January
29, 2010
Via
EDGAR and FedEx
Securities
and Exchange Commission
Division
of Corporation Finance
Washington,
DC 20549-7010
Mail Stop
3561
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Re:
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NeoStem,
Inc.
Amendment
No. 1 to Registration Statement on Form S-1
Filed
January 19, 2010
File
No. 333-163741
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Ladies
and Gentlemen:
On behalf
of NeoStem, Inc. (the "Company"), we are responding to the comments contained in
the letter, dated January 29, 2010 (the "Comment Letter"), from John Reynolds,
Assistant Director, of the staff (the “Staff”) of the Securities and Exchange
Commission (the “Commission”) regarding Amendment No. 1 to the Company's
Registration Statement on Form S-1/A (Registration No. 333-163741) (the
"Registration Statement"). To facilitate your review of our response,
the pages of the Registration Statement that require revision ("Marked Pages"),
marked to show the revisions that are responsive to the Comment Letter, are
submitted with this letter in the Amendment No. 2 that is enclosed
herewith.
For ease
of reference, set forth in bold below is the comment to Amendment No. 1 to the
Registration Statement, as reflected in the Comment Letter. The
Company’s response is set forth below the comment.
The
Company has authorized this firm to respond to the Comment Letter as
follows:
General
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1.
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We
note your response to comment one of our letter dated January 12, 2010 and
we reissue our comment. You state that the common stock for
which the registration statement, File No. 333-140512, covered the resale
was purchased by the selling shareholder longer than three year
ago. We note, however, that the resale registration statement
itself was dated within three years. Please explain why you
believe you are eligible to incorporate by reference or
revise.
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Response:
The
Pre-Effective Amendment No. 2 to the Registration Statement that is being filed
contemporaneously with this response now includes all of the disclosure and
other text that was incorporated by reference in the Registration
Statement. The disclosure, as well as removal of references to
incorporation by reference, are reflected in the markup that is submitted with
this response on pages i; 40-42; 50-51; 83-88; 93-95; 99; 100; and
114.
Unaudited Proforma Condensed
Combined Financial Statements, page F-2
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2.
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We
note from your response to comment five of our letter dated January 12,
2010, that you estimated the fair value of the preferred shares based on
the value of the underlying NeoStem Common Stock into which the preferred
shares may be converted using a common stock conversion factor of
0.9. Please tell us and disclose the basis for this conversion
factor of 0.9 in estimating the fair value of the preferred shares and
describe how the conversion factor captures the rights and privileges
related to the preferred shares (e.g. redemption feature, accrued
dividends, liquidation preference, etc.). In additional, disclose that
your estimate of fair value of the preferred shares I
preliminary.
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Response: We
would like to clarify our calculation and response to your earlier comment. The
..9 conversion factor we used in our previous response is the $0.90 conversion
price of the Series C Preferred Shares to NeoStem Common Stock. See the revised
analysis below:
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Number
of Preferred Shares
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8,177,512 | |||
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Per
share Conversion price for Series C Convertible Preferred Stock to NeoStem
Common Stock
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$ | 0.90 | ||
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Common
Stock Equivalents of Series C Convertible Preferred Stock
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9,086,124 | |||
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Closing
Price of NeoStem Common Stock October 30, 2009
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$ | 1.90 | ||
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Preliminary
Fair Value of Series C Convertible Preferred Stock
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$ | 17,263,636 |
1
The
Pre-Effective Amendment No. 2 to the
Registration Statement that is being filed contemporaneously with this
response includes
disclosure of the calculation of the estimated value of the Convertible
Preferred Shares and that the fair value used in the proforma financial
statements is preliminary and that the actual value will be determined using the
services of outside financial consultants, as a part of the overall valuation
being conducted in connection with the recent merger, to insure that the value
of all rights and privileges are taken into consideration in determining the
value of the preferred stock and the final determination thereafter will be
disclosed in our audited financial statements included in our Annual Report on
Form 10-K for the year ended December 31, 2009.
This
disclosure is reflected in the markup that is submitted with this response on
page F-7.
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3.
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It
appears from your response to comment 13 of our letter dated January 12,
2010, that you measured the beneficial conversion feature as the
difference between the estimated fair value of the Series C Convertible
Preferred Shares and the liquidation preference of the Series C
Convertible Preferred Shares. Please explain to us how this
measurement complies with the provisions of FASB ASC 470-20-30, whereby
the beneficial conversion feature represents the intrinsic value, defined
as the difference between the conversion price and the fair value of the
common stock into which the preferred stock is convertible multiplied by
the number of shares into which the security is
convertible.
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Response: We
have revised our estimate of the value of the beneficial conversion feature as
follows:
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Fair
Value of NeoStem Common Stock @ 10/30/2009
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$ | 1.90 | ||
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Conversion
Price of NeoStem Preferred Shares
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0.90 | |||
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Intrinsic
Value of Beneficial Conversion
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$ | 1.00 | ||
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Common
Stock Equivalents of Series C Preferred
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9,086,124 | |||
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Estimated
total value of the Beneficial Conversion Feature related to the Preferred
Shares
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$ | 9,086,124 |
2
The
Pre-Effective Amendment No. 2 to the Registration Statement that is being filed
contemporaneously with this response includes this disclosure, which is
reflected in the markup that is submitted with this response on page
F-7.
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4.
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Please
disclose the amount of the beneficial conversion feature related to the
issuance of Series C Convertible Preferred Shares, the impact it will have
on your net income/(loss) available to common shareholders and
earnings/(loss) per share, and the reasons why you excluded presentation
of the beneficial conversion feature from your pro forma statements of
operations.
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Response: The
Pre-Effective Amendment No. 2 to the Registration Statement that is being filed
contemporaneously with this response includes disclosure of the
impact the beneficial conversion feature will have on the proforma net
income/(loss) and our proforma earnings per share in our footnote (a) of the
proforma financial statements. With regard to accounting for the
value of the beneficial conversion feature of this preferred stock we have taken
into consideration the guidance provided by ASC 470-20-35-1 and have concluded
that the value of the beneficial conversion feature should be accounted for as a
dividend immediately upon issuance because the preferred shareholders are not
required to hold the preferred shares for a minimum period of time before they
can convert. We are also including, as Schedule A to this response, a summary of
the material terms and conditions of the Series C Convertible Preferred Stock
and relevant portions of ASC 470-20-35-1 to support our position. In accordance
with Regulations S-X Article 11 Rule 11-02(a)(5), we will not reflect the
immediate recognition of the dividend in the proforma financial statements,
since this would be considered a one-time event and therefore should not be
included in our proforma statement of operations. The pertinent part of this
rule states the following:
The
presentation requirements for the pro forma condensed statement of income, as
described by Rule 11-02(a)(5), are designed to elicit disclosures that clearly
distinguish between the one-time impact and the ongoing impact of the
transaction. The pro forma condensed income statement should show the impact of
the transaction on income from continuing operations of the registrant.
Therefore, any discontinued operations, extraordinary items, and the cumulative
effects of accounting changes should not be reflected in the condensed
historical financial statements used as the starting point for the pro forma
presentation. Also, material nonrecurring
charges or credits, and related tax effects, that result directly from the
transaction and
that will affect the income statement during the next 12 months also should not
be reflected in the pro forma condensed income statement, but they should be
separately disclosed with a clear indication that such charges or credits were
not considered in the pro forma condensed income statement. Thus, the
“bottom line” of the pro forma column of the condensed income statement will be
“income (loss) from continuing operations before nonrecurring charges or credits
directly attributable to the transaction.” If the transaction for which the pro
forma financial information is presented relates to a disposition of a business,
the pro forma condensed income statement should reflect the disposition in
appropriate captions.
3
Since
recognition of this dividend would be a one-time event it should not be included
in our proforma statement of operations. We will also disclose in our footnote
the impact of this non-recurring event on proforma results of operations and its
impact on proforma earnings per share. We will also modify our captions on our
proforma statements of operations to include the language “income (loss) from
continuing operations before nonrecurring charges or credits directly
attributable to the transaction.”
This
disclosure is reflected in the markup that is submitted with this response on
pages F-2, F-3, F-4, F-7 and page 31.
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5.
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We
note in adjustment (b) on page F-7 that you recorded dividends on the
shares of Series C Convertible Stock for 5%. Please disclose
the base upon which the 5% annual dividend is
recorded.
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Response: The
Pre-Effective Amendment No. 2 to the Registration Statement that is being filed
contemporaneously with this response includes in our footnote (b) the following
disclosure of the base upon which the 5% annual dividend is
recorded.
“The 5%
dividend was determined by multiplying the initial value of the preferred shares
($1 per preferred share or $8,177,512) by 5%. The agreed stated value of $1
does not change over time.”
This
disclosure is reflected in the markup that is submitted with this response in
footnote (b) on page F-7.
This will
confirm that the Company understands that the Company and its management are
responsible for the accuracy and adequacy of the disclosures they have
made. Furthermore, notwithstanding the Commission’s comments, in the
event the Company requests acceleration of the effective date of the pending
registration statement, it will furnish a letter, at the time of such request,
acknowledging that:
· the
Company is aware of is respective responsibilities under the Securities Act of
1933 and the Securities Exchange Act of 1934 as they relate to the proposed
public offering of the securities specified in the above registration
statement;
· should
the Commission or the staff, acting pursuant to delegated authority, declare the
filing effective, it does not foreclose the Commission from taking any action
with respect to the filing;
· the
action of the Commission or the staff, acting pursuant to delegated authority,
in declaring the filing effective, does not relieve the company from its full
responsibility for the adequacy and accuracy of the disclosure in the filing;
and
· the
company may not assert this action as defense in any proceeding initiated by the
Commission or any person under the federal securities laws of the United
States.
If you
have any questions with respect to the foregoing, please feel free to call me at
(212) 398-1207 or Andy Smith at (646) 810-2180.
Sincerely,
/s/Gregory
Sichenzia
Gregory
Sichenzia
cc: Catherine
M. Vaczy, Esq.
4
Schedule
A
A summary
of the material terms and conditions of the Series C Preferred Stock are as
follows:
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1)
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The
holders of shares of Series C Preferred Stock shall be entitled to receive
an annual dividend of 5% of the Agreed Stated Value, $1.00 per share,
payable annually on the first day of January. Payment of the annual
dividend may be either in cash or in kind as determined by the NeoStem
Board of Directors. The annual dividend shall be cumulative and shall
begin to accrue on outstanding shares of Series C Preferred Stock from and
after the date of issuance.
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2)
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In
the event of a liquidation of NeoStem or another similar event, after
payment or provision for payment of debts and other liabilities of
NeoStem, the holders of the Series C Preferred Stock then outstanding
shall be entitled to be paid out of the assets of NeoStem available for
distribution to its stockholders, before and in preference to any payment
or declaration and setting apart for payment of any amount shall be made
in respect of any junior stock, an amount equal to $1.125 per share plus
an amount equal to all accrued dividends unpaid thereon, whether or not
declared. All shares of Series C Preferred Stock shall rank as to payment
upon the occurrence of any liquidation event senior to the NeoStem Common
Stock and, unless the terms of such other series shall provide otherwise,
senior to all other series of the NeoStem Preferred
Stock.
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3)
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Each
share of the Series C Preferred Stock shall be convertible, at the option
of the holder thereof, without the payment of additional consideration,
into such number of fully paid and non-assessable shares of the NeoStem
Common Stock equal to the quotient obtained by dividing $1.00 per share
plus all accrued dividends unpaid thereon, whether or not declared,
together with any other dividends declared but unpaid thereon, by $0.90,
the conversion price, subject to
adjustment.
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4)
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Beginning
any time after the date of issuance of the Series C Preferred Stock, if
the closing price of the sale of shares of NeoStem Common Stock on the
NYSE Amex (or NeoStem’s principal securities exchange, if other than the
NYSE Amex) exceed $2.50 per share, subject to adjustment, for a period of
20 out of 30 consecutive trading days, and if the dollar value of the
trading volume of the NeoStem Common Stock for each day during such 20 out
of 30 consecutive trading days equals or exceeds $250,000, NeoStem may
require the holders of Series C Preferred Stock to convert such stock to
NeoStem Common Stock, on ten days notice, based on the conversion
price.
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5)
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Prior
to the seventh anniversary of issuance of the Series C Preferred Stock,
NeoStem may at the option of the NeoStem Board of Directors and after
giving the holders of shares Series C Preferred Stock an opportunity to
convert all their shares of Series C Preferred Stock into shares of
NeoStem Common Stock, redeem in whole, but not in part, all the shares of
Series C Preferred Stock then outstanding by paying in cash, for each
share, an amount equal to the sum of the agreed stated value and all
accrued but unpaid annual dividends. At any time following the seventh
anniversary of the issuance of the Series C Preferred Stock, following the
written request of the holders of not less than a majority of the shares
Series C Preferred Stock then outstanding, NeoStem shall redeem all of the
shares of Series C Preferred Stock (or, if less, the maximum amount it may
lawfully redeem) by paying in cash, for each share, an amount equal to the
sum of the agreed stated value and all accrued but unpaid annual dividends
on such share.
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With
regard to accounting for the value of the beneficial conversion feature of this
preferred stock we have taken into consideration the guidance provided by ASC
470-20-35 and have concluded that the value of the beneficial conversion feature
should be accounted for as a dividend immediately upon issuance because the
preferred shareholders are not required to hold the preferred shares for a
minimum period of time before they can convert. Specifically the relevant
portions of ASC 470-20-35 are as follows:
5
35-7 Any
discount recognized by the allocation of proceeds to a beneficial conversion
feature under paragraph 470-20-25-5 shall be accounted
for as follows:
a. Instruments
having a stated redemption date. If a convertible
instrument has a stated redemption date (such as debt and mandatorily
redeemable preferred stock), that discount shall be accreted from the date of
issuance to the stated redemption date of the convertible instrument, regardless
of when the earliest conversion date occurs.
1. For convertible preferred securities, that discount (which
is analogous to a dividend) shall be recognized as a return to the preferred
shareholders over the minimum period from the date of issuance to the date at
which the preferred shareholders can realize that return (that is, through the
date of earliest conversion) using the effective yield method. For those preferred securities that are convertible at the
date of issuance, the discount would be fully amortized through retained
earnings at the date of issuance.
6