September
14, 2009
Ms. Tia Jenkins
Senior Assistant Chief
Accountant
Office of Beverages, Apparel and
Healthcare Services
Division of Corporate
Finance
United States Securities and Exchange
Commission
100 F. Street, N.E.
Washington, D.C.
20549
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Re:
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NeoStem,
Inc. (the "Company" or "NeoStem")
Supplemental
Response to
Form
10-K for the fiscal year ended December 31, 2008 Filed March 31,
2009
File
No. 001-33650
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Dear Ms.
Jenkins:
We are in receipt of your supplemental
response letter dated September 10, 2009 (the "Staff Response Letter") to our
letter dated August 31, 2009 (the “Company Response Letter”) regarding the
review by the Securities and Exchange Commission (the "Commission") of the
Annual Report on Form 10-K of the Company for the
year ended December 31, 2008 (the "2008 Annual Report").
The comments and responses set forth
below are keyed to the numbering of the comments and the headings used in the
Staff Response Letter.
General
1. To
the extent that your Form 10-K is revised in response to our comments below,
please revise the subsequent interim filing on Form 10-Q to conform to the
changes.
Company
Response:
The
Company will make conforming changes to its Form 10-Q to the extent that the
Form 10-K is revised.
420
Lexington Avenue, Suite 450, New York, NY 10170 212.584.4180
main 646.514.7787 fax
1
Form 10-K for the Fiscal
Year Ended December 31, 2008
Item 7,
Management’s Discussion and Analysis of Financial Condition and Results of
Operations, page
64
Off Balance Sheet
Arrangements, page 76
2. You
state that you do not have any off-balance sheet
arrangements. However, we note from your disclosure in footnote 9 on
page F-24 that you have significant common stock purchase warrants that are
issued and outstanding, most of which are classified as equity. As
these instruments meet the definition of an off-balance sheet arrangement,
please tell us your consideration and assessment of materiality for the required
disclosure under Item 303(a)(4) of Regulation S-K.
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Company
Response:
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The
Company respectfully submits that none of the Company’s common stock purchase
warrants classified as equity meet the definition of an “off-balance sheet
arrangement” under Item 303(a)(4) of Regulation S-K. None of such
warrants fall within the definition of a “derivative instrument” nor would they
ever have been accounted for as such under any circumstances (with or without
regard to the exclusion provided by SFAS No. 133) as contemplated by Item
303(a)(4)(ii)(D). They were all equity issues, the Company valued
them at fair value and recorded them as equity on the balance sheet at the issue
date. The remaining portion of the Company’s common stock purchase
warrants, which have been classified and recorded as derivative liabilities
directly on the balance sheet, also would not fall within the purview of
off-balance sheet arrangements.
Note 2 — Summary of
Significant Accounting Policies, page F-10
Revenue Recognition, page
F-10
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3.
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We
note your response to our comment two of our letter dated July 24,
2009. Please disclose in future filings that your revenue is
reported on a gross basis and explain the rationale for this
presentation. Please explain and disclose if you are obligated
to remit the portion attributable to the physician’s professional service
even if you have not received payment from
patient.
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Company
Response:
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The
Company will make this disclosure in future
filings.
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420
Lexington Avenue, Suite 450, New York, NY 10170 212.584.4180
main 646.514.7787 fax
2
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4.
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We
note your response to our comment three of our letter dated July 24, 2009
and do not agree with your analysis that start-up fees can be immediately
recognized. It appears that you receive start-up fees in
exchange for a physician signing a collection center agreement which has a
term of three to five years and promoting stem cell collection to
patients. Please provide us the
following:
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a.
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the
amount of start-up fees you received for each of the past three
years;
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b.
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the
start-up fees you recognized immediately in revenue for each of the three
years;
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c.
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the
amount you would recognize as revenue for each of the three years if you
amortized start up fees over the lives of
contracts;
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d.
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explain
why the amount reported as start up fees in 2008 is lower for immediate
recognition ($31,000) while the adjusted amount if you modified your
revenue recognition to be recognized ratably over the life of the contract
is higher ($90,050).
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e.
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a
comprehensive SAB 99 analysis of the effects of the misstatement for the
past three years. Describe for us in detail, both
quantitatively and qualitatively, the basis used to conclude whether your
financial statements previously issued should continue to be relied
upon. In addition, tell us your consideration of SFAS 154 for
the misstatement.
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Company
Response:
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Please
note that, as stated in the Company Response Letter, during the quarter ended
June 30, 2009, the Company modified its revenue recognition policy to recognize
start-up fees ratably over the life of the contract as it concluded that start
up fees cannot be recognized immediately as revenue, which is reflected in its
Quarterly Report on Form 10-Q for the quarter ended June 30,
2009. Following is a table containing the information requested in
items a, b, c and d, above, with explanatory footnotes, followed by a
comprehensive SAB 99 analysis as requested in item e above, along with a
discussion of the Company’s consideration of SFAS 154.
The
following table also illustrates the overall accounting impact on the Company’s
net loss if such revenue recognition policy had been in place during the year
ended December 31, 2006 and in each subsequent annual reporting
period. The Company
believes that the impact on
the financial position and results of operations of the Company would not have influenced an investor’s
decision to invest in the Company during any of the relevant past
reporting periods, as it is not probable that, in light of the surrounding
circumstances, the judgment of a reasonable person relying upon such reports
would have been influenced or changed as a result of this accounting
treatment. The Company also does not believe that there is a
substantial likelihood that a reasonable person would have viewed such a change
to have been significant in the context of the Company’s financial statements
taken as a whole, or to have altered the total mix of information made
available. For these reasons and the reasons set forth below, we believe that
our previously issued financial statements can continue to be relied upon, and propose to prospectively modify the revenue
recognition policy commencing with the filing of our Form
10-Q for the period ended June 30, 2009, which as noted above has
already occurred. We draw this conclusion
based upon both quantitative and qualitative criteria, as
follows:
420
Lexington Avenue, Suite 450, New York, NY 10170 212.584.4180
main 646.514.7787 fax
3
The
impact of accounting for revenues under a modified revenue recognition policy
and its corresponding impact on net loss for each of the years ended December
31, 2006, 2007 and 2008 would have been as follows, reflecting for each period
the relevant amounts as reported and as adjusted:
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2006
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2007
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2008
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Revenues
as Reported
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Start Up Fees*
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$ 10,000*
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$ 189,000*
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$ 31,000*
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Stem
Cell Collections and Storage
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10,676
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40,967
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51,941
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Shipment
of Cells
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-
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-
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600
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Other
Revenues
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25,048
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1,697
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-
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45,724
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231,664
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83,541
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Revenues
as Adjusted
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Start
Up Fees**
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278**
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14,484**
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93,383**
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Stem
Cell Collections and Storage
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10,676
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40,967
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51,941
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Shipment
of Cells
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-
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-
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600
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Other
Revenues
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25,048
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1,697
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-
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36,002
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57,148
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145,924
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Bad
Debt Expense as reported
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-
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19,500
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21,500
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Bad
Debt Expense as adjusted
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-
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4,500
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9,450
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Net
Loss as Reported
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(6,051,400)
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(10,445,473)
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(9,242,071)
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Net
Loss as Adjusted
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(6,061,122)
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(10,604,989)
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(9,167,638)
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Change
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(9,722)
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(159,516)
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74,433
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% of Net
Loss
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0.16%
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1.53%
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-0.81%
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* All
start-up fees shown “as reported” were both received and immediately recognized
in the period shown.
** In
the foregoing presentation reflecting a retrospective modification of the
revenue recognition policy, all start-up fees shown “as adjusted” have been
amortized over the respective lives of the relevant contracts. In
response to Staff comment 4.d., however, please note that of the amount of
start-up fees originally reported as revenue for the year ended December 31,
2007, an aggregate of $60,000 related to two agreements that were terminated
during the year ended December 31, 2008 as to which such fees were
non-refundable. Therefore, although the entirety of such amounts
would not have been properly includable in revenue for the year ended December
31, 2007 under the modified revenue recognition policy, they also would not have
been properly amortized over the expected life of the relevant contract but
instead the remaining portion would have been appropriately recognized in 2008
upon the contract terminations. For this reason, the amount reported
as start up fees in 2008 is lower for immediate recognition while the adjusted
amount if we modified our revenue recognition policy is higher.
420
Lexington Avenue, Suite 450, New York, NY 10170 212.584.4180
main 646.514.7787 fax
4
As
demonstrated above, modifying our revenue recognition policy would not have had
a material impact on our net loss during such periods.
While we
acknowledge that quantitative measurements cannot fully assess the impact of an
accounting change, we also believe that there are no qualitative factors (such
as those cited in Staff Accounting Bulletin No. 99 - Materiality) that would cause
the Company to consider this to be a change that requires restatement of our
previously issued financial statements. To that end, the following factors
should be considered:
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2)
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Modifying
the revenue recognition policy for the periods at issue would not have
changed a net loss into net income or vice
versa.
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3)
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We
have no loan covenants, regulatory or listing requirements
that would have been impacted as a result of not
having amortized start-up fees during the reporting periods at issue, or
vice versa.
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4)
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There
was no compensation paid to directors, officers, employees or consultants,
either in the form of cash or equity, that was contingent on the
previously reported results of operations or financial position; nor was
any additional compensation earned because the start-up fees had not been
amortized during such reporting periods; nor would any additional
compensation have been earned if the start-up fees were amortized during
such reporting periods.
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420
Lexington Avenue, Suite 450, New York, NY 10170 212.584.4180
main 646.514.7787 fax
5
For the
reasons cited above, the Company
believes that its financial statements previously issued can continue to
be relied upon. Considering the application of SFAS 154, in light of
the Company’s determination that a retroactive application of the modified
revenue recognition policy would not have had a material effect on prior
periods, as well as the fact that the Company does not anticipate this to have a
material effect on future periods, the Company believes that additional
disclosure under SFAS 154 beyond that which the Company has already disclosed
(as set forth below) would not be applicable. The Company has
undertaken what it believes to be the appropriate and equitable course of
action, which was to modify its revenue recognition policy on a prospective
basis, commencing with the filing of its Form 10-Q for the quarter ended June
30, 2009, as disclosed in the following manner in Note 2 to its Unaudited
Consolidated Financial Statements contained therein:
“The Company also earns revenue, in the
form of start up fees, from physicians seeking to establish autologous adult
stem cell collection centers. Start up fees are billed once the agreement has
been signed and the physician has been qualified by the Company’s credentialing
committee. During the quarter ended June 30, 2009, the Company has modified its
revenue recognition policy relative to these fees to recognize such fees as
revenues ratably over the appropriate period of time to which the revenue
element relates. Previously these fees were recognized in full when agreements
were signed and the physician had been qualified by the Company’s credentialing
committee. This modification of our revenue recognition policy did not have a
material impact on our results of operations.”
420
Lexington Avenue, Suite 450, New York, NY 10170 212.584.4180
main 646.514.7787 fax
6
In
connection with the Company's response, we acknowledge that:
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·
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the
Company is responsible for the adequacy and accuracy of the disclosure in
the 2008 Annual Report;
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·
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staff
comments or changes to disclosure in response to staff comments do not
foreclose the Commission from taking any action with respect to the 2008
Annual Report; and
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·
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the
Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
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Management trusts that the above
responses will be acceptable to the Staff. Should you have any
questions or require any further clarification, please do not hesitate to
contact me at (212) 584-4171 or at the address set forth on the first page of
this letter.
Very
truly yours,
/s/
Catherine M. Vaczy
Catherine
M. Vaczy
Vice
President and General Counsel
420
Lexington Avenue, Suite 450, New York, NY 10170 212.584.4180
main 646.514.7787 fax
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