g. In a business combination involving more than two entities, determining the acquiror shall include a consideration of, among other things, which of the combining entities initiated the combination, as well as the relative size of the combining entities.

Regarding factors a and b:

Below is a recap of ownership interests before and after the merger:

 

		Before Merger								After Merger
		Outstanding  Shares				%				Outstanding  Shares				%
NeoStem  - Public Shareholders			15,493,137				71.9	%			16,299,038				44.6	%
RimAsia			5,000,000				23.2	%			11,458,009				31.4	%
EET/Fullbright			1,040,000				4.8	%			4,234,918				11.6	%
CBH -  Public Shareholders			-				0.0	%			4,520,735				12.4	%
			21,533,137				100.0	%			36,512,700				100.0	%

 

The pre-merger NeoStem shareholders continue to hold the majority (88%) of the voting rights of the common shares of the combined entity following the merger.  While the voting interests of  RimAsia and EET increased as result of the merger it is important to note that the former CBH shareholders, comprised of three principle groups, EET/Fullbright (49% owner of Suzhou Erye Pharmaceuticals Company Ltd), CBH public shareholders (a diverse group of US and Chinese investors) and RimAsia Capital Partners, L.P. acted as independent groups during the merger negotiations and were separately represented in the merger negotiations for both business and legal purposes and we consider them separate investor groups in the new organization.

With regard to factors c and d:

The NeoStem Board of Directors initially consisted of five members, and was increased to six immediately post-transaction and will be increased to seven, having received all PRC approvals relating to the merger, subject to appropriate Board action.  Robin L. Smith, the Chairman of the Board of NeoStem prior to the merger, will remain as Chairman of the Board, and Richard Berman, Steven S. Myers and Drew Bernstein, each a director of NeoStem prior to the merger (the latter three independent directors, as defined under the listing standards of AMEX) will stay on the Board.  Joseph Zuckerman, a director of NeoStem prior the merger,  advised the Board that he would resign effective upon the consummation of the merger and was replaced by the pre-merger NeoStem Board (effective upon consummation of the merger) by Edward C. Geehr (an independent director, as defined under the listing standards of AMEX). Pursuant to the terms of the merger agreement, Eric Wei, the Managing Partner of RimAsia Capital Partners, L.P., was appointed to our Board of Directors upon consummation of the Merger. In addition, pursuant to the terms of the Merger Agreement, Shi Mingsheng will become a member of our Board of Directors, as the merger has received all applicable PRC approvals, subject to appropriate Board action. Thus, at the consummation of the merger, 67% of the initial NeoStem Board was a continuation of the pre-merger NeoStem Board and, when approvals for the merger are received from the PRC, four of the seven board members will be a continuation of the pre-merger NeoStem Board, and a fifth member will have been identified and appointed by the pre-merger NeoStem Board (Edward Geehr) and will have had no relationship whatsoever with CBH.  Thus, to the extent that board composition is a factor, clearly there is no change of control.

It is expected that the composition of the Board of Directors will retain its composition for the foreseeable future. The Company’s Nominating Committee (consisting of pre-merger NeoStem directors) will continue to control the nomination process for the Board and the investor base does not have a single group that can gain control of the Board of Directors. While a group of investors could, at a later date, submit proposals for director nominations, more than one group likely need to join together to insure sufficient votes to assure nomination and election of a director to effect any change to the Board’s composition.

With respect to the composition of senior management, the per-merger officers of NeoStem continue to constitute and control NeoStem “management”.  Robin Smith remains as Chairman of the Board and Chief Executive Officer and Catherine Vaczy remains as General Counsel.  Larry May, remains as NeoStem's current Chief Financial Officer, though he intends to take another strategic role within the Company.  So, a new Chief Financial Officer will need to be selected, but the search process, which has been initiated, does not involve anyone from any of the entities participating in these transactions and will be someone who is outside these entities. In addition, we have added to the post-merger senior management a VP of Sales and Marketing, VP of Business Development and VP of Research and Development, none of which positions have been filled with former officers or employees of CBH.

It is expected that this NeoStem management team will be responsible for the strategic direction of the Company. In addition, it is expected that NeoStem, through the direct efforts of its current management team, will provide new product and market opportunities for Erye.

The only current members of senior management of CBH that have been retained post-merger in any management capacity are Madame Zhang and Shi Mingsheng, who are the Managing Directors of Erye Pharmaceutical.

NeoStem’s current senior management, which is comprised substantially of pre-merger NeoStem senior management, will continue to lead NeoStem for the foreseeable future.

Regarding factor e:

With regard to the terms of the exchange of equity interest, the fair market value of the CBH common stock, common stock warrants and preferred stock outstanding on the date of merger had a fair value of approximately of $24.5 million while the fair value of the NeoStem Common Stock, Common Stock Warrants and Series C Preferred Stock that was paid was approximately $43.9 million. As the following table illustrates, NeoStem paid a premium over the fair value for the equity interests of CBH:

 

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Value of equities issued by NeoStem to shareholders of CBH						Value at 10/30/2009
Common Shares issued to CBH Shareholders			7,150,000			$	1.900			$	13,585,000
Common Shares issued to Rim Asia			6,458,009			$	1.900				12,270,217
Common Shares issued to EET for Bonus to obtain PRC aproval			328,338			$	1.900				623,842
Series C Convertible Preferred Shares issued to  Rim Asia			8,177,512			$	2.110				17,254,550
Series E Warrants (Black Sholes Value)			1,603,191			$	0.11567				185,449
Cash Buyout of Existing CBH Warrant Shares			24,752			$	0.00117				29
Total Value										$	43,919,087
Fair Value of CBH Equties
Series B Prefered Stock*			6,187,607			$	2.0222			$	12,512,579
Common Stock			37,207,213			$	0.30				11,161,792
Warrants @ Black Sholes Value
RimAsia (issued November 2007)			12,000,000			$	0.06507				780,849
Warrants issued March 2006			7,370,298			$	0.00117				8,611
Warrants issued February 2006			1,000,000			$	0.00029				286
Total Value										$	24,464,117
* Redemption value

 

Regarding factor f:

In considering the relative sizes of the two companies, for the nine months ended September 30, CBH, as the result of its Erye Pharmaceutical Co. subsidiary, had revenues of approximately $45 million and after tax profit $3.7 million. NeoStem’s revenues for nine months ended September 30, 2009 were $175 thousand and it had historically experienced considerable operating losses. CBH’s total asset base, as of September 30, 2009, was $47.5 million, while NeoStem’s assets were $8.6 million.  However, as NeoStem is engaged in the research and development of new diagnostic and therapeutic products using adult stem cells, the value of its business is not reflected by current revenues and must also take into account the potential value of these future products and the intellectual property that protects them.

Regarding factor g:

Another indicator of which entity is to be treated as the accounting acquirer in a merger is the entity that initiates the transaction.  As described in the “Background of the Merger” section of our Registration Statement on Form S-4 used in connection with the Merger, Dr. Robin Smith was personally invested in CBH in 2005 and sat on its advisory board during the period April 1, 2005 through March 31, 2006. During this period of time, CBH acquired its 51% interest in Erye, and as a result Dr. Smith became knowledgeable regarding Erye and its operations. She continued to follow CBH’s progress after the expiration of her CBH advisory board service.

At a NeoStem Board meeting held on September 27, 2007, the Board authorized and directed management of the Company to move forward with identifying merger and acquisition target companies as a means of more quickly generating revenues for the Company. Management began identifying target companies and at a Board meeting held on November 12, 2007, the Board was updated by Dr. Smith on the status of this activity and the Board reiterated its directive that the Company continue to identify acquisition candidates and update them from time to time. Accordingly, in her capacity as CEO of NeoStem and in furtherance of this directive, in December 2007, Dr. Smith organized a meeting with Chris Peng Mao, CBH’s CEO, at the NeoStem offices in New York City. Dr. Smith sought to better understand reasons for the dramatic decline in the trading price of CBH’s Common Stock which had traded at a high of $1.50 per share during the fourth quarter of 2005 (following the consummation of CBH’s acquisition of a 51% ownership interest in Erye in June 2005) to a low of $0.24 during the fourth quarter of 2007. In contrast, Erye’s revenues had substantially increased from $22,300,736 for the year ended December 31, 2006 to $31,881,294 for the year ended December 31, 2007, a more than 42% increase year over year. Dr. Smith viewed this potential acquisition as a significant opportunity and the CBH acquisition became the acquisition she recommended to the NeoStem Board be the one in furtherance of their directive to acquire a revenue generating business.

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Accordingly, the facts demonstrate that the Merger was initiated by NeoStem at the directive of the NeoStem Board and that NeoStem was the driver in the consummation of the transaction.

Conclusion

While it cannot be disputed that based on current operating metrics such as revenues the relative size of CBH is significantly larger than NeoStem the voting power of the original NeoStem shareholder group, the control of the Board of Directors and the senior management charged with guiding the company all remain controlled by NeoStem. Taking all of these points into consideration, we conclude that NeoStem is in fact the “accounting acquirer” for the merger.

Unaudited Proforma Condensed Combined Balance Sheets, page F-2

4.	Please disclose why you classify the Series C Convertible Preferred Stock in temporary equity within your unaudited proforma condensed combined balance sheet.

Response:

Based on an analysis of the terms of the Series C Convertible Stock, it has been classified as temporary equity as there was uncertainty about whether those shares would be redeemed and redemption was outside the Company's control and therefore it should not be treated as a liability in accordance with Accounting Standards Codification (ASC) 480.

We base our determination on the terms and conditions of the Series C Convertible Preferred Stock the relevant terms of which are as follows:

The holders of shares of Series C Convertible Preferred Stock have dividend rights, liquidation rights and conversion rights to convert the Series C Convertible Preferred Stock into shares of Common Stock. In addition there is a redemption feature with is described as follows:

Prior to the seventh anniversary of issuance of the Series C Convertible 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 Convertible 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 original issue price 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 original issue price and all accrued but unpaid annual dividends on such share.

 

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Our conclusion was further supported by clarification issued by the SEC staff in paragraph 26 of Topic No. D-98, “if a company issues preferred shares that are conditionally redeemable, for example, at the holder's option or upon the occurrence of an uncertain event not solely within the company's control, the shares are not within the scope of ASC 480 because there is no unconditional obligation to redeem the shares by transferring assets at a specified or determinable date or upon an event certain to occur. If the uncertain event occurs, the condition is resolved, or the event becomes certain to occur, then the shares become mandatorily redeemable under ASC 480 and would require reclassification to a liability.”

If preferred shares are not treated as a liability and are not considered permanent equity, treatment of the security should be accounted for according to the guidance of paragraph 6 of Topic No. D-98: “if the issuer does not control settlement by delivery of its own shares, cash settlement of the instrument would be presumed and the instrument would be classified as temporary equity.” ASR 268 requires the Company to classify these redeemable equity instruments outside of permanent equity as temporary equity in the mezzanine section of the balance sheet because the outstanding equity instruments (shares and vested options) are redeemable upon the occurrence of an event that is not solely within the control of the issuer.

Accordingly, we treated the Series C Convertible Preferred Stock as temporary equity.

Pre-Effective Amendment No. 1 to the Registration Statement will include the following disclosure:

The holders of shares of Series C Convertible Preferred Stock have dividend rights, liquidation rights, conversion rights to NeoStem Common Stock and a redemption feature. Based on an analysis of the terms of the Series C Convertible Stock, we have classified the Series C Convertible Preferred Stock as temporary equity as there is uncertainty about whether these shares will be redeemed and redemption is outside the Company's control and therefore it should not be treated as a liability in accordance with Accounting Standards Codification (ASC) 480.

Notes to the NeoStem Unaudited Proforma Condensed Combined Balance Sheets and Results of Operations, page F-5

5.	We note in adjustment (a) you determined the fair value of the Series C Convertible Preferred Shares issued to be $17,254,550. Please tell us and disclose how you determined the fair value of the Series C Convertible Preferred Shares.

Response:

For the purposes of presenting the proforma financials, the estimated fair value of the Series C Convertible Preferred Shares was determined based on the value of the underlying NeoStem Common Stock these shares may be converted into. Specifically the valuation was determined as follows:

 

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Number of Preferred Shares			8,177,512
Closing Price of NeoStem Common Stock October 30, 2009		$	1.90
Conversion factor for Series C Convertible Preferred Stock			0.9
Value of one share of Series C Convertible Preferred Stock		$	2.11
Fair Value of Series C Convertible Preferred Stock		$	17,254,550

 

It should be noted we have engaged financial consultants to assist us in determining the fair value of the Series C Convertible Preferred for our final accounting of the merger.

Pre-Effective Amendment No. 1 to the Registration Statement will include the following disclosure in footnote (a):

As of October 30, 2009, the date of the Merger, the value of NeoStem Common Stock was $1.90 and has been used as the basis for estimating the value of the equities being issued in this transaction. For purposes of the proforma balance sheet the fair value of Series C Convertible Preferred Stock was determined based on the value of NeoStem Common Stock on October 30, 2009 adjusted for the common stock conversion factor of .9 ($1.90/.9). The Series E Warrants were valued using the Black Scholes valuation model. The estimated fair values of the various equities being issued are as follows:

6.

We note in adjustment (a) that you decreased the CBH consolidated net assets at September 30, 2009 by $4,053,457 for the loss on transfer of plant to EET. It appears to us that you reduced the book value of CBH by the fair value of the plant that was not part of the assets transferred in the merger. Please clarify the nature of and reason for this adjustment to the CBH consolidated net assets.

Response:

The agreement with regard to the transfer of assets was not finalized until October 2009 and the balance sheet at September 30, 2009 as filed by CBH on Form 10Q for the quarter ended September 30, 2009 reflected the value of the manufacturing plant and related land rights which are the subject of this transfer. In determining the amounts to be recorded to account for this transfer in the proforma financial statements we used the net book value of the building and land rights as of September 30, 2009. In addition, please refer to footnote (f) for a further description of the nature and reason for the transaction.

The Pre-Effective Amendment No. 1 to the Registration Statement will be amended to modify the language of footnote (f) of the “Notes to The NeoStem Unaudited Proforma Condensed Combined Balance Sheets and Results of Operations” to clarify the proper timing of the agreement.

7.	We note in adjustment (a) that funds advanced by RimAsia reduced the net assets acquired by $478,087. Please explain to us why the receipt of funds would reduce net assets and clarify your disclosure accordingly.

Response:

The description “Funds advanced by RimAsia after 9/30/2009” does not properly describe the transaction being disclosed. “Obligation arising from funds advanced by RimAsia recorded after September 30, 2009” more properly describes this transaction.

 

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Pre-Effective Amendment No. 1 to the Registration Statement will reflect the following revised description in footnote (a):

“Obligation arising from funds advanced by RimAsia recorded after September 30, 2009”

As indicated in footnote (e) of “Notes to The NeoStem Unaudited Proforma Condensed Combined Balance Sheets and Results of Operations” we noted that the funds advanced on behalf of NeoStem and CBH by RimAsia totaled $1,960,451 and that as of September 30, 2009 NeoStem had recorded $1,044,209 of expenses relative to this agreement and that CBH had recorded $397,276, or a total of $1,441,485. In order to reflect the obligations due RimAsia as of October 30, 2009, the settlement date of the Funding Agreement, we were required to record $40,879 of expense for NeoStem and $478,087 for CBH with a corresponding increase in accrued liabilities of $518,966.

Pre-Effective Amendment No. 1 to the Registration Statement will reflect the following revised description of this transaction to make clear the adjustment required to properly reflect the impact of the Funding Agreement in footnote (e):

As of September 30, 2009 these advances totaled approximately $1,044,209 for NeoStem and CBH had recognized $397,276 related to these expenses and at October 30, 2009 the total expenses advanced by RimAsia on behalf of NeoStem totaled $1,085,088 and $875,363 for CBH or a total of $1,960,451. The total funds advanced by RimAsia totaled $1,960,451which has exceeded the $1,600,000 limit established by the agreement by $360,451 which will be settled from CBH’s portion of funds recovered from the LXB Litigation which totaled $550,000 and were being held by RimAsia. The resulting remainder of $189,649 was paid to NeoStem on November 13, 2009. This entry records the additional expense not recognized as of September 30, 2009 totaling $518,966, including $40,879 due from NeoStem and $478,087 due from CBH, and a receivable due from RimAsia of $550,000 for CBH’s portion of the funds recovered in the LXB Litigation.

8.	We note in adjustment (a) that you calculated "Goodwill" to be $29,284,061. Please revise the caption to reflect that the calculated amount represents other identified intangible assets and adjustments to fair value that are not yet determined.

Response:

Pre-Effective Amendment No. 1 to the Registration Statement will reflect a modified balance sheet caption and table in footnote (a) to read “Goodwill and other intangibles assets not yet determined”

9.	We note in adjustment (c) that you will have issued 13,953,505 shares of common stock at the conclusion of the transactions described. We could not reconcile this total number of shares of common stock to your disclosures. Please reconcile how the total amount of shares was reached.

Response:

The 13,953,505 Shares issued in connection with the Merger are comprised of the following:

 

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NeoStem Common Shares issued to CBH Shareholders			7,150,000
NeoStem Common Shares issued to Rim Asia			6,458,009
NeoStem Common Shares issued to Shi and Zhang			203,338
NeoStem Common Shares issued to EET for assistance in the Merger			125,000
Common Shares issued settle CBH debt due an Officer and a Director of CBH			17,158
			13,953,505

 

10.

We note that you adjusted intangible assets and other assets to reflect, as explained in adjustment (f), "the loss as a result of the transfer of land and building to EET, the value of the lease during the remainder of the construction period, and assigns the loss proportionately to CBH and EET”. Please clarify why the adjustment impacts intangible assets and other assets and how you determined the amount of the adjustments.

Response:

In China, the government owns all land; however private enterprises may purchase long term land rights to use property. When land rights are purchased they are classified as an intangible asset and amortized over the life of the land rights agreement. In accounting for the transfer of land rights and building we reduced intangible assets by the net book value of the land rights associated with the transfer.

Pre-Effective Amendment No. 1 to the Registration Statement will include the following disclosure in footnote (f):

The agreement creating the new joint venture also called for a lease agreement between the new joint venture and Erye for Erye’s use of the land rights and buildings until the construction of its new plant is completed and Erye’s relocation is complete. In the original MOU CBH and EET intended the transfer of this property to be in the form of a dividend to EET and therefore there was no consideration received by Erye in connection with the transfer of ownership. The joint venture agreement does not call for any lease payments due from Erye for the use of the building during the construction and relocation period. However, the lease back of the facility for the balance of the construction period is considered the effective consideration for the transfer of the buildings. The value of lease is estimated to be $366,500 annually and $791,600 for the duration of the lease. This entry records the loss as a result of the transfer of land rights (an intangible asset) and building to EET, the value of the lease during the remainder of the construction period and assigns the loss proportionately to CBH and EET.

11.	We note your explanation of adjustment (i). However, we were unable to locate the adjustment within your proforma financial statements. Please clarify where the adjustment is located.

Response:

Pre-Effective Amendment No. 1 to the Registration Statement will delete footnote (i) and the reference to it, as it duplicates footnote (b).

Note 10— Subsequent Events, page F-89

12.	We note on page F-89 that the Series C Convertible Preferred Stock is initially convertible at $0.90 per share. Please tell us whether the conversion rate is subject to change, and if so, disclose how the rate may change.

 

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Response:

The conversion rate is not subject to change however; the conversion rate would be adjusted if the Company implemented a common stock split or reverse common stock split. We will remove the word “initial” from the description in the footnote on F-89.

13.	We note that the Series C Convertible Preferred Stock is initially convertible at $0.90 per share. Please tell us whether you recorded a beneficial conversion feature and describe to us the basis for your determination.

Response:

We did account for the beneficial conversion feature associated with the Series C Convertible Preferred Stock. The value of the beneficial conversion feature was determined by assigning the liquidation value of the Series C Convertible Preferred Stock to temporary equity and the residual value (the difference between the fair value of the Series C Convertible Preferred Stock and the liquidation value) was assigned to paid in capital.

 

Series C Convertible Preferred Shares issued to  Rim Asia			8,177,512			$	2.110			$	17,254,550
Temporary Equity Value of Series C Convertible Preferred Stock*			8,177,512				1.125				9,199,701
Value of Beneficial Conversion Feature of Series C Convertible Preferred Shares										$	8,054,849
* Based on liquidity value of Series C Convertible Preferred Stock

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

cc:  Catherine M. Vaczy, Esq.

 

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