Filed
Pursuant to Rule 424(b)(5)
Registration
No. 333-166169
PROSPECTUS
SUPPLEMENT
(To
Prospectus dated May 19, 2010)
685,226
Shares
NeoStem,
Inc.
Common
Stock
Pursuant
to this prospectus supplement and the accompanying prospectus, we are offering
685,226 shares of our common stock to Commerce Court Small Cap Value Fund, Ltd.,
or Commerce Court, pursuant to a Common Stock Purchase Agreement, dated May 19,
2010, between us and Commerce Court, at a price of approximately $2.63 per
share. The total purchase price for the shares is
$1,800,000. We will receive net proceeds from the sale of these
shares of approximately $1,700,000 after deducting our estimated offering
expenses of approximately $100,000, including a placement agent fee of $36,000
to be paid to Reedland Capital Partners, an Institutional Division of Financial
West Group, Member FINRA/SIPC, in connection with this offering.
This
prospectus supplement and the accompanying prospectus also cover the sale of
these shares by Commerce Court to the public. Commerce Court is an “underwriter”
within the meaning of Section 2(a)(11) of the Securities Act of 1933, as
amended, and any profits on the sales of shares of our common stock by Commerce
Court and any discounts, commissions or concessions received by Commerce Court
may be deemed to be underwriting discounts and commissions under the Securities
Act.
We expect
to issue the shares to Commerce on or about June 7, 2010. Our common
stock is traded on the NYSE Amex under the symbol “NBS.” The last
reported sale price of the common stock on June 3, 2010 was $2.38 per
share. As of June 3, 2010, the aggregate market value of our
outstanding common stock held by non-affiliates was approximately
$59,771,418. We have offered 749,018 shares of our common stock
(including
the 685,226 shares offered pursuant to this prospectus supplement and
accompanying prospectus), having an aggregate market value of approximately
$1,951,825, pursuant
to General Instruction I.B.6 of Form S-3 during the 12 calendar month period
that ends on, and includes, the date of this prospectus supplement.
Investing
in our common stock involves a high degree of risk. See “Risk Factors” on page
S-4 of this prospectus supplement and page 2 of the accompanying prospectus to
read about factors that you should consider before buying shares of our common
stock.
Neither the Securities and Exchange
Commission nor any state securities commission has approved or disapproved of
these securities or determined if this prospectus supplement or the accompanying
prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
The date
of this prospectus supplement is June 4, 2010
TABLE
OF CONTENTS
PROSPECTUS
SUPPLEMENT
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Page
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About this Prospectus
Supplement
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S-ii
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Prospectus Supplement
Summary
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S-1
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The Offering
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S-3
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Risk Factors
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S-4
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|
Special Note Regarding Forward-Looking
Statements
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S-31
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|
Use of Proceeds
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S-31
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|
Dilution
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S-31
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Capitalization
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S-33
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|
Dividends and Dividend
Policy
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S-34
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|
Description of Common Stock
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S-35
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|
Plan of Distribution
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S-36
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|
Legal Matters
|
S-37
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Where You Can Find Additional
Information
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S-37
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|
Incorporation of Certain Information by
Reference
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S-38
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PROSPECTUS
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Page
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|
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Table of Contents
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i
|
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About This Prospectus
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1
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|
NeoStem, Inc.
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1
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Risk Factors
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2
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|
Special Note Regarding Forward-Looking
Statements
|
2
|
|
Use of Proceeds
|
2
|
|
The
Securities We May
Offer
|
3
|
|
Description
of Capital Stock
|
3
|
|
Description
of Debt Securities
|
9
|
|
Description
of Warrants
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18
|
|
Description
of Units
|
20
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|
Plan of Distribution
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21
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|
Validity of Securities
|
25
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|
Experts
|
25
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|
Incorporation of Certain Information by
Reference
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25
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|
Where
You Can Find More Information
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26
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You
should rely only on the information contained in this prospectus supplement, the
accompanying prospectus and the documents incorporated or deemed incorporated by
reference herein or therein. We have not, and the underwriter has not,
authorized anyone to provide you with information different from and in addition
to that contained in this prospectus supplement, the accompanying prospectus or
the documents incorporated or deemed incorporated by reference herein or
therein. We are not, and the underwriter is not, making an offer to sell or
seeking an offer to buy these securities in any jurisdiction where the offer or
sale is not permitted.
The
information contained in this prospectus supplement, the accompanying prospectus
and the documents incorporated or deemed incorporated by reference herein or
therein is complete and accurate as of their respective dates, and may have
changed since those dates.
S-i
ABOUT
THIS PROSPECTUS SUPPLEMENT
This
document is in two parts. The first part is this prospectus
supplement, which describes the specific terms of this offering and certain
other matters relating to us and our financial condition. The second
part, the accompanying prospectus, gives more general information about
securities we may offer from time to time, some of which may not apply to the
common stock we are offering under this prospectus supplement. In
addition, we incorporate important information into this prospectus supplement
and the accompanying prospectus by reference. You may obtain the
information incorporated by reference into this prospectus supplement and the
accompanying prospectus without charge by following the instructions under
“Where You Can Find Additional Information” in this prospectus
supplement. Generally, when we refer to “this prospectus,” we are
referring to this prospectus supplement and the accompanying prospectus as well
as to the information incorporated by reference herein and
therein. Before investing in shares of our common stock, you should
carefully read this prospectus supplement, the accompanying prospectus and the
additional information described under “Where You Can Find Additional
Information.” If the description of the offering contained in this
prospectus supplement varies from that contained in the accompanying prospectus,
you should rely on the information in this prospectus supplement.
We
further note that the representations, warranties and covenants made by us in
any agreement that is filed as an exhibit to any document that is incorporated
by reference in this prospectus supplement or the accompanying prospectus were
made solely for the benefit of the parties to such agreement, including, in some
cases, for the purpose of allocating risk among the parties to such agreements,
and should not be deemed to be a representation, warranty or covenant to
you. Moreover, such representations, warranties and covenants were
accurate only as of the date when made; therefore, such representations,
warranties and covenants should not be relied on as accurate representations of
the current state of our affairs.
S-ii
PROSPECTUS
SUPPLEMENT SUMMARY
This summary highlights information
contained elsewhere in this prospectus supplement and the accompanying
prospectus. This summary may not contain all of the information that you should
consider before deciding whether or not to invest in our common stock. You
should read the entire prospectus supplement and the accompanying prospectus
carefully, including the section entitled “Risk Factors” beginning on page S-4
of this prospectus supplement and page 2 of the accompanying prospectus, and all
other information included or incorporated therein by reference in this
prospectus supplement and the accompanying prospectus in its entirety before you
decide whether to invest in our common stock. When used in this
prospectus supplement and the accompanying prospectus, except where the context
otherwise requires, the terms “NeoStem,” “we,” “us” and “our” refer to NeoStem,
Inc.
NeoStem,
Inc.
In 2009,
through our expansion efforts within the People’s Republic of China (“China” or
the “PRC”), and with the acquisition of a controlling interest in Suzhou Erye
Pharmaceuticals Company Ltd. (“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, Massachusetts 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
website address is www.neostem.com. The
information on our website is not incorporated by reference into this prospectus
and should not be considered to be a part of this prospectus. We have
included our website address as an inactive technical reference
only.
S-1
NeoStem,
Inc. 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. On October 30, 2009, we
completed a merger with China Biopharmaceuticals Holdings, Inc., 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.
S-2
THE OFFERING
|
Common
stock offered by us:
|
685,226
shares
|
|
|
Common
stock to be outstanding after this offering (1):
|
54,259,191
shares
|
|
|
Use
of proceeds:
|
We
intend to use the net proceeds from this offering for working capital and
other general corporate purposes. See “Use of Proceeds” on page
S-31.
|
|
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NYSE
Amex symbol:
|
NBS
|
|
|
Risk
factors:
|
See
“Risk Factors” and other information included or incorporated into this
prospectus supplement and the accompanying prospectus for a discussion of
the factors you should carefully consider before deciding to invest in our
common stock.
|
|
(1)
|
The
total number of shares of our common stock outstanding after this offering
is based on 53,573,965 shares outstanding as of June 3,
2010. This number
excludes:
|
|
|
•
|
10,245,204
shares of common stock issuable upon exercise of outstanding stock options
at a weighted average exercise price of $1.90 per share, under our stock
plans;
|
|
|
•
|
3,710,099
shares of common stock issuable upon exercise of our outstanding warrants
to purchase at a weighted average exercise price of $2.98 per
share;
|
|
|
•
|
635,000
shares of our common stock issuable upon exercise of our outstanding Class
A warrants at an exercise price of $6.00 per
share;
|
|
|
•
|
12,932,512
shares of our common stock issuable upon exercisable of our outstanding
Class D warrants at an exercise price of $2.50 per
share;
|
|
|
•
|
10,000
shares of our common stock issuable upon conversion of our Series B
Convertible Redeemable Preferred Stock;
and
|
|
|
•
|
11,645,782
additional shares of common stock reserved for future issuance under our
stock option plans.
|
S-3
RISK
FACTORS
Investing in our common stock
involves a high degree of risk. You should consider the following risk factors,
as well as other information contained or incorporated by reference in this
prospectus supplement and the accompanying prospectus, before deciding to
purchase any shares of common stock offered herein. If any of these risks occur,
our business, financial condition or results of operations could suffer, the
market price of our common stock could decline and you could lose all or part of
your investment. Shares information set forth in these risk factors
is as of the dates set forth herein and unless otherwise indicated, does not
give effect to the issuance of 685,226 shares in connection with this
Offering.
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 $76.4 million through March 31, 2010. We incurred net
losses of approximately $4.6 million for the three month period ended March 31,
2010, approximately $26.1 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
Erye, a Chinese pharmaceutical company in which we recently acquired a 51%
interest, had revenue of $15.8 million for the three months ended March 31, 2010
and $11.4 million in revenue for the year ended December 31, 2009 (this reflects
Erye’s operations for the two months ended December 31, 2009 since the merger
was effective October 30, 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.
S-4
At March
31, 2010, we had a cash balance of $11.4 million. 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.
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.
S-5
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.
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.
S-6
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.
S-7
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.
S-8
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.
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.
S-9
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.
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.
S-10
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.
S-11
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.
S-12
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.
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.
S-13
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.
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.
S-14
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 Erye’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.
Erye’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.
S-15
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.
S-16
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 Erye’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 Erye’s and our business, operating
results and financial condition and our ability to continue as a going
concern.
S-17
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.
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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S-18
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.
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.
S-19
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.
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.
S-20
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.
S-21
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.
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.
S-22
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.
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.
S-23
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.
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.
S-24
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.
S-25
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.
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.
S-26
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.
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.
S-27
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.
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.
S-28
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 53,573,965 shares of our common stock outstanding as
of June 3, 2010. As of that date, preferred stock outstanding could
be converted into 10,000 shares of our common stock and stock options and
warrants outstanding that are exercisable represented an
additional 27,522,815 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
June 3, 2010, our executive officers, directors, and 5%-or-more stockholders
collectively beneficially owned 44,413,482 shares of our common
stock. These beneficial holdings represent 67.8% 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.
S-29
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 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 June 3, 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 8.6% of our common stock as of
June 3, 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.
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.
Risks
Related to this Offering
Management
will have broad discretion as to the use of the proceeds from this offering, and
we may not use the proceeds effectively.
Our
management will have broad discretion as to the application of the net proceeds
from this offering and could use them for purposes other than those contemplated
at the time of this offering. Our shareholders may not agree with the manner in
which our management chooses to allocate and spend the net proceeds.
Moreover, our management may use the net proceeds for corporate purposes that
may not improve our financial condition or market value.
Shareholders
will experience an immediate dilution in the net tangible book value per share
of the our common stock.
Since the
price per share of our common stock being offered is substantially lower than
the book value per share of our common stock, shareholders will experience an
immediate dilution in the net tangible book value of the common stock purchased
in this offering. See the section entitled “Dilution” below for a more
detailed discussion of the dilution associated with this offering.
The
issuance of the shares pursuant to this offering may depress the market value of
our common stock.
A
significant number of shares may be sold in the market following this offering,
which may depress the market price of our common stock. Sales of a
substantial number of shares of our common stock in the public market following
this offering could cause the market price of our common stock to decline.
If there are more shares of common stock offered for sale than buyers are
willing to purchase, then the market price of our common stock may decline to a
market price at which buyers are willing to purchase the offered shares of
common and sellers remain willing to sell the shares. All of the shares
sold in the offering will be freely tradable without restriction or further
registration under the Securities Act.
S-30
This
prospectus supplement, the accompanying prospectus, and the documents
incorporated by reference herein and therein contain forward-looking statements
regarding our future performance. All forward-looking information is inherently
uncertain and actual results may differ materially from assumptions, estimates
or expectations reflected or contained in the forward-looking statements as a
result of various factors, including those set forth under “Risk Factors” in
this prospectus supplement and elsewhere in this prospectus supplement, the
accompanying prospectus, and the documents incorporated by reference herein and
therein. In addition, such “Risk Factors” may be updated from time to time by
our filings under the Securities Exchange Act of 1934. Forward-looking
statements convey our current expectations or forecasts of future events. All
statements contained in this prospectus supplement and the accompanying
prospectus other than statements of historical fact are forward-looking
statements. Forward-looking statements include statements regarding our future
financial position, business strategy, budgets, projected costs, plans and
objectives of management for future operations. The words “may,” “continue,”
“estimate,” “intend,” “plan,” “will,” “believe,” “project,” “expect,”
“anticipate” and similar expressions may identify forward-looking statements,
but the absence of these words does not necessarily mean that a statement is not
forward-looking. With respect to the forward-looking statements, we claim the
protection of the safe harbor for forward-looking statements contained in the
Private Securities Litigation Reform Act of 1995.
These
forward-looking statements speak only as of the date each such statement is
made. Unless required by law, we undertake no obligation to publicly update or
revise any forward-looking statements to reflect new information or future
events or otherwise, and we do not intend to provide such updates.
USE OF PROCEEDS
The net
proceeds of this offering will be approximately $1,700,000, after deducting
estimated offering expenses. We expect to use the net proceeds from this
offering for working capital and other general corporate purposes. Pending
use of the net proceeds of this offering, we intend to invest the net proceeds
in short-term interest-bearing investment grade instruments.
DILUTION
Our net
tangible book value on March 31, 2010 was approximately $14,859,000, or $0.34
per share of common stock. “Net tangible book value” is total assets minus the
sum of liabilities and intangible assets. “Net tangible book value per
share” is net tangible book value divided by the total number of common shares
outstanding. After giving effect to the sale of 685,226 shares of common
stock offered by us in this offering, our pro forma net tangible book value on
March 31, 2010 would have been approximately $30,279,000, or $0.69 per share of
common stock.
The
adjustments made to determine pro forma net tangible book value per share are
the following:
|
|
•
|
an
increase in total assets to reflect the net proceeds of the offering as
described under “Use of Proceeds;”
|
|
|
•
|
the
addition of the number of shares offered by this prospectus supplement to
the number of shares outstanding as of March 31, 2010;
and
|
|
|
•
|
the
addition of 9,086,124 shares of our common stock issued on May 17, 2010
upon conversion of our Series C Convertible Redeemable Preferred Stock to
the number of shares outstanding as of March 31, 2010;
and
|
S-31
The
following table illustrates the pro forma increase in net tangible book value of
$.16 per share and the dilution (the difference between the offering price per
share and net tangible book value per share) to new investors in this
offering:
|
Public
offering price per share
|
$ | 2.63 | ||
|
Net
tangible book value per share on March 31, 2010
|
$ | .34 | ||
|
Increase
in net tangible book value per share attributable to this
offering
|
$ | .35 | ||
|
Pro
forma net tangible book value per share on March 31, 2010, after giving
effect to the offering
|
$ | .69 | ||
|
Dilution
per share to new investors in this offering
|
$ | 1.94 |
The
following table shows the difference between existing shareholders and new
investors in this offering with respect to the number of shares purchased from
us, the total consideration paid and the average price paid per
share.
|
Shares Purchased
|
Total Consideration
|
Average Price
|
||||||||||||||||||
|
Number
|
Percent
|
Amount
|
Percent
|
Per Share
|
||||||||||||||||
|
Existing
shareholders
|
53,033,266 | 99 | % | $ | 120,093,409 | 99 | % | $ | 2.26 | |||||||||||
|
New
investors
|
685,226 | 1 | % | 1,700,000 | 1 | % | $ | 2.48 | ||||||||||||
|
Total
|
53,718,492 | 100 | % | $ | 121,793,409 | 100 | % | $ | 2.27 | |||||||||||
The above
discussion and tables are based on 43,947,142 shares of common stock outstanding
at March 31, 2010, and do not include:
|
|
•
|
10,065,574
shares of common stock issuable upon exercise of outstanding stock options
at a weighted average exercise price of $1.90 per share, under our stock
plans;
|
|
|
•
|
4,195,099
shares of common stock issuable upon exercise of our outstanding warrants
to purchase at a weighted average exercise price of $2.88 per
share;
|
|
|
•
|
635,000
shares of our common stock issuable upon exercise of our outstanding Class
A warrants at an exercise price of $6.00 per
share;
|
|
|
•
|
12,932,512
shares of our common stock issuable upon exercisable of our outstanding
Class D warrants at an exercise price of $2.50 per
share;
|
|
|
•
|
10,000
shares of our common stock issuable upon conversion of our Series B
Convertible Redeemable Preferred Stock;
and
|
|
|
•
|
3,877,319
additional shares of common stock reserved for future issuance under our
stock option plans.
|
S-32
CAPITALIZATION
The
following table sets forth our capitalization as of March 31, 2010:
|
•
|
on
an actual basis, without giving effect to this
offering;
|
|
•
|
on
an as adjusted basis to reflect (i) the sale of the 685,226 shares of
common stock offered by us, after deducting estimated offering expenses,
and (ii) the conversion of 8,177,512 shares of our Series C convertible
redeemable preferred stock into 9,086,124 shares of common stock in
connection with this Offering.
|
This
capitalization table should be read in conjunction with management’s discussion
and analysis of results of operations and our consolidated financial statements
and related notes included in our annual report on Form 10-K for the year ended
March 31, 2010 and incorporated by reference into this prospectus
supplement.
|
As of March 31, 2010
|
||||||||
|
Pro Forma,
|
||||||||
|
As
|
||||||||
|
Actual
|
Adjusted
|
|||||||
|
Total
long-term liabilities
|
$ | 11,853.8 | $ | 11,853.8 | ||||
|
Shareholders’
equity
|
||||||||
|
Preferred
stock, par value $0.01, 20,000,000 shares authorized, 10,000 shares of
Series B convertible redeemable preferred stock issued and outstanding pro
forma and pro forma, as adjusted, and 8,177,512 shares and 0 shares of
Series C convertible redeemable preferred stock issued and outstanding,
pro forma and pro forma, as adjusted, respectively.
|
13,720.1 | 0.1 | ||||||
|
Common
stock, par value $0.001, 500,000,000 shares authorized, 43,947,142 shares
issued and outstanding, actual; 53,718,492 shares issued and outstanding,
pro forma, as adjusted (1)
|
43.9 | 53.7 | ||||||
|
Additional
paid in capital
|
106,329.4 | 121,739.7 | ||||||
|
Accumulated
other comprehensive loss, net
|
(54.7 | ) | (54.7 | ) | ||||
|
Retained
deficit
|
(76,385.0 | ) | (76,385.0 | ) | ||||
|
Total
shareholders’ equity
|
29,933.8 | 45,353.8 | ||||||
|
Total
capitalization
|
$ | 65,261.0 | $ | 80,681.1 | ||||
|
(1)
|
Outstanding
shares of common stock as of March 31, 2010 does not
include:
|
|
|
•
|
10,065,574
shares of common stock issuable upon exercise of outstanding stock options
at a weighted average exercise price of $1.90 per share, under our stock
plans;
|
|
|
•
|
4,195,099
shares of common stock issuable upon exercise of our outstanding warrants
to purchase at a weighted average exercise price of $2.88 per
share;
|
S-33
|
|
•
|
635,000
shares of our common stock issuable upon exercise of our outstanding Class
A warrants at an exercise price of $6.00 per
share;
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|
|
•
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12,932,512
shares of our common stock issuable upon exercisable of our outstanding
Class D warrants at an exercise price of $2.50 per
share;
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|
|
•
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10,000
shares of our common stock issuable upon conversion of our Series B
Convertible Redeemable Preferred Stock;
and
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|
|
•
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9,086,124
shares of our common stock issuable upon conversion of our Series C
Convertible Preferred Stock at a conversion price of $0.90 per share;
and
|
|
|
•
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3,877,319
additional shares of common stock reserved for future issuance under our
stock option plans.
|
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. On May 17, 2010, all of our then outstanding shares of
Series C Convertible Preferred Stock were converted into 9,086,124 shares of our
common 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 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.
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.
S-34
The
following summary of certain provisions of our common stock does not purport to
be complete. You should refer to our amended and restated certificate of
incorporation and our amended and restated bylaws, both of which are on file
with the SEC as exhibits to previous SEC filings. The summary below is also
qualified by provisions of applicable law.
We are
authorized to issue 500,000,000 shares of common stock, par value $0.001 per
share. Holders of our common stock are entitled to one vote per share in
the election of directors and on all other matters on which stockholders are
entitled or permitted to vote. Holders of our common stock are not
entitled to cumulative voting rights. Therefore, holders of a majority of the
shares voting for the election of directors can elect all of the directors.
Subject to the terms of any outstanding series of preferred stock, the holders
of common stock are entitled to dividends in the amounts and at times as may be
declared by our Board of Directors out of funds legally available. Upon
liquidation or dissolution, holders of our common stock are entitled to share
ratably in all net assets available for distribution to stockholders after
payment of any liquidation preferences to holders of our preferred stock.
Holders of our common stock have no redemption, conversion or preemptive
rights.
As of
June 3, 2010, we had 53,573,965 shares of common stock issued and outstanding,
exclusive of the following.
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•
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10,245,204
shares of common stock issuable upon exercise of outstanding stock options
at a weighted average exercise price of $1.90 per share, under our stock
plans;
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•
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3,710,099
shares of common stock issuable upon exercise of our outstanding warrants
to purchase at a weighted average exercise price of $2.98 per
share;
|
|
|
•
|
635,000
shares of our common stock issuable upon exercise of our outstanding Class
A warrants at an exercise price of $6.00 per
share;
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|
|
•
|
12,932,512
shares of our common stock issuable upon exercisable of our outstanding
Class D warrants at an exercise price of $2.50 per
share;
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|
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•
|
10,000
shares of our common stock issuable upon conversion of our Series B
Convertible Redeemable Preferred Stock;
and
|
|
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•
|
11,645,782
additional shares of common stock reserved for future issuance under our
stock option plans.
|
The
transfer agent and registrar for our common stock is Continental Stock Transfer
& Trust Company. Its address is 17 Battery Place, New York, New York,
10004 and its telephone number is (212) 509-4000.
S-35
The
aggregate number of shares that we can sell to Commerce Court under the Purchase
Agreement may in no case exceed 10,536,208 shares of common stock (which is
equal to approximately 19.9% of our common stock outstanding on the closing date
of the Purchase Agreement, less 63,792 shares issued to Commerce Court as its
commitment fee), which we refer to as the Trading Market Limit. In
addition, in no event shall Commerce Court purchase under the Purchase Agreement
any shares of our common stock which, when aggregated with all other shares of
our common stock then beneficially owned by Commerce Court, would result in the
beneficial ownership by Commerce Court of more than 4.9% of the then issued and
outstanding shares of our common stock, which we refer to as the Ownership
Limitation, or when aggregated with all other shares of Common Stock offered
pursuant to the registration statement of which this prospectus supplement forms
a part, would exceed the maximum amount permissible under General Instruction
I.B.6. of Form S-3, which we refer to as the Registration
Limitation.
On
May 27, 2010, we presented Commerce Court with a draw down notice to purchase
72,786 shares of our common stock, subject in all cases to the Trading Market
Limit, the Ownership Limitation and the Registration
Limitation. We and
Commerce Court agreed to waive the minimum threshold price of $3.00 per share
set forth in the Purchase Agreement and set the
threshold price in such
draw down notice at $2.75. Commerce Court also agreed to waive the 2.5%
market capitalization limitation for this draw down. Pursuant to the
Purchase Agreement, the shares were offered at a discount price to Commerce
Court mutually agreed upon by the parties under the Purchase Agreement equal to
95.0% of the daily volume weighted average price of the Company’s common stock
during the pricing period of the draw down (or a 5% discount). As
expressly permitted by the Purchase Agreement, the parties also mutually agreed
that the pricing period for this draw down would be five (rather than ten)
consecutive trading days. Pursuant to the Draw Down Notice, the Company
also granted Commerce Court the right to exercise one or more options to
purchase additional shares of Common Stock during the Pricing Period, based on
the trading price of the Common Stock, subject in all cases to the Trading
Market Limit, the Ownership Limitation and the Registration Limitation, and
Commerce Court exercised its right to purchase 612,440 additional shares of
Common Stock during the Pricing Period.
S-36
On June
7, 2010, we expect to settle with Commerce Court on the purchase of an aggregate
of 685,226 shares of our common stock under the terms of this draw down notice
and the Purchase Agreement. Accordingly, pursuant to this prospectus
supplement and the accompanying prospectus, we are offering 685,226 shares of
our common stock to Commerce Court, at a price of approximately $2.63 per
share. This prospectus supplement and the accompanying prospectus also
cover the sale of these shares by Commerce Court to the public. The total
gross purchase price for the shares is $1,800,000. We will receive net
proceeds from the sale of these shares of approximately $1,700,000, after
deducting our estimated offering expenses of approximately $100,000, including a
placement agent fee of $36,000 to be paid to Reedland Capital Partners, an
Institutional Division of Financial West Group, Member FINRA/SIPC, in connection
with this offering.
Additional
information is set forth under the caption “Plan of Distribution” in the
accompanying prospectus and in our Current Report on Form 8-K filed with the SEC
on May 19, 2010 (including the Purchase Agreement filed as an exhibit thereto),
which is incorporated herein by reference. For more information, please see the
section entitled “Information Incorporated by Reference” in this prospectus
supplement.
LEGAL MATTERS
Certain
legal matters relating to the validity of the common stock offered by this
prospectus supplement and the accompanying prospectus will be passed upon for us
by Lowenstein Sandler PC,
Roseland,
New Jersey.
We file
annual, quarterly and current reports, proxy statements and other information
with the SEC. You may read and copy these documents at the SEC’s Public
Reference Room, which is located at 100 F Street, NE, Washington, D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for more information about the operation
of the SEC’s Public Reference Room. In addition, the SEC maintains an
Internet website, which is located at http://www.sec.gov, which contains
reports, proxy and information statements and other information regarding
issuers that file electronically with the SEC. Copies of our SEC filings
are also available through our website (http://www.neostem.com) as soon as
reasonably practicable after we electronically file the material with, or
furnish it to, the SEC. We do not incorporate by reference into this
prospectus supplement or the accompanying prospectus the information on, or
accessible through, our website, and you should not consider it as part of this
prospectus supplement or the accompanying prospectus.
We have filed with the SEC a registration statement
on Form S-3 under the Securities Act of 1933 to register the common stock
offered by this prospectus supplement. This prospectus supplement, which
along with the accompanying prospectus, constitutes a part of the registration
statement, does not contain all of the information in the registration statement
and the exhibits of the registration statement. For further information with
respect to us and our common stock, we refer you to the registration statement
and to the exhibits to the registration statement. A copy of the
registration statement may be inspected, without charge, at the offices of the
SEC at 100 F Street, NE, Washington, DC 20549, and copies of all or any part of
the registration statement may be obtained from the SEC’s public reference room
at 100 F Street, NE, Washington, DC 20549, upon the payment of any fees required
by the SEC. The registration statement is also available on the SEC’s
website at http://www.sec.gov.
S-37
INCORPORATION
OF CERTAIN INFORMATION BY REFERENCE
The SEC allows us to “incorporate” into this
prospectus supplement information that we file with the SEC in other documents.
This means that we can disclose important information to you by referring to
other documents that contain that information. Any information that we
incorporate by reference is considered part of this prospectus
supplement.
Information contained in this
prospectus supplement and information that we file with the SEC in the future
and incorporate by reference in this prospectus supplement automatically
modifies and supersedes previously filed information, including information in
previously filed documents or reports that have been incorporated by reference
in this prospectus supplement, to the extent the new information differs from or
is inconsistent with the old information. Any information so modified or
superseded shall not be deemed, except as so modified or superseded, to
constitute a part of this prospectus supplement.
The
following documents previously filed by us with the SEC are incorporated in this
registration statement by reference.
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(a)
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Annual Report on Form 10-K for
the year ended December 31, 2009, filed on March 31,
2010.
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(b)
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Definitive Proxy Statement for
our 2010 Annual Meeting of Stockholders, filed on April 28,
2010.
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|
(c)
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Quarterly Report on Form 10-Q for
the quarter ended March 31, 2010, filed on May 17,
2010.
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(d)
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Current Reports on Form 8-K and
amendments thereto filed on November 4, 2009 (as amended on January 5,
2010), January 7, 2010, February 12, 2010, February 19, 2010, March 16,
2010 (as amended on April 6, 2010), March 17, 2010, March 18, 2010, April
1, 2010, May 19, 2010 and May 21, 2010 (excluding any information deemed
furnished pursuant to Item 2.02 or Item 7.01 of any such Current Report on
Form 8-K).
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(e)
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Description of our common stock
contained in the Registration Statement on Form 8-A, declared effective on
August 8, 2007 (including any amendment or report filed with the SEC for
the purpose of updating such
description).
|
All
reports and other documents that we file pursuant to Section 13(a) and 13(c), 14
and 15(d) of the Exchange Act prior to the filing of a post-effective amendment
which indicates that all securities offered hereunder have been sold or which
deregisters all such securities then remaining unsold shall be deemed to be
incorporated by reference in this prospectus and to be a apart hereof from the
date of filing of such reports and documents.
We will
provide to each person, including any beneficial owner, to whom a prospectus is
delivered, copies of these filings, excluding all exhibits unless an exhibit has
been specifically incorporated by reference in such filings, at no cost, upon
written or oral request made to:
NeoStem,
Inc.
420
Lexington Avenue, Suite 450
New York,
NY 10170
Catherine
M. Vaczy, Esq., Vice President and General Counsel
(212)
584-4180
You should rely only on the
information provided in and incorporated by reference into this prospectus
supplement and the accompanying prospectus. We have not authorized anyone else
to provide you with different information. You should not assume that the
information in this prospectus supplement or the accompanying prospectus is
accurate as of any date other than the date on the front cover of these
documents.
S-38
Filed
Pursuant to Rule 424(b)(2)
Registration
No. 333-166169
PROSPECTUS
$45,000,000
NEOSTEM,
INC.
Common
Stock
Preferred
Stock
Debt
Securities
Warrants
Units
We may
from time to time offer and sell common stock, preferred stock, debt securities,
warrants and units, having an aggregate offering price of up to
$45,000,000. We may offer and sell these securities separately or together
in any combination. We may offer and sell these securities to or through
underwriters, directly to investors or through agents. We will specify the
terms of the securities, and the names of any underwriters or agents and their
respective compensation, in supplements to this prospectus.
Our
common stock is listed on the on the NYSE Amex and traded under the symbol
“NBS.” The closing bid price of our common stock on the NYSE Amex on
May 14, 2010 was $3.41 per share. As of May 14, 2010, the aggregate market
value of our outstanding common stock held by non-affiliates was approximately
$28,384,459. We have not offered any of our common stock pursuant to
General Instruction I.B.6 of Form S-3 during the 12 calendar month period that
ends on, and includes, the date of this prospectus.
Investing
in our securities involves risks. See “Risk Factors” at page 2 of this
prospectus.
Neither
the Securities and Exchange Commission nor any state securities commission has
approved or disapproved of these securities or passed upon the accuracy or
adequacy of this prospectus. Any representation to the contrary is a
criminal offense.
We may
also offer from time to time shares of our common stock pursuant to this
prospectus and any applicable prospectus supplement in accordance with the terms
of a common stock purchase agreement we have entered into with Commerce Court
Small Cap Value Fund, Ltd., or Commerce Court. The terms of the
common stock purchase agreement are described in this prospectus under the
section entitled “Plan of Distribution.” Commerce Court is an
“underwriter” within the meaning of Section 2(a)(11) of the Securities Act of
1933, as amended, with respect to the shares of our common stock that we may
offer pursuant to the common stock purchase agreement, and any profits on the
sales of shares of our common stock by Commerce Court and any discounts,
commissions or concessions received by Commerce Court may be deemed to be
underwriting discounts and commissions under the Securities. Act. We
agreed to issue Commerce Court pursuant to the registration statement of which
this prospectus forms a part, in consideration of its execution and delivery of
the stock purchase agreement, 63,792 shares of our common stock, and this
prospectus covers the sale to the public of those shares. We expect
to deliver to Commerce Court the above-referenced shares of common stock on or
about May 21, 2010.
This
prospectus may not be used to consummate sales of securities unless it is
accompanied by a prospectus supplement.
The date
of this prospectus is May 19, 2010.
TABLE
OF CONTENTS
|
About
This Prospectus
|
1
|
|
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NeoStem,
Inc.
|
1
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Risk
Factors
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2
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|
Special
Note Regarding Forward-Looking Statements
|
2
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|
Use
of Proceeds
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2
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The
Securities We May Offer
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3
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Description
of Capital Stock
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3
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Description
of Debt Securities
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9
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Description
of Warrants
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18
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Description
of Units
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20
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Plan
of Distribution
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21
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Validity
of Securities
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25
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Experts
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25
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Incorporation
of Certain Information by Reference
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25
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Where
You Can Find More Information
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26
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No
dealer, salesperson or other person has been authorized to give any information
or to make any representations other than those contained or incorporated by
reference in this prospectus or any accompanying prospectus supplement in
connection with the offer made by this prospectus or any accompanying prospectus
supplement and, if given or made, such information or representations must not
be relied upon as having been authorized by NeoStem, Inc. or any such
person. Neither the delivery of this prospectus or any accompanying
prospectus supplement nor any sale made hereunder and thereunder shall under any
circumstances create an implication that there has been no change in the affairs
of NeoStem, Inc. since the date hereof. This prospectus or any
accompanying prospectus supplement does not constitute an offer or solicitation
by anyone in any state in which such offer or solicitation is not authorized or
in which the person making such offer or solicitation is not qualified to do so
or to anyone to whom it is unlawful to make such offer or
solicitation.
i
ABOUT
THIS PROSPECTUS
This
prospectus is part of a registration statement that we filed with the Securities
and Exchange Commission, using a “shelf” registration process. Under this
shelf process, we may sell any combination of the securities described in this
prospectus in one or more offerings up to a total dollar amount of
$45,000,000. We have provided to you in this prospectus a general
description of the securities we may offer. Each time we sell securities
under this shelf registration process, we will provide a prospectus supplement
that will contain specific information about the terms of the offering. We
may also add, update or change in the prospectus supplement or any “free writing
prospectus” we may authorize to be delivered to you any of the information
contained in this prospectus. To the extent there is a conflict between
the information contained in this prospectus and the prospectus supplement or
any free writing prospectus we may authorize to be delivered to you, you should
rely on the information in the prospectus supplement or free writing prospectus,
as the case may be, provided that if any statement in one of these documents is
inconsistent with a statement in another document having a later date—for
example, a document incorporated by reference in this prospectus or any
prospectus supplement—the statement in the document having the later date
modifies or supersedes the earlier statement. This prospectus, together
with the applicable prospectus supplements and any free writing prospectus we
may authorize to be delivered to you, includes all material information relating
to this offering.
An
investment in our securities involves certain risks that should be carefully
considered by prospective investors. See “Risk Factors.”
You
should read this prospectus and any prospectus supplement as well as additional
information described under “Incorporation of Certain Documents by Reference”
and “Where You Can Find More Information” on pages 25 and 26,
respectively.
NEOSTEM,
INC.
In 2009,
through our expansion efforts within the People’s Republic of China (“China” or
the “PRC”), and with the acquisition of a controlling interest in Suzhou Erye
Pharmaceuticals Company Ltd. (“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, Massachusetts 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.
1
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
website address is www.neostem.com. The
information on our website is not incorporated by reference into this prospectus
and should not be considered to be a part of this prospectus. We have
included our website address as an inactive technical reference
only.
NeoStem,
Inc. 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. On October 30, 2009, we
completed a merger with China Biopharmaceuticals Holdings, Inc., 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. Unless otherwise stated, all
references to “us,” “our,” “NeoStem,” “we,” the “Company” and similar
designations refer to NeoStem, Inc.
RISK
FACTORS
Investing
in our securities involves risk. Please see the risk factors under the
heading “Risk Factors” located on page 19 of our Annual Report on Form 10-K for
the year ended December 31, 2009 and on page 38 of our Quarterly Report on
Form 10-Q for the quarter ended March 31, 2010 on file with the Securities and
Exchange Commission. Before making an investment decision, you should
carefully consider these risks as well as other information we include or
incorporate by reference in this prospectus and any prospectus supplement.
The risks and uncertainties we have described are not the only ones facing our
company. Additional risks and uncertainties not presently known to us or
that we currently deem immaterial may also affect our business
operations.
SPECIAL
NOTE REGARDING FORWARD-LOOKING INFORMATION
This
prospectus, any prospectus supplement and the documents we incorporate by
reference in this prospectus contain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). All statements, other than statements of
historical facts, that we include in this prospectus, any prospectus supplement,
and in the documents we incorporate by reference in this prospectus, may be
deemed forward-looking statements for purposes of the Securities Act and the
Exchange Act. We use the words “anticipate,” “believe,” “estimate,”
“expect,” “intend,” “may,” “plan,” “project,” “will,” “would” and similar
expressions to identify forward-looking statements, although not all
forward-looking statements contain these identifying words. We cannot
guarantee that we actually will achieve the plans, intentions or expectations
disclosed in our forward-looking statements and, accordingly, you should not
place undue reliance on our forward-looking statements. There are a number
of important factors that could cause actual results or events to differ
materially from the forward-looking statements that we make, including the
factors included in the documents we incorporate by reference in this
prospectus. You should read these factors and the other cautionary
statements made in the documents we incorporate by reference as being applicable
to all related forward-looking statements wherever they appear in this
prospectus, any prospectus supplement, and any document incorporated by
reference. We caution you that we do not undertake any obligation to
update forward-looking statements made by us.
USE
OF PROCEEDS
Unless
otherwise provided in the applicable prospectus supplement, we intend to use the
net proceeds from the sale of the securities under this prospectus for general
corporate purposes, including working capital. Although we have no present
plans or intentions, we may use a portion of the net proceeds to acquire or
invest in complementary businesses. We will set forth in the prospectus
supplement our intended use for the net proceeds received from the sale of any
securities. Pending the use of the net proceeds, we may use the net
proceeds to invest in investment-grade, interest-bearing
securities.
2
THE
SECURITIES WE MAY OFFER
The
descriptions of the securities contained in this prospectus, together with the
applicable prospectus supplements, summarize all the material terms and
provisions of the various types of securities that we may offer. We will
describe in the applicable prospectus supplement relating to any securities the
particular terms of the securities offered by that prospectus supplement.
If we indicate in the applicable prospectus supplement, the terms of the
securities may differ from the terms we have summarized below. We will
also include in the prospectus supplement information, where applicable, about
material United States federal income tax considerations relating to the
securities, and the securities exchange, if any, on which the securities will be
listed.
We may
sell from time to time, in one or more offerings:
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•
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common
stock;
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|
|
•
|
preferred
stock;
|
|
|
•
|
debt
securities;
|
|
|
•
|
warrants to purchase any of the
securities listed above; and
|
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|
•
|
units consisting of any
combination of the securities listed
above.
|
In this
prospectus, we refer to the common stock, preferred stock, debt securities,
warrants and units collectively as “securities.” The total dollar
amount of all securities that we may sell will not exceed
$45,000,000.
If we
issue debt securities at a discount from their original stated principal amount,
then, for purposes of calculating the total dollar amount of all securities
issued under this prospectus, we will treat the initial offering price of the
debt securities as the total original principal amount of the debt
securities.
This
prospectus may not be used to consummate a sale of securities unless it is
accompanied by a prospectus supplement.
DESCRIPTION
OF CAPITAL STOCK
The
following is a summary of all material characteristics of our capital stock as
set forth in our articles of incorporation and bylaws, and our Class A warrants
and Class D warrants. The summary does not purport to be complete and is
qualified in its entirety by reference to our articles of incorporation and
bylaws and the Class A warrants and Class D warrants, each as amended to date,
and to the provisions of the General Corporation Law of the State of Delaware,
as amended, or the Delaware General Corporation Law.
Common
Stock
We are
authorized to issue 500,000,000 shares of common stock, par value $0.001 per
share. Holders of our common stock are entitled to one vote per share in
the election of directors and on all other matters on which stockholders are
entitled or permitted to vote. Holders of our common stock are not
entitled to cumulative voting rights. Therefore, holders of a majority of the
shares voting for the election of directors can elect all of the directors.
Subject to the terms of any outstanding series of preferred stock, the holders
of common stock are entitled to dividends in the amounts and at times as may be
declared by our Board of Directors out of funds legally available. Upon
liquidation or dissolution, holders of our common stock are entitled to share
ratably in all net assets available for distribution to stockholders after
payment of any liquidation preferences to holders of our preferred stock.
Holders of our common stock have no redemption, conversion or preemptive
rights.
3
As of May
17, 2010, we had 53,034,089 shares of common stock issued and outstanding,
exclusive of existing options and warrants and the shares to be issued in this
offering.
Preferred
Stock
We are
authorized to issue up to 20,000,000 shares of preferred stock, par value $0.01
per share, with such designations, rights and preferences as may be determined
from time to time by our Board of Directors. Accordingly, our Board of Directors
is empowered, without stockholder approval, to issue preferred stock with
dividend, liquidation, conversion, voting, or other rights that could adversely
affect the voting power or other rights of the holders of common stock.
The issuance of preferred stock could have the effect of restricting dividends
on the common stock, diluting the voting power of the common stock, impairing
the liquidation rights of the common stock, or delaying or preventing a change
in control of our company, all without further action by our
stockholders.
As of May
17, 2010, there were 825,000 shares of our Series B Convertible Redeemable
Preferred Stock, $0.01 par value per share (the “Series B Preferred Stock”),
authorized for issuance, 10,000 shares of which were outstanding.
Series
B Preferred Stock
The
Series B Preferred Stock ranks pari passu with our common
stock with respect to the payment of dividends and to the distribution of assets
upon liquidation, dissolution or winding up. So long as any shares of the
Series B Preferred Stock are outstanding, no dividend shall be declared or paid
or set aside for payment or other distribution declared or made upon our common
stock or upon any other stock ranking junior to, or on a parity with, the Series
B Preferred Stock as to dividends or upon liquidation, dissolution or winding
up, unless, in the case of our preferred stock, the same dividend is declared,
paid or set aside for payment on all outstanding shares of the Series B
Preferred Stock or in the case of our common stock, ten times such dividend per
share is declared, paid or set aside for payment on each outstanding share of
our Series B Preferred Stock.
Except as
otherwise provided by law, each share of the Series B Preferred Stock has the
same voting rights as ten shares of our common stock and the holders of the
Series B Preferred Stock and our common stock shall vote together as one class
on all matters. The holder of any share of Series B Preferred Stock
has the right, at such holder’s option, to convert such share into one fully
paid and non-assessable share of our common stock, subject to
adjustment.
In the
event of any voluntary or involuntary dissolution, liquidation or winding up of
our company, after any distribution of assets is made to the holders of any
other class or series of stock that ranks prior to the Series B Preferred Stock
in respect of distributions upon the liquidation of our company, the holder of
each share of Series B Preferred Stock then outstanding shall be entitled to be
paid out of our assets available for distribution to our stockholders, an amount
on a pari passu basis
equal to ten times the amount per share distributed to the holders of our common
stock. After payment of the full amount of the distribution to which they
are entitled, the holders of shares of the Series B Preferred Stock will not be
entitled to any further participation in any distribution of assets by the
corporation.
Shares of
Series B Preferred Stock issued and reacquired by us shall have the status of
authorized and unissued shares of preferred stock, undesignated as to series,
subject to later issuance. Holders of shares of Series B Preferred Stock
are not entitled to any preemptive or subscription rights in respect of any
securities of the corporation.
Options
As of May
17, 2010, we had outstanding options to purchase an aggregate of 10,265,574
shares of our common stock with exercise prices ranging from $0.71 to $15.00 per
share, with an approximate weighted average exercise price of $1.90 per
share. The shares of our common stock underlying all such options are
currently registered for sale with the SEC.
4
Warrants
As of May
17, 2010, we had outstanding (i) warrants to purchase an aggregate of 4,145,099
shares of our common stock with exercise prices ranging from $0.50 to $6.50 or
an approximate weighted average exercise price of $2.86 per share, (ii) Class A
warrants to purchase an aggregate of 635,000 shares of our common stock at an
exercise price of $6.00 per share and (iii) Class D warrants to purchase
12,932,512 shares of our common stock at an exercise price of $2.50 per
share. The holders of a vast majority of such warrants have registration
rights for the shares underlying the warrants.
Class
A Warrants
Each
Class A warrant entitles the holder to purchase one share of our common stock at
an exercise price per share of $6.00. The exercise price per share of each Class
A warrant is subject to adjustment upon the occurrence of certain events as
provided in the Class A warrant certificate and summarized below. The
Class A warrants may be exercised at any time until July 16, 2012, which is the
expiration date, unless redeemed. The Class A warrants which have not previously
been exercised will expire on the expiration date. A Class A warrant
holder will not be deemed to be a holder of the underlying common stock for any
purpose until the Class A warrant has been properly exercised.
In the
event our common stock is trading at a price equal to or exceeding the
redemption threshold of $8.00 per share for 20 consecutive trading days, we have
the option to call the Class A warrants. If the holders of the Class A
warrants have not exercised the Class A warrants within 30 days of the written
notice to call, we may redeem the Class A warrants at $0.001 per warrant.
We will send the written notice of call by first class mail to Class A warrant
holders at their last known addresses appearing on the registration records
maintained by the transfer agent for the Class A warrants. No other form
of notice by publication or otherwise will be required. If we call any
Class A warrants for redemption, they will be exercisable until the close of
business on the business day next preceding the specified redemption
date.
A Class A
warrant holder may exercise our Class A warrants only if an appropriate
registration statement is then in effect with the SEC and if the shares of our
common stock underlying the Class A warrants are qualified for sale under the
securities laws of the state in which the holder resides.
During
the term of the Class A warrants, the holders thereof are given the opportunity
to profit from a rise in the market of our common stock, with a resulting
dilution in the interest of all other stockholders. So long as the Class A
warrants are outstanding, the terms on which we could obtain additional capital
may be adversely affected. The holders of the Class A warrants might be expected
to exercise them at a time when we would, in all likelihood, be able to obtain
any needed capital by a new offering of securities on terms more favorable than
those provided by the Class A warrants.
The
exercise price and redemption price of the Class A warrants are subject to
adjustment in specified circumstances, including in the event we declare any
stock dividend to stockholders or effect any split or reverse split with respect
to our common stock after the issuance thereof. Therefore, if we effect
any stock split or reverse split with respect to our common stock, the exercise
price in effect immediately prior to such stock split or reverse split will be
proportionately reduced or increased, respectively. Any adjustment of the
exercise price will also result in an adjustment of the number of shares
purchasable upon exercise of a Class A warrant or, if we elect, an adjustment of
the number of Class A warrants outstanding. The Class A warrants do not contain
provisions protecting against dilution resulting from the sale of additional
shares of our common stock for less than the exercise price of the Class A
warrants or the current market price of our common stock.
Until
exercised, the Class A warrants will have no voting, dividend or other
stockholder rights.
Class
D Warrants
Each
Class D Warrant entitles the holder to purchase one share of our common stock at
an exercise price per share of $2.50. The exercise price per share of each
Class D warrant is subject to adjustment upon the occurrence of certain events
as provided in the Class D warrant certificate and summarized below. The Class D
warrants may be exercised at any time during their five year term, or eight year
term in the case of a Class D warrant to purchase an aggregate of 4,000,000
shares held by RimAsia Capital Partners, L.P., a Cayman Islands exempted limited
partnership and an affiliate of the Company (“RimAsia”), unless redeemed.
The Class D warrants which have not been previously exercised will expire at the
expiration date. A Class D warrant holder will not be deemed to be a
holder of the underlying common stock for any purpose until the Class D warrant
is exercised.
5
In the
event our common stock is trading at a per share price equal to or exceeding the
redemption threshold of $3.50, or $5.00 in the case of the Class D warrant held
by RimAsia, for twenty consecutive trading days, we have the option to call the
Class D warrants. If the holders of Class D warrants have not exercised
the Class D Warrants within 30 days of the written notice to call, we may redeem
the Class D warrants at $0.001 per warrant. We will send the written
notice of call by first class mail to Class D warrant holders at their last
known addresses appearing on the registration records maintained by the transfer
agent of the Class D warrants. No other form of notice by publication or
otherwise will be required. If we call any Class D Warrants for
redemption, they will be exercisable until close of business on the business day
next preceding the specified redemption date.
The
exercise price and redemption price of the Class D warrants are subject to
adjustment in specified circumstances, including in the event we declare any
stock dividend to stockholders or effect any split or reverse split with respect
to our common stock after the issuance thereof. Therefore, if we effect
any stock split or reverse split with respect to our common stock, the exercise
price in effect immediately prior to such stock split or reverse split will be
proportionately reduced or increased, respectively. Any adjustment of the
exercise price will also result in an adjustment of the number of shares
purchasable upon exercise of a Class D warrant or, if we elect, an adjustment of
the number of Class D warrants outstanding. The Class D warrants do not
contain provisions protecting against dilution resulting from the sale of
additional shares of our common stock for less than the exercise price of the
Class D warrants or the current market price of our common stock.
Until
exercised, the Class D warrants will have no voting, dividend or other
stockholder rights.
Anti-Takeover
Effects of Certain Provisions of Delaware Law and Our Certificate of
Incorporation and Bylaws
Our
Amended and Restated Certificate of Incorporation and bylaws contain a number of
provisions that could make our acquisition by means of a tender or exchange
offer, a proxy contest or otherwise more difficult. These provisions are
summarized below.
Classified Board of Directors.
Pursuant to Article ELEVENTH of our Amended and Restated Certificate of
Incorporation, the directors constituting our Board of Directors are classified,
with respect to the time for which they severally hold office, into three
classes as nearly equal in number as possible. In implementing the classified
Board, our Board of Directors assigned members of the Board of Directors already
in office into three classes, with one class assigned a term expiring at the
annual meeting of stockholders to be held in 2010, a second class assigned a
term expiring at the annual meeting of stockholders to be held in 2011, and a
third class assigned a term expiring at the annual meeting of stockholders to be
held in 2012, with each class to hold office until its successor is elected and
qualified. At each annual meeting of stockholders commencing with the election
in 2010, the successors of the class of directors whose term expires at that
meeting shall be elected to hold office for a term expiring at the annual
meeting of stockholders held in the third year following the year of their
election. Pursuant to the Delaware General Corporation Law, if a board of
directors is classified, unless the certificate of incorporation otherwise
provides, members of the board of directors may be removed by the stockholders
before the expiration of their respective terms only for cause.
Our
classified Board of Directors may have an anti-takeover effect of making more
difficult and discouraging a takeover attempt, merger, tender offer, or proxy
fight. Additionally, our classified Board of Directors extends the time it would
take for holders of a majority of our shares to remove incumbent management to
obtain control of the Board of Directors. That is, as a general matter a
majority stockholder could not obtain control of the Board of Directors until
the second annual stockholder’s meeting after it acquired a majority of the
voting stock. Our classified Board of Directors may have the effect of making it
more difficult for stockholders to remove our existing
management.
6
Removal of Directors.
Our bylaws provide that any one or more or all of our directors may be
removed with cause only by the holders of at least a majority of the shares then
entitled to vote at an election of our directors. No director may be removed by
the stockholders without cause prior to the expiration of his or her term.
Pursuant to the Delaware General Corporation Law, if a board of directors is
classified (as is our Board of Directors), unless the certificate of
incorporation otherwise provides, members of the board of directors may be
removed by the stockholders before the expiration of their respective terms only
for cause.
Special Meetings. Our
bylaws provide that special meetings of our stockholders may, unless otherwise
prescribed by law, be called by our Chairman of the Board (if any), our Board of
Directors or our Chief Executive Officer and shall be held at such place, on
such date and at such time as shall be fixed by our Board of Directors or the
person calling the meeting. Business transacted at any special meeting shall be
limited to matters relating to the purpose or purposes stated in the notice of
the meeting.
Undesignated Preferred Stock.
The ability to authorize undesignated preferred stock makes it possible
for our Board of Directors to issue preferred stock with voting or other rights
or preferences that could impede the success of any attempt to acquire us. The
ability to issue preferred stock may have the effect of deferring hostile
takeovers or delaying changes in control or management of our
company.
Delaware Anti-Takeover
Statute. The provisions of Delaware law, our Amended and Restated
Certificate of Incorporation and bylaws could have the effect of discouraging
others from attempting hostile takeovers and, as a consequence, they may also
inhibit temporary fluctuations in the market price of our common stock that
often result from actual or rumored hostile takeover attempts. These provisions
may also have the effect of preventing changes in our management. It is possible
that these provisions could make it more difficult to accomplish transactions
that stockholders may otherwise deem to be in their best interests.
We are
subject to the provisions of Section 203 of the Delaware General Corporation Law
regulating corporate takeovers. In general, Section 203 prohibits a publicly
held Delaware corporation from engaging in a business combination with an
interested stockholder for a period of three years following the date the person
became an interested stockholder unless:
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prior to the date of the
transaction, the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an interested
stockholder;
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upon completion of the
transaction that resulted in the stockholder becoming an interested
stockholder, the stockholder owned at least 85% of the voting stock of the
corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding (1) shares
owned by persons who are directors and also officers and (2) shares owned
by employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the plan
will be tendered in a tender or exchange offer;
and
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on or subsequent to the date of
the transaction, the business combination is approved by the board and
authorized at an annual or special meeting of stockholders, and not by
written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested
stockholder.
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Generally,
a business combination includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested
stockholder. An interested stockholder is a person who, together with
affiliates and associates, owns or, within three years prior to the
determination of interested stockholder status, owned 15% or more of a
corporation’s outstanding voting securities. We expect the existence of
this provision to have an anti-takeover effect with respect to transactions our
Board of Directors does not approve in advance. We also anticipate that
Section 203 may discourage attempted acquisitions that might result in a premium
over the market price for the shares of our common stock held by
stockholders.
7
Potential
Effects of Authorized but Unissued Stock
We have
shares of common stock and preferred stock available for future issuance without
stockholder approval. We may utilize these additional shares for a variety
of corporate purposes, including future public offerings to raise additional
capital, to facilitate corporate acquisitions or payment as a dividend on the
capital stock.
The
existence of unissued and unreserved common stock and preferred stock may enable
our Board of Directors to issue shares to persons friendly to current management
or to issue preferred stock with terms that could render more difficult or
discourage a third-party attempt to obtain control of us by means of a merger,
tender offer, proxy contest or otherwise, thereby protecting the continuity of
our management. In addition, the Board of Directors has the discretion to
determine designations, rights, preferences, privileges and restrictions,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences of each series of preferred stock, all to
the fullest extent permissible under the Delaware General Corporation Law and
subject to any limitations set forth in our certificate of incorporation.
The purpose of authorizing the Board of Directors to issue preferred stock and
to determine the rights and preferences applicable to such preferred stock is to
eliminate delays associated with a stockholder vote on specific issuances.
The issuance of preferred stock, while providing desirable flexibility in
connection with possible financings, acquisitions and other corporate purposes,
could have the effect of making it more difficult for a third party to acquire,
or could discourage a third party from acquiring, a majority of our outstanding
voting stock.
Limitations
of Director Liability and Indemnification of Directors, Officers and
Employees
Section
145 of the Delaware General Corporation Law, permits indemnification of
directors, officers, agents and controlling persons of a corporation under
certain conditions and subject to certain limitations. Section 145
empowers a corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding whether civil, criminal, administrative or investigative, by
reason of the fact that he or she is or was a director, officer or agent of the
corporation or another enterprise if serving at the request of the
corporation. Depending on the character of the proceeding, a corporation
may indemnify against expenses (including attorneys’ fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred in connection with
such action, suit or proceeding if the person indemnified acted in good faith
and in a manner he or she reasonably believed to be in or not opposed to, the
best interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his or her conduct was
unlawful. In the case of an action by or in the right of the corporation,
no indemnification may be made with respect to any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine that despite the adjudication of
liability such person is fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper. Section 145 further provides
that to the extent a present or former director or officer of a corporation has
been successful in the defense of any action, suit or proceeding referred to
above or in the defense of any claim, issue or matter therein, such person shall
be indemnified against expenses (including attorneys’ fees) actually and
reasonably incurred by such person in connection therewith.
Indemnification
Agreements
We have
entered into indemnification agreements with each of our Chief Executive
Officer, Chief Financial Officer, General Counsel, certain other employees and
each of our directors pursuant to which we have agreed to indemnify such party
to the full extent permitted by law, subject to certain exceptions, if such
party becomes subject to an action because such party is our director, officer,
employee, agent or fiduciary.
Transfer
Agent
The
transfer agent and registrar for our common stock is Continental Stock Transfer
& Trust Company. Its address is 17 Battery Place, New York, New York,
10004 and its telephone number is (212) 509-4000.
8
DESCRIPTION
OF DEBT SECURITIES
We
summarize below some of the provisions that will apply to the debt securities
unless the applicable prospectus supplement provides otherwise. This summary may
not contain all information that is important to you. The complete terms of the
debt securities will be contained in the applicable notes. The notes will be
included or incorporated by reference as exhibits to the registration statement
of which this prospectus is a part. You should read the provisions of the notes.
You should also read the prospectus supplement, which will contain additional
information and which may update or change some of the information
below.
General
This
prospectus describes certain general terms and provisions of the debt
securities. The debt securities will be issued under an indenture between us and
a trustee to be designated prior to the issuance of the debt securities. When we
offer to sell a particular series of debt securities, we will describe the
specific terms of the securities in a supplement to this prospectus. The
prospectus supplement will also indicate whether the general terms and
provisions described in this prospectus apply to a particular series of debt
securities.
We may
issue, from time to time, debt securities, in one or more series, that will
consist of either our senior debt (“senior debt securities”), our senior
subordinated debt (“senior subordinated debt securities”), our subordinated debt
(“subordinated debt securities”) or our junior subordinated debt (“junior
subordinated debt securities” and, together with the senior subordinated debt
securities and the subordinated debt securities, the “subordinated securities”).
Debt securities, whether senior, senior subordinated, subordinated or junior
subordinated, may be issued as convertible debt securities or exchangeable debt
securities.
We have
summarized herein certain terms and provisions of the form of indenture (the
“indenture”). The summary is not complete and is qualified in its entirety by
reference to the actual text of the indenture. The indenture is an exhibit to
the registration statement of which this prospectus is a part. You should read
the indenture for the provisions which may be important to you. The indenture is
subject to and governed by the Trust Indenture Act of 1939, as
amended.
The
indenture does not limit the amount of debt securities which we may issue. We
may issue debt securities up to an aggregate principal amount as we may
authorize from time to time which securities may be in any currency or currency
unit designated by us. The terms of each series of debt securities will be
established by or pursuant to (a) a supplemental indenture, (b) a resolution of
our board of directors, or (c) an officers’ certificate pursuant to authority
granted under a resolution of our board of directors. The prospectus supplement
will describe the terms of any debt securities being offered,
including:
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the title of the debt
securities;
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the limit, if any, upon the
aggregate principal amount or issue price of the debt securities of a
series;
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ranking of the specific series of
debt securities relative to other outstanding indebtedness, including any
debt of any of our
subsidiaries;
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the price or prices at which the
debt securities will be
issued;
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the designation, aggregate
principal amount and authorized denominations of the series of debt
securities;
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the issue date or dates of the
series and the maturity date of the
series;
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whether the securities will be
issued at par or at a premium over or a discount from their face
amount;
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the interest rate, if any, and
the method for calculating the interest rate and basis upon which interest
shall be calculated;
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the right, if any, to extend
interest payment periods and the duration of the
extension;
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the interest payment dates and
the record dates for the interest
payments;
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any mandatory or optional
redemption terms or prepayment, conversion, sinking fund or
exchangeability or convertibility
provisions;
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the currency of denomination of
the securities;
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the place where we will pay
principal, premium, if any, and interest, if any, and the place where the
debt securities may be presented for
transfer;
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if payments of principal of,
premium, if any, or interest, if any, on the debt securities will be made
in one or more currencies or currency units other than that or those in
which the debt securities are denominated, the manner in which the
exchange rate with respect to these payments will be
determined;
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if other than denominations of
$1,000 or multiples of $1,000, the denominations the debt securities will
be issued in;
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whether the debt securities will
be issued in the form of global securities or
certificates;
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the applicability of and
additional provisions, if any, relating to the defeasance of the debt
securities;
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the portion of principal amount
of the debt securities payable upon declaration of acceleration of the
maturity date, if other than the entire principal
amount;
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the currency or currencies, if
other than the currency of the United States, in which principal and
interest will be paid;
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the dates on which premium, if
any, will be paid;
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any addition to or change in the
“Events of Default” described in this prospectus or in the indenture with
respect to the debt securities and any change in the acceleration
provisions described in this prospectus or in the indenture with respect
to the debt securities;
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any addition to or change in the
covenants described in the prospectus or in the indenture with respect to
the debt securities;
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our right, if any, to defer
payment of interest and the maximum length of this deferral period;
and
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other specific terms, including
any additional events of default or
covenants.
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We may
issue debt securities at a discount below their stated principal amount. Even if
we do not issue the debt securities below their stated principal amount, for
United States federal income tax purposes the debt securities may be deemed to
have been issued with a discount because of certain interest payment
characteristics. We will describe in any applicable prospectus supplement the
United States federal income tax considerations applicable to debt securities
issued at a discount or deemed to be issued at a discount, and will describe any
special United States federal income tax considerations that may be applicable
to the particular debt securities.
10
Senior
Debt
Senior
debt securities will rank equally and pari passu with all of our
other unsecured and unsubordinated debt from time to time
outstanding.
Subordinated
Debt
The
indenture does not limit our ability to issue subordinated debt securities. Any
subordination provisions of a particular series of debt securities will be set
forth in the supplemental indenture, board resolution or officers’ certificate
related to that series of debt securities and will be described in the relevant
prospectus supplement.
If this
prospectus is being delivered in connection with a series of subordinated debt
securities, the accompanying prospectus supplement or the information
incorporated by reference in this prospectus will set forth the approximate
amount of senior indebtedness outstanding as of the end of the most recent
fiscal quarter.
Conversion
or Exchange Rights
Debt
securities may be convertible into or exchangeable for our other securities or
property. The terms and conditions of conversion or exchange will be set forth
in the supplemental indenture, board resolution or officers’ certificate related
to that series of debt securities and will be described in the relevant
prospectus supplement. The terms will include, among others, the
following:
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the conversion or exchange
price;
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the conversion or exchange
period;
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provisions regarding our ability
or the ability of the holder to convert or exchange the debt
securities;
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events requiring adjustment to
the conversion or exchange price;
and
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provisions affecting conversion
or exchange in the event of our redemption of the debt
securities.
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Merger,
Consolidation or Sale of Assets
The
indenture prohibits us from merging into or consolidating with any other person
or selling, leasing or conveying substantially all of our assets and the assets
of our subsidiaries, taken as a whole, to any person, unless:
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either we are the continuing
corporation or the successor corporation or the person which acquires by
sale, lease or conveyance substantially all our or our subsidiaries’
assets is a corporation organized under the laws of the United States, any
state thereof, or the District of Columbia, and expressly assumes the due
and punctual payment of the principal of, and premium, if any, and
interest, if any, on all the debt securities and the due performance of
every covenant of the indenture to be performed or observed by us, by
supplemental indenture satisfactory to the trustee, executed and delivered
to the trustee by such
corporation;
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immediately after giving effect
to such transactions, no Event of Default described under the caption
“Events of Default and Remedies” below or event which, after notice or
lapse of time or both would become an Event of Default, has happened and
is continuing; and
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we have delivered to the trustee
an officers’ certificate and an opinion of counsel each stating that such
transaction and such supplemental indenture comply with the indenture
provisions relating to merger, consolidation and sale of
assets.
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Upon any
consolidation or merger with or into any other person or any sale, conveyance,
lease, or other transfer of all or substantially all of our or our subsidiaries’
assets to any person, the successor person shall succeed, and be substituted
for, us under the indenture and each series of outstanding debt securities, and
we shall be relieved of all obligations under the indenture and each series of
outstanding debt securities to the extent we were the predecessor
person.
Events
of Default and Remedies
When we
use the term “Event of Default” in the indenture with respect to the debt
securities of any series, we mean:
(1) default
in paying interest on the debt securities when it becomes due and the default
continues for a period of 30 days or more;
(2) default
in paying principal, or premium, if any, on the debt securities when
due;
(3) default
is made in the payment of any sinking or purchase fund or analogous obligation
when the same becomes due, and such default continues for 30 days or
more;
(4) default
in the performance, or breach, of any covenant or warranty in the indenture
(other than defaults specified in clause (1), (2) or (3) above) and the default
or breach continues for a period of 60 days or more after we receive written
notice of such default from the trustee or we and the trustee receive notice
from the holders of at least 25% in aggregate principal amount of the
outstanding debt securities of the series;
(5) certain
events of bankruptcy, insolvency, reorganization, administration or similar
proceedings with respect to us have occurred; and
(6) any
other Event of Default provided with respect to debt securities of that series
that is set forth in the applicable prospectus supplement accompanying this
prospectus.
No Event
of Default with respect to a particular series of debt securities (except as to
certain events of bankruptcy, insolvency or reorganization) necessarily
constitutes an Event of Default with respect to any other series of debt
securities. The occurrence of certain Events of Default or an acceleration under
the indenture may constitute an event of default under certain of our other
indebtedness that we may have outstanding from time to time. Unless otherwise
provided by the terms of an applicable series of debt securities, if an Event of
Default under the indenture occurs with respect to the debt securities of any
series and is continuing, then the trustee or the holders of not less than 51%
of the aggregate principal amount of the outstanding debt securities of that
series may by written notice require us to repay immediately the entire
principal amount of the outstanding debt securities of that series (or such
lesser amount as may be provided in the terms of the securities), together with
all accrued and unpaid interest and premium, if any. In the case of an Event of
Default resulting from certain events of bankruptcy, insolvency or
reorganization, the principal (or such specified amount) of and accrued and
unpaid interest, if any, on all outstanding debt securities will become and be
immediately due and payable without any declaration or other act on the part of
the trustee or any holder of outstanding debt securities. We refer you to the
prospectus supplement relating to any series of debt securities that are
discount securities for the particular provisions relating to acceleration of a
portion of the principal amount of such discount securities upon the occurrence
of an Event of Default.
After a
declaration of acceleration, the holders of a majority in aggregate principal
amount of outstanding debt securities of any series may rescind this accelerated
payment requirement if all existing Events of Default, except for nonpayment of
the principal on the debt securities of that series that has become due solely
as a result of the accelerated payment requirement, have been cured or waived
and if the rescission of acceleration would not conflict with any judgment or
decree. The holders of a majority in aggregate principal amount of the
outstanding debt securities of any series also have the right to waive past
defaults, except a default in paying principal or interest on any outstanding
debt security, or in respect of a covenant or a provision that cannot be
modified or amended without the consent of all holders of the debt securities of
that series.
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No holder
of any debt security may seek to institute a proceeding with respect to the
indenture unless such holder has previously given written notice to the trustee
of a continuing Event of Default, the holders of not less than 51% in aggregate
principal amount of the outstanding debt securities of the series have made a
written request to the trustee to institute proceedings in respect of the Event
of Default, the holder or holders have offered reasonable indemnity to the
trustee and the trustee has failed to institute such proceeding within 60 days
after it received this notice. In addition, within this 60-day period the
trustee must not have received directions inconsistent with this written request
by holders of a majority in aggregate principal amount of the outstanding debt
securities of that series. These limitations do not apply, however, to a suit
instituted by a holder of a debt security for the enforcement of the payment of
principal, interest or any premium on or after the due dates for such
payment.
During
the existence of an Event of Default actually known to a responsible officer of
the trustee, the trustee is required to exercise the rights and powers vested in
it under the indenture and use the same degree of care and skill in its exercise
as a prudent person would under the circumstances in the conduct of that
person’s own affairs. If an Event of Default has occurred and is continuing, the
trustee is not under any obligation to exercise any of its rights or powers at
the request or direction of any of the holders unless the holders have offered
to the trustee security or indemnity reasonably satisfactory to the trustee.
Subject to certain provisions, the holders of a majority in aggregate principal
amount of the outstanding debt securities of any series have the right to direct
the time, method and place of conducting any proceeding for any remedy available
to the trustee, or exercising any trust, or power conferred on the
trustee.
The
trustee will, within 90 days after receiving notice of any default, give notice
of the default to the holders of the debt securities of that series, unless the
default was already cured or waived. Unless there is a default in paying
principal, interest or any premium when due, the trustee can withhold giving
notice to the holders if it determines in good faith that the withholding of
notice is in the interest of the holders. In the case of a default specified in
clause (4) above describing Events of Default, no notice of default to the
holders of the debt securities of that series will be given until 60 days after
the occurrence of the event of default.
The
indenture requires us, within 120 days after the end of our fiscal year, to
furnish to the trustee a statement as to compliance with the indenture. The
indenture provides that the trustee may withhold notice to the holders of debt
securities of any series of any Event of Default (except in payment on any debt
securities of that series) with respect to debt securities of that series if it
in good faith determines that withholding notice is in the interest of the
holders of those debt securities.
Modification
and Waiver
The
indenture may be amended or modified without the consent of any holder of debt
securities in order to:
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evidence a successor to the
trustee;
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cure ambiguities, defects or
inconsistencies;
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provide for the assumption of our
obligations in the case of a merger or consolidation or transfer of all or
substantially all of our assets that complies with the covenant described
under “— Merger, Consolidation or Sale of
Assets”;
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make any change that would
provide any additional rights or benefits to the holders of the debt
securities of a series;
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add guarantors or co-obligors
with respect to the debt securities of any
series;
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secure the debt securities of a
series;
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establish the form or forms of
debt securities of any
series;
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add additional Events of Default
with respect to the debt securities of any
series;
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add additional provisions as may
be expressly permitted by the Trust Indenture
Act;
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maintain the qualification of the
indenture under the Trust Indenture Act;
or
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make any change that does not
adversely affect in any material respect the interests of any
holder.
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Other
amendments and modifications of the indenture or the debt securities issued may
be made with the consent of the holders of not less than a majority in aggregate
principal amount of the outstanding debt securities of each series affected by
the amendment or modification. However, no modification or amendment may,
without the consent of the holder of each outstanding debt security
affected:
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change the maturity date or the
stated payment date of any payment of premium or interest payable on the
debt securities;
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reduce the principal amount, or
extend the fixed maturity, of the debt
securities;
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change the method of computing
the amount of principal or any interest of any debt
security;
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change or waive the redemption or
repayment provisions of the debt
securities;
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change the currency in which
principal, any premium or interest is paid or the place of
payment;
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reduce the percentage in
principal amount outstanding of debt securities of any series which must
consent to an amendment, supplement or waiver or consent to take any
action;
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impair the right to institute
suit for the enforcement of any payment on the debt
securities;
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waive a payment default with
respect to the debt
securities;
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reduce the interest rate or
extend the time for payment of interest on the debt
securities;
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adversely affect the ranking or
priority of the debt securities of any series;
or
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release any guarantor or
co-obligor from any of its obligations under its guarantee or the
indenture, except in compliance with the terms of the
indenture.
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Satisfaction,
Discharge and Covenant Defeasance
We may
terminate our obligations under the indenture with respect to the outstanding
debt securities of any series, when:
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either:
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all debt securities of any series
issued that have been authenticated and delivered have been delivered to
the trustee for cancellation;
or
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all the debt securities of any
series issued that have not been delivered to the trustee for cancellation
have become due and payable, will become due and payable within one year,
or are to be called for redemption within one year and we have made
arrangements satisfactory to the trustee for the giving of notice of
redemption by such trustee in our name and at our expense, and in each
case, we have irrevocably deposited or caused to be deposited with the
trustee sufficient funds to pay and discharge the entire indebtedness on
the series of debt securities;
and
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we have paid or caused to be paid
all other sums then due and payable under the indenture;
and
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we have delivered to the trustee
an officers’ certificate and an opinion of counsel, each stating that all
conditions precedent under the indenture relating to the satisfaction and
discharge of the indenture have been complied
with.
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We may
elect to have our obligations under the indenture discharged with respect to the
outstanding debt securities of any series (“legal defeasance”). Legal defeasance
means that we will be deemed to have paid and discharged the entire indebtedness
represented by the outstanding debt securities of such series under the
indenture, except for:
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the rights of holders of the debt
securities to receive principal, interest and any premium when
due;
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our obligations with respect to
the debt securities concerning issuing temporary debt securities,
registration of transfer of debt securities, mutilated, destroyed, lost or
stolen debt securities and the maintenance of an office or agency for
payment for security payments held in
trust;
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the rights, powers, trusts,
duties and immunities of the trustee;
and
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the defeasance provisions of the
indenture.
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In
addition, we may elect to have our obligations released with respect to certain
covenants in the indenture (“covenant defeasance”). If we so elect, any failure
to comply with these obligations will not constitute a default or an event of
default with respect to the debt securities of any series. In the event covenant
defeasance occurs, certain events, not including non-payment, bankruptcy and
insolvency events, described under “Events of Default and Remedies,” will no
longer constitute an event of default for that series.
In order
to exercise either legal defeasance or covenant defeasance with respect to
outstanding debt securities of any series:
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we must irrevocably have
deposited or caused to be deposited with the trustee as trust funds for
the purpose of making the following payments, specifically pledged as
security for, and dedicated solely to the benefits of the holders of the
debt securities of a series:
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money in an amount;
or
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U.S. government obligations (or
equivalent government obligations in the case of debt securities
denominated in other than U.S. dollars or a specified currency) that will
provide, not later than one day before the due date of any payment, money
in an amount; or
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a combination of money and U.S.
government obligations (or equivalent government obligations, as
applicable),
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in each
case sufficient, in the written opinion (with respect to U.S. or equivalent
government obligations or a combination of money and U.S. or equivalent
government obligations, as applicable) of a nationally recognized firm of
independent public accountants to pay and discharge, and which shall be applied
by the trustee to pay and discharge, all of the principal (including mandatory
sinking fund payments), interest and any premium at due date or
maturity;
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in the case of legal defeasance,
we have delivered to the trustee an opinion of counsel stating that, under
then applicable federal income tax law, the holders of the debt securities
of that series will not recognize income, gain or loss for federal income
tax purposes as a result of the deposit, defeasance and discharge to be
effected and will be subject to the same federal income tax as would be
the case if the deposit, defeasance and discharge did not
occur;
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in the case of covenant
defeasance, we have delivered to the trustee an opinion of counsel to the
effect that the holders of the debt securities of that series will not
recognize income, gain or loss for federal income tax purposes as a result
of the deposit and covenant defeasance to be effected and will be subject
to the same federal income tax as would be the case if the deposit and
covenant defeasance did not
occur;
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no event of default or default
with respect to the outstanding debt securities of that series has
occurred and is continuing at the time of such deposit after giving effect
to the deposit or, in the case of legal defeasance, no default relating to
bankruptcy or insolvency has occurred and is continuing at any time on or
before the 91st day after the date of such deposit, it being understood
that this condition is not deemed satisfied until after the 91st
day;
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the legal defeasance or covenant
defeasance will not cause the trustee to have a conflicting interest
within the meaning of the Trust Indenture Act, assuming all debt
securities of a series were in default within the meaning of such
Act;
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the legal defeasance or covenant
defeasance will not result in a breach or violation of, or constitute a
default under, any other agreement or instrument to which we are a
party;
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if prior to the stated maturity
date, notice shall have been given in accordance with the provisions of
the indenture;
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the legal defeasance or covenant
defeasance will not result in the trust arising from such deposit
constituting an investment company within the meaning of the Investment
Company Act of 1940, as amended, unless the trust is registered under such
Act or exempt from registration;
and
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we have delivered to the trustee
an officers’ certificate and an opinion of counsel stating that all
conditions precedent with respect to the legal defeasance or covenant
defeasance have been complied
with.
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Covenants
We will
set forth in the applicable prospectus supplement any restrictive covenants
applicable to any issue of debt securities.
Paying
Agent and Registrar
The
trustee will initially act as paying agent and registrar for all debt
securities. We may change the paying agent or registrar for any series of debt
securities without prior notice, and we or any of our subsidiaries may act as
paying agent or registrar.
Form
of Securities
Each debt
security will be represented either by a certificate issued in definitive form
to a particular investor or by one or more global securities representing the
entire issuance of the series of debt securities. Certificated securities will
be issued in definitive form and global securities will be issued in registered
form. Definitive securities name you or your nominee as the owner of the
security, and in order to transfer or exchange these securities or to receive
payments other than interest or other interim payments, you or your nominee must
physically deliver the securities to the trustee, registrar, paying agent or
other agent, as applicable. Global securities name a depositary or its nominee
as the owner of the debt securities represented by these global securities. The
depositary maintains a computerized system that will reflect each investor’s
beneficial ownership of the securities through an account maintained by the
investor with its broker/dealer, bank, trust company or other representative, as
we explain more fully below.
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Global
Securities
We may
issue the registered debt securities in the form of one or more fully registered
global securities that will be deposited with a depositary or its custodian
identified in the applicable prospectus supplement and registered in the name of
that depositary or its nominee. In those cases, one or more registered global
securities will be issued in a denomination or aggregate denominations equal to
the portion of the aggregate principal or face amount of the securities to be
represented by registered global securities. Unless and until it is exchanged in
whole for securities in definitive registered form, a registered global security
may not be transferred except as a whole by and among the depositary for the
registered global security, the nominees of the depositary or any successors of
the depositary or those nominees.
If not
described below, any specific terms of the depositary arrangement with respect
to any securities to be represented by a registered global security will be
described in the prospectus supplement relating to those securities. We
anticipate that the following provisions will apply to all depositary
arrangements.
Ownership
of beneficial interests in a registered global security will be limited to
persons, called participants, that have accounts with the depositary or persons
that may hold interests through participants. Upon the issuance of a registered
global security, the depositary will credit, on its book-entry registration and
transfer system, the participants’ accounts with the respective principal or
face amounts of the securities beneficially owned by the participants. Any
dealers, underwriters or agents participating in the distribution of the
securities will designate the accounts to be credited. Ownership of beneficial
interests in a registered global security will be shown on, and the transfer of
ownership interests will be effected only through, records maintained by the
depositary, with respect to interests of participants, and on the records of
participants, with respect to interests of persons holding through participants.
The laws of some states may require that some purchasers of securities take
physical delivery of these securities in definitive form. These laws may impair
your ability to own, transfer or pledge beneficial interests in registered
global securities.
So long
as the depositary, or its nominee, is the registered owner of a registered
global security, that depositary or its nominee, as the case may be, will be
considered the sole owner or holder of the securities represented by the
registered global security for all purposes under the indenture. Except as
described below, owners of beneficial interests in a registered global security
will not be entitled to have the securities represented by the registered global
security registered in their names, will not receive or be entitled to receive
physical delivery of the securities in definitive form and will not be
considered the owners or holders of the securities under the indenture.
Accordingly, each person owning a beneficial interest in a registered global
security must rely on the procedures of the depositary for that registered
global security and, if that person is not a participant, on the procedures of
the participant through which the person owns its interest, to exercise any
rights of a holder under the indenture. We understand that under existing
industry practices, if we request any action of holders or if an owner of a
beneficial interest in a registered global security desires to give or take any
action that a holder is entitled to give or take under the indenture, the
depositary for the registered global security would authorize the participants
holding the relevant beneficial interests to give or take that action, and the
participants would authorize beneficial owners owning through them to give or
take that action or would otherwise act upon the instructions of beneficial
owners holding through them.
Principal,
premium, if any, and interest payments on debt securities represented by a
registered global security registered in the name of a depositary or its nominee
will be made to the depositary or its nominee, as the case may be, as the
registered owner of the registered global security. Neither we nor the trustee
or any other agent of ours or the trustee will have any responsibility or
liability for any aspect of the records relating to payments made on account of
beneficial ownership interests in the registered global security or for
maintaining, supervising or reviewing any records relating to those beneficial
ownership interests.
We expect
that the depositary for any of the securities represented by a registered global
security, upon receipt of any payment of principal, premium, interest or other
distribution of underlying securities or other property to holders on that
registered global security, will immediately credit participants’ accounts in
amounts proportionate to their respective beneficial interests in that
registered global security as shown on the records of the depositary. We also
expect that payments by participants to owners of beneficial interests in a
registered global security held through participants will be governed by
standing customer instructions and customary practices, as is now the case with
the securities held for the accounts of customers in bearer form or registered
in “street name,” and will be the responsibility of those
participants.
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If the
depositary for any of these securities represented by a registered global
security is at any time unwilling or unable to continue as depositary or ceases
to be a clearing agency registered under the Exchange Act, and a successor
depositary registered as a clearing agency under the Exchange Act is not
appointed by us within 90 days, we will issue securities in definitive form in
exchange for the registered global security that had been held by the
depositary. Any securities issued in definitive form in exchange for a
registered global security will be registered in the name or names that the
depositary gives to the trustee or other relevant agent of ours or theirs. It is
expected that the depositary’s instructions will be based upon directions
received by the depositary from participants with respect to ownership of
beneficial interests in the registered global security that had been held by the
depositary.
Unless we
state otherwise in a prospectus supplement, the Depository Trust Company (“DTC”)
will act as depositary for each series of debt securities issued as global
securities. DTC has advised us that DTC is a limited-purpose trust
company created to hold securities for its participating organizations
(collectively, the “Participants”) and to facilitate the clearance and
settlement of transactions in those securities between Participants through
electronic book-entry changes in accounts of its Participants. The
Participants include securities brokers and dealers, banks, trust companies,
clearing corporations and certain other organizations. Access to DTC’s system is
also available to other entities such as banks, brokers, dealers and trust
companies that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly (collectively, the “Indirect
Participants”). Persons who are not Participants may beneficially own securities
held by or on behalf of DTC only through the Participants or the Indirect
Participants. The ownership interests in, and transfers of ownership interests
in, each security held by or on behalf of DTC are recorded on the records of the
Participants and the Indirect Participants.
Governing Law
The
indenture and each series of debt securities are governed by, and construed in
accordance with, the laws of the State of New York.
DESCRIPTION
OF WARRANTS
The
following description, together with the additional information we may include
in any applicable prospectus supplements, summarizes the material terms and
provisions of the warrants that we may offer under this prospectus and the
related warrant agreements and warrant certificates. While the terms
summarized below will apply generally to any warrants that we may offer, we will
describe the particular terms of any series of warrants in more detail in the
applicable prospectus supplement. If we indicate in the prospectus
supplement, the terms of any warrants offered under that prospectus supplement
may differ from the terms described below. Specific warrant
agreements will contain additional important terms and provisions and will be
incorporated by reference as an exhibit to the registration statement that
includes this prospectus.
General
We may
issue warrants for the purchase of common stock, preferred stock or debt
securities in one or more series. We may issue warrants independently
or together with common stock, preferred stock and debt securities, and the
warrants may be attached to or separate from these securities.
We will
evidence each series of warrants by warrant certificates that we will issue
under a separate agreement. We may enter into a warrant agreement
with a warrant agent. If we engage a warrant agent, each warrant
agent will be a bank that we select which has its principal office in the United
States and a combined capital and surplus of at least $50,000,000. We
will indicate the name and address of the warrant agent in the applicable
prospectus supplement relating to a particular series of warrants.
Before
exercising their warrants, holders of warrants will not have any of the rights
of holders of the securities purchasable upon such exercise,
including:
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in the case of warrants to
purchase debt securities, the right to receive payments of principal of,
or premium, if any, or interest on, the debt securities purchasable upon
exercise or to enforce covenants in the applicable indenture;
or
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in the case of warrants to
purchase common stock or preferred stock, the right to receive dividends,
if any, or, payments upon our liquidation, dissolution or winding up or to
exercise voting rights, if
any.
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Additional
Information
We will
describe in the applicable prospectus supplement the terms of the series of
warrants, including:
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the offering price and aggregate
number of warrants offered;
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the currency for which the
warrants may be purchased;
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if applicable, the designation
and terms of the securities with which the warrants are issued and the
number of warrants issued with each such security or each principal amount
of such security;
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if applicable, the date on and
after which the warrants and the related securities will be separately
transferable;
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in the case of warrants to
purchase debt securities, the principal amount of debt securities
purchasable upon exercise of one warrant and the price at, and currency in
which, this principal amount of debt securities may be purchased upon such
exercise;
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in the case of warrants to
purchase common stock or preferred stock, the number of shares of common
stock or preferred stock, as the case may be, purchasable upon the
exercise of one warrant and the price at which these shares may be
purchased upon such
exercise;
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the effect of any merger,
consolidation, sale or other disposition of our business on the warrant
agreement and the warrants;
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the terms of any rights to redeem
or call the warrants;
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any provisions for changes to or
adjustments in the exercise price or number of securities issuable upon
exercise of the warrants;
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the dates on which the right to
exercise the warrants will commence and
expire;
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the manner in which the warrant
agreement and warrants may be
modified;
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a discussion on any material or
special United States federal income tax consequences of holding or
exercising the warrants;
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the terms of the securities
issuable upon exercise of the warrants;
and
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any other specific terms,
preferences, rights or limitations of or restrictions on the
warrants.
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Exercise
of Warrants
Each
warrant will entitle the holder to purchase the securities that we specify in
the applicable prospectus supplement at the exercise price that we describe in
the applicable prospectus supplement. Unless we otherwise specify in
the applicable prospectus supplement, holders of the warrants may exercise the
warrants at any time up to 5 p.m., Eastern time, on the expiration date that we
set forth in the applicable prospectus supplement. After the close of
business on the expiration date, unexercised warrants will become
void.
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Holders
of the warrants may exercise the warrants by delivering the warrant certificate
representing the warrants to be exercised together with specified information,
and paying the required amount to the warrant agent in immediately available
funds, as provided in the applicable prospectus supplement. We will
set forth on the reverse side of the warrant certificate and in the applicable
prospectus supplement the information that the holder of the warrant will be
required to deliver to the warrant agent.
Upon
receipt of the required payment and the warrant certificate properly completed
and duly executed at the corporate trust office of the warrant agent or any
other office indicated in the applicable prospectus supplement, we will issue
and deliver the securities purchasable upon such exercise. If fewer
than all of the warrants represented by the warrant certificate are exercised,
then we will issue a new warrant certificate for the remaining amount of
warrants. If we so indicate in the applicable prospectus supplement,
holders of the warrants may surrender securities as all or part of the exercise
price for warrants.
Enforceability
of Rights by Holders of Warrants
Each
warrant agent will act solely as our agent under the applicable warrant
agreement and will not assume any obligation or relationship of agency or trust
with any holder of any warrant. A single bank or trust company may
act as warrant agent for more than one issue of warrants. A warrant
agent will have no duty or responsibility in case of any default by us under the
applicable warrant agreement or warrant, including any duty or responsibility to
initiate any proceedings at law or otherwise, or to make any demand upon
us. Any holder of a warrant may, without the consent of the related
warrant agent or the holder of any other warrant, enforce by appropriate legal
action its right to exercise, and receive the securities purchasable upon
exercise of, its warrants.
DESCRIPTION
OF UNITS
We may
issue units comprised of one or more of the other securities described in this
prospectus in any combination. Each unit will be issued so that the
holder of the unit is also the holder of each security included in the
unit. Thus, the holder of a unit will have the rights and obligations
of a holder of each included security. The unit agreement under which
a unit is issued may provide that the securities included in the unit may not be
held or transferred separately, at any time or at any time before a specified
date. The applicable prospectus supplement may describe:
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the designation and terms of the
units and of the securities comprising the units, including whether and
under what circumstances those securities may be held or transferred
separately;
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any provisions for the issuance,
payment, settlement, transfer or exchange of the units or of the
securities comprising the
units;
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the terms of the unit agreement
governing the units;
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United States federal income tax
considerations relevant to the units;
and
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whether the units will be issued
in fully registered global
form.
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This
summary of certain general terms of units and any summary description of units
in the applicable prospectus supplement do not purport to be complete and are
qualified in their entirety by reference to all provisions of the applicable
unit agreement and, if applicable, collateral arrangements and depositary
arrangements relating to such units. The forms of the unit agreements and other
documents relating to a particular issue of units will be filed with the SEC
each time we issue units, and you should read those documents for provisions
that may be important to you.
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PLAN
OF DISTRIBUTION
We may
sell the securities through underwriters or dealers, through agents, or directly
to one or more purchasers. The accompanying prospectus supplement
will describe the terms of the offering of the securities,
including:
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the name or names of any
underwriters;
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the purchase price of the
securities being offered and the proceeds we will receive from the
sale;
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any over-allotment options
pursuant to which underwriters may purchase additional securities from
us;
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any agency fees or underwriting
discounts and other items constituting agents’ or underwriters’
compensation;
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any public offering
price;
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any discounts or concessions
allowed or reallowed or paid to dealers;
and
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any securities exchange or market
on which the securities may be
listed.
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If
underwriters are used in the sale, they will acquire the securities for their
own account and may resell the securities from time to time in one or more
transactions at a fixed public offering price or at varying prices determined at
the time of the sale. The obligations of the underwriters to purchase
the securities will be subject to the conditions set forth in the applicable
underwriting agreement. We may offer the securities to the public
through underwriting syndicates represented by managing underwriters or by
underwriters without a syndicate. Subject to certain conditions, the
underwriters will be obligated to purchase all the securities offered by the
prospectus supplement. We may change from time to time the public
offering price and any discounts or concessions allowed or reallowed or paid to
dealers. We may use underwriters with whom we have a material
relationship. We will describe such relationships in the prospectus
supplement naming the underwriter and the nature of any such
relationship.
We may
engage in “at the market” offerings of our common stock, which are offerings
into an existing trading market, at other than a fixed price, on or through the
facilities of a national securities exchange or to or through a market maker
otherwise than on an exchange.
We may
sell securities directly or through agents we designate from time to
time. We will name any agent involved in the offering and sale of the
securities, and we will describe any commissions we will pay the agent in the
prospectus supplement. Unless the prospectus supplement states
otherwise, our agent will act on a best efforts basis for the period of its
appointment.
We may
enter into derivative transactions with third parties, or sell securities not
covered by this prospectus to third parties in privately negotiated
transactions. If the applicable prospectus supplement indicates, in
connection with those derivatives, the third parties may sell securities covered
by this prospectus and the applicable prospectus supplement, including short
sale transactions. If so, the third party may use securities pledged
by us or borrowed from us or others to settle those sales or to close out any
related open borrowings of common shares, and may use securities received from
us in settlement of those derivatives to close out any related open borrowings
of common shares. The third party in such sale transactions will be
an underwriter and, if not identified in this prospectus, will be identified in
the applicable prospectus supplement or a post-effective amendment to this
registration statement.
All
securities we offer other than common stock will be new issues of securities
with no established trading market. Any underwriters may make a
market in these securities, but will not be obligated to do so and may
discontinue any market making at any time without notice. We cannot
guarantee the liquidity of the trading markets for any
securities.
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We
may provide agents and underwriters with indemnification against civil
liabilities related to this offering, including liabilities under the Securities
Act, or contribution with respect to payments that the agents or underwriters
may make with respect to these liabilities. Agents and underwriters
may engage in transactions with, or perform services for, us in the ordinary
course of business.
Rules of
the Securities and Exchange Commission may limit the ability of any underwriters
to bid for or purchase securities before the distribution of the securities is
completed. However, underwriters may engage in the following
activities in accordance with the rules:
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Stabilizing
transactions —
Underwriters may make bids or purchases for the purpose of pegging, fixing
or maintaining the price of the shares, so long as stabilizing bids do not
exceed a specified maximum.
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Over-allotments
and syndicate covering transactions — Underwriters may sell more
shares of our common stock than the number of shares that they have
committed to purchase in any underwritten offering. This
over-allotment creates a short position for the
underwriters. This short position may involve either “covered”
short sales or “naked” short sales. Covered short sales are
short sales made in an amount not greater than the underwriters’
over-allotment option to purchase additional shares in any underwritten
offering. The underwriters may close out any covered short
position either by exercising their over-allotment option or by purchasing
shares in the open market. To determine how they will close the
covered short position, the underwriters will consider, among other
things, the price of shares available for purchase in the open market, as
compared to the price at which they may purchase shares through the
over-allotment option. Naked short sales are short sales in
excess of the over-allotment option. The underwriters must
close out any naked position by purchasing shares in the open
market. A naked short position is more likely to be created if
the underwriters are concerned that, in the open market after pricing,
there may be downward pressure on the price of the shares that could
adversely affect investors who purchase shares in the
offering.
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Penalty
bids — If
underwriters purchase shares in the open market in a stabilizing
transaction or syndicate covering transaction, they may reclaim a selling
concession from other underwriters and selling group members who sold
those shares as part of the
offering.
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Similar
to other purchase transactions, an underwriter’s purchases to cover the
syndicate short sales or to stabilize the market price of our securities may
have the effect of raising or maintaining the market price of our securities or
preventing or mitigating a decline in the market price of our
securities. As a result, the price of the securities may be higher
than the price that might otherwise exist in the open market. The
imposition of a penalty bid might also have an effect on the price of shares if
it discourages resales of the securities.
If
commenced, the underwriters may discontinue any of the activities at any
time.
In
compliance with guidelines of the Financial Industry Regulatory Authority, or
FINRA, the maximum consideration or discount to be received by any FINRA member
or independent broker dealer may not exceed 8% of the aggregate amount of the
securities offered pursuant to this prospectus and any applicable prospectus
supplement.
Equity
Line of Credit.
On May
19, 2010, we entered into what is sometimes termed as an equity line of credit
arrangement with Commerce Court Small Cap Value Fund, Ltd., or Commerce
Court. Specifically we entered into a Common Stock Purchase
Agreement, or the Purchase Agreement, with which provides that, upon the terms
and subject to the conditions set forth therein, Commerce Court is committed to
purchase up to $20,000,000 worth of shares of our common stock over the
approximately 24-month term of the Purchase Agreement; provided, however, that
in no event may we issue under the Purchase Agreement more than 10,536,208
shares of common stock, which is approximately 19.9% of our outstanding shares
of common stock on the closing date of the Purchase Agreement, less 63,792
shares of common stock issued to Commerce Court on the closing date in payment
of its commitment fee.
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From time
to time over the term of the Purchase Agreement, and at our sole discretion, we
may present Commerce Court with draw down notices to purchase our common stock
over ten consecutive trading days or such other period mutually agreed upon by
us and Commerce Court, or the draw down period, with each draw down subject to
limitations based on the price of our common stock and a limit of 2.5% of our
market capitalization at the time of such draw down (which limitations may be
waived or modified by mutual agreement of the parties). We are able to
present Commerce Court with up to 24 draw down notices during the term of the
Purchase Agreement, with only one such draw down notice allowed per draw down
period and a minimum of five trading days required between each draw down
period.
Once
presented with a draw down notice, Commerce Court is required to purchase a pro
rata portion of the shares on each trading day during the trading period on
which the daily volume weighted average price for our common stock exceeds a
threshold price determined by us for such draw down. The per share
purchase price for these shares will equal the daily volume weighted average
price of our common stock on each date during the draw down period on which
shares are purchased, less a discount of 5.0%, based on the trading price of our
common stock. If the daily volume weighted average price of our common
stock falls below the threshold price on any trading day during a draw down
period, the Purchase Agreement provides that Commerce Court will not be required
to purchase the pro-rata portion of shares of common stock allocated to that
day. However, at its election, Commerce Court may buy the pro-rata
portion of shares allocated to that day at the threshold price less the discount
described above.
The
Purchase Agreement also provides that, from time to time and at our sole
discretion, we may grant Commerce Court the right to exercise one or more
options to purchase additional shares of our common stock during each draw down
period for an amount of shares specified by us based on the trading price of our
common stock. Upon Commerce Court’s exercise of an option, we would sell
to Commerce Court the shares of our common stock subject to the option at a
price equal to the greater of the daily volume weighted average price of our
common stock on the day Commerce Court notifies us of its election to exercise
its option or the threshold price for the option determined by us, less a
discount calculated in the same manner as it is calculated in the draw down
notices.
In
addition to our issuance of shares of common stock to Commerce Court pursuant to
the Purchase Agreement, the registration statement to which this prospectus
relates also covers the sale of those shares from time to time by Commerce Court
to the public. Commerce Court is an “underwriter” within the meaning
of Section 2(a)(11) of the Securities Act of 1933, as amended, or the
Securities Act.
Commerce
Court has informed us that it will use an unaffiliated broker-dealer to
effectuate all sales, if any, of common stock that it may purchase from us
pursuant to the Purchase Agreement. Such sales will be made on the NYSE
Amex at prices and at terms then prevailing or at prices related to the then
current market price. Each such unaffiliated broker-dealer will be an
underwriter within the meaning of Section 2(a)(11) of the Securities
Act. Commerce Court has informed us that each such broker-dealer will
receive commissions from Commerce Court which will not exceed customary
brokerage commissions. Commerce Court may also pay other expenses
associated with the sale of the common stock it acquires pursuant to the
Purchase Agreement.
In
connection with this transaction, a filing was made with the Corporate Finance
Department of the Financial Industry Regulatory Authority (“FINRA”), pursuant to
FINRA Rule 5110, and we have received written confirmation from FINRA to
the effect that FINRA’s Corporate Finance Department has determined not to raise
any objection with respect to the fairness or reasonableness of the terms of the
Purchase Agreement or the transactions contemplated thereby.
The
shares of common stock issued under the Purchase Agreement may be sold in one or
more of the following manners:
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ordinary
brokerage transactions and transactions in which the broker solicits
purchasers; or
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a
block trade in which the broker or dealer so engaged will attempt to sell
the shares as agent, but may position and resell a portion of the block as
principal to facilitate the
transaction.
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Commerce
Court has agreed that during the periods listed above neither it nor any of its
affiliates will enter into a short position with respect to shares of our common
stock except that Commerce Court may sell shares that it is obligated to
purchase under a pending draw down notice but has not yet taken possession of so
long as Commerce Court covers any such sales with the shares purchased pursuant
to such draw down notice. Commerce Court has further agreed that during
the periods listed above it will not grant any option to purchase or acquire any
right to dispose or otherwise dispose for value of any shares of our common
stock or any securities convertible into, or exchangeable for, or warrants to
purchase, any shares of our common stock, or enter into any swap, hedge or other
agreement that transfers, in whole or in part, the economic risk of ownership of
our common stock, except for the sales permitted by the prior
sentence.
In
addition, Commerce Court and any unaffiliated broker-dealer will be subject to
liability under the federal securities laws and must comply with the
requirements of the Securities Act and the Securities Exchange Act or 1934, as
amended, or the Exchange Act, including, without limitation, Rule 10b-5 and
Regulation M under the Exchange Act. These rules and regulations may
limit the timing of purchases and sales of shares of common stock by Commerce
Court or any unaffiliated broker-dealer. Under these rules and
regulations, Commerce Court and any unaffiliated broker-dealer:
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may
not engage in any stabilization activity in connection with our
securities;
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must
furnish each broker which offers shares of our common stock covered by the
prospectus that is a part of our registration statement with the number of
copies of such prospectus and any prospectus supplement which are required
by each broker; and
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may
not bid for or purchase any of our securities or attempt to induce any
person to purchase any of our securities other than as permitted under the
Exchange Act.
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These
restrictions may affect the marketability of the shares of common stock
purchased and sold by Commerce Court and any unaffiliated
broker-dealer.
We have
agreed to indemnify and hold harmless Commerce Court and each person who
controls Commerce Court against certain liabilities, including certain
liabilities under the Securities Act. We have agreed to pay up to $35,000
of Commerce Court’s reasonable attorneys’ fees and expenses incurred by Commerce
Court in connection with the preparation, negotiation, execution and delivery of
the Purchase Agreement and related transaction documentation. In addition,
during any full calendar quarter that falls within the term of the Purchase
Agreement when no shares of our common stock have been purchased or sold because
we did not deliver a draw down notice, we are required to pay all reasonable
attorneys’ fees and expenses, up to $5,000, representing the due diligence
expenses incurred by Commerce Court during such calendar
quarter. Further, if we issue a draw down notice and fail to deliver
the shares to Commerce Court on the applicable settlement date, and such failure
continues for ten trading days, we have agreed to pay Commerce Court liquidated
damages in cash or restricted shares of our common stock, at Commerce Court’s
option.
Commerce
Court has agreed to indemnify and hold harmless us and each of our directors,
officers and persons who control us against certain liabilities under the
Securities Act that may be based upon written information furnished by Commerce
Court to us for inclusion in this prospectus or any other prospectus or
prospectus supplement related to this transaction.
Upon each
sale of our common stock to Commerce Court under the Purchase Agreement, we have
agreed to pay Reedland Capital Partners, an Institutional Division of Financial
West Group, Member FINRA/SIPC, or FWG, a placement fee equal to 2% of the
aggregate dollar amount of common stock purchased by Commerce Court. We
also have agreed to pay up to $10,000 of FWG’s attorneys’ fees and expenses
incurred by FWG in connection with the preparation with filings required to be
made on behalf of FWG in connection with the Purchase Agreement and the related
transaction pursuant to FINRA Rule 5110. We have agreed to indemnify
and hold harmless FWG and each person who controls FWG against certain
liabilities, including certain liabilities under the Securities
Act.
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In
consideration of Commerce Court’s execution and delivery of the Purchase
Agreement, we agreed to issue to Commerce Court upon the execution of the
Purchase Agreement 63,792 shares of our common stock. The
registration statement to which this prospectus relates covers the issuance of
those shares to Commerce Court, as well as the sale of those shares from time to
time by Commerce Court to the public.
VALIDITY OF
SECURITIES
The
validity of the issuance of the securities offered by this prospectus will be
passed upon for us by Lowenstein Sandler PC, Roseland, New Jersey.
EXPERTS
The consolidated
financial statements incorporated in this prospectus by reference from our
Annual Report on Form 10-K for the year ended December 31, 2009, have been
audited by Holtz Rubenstein Reminick LLP, an independent registered public
accounting firm, as stated in their report dated March 31, 2010 with respect to
their audit of the balance sheets of NeoStem, Inc. and its 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, which report appears in our
Annual Report on Form 10-K for the fiscal year ended December 31, 2009 and is
incorporated herein by reference, and has been so incorporated in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
INCORPORATION
OF CERTAIN DOCUMENTS BY REFERENCE
The
following documents previously filed by us with the SEC are incorporated in this
registration statement by reference.
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Annual Report on Form 10-K for
the year ended December 31, 2009, filed on March 31,
2010.
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(b)
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Definitive Proxy Statement for
our 2010 Annual Meeting of Stockholders, filed on April 28,
2010.
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(c)
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Quarterly
Report on Form 10-Q for the quarter ended March 31, 2010, filed on May 17,
2010.
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(d)
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Current Reports on Form 8-K and
amendments thereto filed on November 4, 2009 (as amended on January 5,
2010), January 7, 2010, February 12, 2010, February 19, 2010, March 16,
2010 (as amended on April 6, 2010), March 17, 2010, March 18, 2010, April
1, 2010 and May 19, 2010 (excluding any information deemed furnished
pursuant to Item 2.02 or Item 7.01 of any such Current Report on Form
8-K).
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Description of our units, common
stock and Class A warrants contained in the Registration Statement on Form
8-A, declared effective on August 8, 2007 (including any amendment or
report filed with the SEC for the purpose of updating such
description).
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All
reports and other documents that we file pursuant to Section 13(a) and 13(c), 14
and 15(d) of the Exchange Act prior to the filing of a post-effective amendment
which indicates that all securities offered hereunder have been sold or which
deregisters all such securities then remaining unsold shall be deemed to be
incorporated by reference in this prospectus and to be a apart hereof from the
date of filing of such reports and documents.
We will
provide to each person, including any beneficial owner, to whom a prospectus is
delivered, copies of these filings, excluding all exhibits unless an exhibit has
been specifically incorporated by reference in such filings, at no cost, upon
written or oral request made to:
NeoStem,
Inc.
420
Lexington Avenue, Suite 450
New York,
NY 10170
Catherine
M. Vaczy, Esq., Vice President and General Counsel
(212)
584-4180
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WHERE
YOU CAN FIND MORE INFORMATION
We have
filed a registration statement on Form S-3 with the Securities and Exchange
Commission under the Securities Act of 1933. This prospectus omits
some information and exhibits included in the registration statement, copies of
which may be obtained upon payment of a fee prescribed by the Commission or may
be examined free of charge at the principal office of the SEC in Washington,
D.C.
We are
subject to the informational requirements of the Securities Exchange Act of 1934
and in accordance therewith file reports, proxy statements and other information
with the SEC. The reports, proxy statements and other information
filed by us with the SEC can be inspected and copied at the Public Reference
Room maintained by the SEC at 100 Fifth Street, N.E., Washington, D.C.
20549. Copies of filings can be obtained from the Public Reference
Room maintained by the SEC by calling the SEC at 1-800-SEC-0330. In
addition, the Commission maintains a website that contains reports, proxy and
informational statements and other information filed electronically with the SEC
at http://www.sec.gov.
You may
request, orally or in writing, a copy of these documents, which will be provided
to you at no cost, by contacting Catherine M. Vaczy, Esq., Vice President and
General Counsel, NeoStem, Inc., 420 Lexington Avenue, Suite 450, New York, NY
10170, telephone (212) 584-4180.
You
should rely only on the information contained in this prospectus, including
information incorporated by reference as described above, or any prospectus
supplement that we have specifically referred you to. We have not
authorized anyone else to provide you with different information. You
should not assume that the information in this prospectus or any prospectus
supplement is accurate as of any date other than the date on the front of those
documents or that any document incorporated by reference is accurate as of any
date other than its filing date. You should not consider this
prospectus to be an offer or solicitation relating to the securities in any
jurisdiction in which such an offer or solicitation relating to the securities
is not authorized. Furthermore, you should not consider this
prospectus to be an offer or solicitation relating to the securities if the
person making the offer or solicitation is not qualified to do so, or if it is
unlawful for you to receive such an offer or solicitation.
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