stem cells, China adult stem cells and China
pharmaceuticals. The following is an overview of our collective liquidity and
capital requirements.
Erye is
constructing a new pharmaceutical manufacturing facility and began transferring
its operations in January 2010. The relocation will continue as the
new production lines are completed and receive cGMP certification through 2011.
The new facility is estimated to cost approximately $30 million, of which
approximately $16 million has been paid for through December 31, 2009. To date,
construction has been self-funded by Erye and EET, the holder of the minority
joint venture interest in Erye. The remaining $14 million is expected to be
funded from a combination of proceeds from the Company’s February 2010 common
stock offering in which it raised net proceeds of approximately $7.1 million,
the proceeds from the exercise by RimAsia in March 2010 of a warrant to purchase
1,000,000 shares of Common Stock at a per share purchase price of $1.75
resulting in gross proceeds to the Company of $1,750,000 (in each of the prior
two cases such funding would be in the form of a loan from the Company), an Erye
line of credit and the reinvestment of certain dividends by Erye’s shareholders.
We have agreed for a period of three years to reinvest in Erye approximately 90%
of the net earnings we would be entitled to receive under the Joint Venture
Agreement by reason of our 51% interest in Erye.
- 54
- -
We are
also engaged in other initiatives to expand our operations into China including
with respect to technology licensing, establishment of stem cell processing and
storage capabilities and research and clinical development. In June 2009 we
established NeoStem (China) as our wholly foreign-owned subsidiary. To comply
with PRC’s foreign investment regulations regarding stem cell research and
development, clinical trials and related activities, we conduct our current stem
cell business in the PRC through two domestic variable interest entities. We
have incurred and expect to continue to incur substantial expenses in connection
with our China activities.. In order to implement the establishment of the
Beijing Facility, as of December 31, 2009, our Company, our
WFOE subsidiary NeoStem (China), and PCT entered into the PCT
Agreement, whereby NeoStem and NeoStem (China) engaged PCT to perform the
services necessary (1) to construct the Beijing Facility, consisting of a clean
room for adult stem cell clinical trial processing and other stem cell
collections which will have the processing capacity on an annual basis
sufficient for at least 10,000 samples, research and development laboratory
space, collection and stem cell storage area and offices, together with the
furnishings and equipment, and (2) to effect the installation of quality control
systems consisting of materials management, equipment maintenance and
calibration, environmental monitoring and compliance and adult stem cell
processing and preservation which comply with cGMP standards and regulatory
standards that would be applicable in the United States under GTP standards, as
well as all regulatory requirements applicable to the program under the laws of
the PRC. The aggregate cost of the program, including the Phase 1
equipment purchases, is expected to be approximately $3,000,000. The project
will commence on April 1, 2010, and is anticipated to take approximately seven
months to complete. We have the option to terminate the PCT Agreement without
cause upon providing no less than 60 days written notice to PCT, subject to our
obligation to pay for any services performed up to the date of termination and
certain costs and expenses incurred by PCT.
We expect
to rely partly on dividends paid to us under the Joint Venture Agreement,
attributable to our 51% ownership interest in Erye, to meet our future cash
needs. However, there can be no assurance that the WFOE in China will receive
payments uninterrupted or at all as arranged under our contracts with the VIEs.
In addition, pursuant to the Joint Venture Agreement that governs the ownership
and management of Erye, for the next three years: (i) 49% of undistributed
profits (after tax) will be distributed to EET and loaned back to Erye for use
in connection with its construction of the new Erye facility; (ii) 45% of the
net profit after tax will be provided to Erye as part of the new facility
construction fund, which will be characterized as paid-in capital for our 51%
interest in Erye; and (iii) only 6% of the net profit will be distributed to us
directly for our operating expenses.
The
payment of dividends by entities organized under PRC law to non-PRC entities is
subject to limitations. Regulations in the PRC currently permit payment of
dividends by our WFOE and Erye only out of accumulated distributable earnings,
if any, as determined in accordance with accounting standards and regulations in
China. Moreover, our WFOE and Erye will be required to set aside a certain
percentage of their accumulated after-tax profit each year, if any, to fund
certain mandated reserve funds (for our WFOE, such percentage is at least 10%
each year until its reserves have reached at least 50% of its registered
capital), and these reserves are not payable or distributable as cash dividends.
In addition, Erye is also required to reserve a portion of its after-tax profits
for its employee welfare and bonus fund, the amount of which is subject to the
discretion of the Erye board of directors. In addition, if Erye incurs debt on
its own behalf in the future, the instruments governing the debt may restrict
Erye’s or the joint venture’s ability to pay dividends or make other
distributions to us. This may diminish the cash flow we receive from Erye’s
operations, which would have a material adverse effect on our business,
operating results and financial condition.
Our
interests in China will be subject to China’s rules and regulations on currency
conversion. In particular, the initial capitalization and operating expenses of
the two VIEs are funded by our WFOE. In China, the State Administration for
Foreign Exchange, or the SAFE, regulates the conversion of the Chinese Renminbi
into foreign currencies. Currently, foreign investment enterprises are required
to apply to the SAFE for Foreign Exchange Registration Certificates, or IC Cards
of Enterprises with Foreign Investment. Foreign investment enterprises holding
such registration certificates, which must be renewed annually, are allowed to
open foreign currency accounts including a “basic account” and “capital
account.” Currency translation within the scope of the “basic account,” such as
remittance of foreign currencies for payment of dividends, can be effected
without requiring the approval of the SAFE. However, conversion of currency in
the “capital account,” including capital items such as direct investments,
loans, and securities, require approval of the SAFE. According to the Notice of the General Affairs
Department of the State Administration of Foreign Exchange on the Relevant
Operating Issues Concerning the Improvement of the Administration of Payment and
Settlement of Foreign Currency Capital of Foreign-invested
Enterprises promulgated on August
29, 2008, or the SAFE Notice 142. To apply to a bank for settlement
of foreign currency capital, a foreign invested enterprise shall submit the
documents certifying the uses of the RMB funds from the settlement of foreign
currency capital and a detailed checklist on use of the RMB funds from the last
settlement of foreign currency capital. It is stipulated that only if the funds
for the settlement of foreign currency capital are of an amount not more than
US$50,000 and are to be used for enterprise reserve, the above documents may be
exempted by the bank. This SAFE Notice 142, along with the recent practice of
Chinese banks of restricting foreign currency conversion for fear of “hot money”
going into China, have limited and may continue to limit our ability to channel
funds to the two VIE entities for their operation. We are exploring options with
our PRC counsels and banking institutions in China as to acceptable methods of
funding the operation of the two VIEs, including advances from Erye, but there
can be no assurance that acceptable funding alternatives will be
identified.
- 55
- -
Neither
Erye nor our other expansion activities into China are expected to generate
sufficient excess cash flow to support our platform business or our initiatives
in China in the near term.
In
October 2008, we were advised that we would receive Federal funding from the
Department of Defense to evaluate the potential use of adult stem cell therapy
for wound healing. Our budget for the project must not exceed $681,000 and the
funds must be distributed to us by October 2010. No funds have been received to
date. In January 2010, we received a Grand Opportunities grant in the
amount of $108,746 from the National Institutes of Health to fund research at
the University of Michigan to evaluate bone defect repair.
On
February 18, 2010, the Company completed a public offering of 5,750,000 shares
of the Company's common stock, par value $0.001 per share, (the "Common Stock"),
at a price of $1.35 per share for aggregate proceeds of approximately $7,089,125
(net of underwriting discounts, commissions, fees and expenses).
We
believe that we will need to raise additional capital to fund the development of
advanced stem cell technologies and therapies in the U.S. and China, including
the VSELTM
technology licensed from the University of Louisville and other regenerative
technologies. In the U.S., we currently intend to fund our operating activities
through additional financings, including potentially additional warrant and
option exercises, the 6% of net profits to which we are entitled from Erye, and,
ultimately, the growth of our revenue generating activities in China. In
addition, we will continue to seek grants for scientific and clinical studies
from the National Institutes of Health and other governmental agencies, but
there can be no assurance that we will be successful in obtaining such grants.
Our history of losses and liquidity problems may make it difficult to raise
additional funds. There can be no assurance that we will be successful in
obtaining additional funding on terms acceptable to us or otherwise. Any equity
financing may be dilutive to stockholders and debt financing, if available, may
involve significant restrictive covenants. If we are not able to
raise additional capital we will need to cut back on certain current planned
intiatives.
At
October 31, 2009 Erye had a statutory reserve of $1,126,300. The
laws and regulations of the PRC require that
before foreign invested enterprise can legally
distribute profits, it must first satisfy all tax
liabilities, provide for losses in previous years, and
make allocations, in proportions determined at the
discretion of the board of directors, after the statutory reserves.
To fund its statutory reserve requirement Erye is required to set aside a
certain percentage of their accumulated after-tax profit each year, if any, to
fund certain mandated reserve funds of at least 10% each year until its reserves
have reached at least 50% of its registered capital, The statutory reserves
include the surplus reserve fund and the common welfare fund. The amount of
statutory reserve at December 31, 2009 was determined to be $1,126,300 and no
further allocations were required.
The
following table reflects a summary of NeoStem’s contractual cash obligations as
of December 31, 2009:
|
Total
|
Less
than 1 Year
|
1- 3
Years
|
3-5
Years
|
More
than 5 Years
|
||||||||||||||||
|
Employement
Agreements
|
$ | 3,468,796 | $ | 1,900,430 | $ | 1,568,366 | $ | - | $ | - | ||||||||||
|
Facility
Leases
|
2,370,788 | 883,287 | 1,487,501 | - | - | |||||||||||||||
|
License
Fees
|
210,000 | 30,000 | 60,000 | 60,000 | 60,000 | |||||||||||||||
|
Sponsored
Research Agreement with the University of Louisville
|
75,000 | 75,000 | - | - | - | |||||||||||||||
|
Consulting
Agreements
|
1,560,082 | 995,582 | 564,500 | - | - | |||||||||||||||
|
Design
& Construction of Laboratory
|
2,714,100 | 2,633,570 | 80,530 | - | - | |||||||||||||||
|
Director
Fees
|
360,000 | 360,000 | ||||||||||||||||||
| $ | 10,758,767 | $ | 6,877,870 | $ | 3,760,897 | $ | 60,000 | $ | 60,000 | |||||||||||
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
financial statements and notes thereto required to be filed under this Item are
presented commencing on page F-1 of this Annual Report on Form
10-K.
- 56
- -
NeoStem,
Inc. and Subsidiaries
Table of
Contents
|
Page
|
||||||||
|
Report
of Independent Registered Public Accounting Firm -
|
||||||||
|
Holtz
Rubenstein Reminick LLP
|
F –
1
|
|||||||
|
Financial
Statements:
|
||||||||
|
Consolidated
Balance Sheets at December 31, 2009 and 2008
|
F –
2
|
|||||||
|
Consolidated Statements
of Operations
|
||||||||
|
Years
Ended December 31, 2009, 2008 and 2007
|
F –
3
|
|||||||
|
Consolidated Statements
of Stockholders’ Equity/ (Deficit)
|
||||||||
|
Years
Ended December 31, 2009, 2008 and 2007
|
F –
4 – F–5
|
|||||||
|
Consolidated Statements
of Cash Flows
|
||||||||
|
Years
Ended December 31, 2009, 2008 and 2007
|
F –
6 – F–7
|
|||||||
|
Notes
to Consolidated Financial Statements
|
F
–8 – F – 29
|
|||||||
- 57
- -
Report of Independent
Registered Public Accounting Firm
To the
Board of Directors and Stockholders
NeoStem,
Inc. and Subsidiaries
We have
audited the accompanying consolidated balance sheets of NeoStem, Inc. and
Subsidiaries as of December 31, 2009 and 2008 and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for each
of the years in the three-year period ended December 31, 2009. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, audits of its
internal control over financial reporting. Our audits include consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of NeoStem, Inc. and
Subsidiaries as of December 31, 2009 and 2008 and the results of their
operations and cash flows for each of the years in the three year period ended
December 31, 2009 in conformity with accounting principles generally accepted in
the United States of America.
/s/ Holtz Rubenstein Reminick LLP
Melville,
New York
March 31,
2010
F-1
NEOSTEM,
INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 7,159,369 | $ | 430,786 | ||||
|
Restricted
Cash
|
4,714,610 | - | ||||||
|
Accounts
receivable trade, less allowances for doubtful accounts
|
||||||||
|
of
$273,600 and $0, respectively
|
5,725,241 | 7,193 | ||||||
|
Inventories
|
12,979,008 | - | ||||||
|
Prepaid
expenses and other current assets
|
1,220,990 | 92,444 | ||||||
|
Total
current assets
|
31,799,218 | 530,423 | ||||||
|
Property,
plant and equipment, net
|
21,299,381 | 99,490 | ||||||
|
Intangible
assets, net
|
||||||||
|
Goodwill
|
29,862,123 | 558,169 | ||||||
|
Land
use rights, net
|
4,698,567 | - | ||||||
|
Lease
rights
|
633,136 | - | ||||||
|
Customer
list, net
|
16,756,147 | - | ||||||
|
Other
intangible assets, net
|
747,288 | 636,234 | ||||||
|
Total
intangible assets
|
52,697,261 | 1,194,403 | ||||||
|
Other
assets
|
238,941 | - | ||||||
| $ | 106,034,801 | $ | 1,824,316 | |||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY/(DEFICIT)
|
||||||||
|
Current
liabilities:
|
||||||||
|
Bank
loans
|
$ | 2,197,500 | $ | - | ||||
|
Notes
payable
|
9,793,712 | - | ||||||
|
Accounts
payable
|
8,263,719 | 508,798 | ||||||
|
Accrued
liabilities
|
2,965,525 | 427,767 | ||||||
|
Unearned
revenues
|
2,273,105 | 9,849 | ||||||
|
Current
portion of capitalized lease obligation
|
- | 14,725 | ||||||
|
Total
current liabilities
|
25,493,560 | 961,139 | ||||||
|
Long-term
liabilities
|
||||||||
|
Amount
due related party
|
7,234,291 | - | ||||||
|
COMMITMENTS
AND CONTINGENCIES
|
||||||||
|
Convertible
Redeemable Series C Preferred stock;
|
13,720,048 | - | ||||||
|
8,177,512
shares designated, liquidation value $12.50 per share;
|
||||||||
|
8,177,512
shares issued and outstanding at December 31, 2009
|
||||||||
|
and
0 shares issued and outstanding at December 31, 2008
|
||||||||
|
EQUITY
|
||||||||
|
Shareholders'
equity:
|
||||||||
|
Preferred
stock; authorized, 20,000,000 shares
|
||||||||
|
Series
B convertible redeemable preferred stock,
|
100 | 100 | ||||||
|
liquidation
value, 1 share of common stock, $.01 par value;
|
||||||||
|
825,000
shares designated; issued and outstanding,
|
||||||||
|
10,000
shares at December 31, 2009 and 2008
|
||||||||
|
Common
stock, $.001 par value; authorized, 500,000,000 shares;
|
37,193 | 7,715 | ||||||
|
issued
and outstanding, 37,193,491 December 31, 2009
|
||||||||
|
and
7,715,006 shares at December 31, 2008
|
||||||||
|
Additional
paid-in capital
|
95,709,491 | 40,849,670 | ||||||
|
Accumulated
deficit
|
(70,878,816 | ) | (39,994,309 | ) | ||||
|
Accumulated
other comprehensive loss
|
(67,917 | ) | - | |||||
|
Total
shareholders' equity
|
24,800,051 | 863,176 | ||||||
|
Non
controlling interests
|
34,786,851 | - | ||||||
|
Total
equity
|
59,586,902 | 863,176 | ||||||
| $ | 106,034,801 | $ | 1,824,316 | |||||
The
accompanying notes are an integral part of these consolidated financial
statements
F-2
NEOSTEM,
INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
|
Years
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenues
|
$ | 11,565,118 | $ | 83,541 | $ | 231,664 | ||||||
|
Direct
Costs
|
7,587,175 | 31,979 | 24,847 | |||||||||
|
Gross
Profit
|
3,977,943 | 51,562 | 206,817 | |||||||||
|
Research
and Development (Including non-cash share-based payment charges totaling
$1,374,272 in 2009, $219,982 in 2008, and $0 in 2007)
|
4,318,805 | 792,182 | - | |||||||||
|
Selling,
general and administrative (Including non-cash share-based payment charges
totaling $10,949,725 in 2009, $3,670,437 in 2008, and $4,590,256 in
2007)
|
23,459,600 | 8,492,833 | 10,645,653 | |||||||||
|
Operating
loss
|
(23,800,462 | ) | (9,233,453 | ) | (10,438,836 | ) | ||||||
|
Other
income (expense):
|
||||||||||||
|
Other
income
|
52,073 | 3,044 | 15,331 | |||||||||
|
Interest
expense
|
(91,261 | ) | (11,662 | ) | (21,968 | ) | ||||||
| (39,188 | ) | (8,618 | ) | (6,637 | ) | |||||||
|
Loss
from operations before provision for income taxes and non-controlling
interests
|
(23,839,650 | ) | (9,242,071 | ) | (10,445,473 | ) | ||||||
|
Provision
for taxes
|
344,200 | - | - | |||||||||
|
Net
Loss
|
(24,183,850 | ) | (9,242,071 | ) | (10,445,473 | ) | ||||||
|
Less
- Net income attributable to non-controlling
interests
|
1,088,667 | - | - | |||||||||
|
Net
Loss attributable to controlling interests
|
(25,272,517 | ) | (9,242,071 | ) | (10,445,473 | ) | ||||||
|
Preferred
Dividends
|
5,611,989 | - | - | |||||||||
|
Net
Loss attributable to common shareholders
|
$ | (30,884,506 | ) | $ | (9,242,071 | ) | $ | (10,445,473 | ) | |||
|
Basic
and diluted loss per share
|
$ | (2.37 | ) | $ | (1.53 | ) | $ | (3.18 | ) | |||
|
Weighted
average common shares outstanding
|
13,019,518 | 6,056,886 | 3,284,116 | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements
F-3
NEOSTEM,
INC. AND SUBSIDIARIES
Consolidated
Statements of Stockholders’ Equity/(Deficit)
|
Series
B Convertible
|
||||||||||||||||||||||||||||||||||||
|
Preferred
Stock
|
Common
Stock
|
|||||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Additional
Paid in Capital
|
Accumulated
Other Comprehensive Income
|
Accumulated
Deficit
|
Non-Controlling
Interest in Subsidiary
|
Total
|
||||||||||||||||||||||||||||
|
Balance
at December 31, 2007
|
10,000 | $ | 100 | 4,826,055 | $ | 4,826 | $ | 34,063,506 | $ | - | $ | (30,752,238 | ) | - | $ | 3,316,194 | ||||||||||||||||||||
|
Issuance
of common stock for cash net of offering costs
|
- | - | 2,359,152 | 2,359 | 2,894,401 | - | $ | 2,896,760 | ||||||||||||||||||||||||||||
|
Issuance
of common stock to officers and directors
|
- | - | 83,780 | 84 | 86,499 | - | - | - | $ | 86,583 | ||||||||||||||||||||||||||
|
Issuance
of restricted common stock for services
|
- | - | 40,000 | 40 | (40 | ) | - | - | - | $ | - | |||||||||||||||||||||||||
|
Vesting
of unearned compensation related to restricted common stock issued for
services
|
- | - | - | - | 173,331 | - | - | - | $ | 173,331 | ||||||||||||||||||||||||||
|
Issuance
of common stock to staff for compensation
|
- | - | 42,014 | 42 | 52,909 | - | - | - | $ | 52,951 | ||||||||||||||||||||||||||
|
Vesting
of unearned compensation related to restricted common stock issued to
officers and directors
|
- | - | - | - | 573,146 | - | - | - | $ | 573,146 | ||||||||||||||||||||||||||
|
Issuance
of common stock for services
|
- | - | 384,157 | 384 | 499,900 | - | - | - | $ | 500,284 | ||||||||||||||||||||||||||
|
Issuance
of common stock purchase warrants for services
|
- | - | - | - | 613,766 | - | - | - | $ | 613,766 | ||||||||||||||||||||||||||
|
Compensatory
element of stock options issued to staff
|
- | - | - | - | 1,986,103 | - | - | - | $ | 1,986,103 | ||||||||||||||||||||||||||
|
Exercise
of common stock options
|
- | - | 2,500 | 2 | 1,873 | - | - | - | $ | 1,875 | ||||||||||||||||||||||||||
|
Issuance
of common stock to pay debt
|
- | - | 3,529 | 4 | 5,643 | - | - | - | $ | 5,647 | ||||||||||||||||||||||||||
|
Forfeiture
of restricted common stock
|
- | |||||||||||||||||||||||||||||||||||