UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
(Mark
One)
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x
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended December 31, 2009
OR
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o
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from ________ to ________
Commission
file number: 0-10909
NEOSTEM,
INC.
(Exact
name of registrant as specified in its charter)
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Delaware
(State
or other jurisdiction of
incorporation
or organization)
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22-2343568
(I.R.S.
Employer Identification No.)
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420
Lexington Avenue
Suite
450
New
York, New York
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10170
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code:
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(212)
584-4180
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Securities
Registered Pursuant to Section 12(b) of the Act:
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Title of Each Class
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Name
of Each Exchange
On Which Registered
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Common
Stock, par value $0.001 per share
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NYSE
Amex
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Class
A Common Stock Purchase Warrants
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NYSE
Amex
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. o
Yes x No
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Securities Exchange Act of
1934.
o
Yes x No
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. xYes oNo
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). o Yes o No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this Chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one):
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Large
accelerated filer o
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Accelerated
filer o
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Non-accelerated
filer o
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Smaller
reporting company x
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). o
Yes x No
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of June 30, 2009 (the last business day of
the most recently completed second fiscal quarter) was approximately
$11,724,108, computed by reference to the closing sales price of $1.90 for the
common stock on the NYSE Amex reported for such date. (For purposes
of determining this amount, only directors, executive officers, and 10% or
greater holders of our common stock have been deemed affiliates).
On March
24, 2010, 43,946,031 shares of the registrant's common stock, par value $0.001
per share, were outstanding.
Documents
incorporated by reference: Portions of the registrant’s definitive Proxy
Statement for the 2010 Annual Meeting of Stockholders, to be filed with the
Commission not later than 120 days after the close of the registrant’s
fiscal year, have been incorporated by reference, in whole or in part, into
Part III, Items 10, 11, 12, 13 and 14 of this Annual Report on
Form 10-K.
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TABLE
OF CONTENTS
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CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS
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4
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PART
I
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5
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ITEM
1. BUSINESS
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5
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ITEM
1A. RISK FACTORS
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19
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ITEM
1B. UNRESOLVED STAFF COMMENTS
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39
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ITEM
2. PROPERTIES
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39
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ITEM
3. LEGAL PROCEEDINGS
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39
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ITEM
4. (REMOVED AND RESERVED)
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40
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PART
II
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40
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ITEM
5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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40
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ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION
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44
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ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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56
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ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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58
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ITEM
9A. CONTROLS AND PROCEDURES
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58
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ITEM
9B. OTHER INFORMATION
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60
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PART
III
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61
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ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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61
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ITEM
11. EXECUTIVE COMPENSATION
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61
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ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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61
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ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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61
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ITEM
14. PRINCIPAL ACCOUNTING FEES AND SERVICES
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61
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PART
IV
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61
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ITEM
15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
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61
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This
Annual Report on Form 10-K includes “forward-looking” statements within the
meaning of the Private Securities Litigation Reform Act of 1995, as well as
historical information. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements, or industry results, to be materially
different from anticipated results, performance or achievements expressed or
implied by such forward-looking statements. When used in this Annual Report on
Form 10-K, statements that are not statements of current or historical fact may
be deemed to be forward-looking statements. Without limiting the foregoing, the
words “plan,” “intend,” “may,” “will,” “expect,” “believe,” “could,”
“anticipate,” “estimate,” or “continue” or similar expressions or other
variations or comparable terminology are intended to identify such
forward-looking statements. Additionally, statements concerning our ability to
successfully develop the adult stem cell business at home and abroad, the future
of regenerative medicine and the role of adult stem cells in that future, the
future use of adult stem cells as a treatment option and the role of VSELTM
technology in that future, and the potential revenue growth of such business are
forward-looking statements. Our future operating results are dependent upon many
factors, and our further development is highly dependent on future medical and
research developments and market acceptance, which is outside its control.
Forward-looking statements may not be realized due to a variety of factors,
including, without limitation, (i) our ability to manage the business despite
continuing operating losses and cash outflows; (ii) our ability to obtain
sufficient capital or a strategic business arrangement to fund our operations
and expansion plans, including meeting our financial obligations under various
licensing and other strategic arrangements and the successful commercialization
of the relevant technology; (iii) our ability to build the management and human
resources and infrastructure necessary to support the growth of the business and
expansion into China; (iv) competitive factors and developments beyond our
control; (v) scientific and medical developments beyond our control; (vi) our
inability to obtain appropriate governmental licenses or any other adverse
effect or limitations caused by government regulation of the business; (vii)
whether any of our current or future patent applications result in issued
patents and our ability to obtain and maintain other rights to technology
required or desirable for the conduct of our business; (viii) whether any
potential strategic benefits of various licensing transactions will be realized
and whether any potential benefits from the acquisition of these new licensed
technologies will be realized; (ix) whether we can obtain the consents we may
require to sublicensing arrangements from technology licensors in connection
with technology development; (x) our ability to maintain our NYSE Amex listing;
(xi) factors regarding our business in China and, generally, regarding doing
business in China, including through our variable interest entity structure; and
(xii) the other factors discussed in “Risk Factors” and elsewhere in this Annual
Report on Form 10-K and in other periodic Company filings with the SEC. The
Company’s filings with the Securities and Exchange Commission are available for
review at www.sec.gov under
“Search for Company Filings.”
All
forward-looking statements attributable to us are expressly qualified in their
entirety by these and other factors. Readers are cautioned not to place undue
reliance on these forward-looking statements, which speak only as of the date
hereof. Except as required by law, the Company undertakes no obligation to
update any forward-looking statements, whether as a result of new information,
future events or otherwise.
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PART
I
ITEM
1. BUSINESS
Overview
NeoStem,
Inc. (“we,” “us,” “NeoStem” or “the Company”) was incorporated under the
laws of the State of Delaware in September 1980 under the name Fidelity Medical
Services, Inc. and commenced operations in our current line of business in
January 2006.
In 2009,
through our expansion efforts within the People’s Republic of China (“China” or
“PRC”) and with the acquisition of a controlling interest in Suzhou Erye
Pharmaceuticals Company Ltd., or Erye, we transitioned into a multi-dimensional
international biopharmaceutical company with product and service revenues,
global research and development capabilities and operations in three distinct
business units: (i) U.S. adult stem cells, (ii) China adult stem cells, and
(iii) China pharmaceuticals, primarily antibiotics. These business units are
expected to provide platforms for the accelerated development and
commercialization of innovative technologies and products in both the U.S. and
China.
In the
U.S. we are a leading provider of adult stem cell collection, processing and
storage services enabling healthy individuals to donate and store their stem
cells for personal therapeutic use. Similar to the banking of cord blood,
pre-donating cells at a younger age helps to ensure a supply of one’s own stem
cells should they be needed for future medical treatment. Our current network of
U.S. adult stem cell collection centers is focused primarily on the Southern
California and Northeast markets and during 2010 we have begun to enter into new
agreements for collection centers with the goal of expanding our coverage to ten
centers by the end of 2010. In addition to our services, we are conducting
research and development activities on our own at our new laboratory facility in
Cambridge, MA and through collaborations in pursuit of diagnostic and
therapeutic applications using autologous adult stem cells, including
applications using our VSELTM
technology, with regard to very small embryonic-like stem cells, which we
license from the University of Louisville.
In 2009,
we began several China-based, adult stem cell initiatives including: (i)
creating a separate China-based stem cell operation, (ii) constructing a stem
cell research and development laboratory and processing facility in Beijing,
(iii) establishing relationships with hospitals to provide stem cell-based
therapies, and (iv) obtaining product licenses covering several adult stem cell
therapeutics focused on regenerative medicine. In 2010, we expect to begin
offering stem cell banking services and certain stem cell therapies to patients
in China, as well as to foreigners traveling to China seeking medical treatments
that are either unavailable or cost prohibitive in their home
countries.
The
cornerstone of our China pharmaceuticals business is the 51% ownership interest
we acquired in Erye in October 2009. Erye was founded more than 50 years ago and
represents an established, vertically-integrated pharmaceutical business.
Historically, Erye has concentrated its efforts on the manufacturing and
distribution of generic antibiotic products and has received more than 160
production certificates from the State Food and Drug Administration of China, or
SFDA, covering both antibiotic prescription drugs and active pharmaceutical
intermediates (APIs) Erye’s revenue for 2009 was approximately $61
million.
Our three
business units are expected to provide platforms for accelerated development and
commercialization of innovative technologies and products in both the U.S. and
China.
Adult
Stem Cell Business in the U.S.
Stem
cells are very primitive and undifferentiated cells that have the unique ability
to transform into many different cells, such as white blood cells, nerve cells
or heart muscle cells. We only work with adult (and not embryonic) stem cells.
Adult stem cells are found in the bone marrow, in peripheral blood and in
umbilical cord blood. For over 40 years physicians have been using adult stem
cells to treat various blood cancers, but only recently has the promise of using
adult stem cells to treat a myriad of other diseases begun to be
realized.
Within
the adult stem cell classification, the use of cells is either autologous,
meaning donor and patient are the same, or allogeneic, meaning donor and patient
are different. The use of allogeneic stem cells requires the identification of a
matching donor, which can result in added costs, critical time delays or may
never occur. Even if a matching donor is identified, the use of allogeneic stem
cells introduces the risk of “graft vs. host disease” requiring
immunosuppression drugs for extended periods following transplantation.
Accordingly, our current stem cell programs are based exclusively on adult stem
cells for autologous use as we believe that adult stem cells hold the greatest
promise for therapeutic innovation.
We are
developing our business in the adult stem cell field to capitalize on the
increasing importance that adult stem cells may have in regenerative medicine,
with an initial focus on the delivery of therapies for cardiac, orthopedic,
wound, cosmetic and dermatologic indications.
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Collection,
Processing and Storage Services
We are a
leading provider of adult stem cell collection, processing and storage services
in the U.S., enabling healthy individuals to donate and store their stem cells
for personal therapeutic use. Similar to the banking of cord blood, pre-donating
cells at a younger age helps to ensure a supply of autologous stem cells should
they be needed for future medical treatment. Our current network of U.S. adult
stem cell collection centers is primarily focused on the Southern California and
Northeast markets and during 2010 we have begun to enter into new agreements for
collection centers with the goal of expanding our coverage to ten centers by the
end of 2010. Commercial stem cell processing and storage services are provided
to us nationally, on an exclusive basis, by Progenitor Cell Therapy LLC, or PCT,
utilizing current good manufacturing practices, or cGMP standards.
Our
process for collecting adult stem cells for autologous use involves the
administration of a mobilizing agent prior to collection, allowing the migration
of stem cells from bone marrow to peripheral blood. Once the stem cells have
reached the bloodstream, an individual goes through a safe and
minimally-invasive procedure called “apheresis,” similar to donating platelets,
at one of the collection centers in our network. Then, the stem cells are
processed and stored under cGMP standards. Our proprietary process does not
change or alter the underlying cells and does not require expansion
technology.
We
believe that individuals will view the ability to pre-donate and store
autologous adult stem cells for future personal therapeutic use as a valuable
part of a “bio-insurance” program. The benefits of pre-donation include: having
a known supply of autologous stem cells rather than an uncertain supply of
compatible allogeneic stem cells; autologous stem cells may be compromised once
a patient becomes sick; and the quantity and quality of stem cells generally
diminish with age. This perceived value of pre-donation should increase as
additional indications for stem cell-based therapies are developed.
We have
initiated a marketing and sales campaign, individually and through
collaborations, for the purpose of educating physicians and potential clients on
the benefits of adult stem cell collection and storage. Our strategy is to work
with our established collection centers to market in their communities and to
build new alliances and partnerships. Utilizing our new laboratory facility in
Cambridge, MA, we also will have on premises an adult stem cell collection
center, scheduled to be launched in the second quarter of 2010. We
continue to build awareness with Boston-area academic institutions that are
researching and treating with adult stem cells.
Our stem
cell banking services generate revenue from a combination of fees paid upfront
and over time, by both collection centers and individual clients. We plan to
grow the client base at each of our centers, and add new centers in other
strategic metropolitan areas. Additional initiatives to drive private sector
revenue growth include:
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collaborations
with high profile medical centers and academic institutions involved in
research and clinical trials relating to adult stem
cells;
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•
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services
in the U.S. targeted for “medical tourism” designed to access stem cell
therapies available outside the
U.S.;
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partnerships
with executive health programs, wellness physicians, concierge medical
programs, medical spas and first responder
groups;
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initiatives
with cord blood companies, tissue banks and pharmaceutical
companies;
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support
for The Stem for Life
Foundation, which promotes public awareness, funds research and
development and subsidizes stem cell collection and storage
programs;
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storage
of excess stem cells collected from bone marrow transplant donors;
and
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•
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processing
and isolation of adult stem cells for research and diagnostic
use.
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While
many individuals could potentially benefit from having a supply of their stem
cells available for personal therapeutic use, our initial targeted customer
niches include:
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•
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individuals
with a family history of serious
diseases;
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•
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individuals
at high risk for burns, wounds and other trauma, such as first responders
and military personnel;
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•
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individuals
at occupational risk from prolonged radiation or chemical exposure, such
as healthcare providers, laboratory personnel and nuclear power plant
workers;
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wellness,
cosmetic and anti-aging focused individuals;
and
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athletes
and others who could benefit from regenerative
therapies.
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To
further drive our stem cell initiatives, we will continue targeting key
governmental agencies, congressional committees and not-for-profit organizations
to contribute funds for our research and development programs. In October 2008,
we were advised that we would receive federal funding from the Department of
Defense to evaluate the potential use of adult stem cell-based therapy for wound
healing, currently anticipated to be in the approximate net amount of $681,000,
and in September 2009, we were notified of an award of a Grand Opportunities
grant in the amount of $108,746 from the National Institutes of Health which we
expect to receive in the second quarter of 2010.
VSELTM
Technology and Other Therapeutic Technologies
We are
engaged in research and development of new therapies based on very small
embryonic-like stem cells, or the VSELTM
technology, with the University of Louisville Research Foundation, or ULRF, and
have a worldwide exclusive license to the VSELTM
technology. Research by a group headed by Dr. Mariusz Ratajczak, M.D., Ph.D.,
who is the head of the Stem Cell Biology Program at the James Graham Brown
Cancer Center at the University of Louisville and co-inventor of the VSELTM
technology, and others, provides compelling evidence that bone marrow contains a
heterogeneous population of stem cells that have properties similar to those of
an embryonic stem cell. These cells are referred to as very small embryonic-like
stem cells. This finding opens the possibility of achieving the positive
benefits associated with embryonic stem cells without the ethical or moral
dilemmas or certain of the potential negative effects associated with embryonic
stem cells. Of even greater potential is the ability to obtain these stem cells
for autologous use.
We have a
sponsored research agreement, or an SRA, with ULRF, pursuant to which we agree
to support further research in the laboratory of Dr. Ratajczak. In return for
supporting additional research relating to the VSELTM
technology to be carried out in the laboratory of Dr. Ratajczak as principal
investigator, we will receive the exclusive first option to negotiate a license
covering the research results.
Recent
studies conducted by us in collaboration with the University of Louisville have
confirmed that significant quantities of very small embryonic-like stem cells
can be obtained from the peripheral blood of humans following stimulation with
granulocyte-colony stimulating factor, commonly known as Neupogen ®.Dr.
Ratajczak’s group at the University of Louisville has published preliminary work
that would indicate that these stem cells have a role in cardiac regeneration
and may help identify those at risk for cardiovascular disease. In addition,
very small embryonic-like stem cells have been shown to increase in numbers in
the peripheral circulation following acute myocardial infarction, stroke and
other stress inducing events in experimental animals and in humans. Thus, very
small embryonic-like stem cells may have significant potential to repair
degenerated, damaged or diseased tissue, or the three “Ds” of aging. With our
existing banking network, we have the ability to collect and store very small
embryonic-like stem cells, along with other stem cell populations, from
individual donors, setting the stage for their future use in personalized
regenerative medicine.
In
addition to the research we are funding in Dr. Ratajczak’s laboratory at the
University of Louisville, we are funding research at the University of Michigan
in the laboratory of Dr. Russell Taichman to evaluate bone defect repair through
the proceeds of a $108,746 Grand Opportunities grant from the National
Institutes of Health. We are also in discussions with other
researchers to generate data relating to other clinical applications of very
small embryonic-like stem cells, that could include neural, cardiac, and
ophthalmic disease, to expand our research efforts and maximize the value of
this technology.
To
facilitate our independent research and development efforts, we opened an 8,000
square foot, state-of-the-art facility at the Riverside Technology Center in
Cambridge, Massachusetts, or the Cambridge Laboratory. In the near term, our
efforts will focus on expanding the current VSELTM
technology know-how and working with other adult stem cell technologies by
performing detailed purification, characterization and expansion of stem cells.
Furthermore, at the Cambridge Laboratory we are characterizing and developing
various adult stem cells, including VSELTM
technology, for therapeutic and diagnostic purposes. Specifically, the use of
stem cells as a diagnostic tool to understand aging has not been sufficiently
explored as a means to improve current therapies and to test new therapies. To
address this unmet need, we intend to create a stem cell screening panel, known
as a biomarker screening panel. This antibody-based test would simultaneously
quantify several important stem cell populations that are known to be
circulating in peripheral blood, including very small embryonic-like stem cells.
This biomarker screening panel would enable researchers to assess the relative
wellness of an individual by comparing his or her existing stem cell profile to
an age-adjusted reference of expected, or normal, stem cell levels. The
Cambridge Laboratory will also support the planned development of a commercial
process that we expect will facilitate the separation of very small
embryonic-like stem cells from blood, enabling us to create high-throughput,
cell-based assays for use in pharmaceutical and nutraceutical
research.
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We also
are engaged in licensing new adult stem cell-based therapies that we plan to use
to commercialize innovative therapeutic applications. Several recent
examples include:
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•
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In
February 2009, we entered into a License Agreement with Vincent Giampapa,
M.D., F.A.C.S. pursuant to which we acquired a world-wide, exclusive
license to certain innovative stem cell technology and applications for
cosmetic, facial and body procedures and skin
rejuvenation.
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In
April 2009, we entered into a License Agreement with Vincent Falanga,
M.D., pursuant to which we acquired a world-wide, exclusive license to
certain innovative stem cell technology and applications for wound
healing.
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In
May 2009, we entered into a License and Referral agreement with Promethean
Corporation, or Promethean, through its subsidiary, Ceres Living, Inc., or
Ceres, to use certain Company marks and publications in connection with
certain sales and marketing activities relating to its nutritional
supplement known as AIO Premium Cellular Health, a liquid nutritional
supplement based on certain nutraceuticals which have been shown to
optimize stem cell functions. Under the agreement, Ceres will
pay to the Company or the Stem for Life
Foundation specified fees for each unit of the product sold; and
Ceres is engaging in a referral service with respect to the Company’s
adult stem cell collection and processing activities. Ceres is
paid a referral fee by us for adult stem collections generated by Ceres’
referral network.
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Adult
Stem Cell Business in China
We
believe that, in China, we can accelerate research, the development of stem
cell-based therapies, and the creation of intellectual property positions in the
stem cell field because of China’s regulatory and scientific environment and its
culture, which are more readily accepting of stem cell-based therapies.
Additionally, China has a large population with a rapidly growing middle and
upper class who are interested in regenerative medicine and can afford such
services. Accordingly, in 2009, we expanded our operations and markets to
include China through the creation of a separate stem cell business
unit.
Our China
stem cell-based initiatives will be led by U.S. researchers and physicians in
collaboration with experts in China for each clinical application to be pursued.
We believe that this collaborative approach, and our expansion into China, will
create commercial, financial and scientific opportunities that, ultimately, will
generate increased revenues for us.
Our
current stem cell-based initiatives in China include:
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•
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developing
a pipeline of regenerative medicine therapies, initially focused on
orthopedic conditions;
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developing
wellness, cosmetic and anti-aging
applications;
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participating
in the medical tourism market for regenerative medical
treatments;
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establishing
a network of collection, processing and storage facilities;
and
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engaging
in research and development designed to improve and expand our service and
product offerings both in the U.S. and in
China.
|
Because
certain PRC regulations currently restrict foreign entities from holding certain
licenses and controlling certain businesses in China, we have created a wholly
foreign-owned entity, or WFOE, NeoStem (China), Inc., or NeoStem (China), to
implement our expansion initiatives in China. Additionally, to comply with
China’s foreign investment regulations with respect to stem cell-related
activities, these business initiatives in China are conducted via two Chinese
domestic entities, Qingdao Niao Bio-Technology Ltd., or Qingdao Niao, and
Beijing Ruijieao Bio-Technology Ltd., or Beijing Ruijieao, that are controlled
by the WFOE through various contractual arrangements. See “PRC Corporate Legal
Structure” below.
Orthopedic
Therapies
In order
to advance our regenerative medicine business in China, in March 2009, we
acquired an exclusive license for Asia to use an innovative process that expands
a patient’s own adult stem cells to treat a variety of musculoskeletal diseases.
The licensed procedure, RegenexxTM, has
been developed by a Colorado-based company, Regenerative Sciences, Inc., or RSI.
The RegenexxTM
procedure uses autologous mesenchymal stem cells extracted from bone marrow for
the treatment of various orthopedic conditions, including osteoarthritis,
meniscus tears of the knee, avascular necrosis and bulging lumbar discs. In
addition, our agreement with RSI includes consulting services to be provided by
RSI to us in the area of stem cell-based orthopedic therapies for the Asia
market. We believe that the integration of our peripheral blood collection
process into the RegenexxTM
procedure will enhance its marketability.
- 8
- -
To
provide orthopedic-related stem cell-based services, we intend to establish a
network of hospitals to offer these orthopedic treatments in China. We recently
established a collaboration with Shandong Wendeng Orthopedic Hospital, or
Wendeng Hospital, which will be the first of such hospitals. In June 2009,
Qingdao Niao entered into a five-year cooperation agreement with Wendeng
Hospital to treat patients and conduct clinical research regarding the
application of autologous stem cells for the treatment of a variety of
orthopedic conditions. Wendeng Hospital is considered to be one of the leading
speciality orthopedic hospitals in China, with close to 90% of its inpatient
capacity dedicated to orthopedic cases. Physician and laboratory personnel have
completed training at RSI, operations began at Wengdeng Hospital in the first
quarter of 2010 and it is anticipated that revenues will start to be generated
in the second quarter of 2010.
Wellness,
Cosmetic & Anti-Aging Applications
We are
developing a program that includes products and therapies, including stem
cell-based therapies and health supplements, that we intend to offer for
wellness, cosmetic and anti-aging applications. One of the key initial therapies
is anticipated to be the autologous adult stem cell-based skin rejuvenation
therapy that we in-licensed from Vincent Giampapa, M.D., in February
2009.
The
license agreement with Dr. Giampapa is intended to advance our regenerative
medicine business in the U.S. and China by our acquisition of a world-wide,
exclusive license to certain innovative stem cell technology and applications
for cosmetic facial and body procedures and skin rejuvenation. This supplements
a three-year agreement that Dr. Giampapa entered into with us in January 2009
where he agreed to provide us with consulting services in the anti-aging area.
In collaboration with Dr. Giampapa, we intend to develop and launch a range of
cosmetic and anti-aging applications in China.
These
therapeutic applications were anticipated to be provided, initially, by Qingdao
Niao at the facilities at the Qingdao Second Sanatorium of Jinan Military
Command, or the Second Sanatorium, pursuant to a three-year cooperation
agreement entered into in June 2009. Second Sanitorium is a leading
comprehensive hospital within the military’s healthcare network and one of the
principal healthcare centers in charge of ensuring the well-being of senior and
retired military officials in China. A section of the hospital is
undergoing renovations to allow for stem cell based thereapies in anti-aging and
such renovations are behind schedule. To avoid delay to our program
we are considering alternative locations for initially commencing these
activities.
Consulting
and Royalty Agreement
In June
2009, we signed an agreement, or the Network Agreement, with Enhance BioMedical
Holdings Limited, or Enhance BioMedical, a Shanghai corporation and subsidiary
of Enhance Holding Corporation, a multinational conglomerate with businesses in
various market sectors including healthcare. Pursuant to the Network Agreement,
Enhance Biomedical will help us develop an adult stem cell collection and
treatment network using our proprietary stem cell technologies in Shanghai and
Taiwan as well as the Chinese provinces of Jiangsu, Zhejiang, Fujian, Anhui and
Jiangxi, or the Network Territory. Enhance BioMedical has healthcare provider
relationships with numerous hospitals and doctors in the Network Territory. It
also operates the Anti-Aging and Prevention Medical Center in Taipei, Taiwan,
with facilities focused on stem cell research and development and anti-aging
therapies. As of March 15, 2010, Enhance BioMedical was the beneficial owner of
approximately 16.7% of our common stock.
The
Network Agreement is a ten-year, exclusive, royalty bearing agreement pursuant
to which we will provide Enhance BioMedical with the training, technical, and
other assistance required for it to offer stem cell-based therapies. Subject to
certain terms and conditions, the Network Agreement is renewable for a
subsequent ten-year term at the option of Enhance BioMedical. This agreement
also gives us the option, until June 2014, to acquire up to a 20% fully diluted
equity interest in Enhance BioMedical. We will receive certain
milestone payments as well as be entitled to a stated royalty on Enhance
BioMedical’s revenues derived from these stem cell-based therapies. Under the
Network Agreement, Enhance BioMedical has the exclusive right to utilize our
proprietary adult stem cell technologies identified by us to provide adult stem
cell services and therapies in the Network Territory.
In the
second quarter of 2010 we expect Enhance Biomedical to launch adult stem cell
collection and storage activities to enable them to launch the application
of cosmetic and anti-aging therapies in Taiwan during the summer of
2010 under our Network Agreement.
Medical
Tourism
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“Medical
tourism” is defined as the process of travelling from home for treatment abroad
or elsewhere domestically. A large segment of the individuals participating in
medical tourism seek access to medical therapies not currently available or
affordable in their home countries. The World Bank estimates that medical
tourism will be a $10 billion industry by 2011. In 2007 alone, 750,000 Americans
traveled outside the U.S. to obtain medical treatment, a number which is
expected to increase to 6 million by 2010.
Since our
inception, we have been building relationships with physicians in the U.S. and
abroad who have developed advanced therapies using autologous stem cells. China,
specifically, is fast emerging as a desirable destination for individuals
seeking medical care in a wide range of medical specialties, including
cardiology, neurology, orthopedics and others. As a result, a number of leading
private and government hospitals in major Chinese cities have established
medical tourism departments to provide treatment to international patients using
advanced Western medical technology and techniques, including stem cell-based
therapies. In addition to capitalizing on this trend as a potential driver for
our collection and storage business, we plan to work with specialty hospitals
and physicians in China and elsewhere to make stem cell-based therapies
available for these medical tourism patients.
Research
and Development
In May
2009, Qingdao Niao leased space from Beijing Zhongguancum Life Science Park
Development Corp., Ltd. to be used for a world-class storage facility in
Beijing, China or the Beijing Facility, that will be equipped to provide
comprehensive adult stem cell collection, processing and storage capabilities,
and a laboratory to support a number of our therapeutic programs, including the
orthopedic program at Wengdeng Hospital.
In
addition to supporting the processing and storage activities, the laboratory
will provide a state-of-the-art venue for expanded adult stem cell-related
research and development activities in China. We are collaborating with experts
in China to expand our intellectual property positions in the stem cell field
and develop adult stem cell-based therapies for the U.S. and broader China
markets. These efforts will be dedicated to the research and development of our
stem cell technology and its application to a number of therapeutic programs,
initially including diabetes, anti-aging and cardiac
disease. We are also in discussions with other researchers to
generate data relating to other clinical applications of very small
embryonic-like stem cells, that could include neural, cardiac, and ophthalmic
disease, to expand our research efforts and maximize the value of this
technology. In this regard, letters of intent have been executed between our
Chinese consultant, Shandong Life Science and Technology Research Institute, or
SLSI, and Peking University Diabetes Center, Beijing Institute of Geriatrics,
the Ministry of Health and Shandong University.
In July
2009, NeoStem (China) entered into a cooperation agreement with our Chinese
consultant, SLSI, to assist in the formation of a not-for-profit organization as
required under PRC law, to organize and conduct various stem cell-based clinical
trials in collaboration with specialty hospitals. This initiative was funded by
NeoStem (China) in the amount of approximately $730,000 and an additional
$500,000 is anticipated to be funded by NeoStem (China) over the next several
months.
In order
to implement the establishment of the Beijing Facility, as of December 31, 2009,
our Company, our WFOE subsidiary NeoStem (China), and Progenitor Cell
Therapy, LLC, a Delaware limited liability company, or PCT, entered into an
agreement, or the PCT Agreement, whereby NeoStem and NeoStem (China) engaged PCT
to perform the services necessary (1) to construct the Beijing Facility,
consisting of a clean room for adult stem cell clinical trial processing and
other stem cell collections which will have the processing capacity on an annual
basis sufficient for at least 10,000 samples, research and development
laboratory space, collection and stem cell storage area and offices, together
with the furnishings and equipment, and (2) to effect the installation of
quality control systems consisting of materials management, equipment
maintenance and calibration, environmental monitoring and compliance and adult
stem cell processing and preservation which comply with cGMP standards and
regulatory standards that would be applicable in the United States under GTP
standards, as well as all regulatory requirements applicable to the program
under the laws of the PRC.
Pursuant
to the terms of the PCT Agreement, the Beijing Facility is to be located at the
Life Science Innovation Center, Life Science Park,
Zhongguancum, Beijing. PCT is to complete the project on a “turn-key” basis.
Once the project has begun, our Company has the option to terminate the PCT
Agreement without cause upon providing no less than 60 days written notice to
PCT, subject to our obligation to pay for any services performed up to the date
of termination and certain costs and expenses incurred by PCT.
The
aggregate cost of the program, including the Phase 1 equipment purchases, is
expected to be approximately $3,000,000. The project will commence on April 1,
2010, and is anticipated to take approximately seven months to complete. PCT has
agreed to provide at least 90 days of support services to our Company for an
additional fee after completion of the project, which is renewable at the
request of our Company for an additional 90 days.
Pharmaceutical
Business in China — Erye
We
believe that China currently affords a unique opportunity to grow our revenues
on an accelerated basis. In order to enter this market, we completed the merger
with China Biopharmaceuticals Holdings, Inc., or the Merger, on October 30,
2009, the net effect of which was the acquisition by us of a 51% ownership
interest in Erye. Our current senior executive management team at Erye, Mr. Shi,
Chairman, and Madame Zhang, General Manager, joined Erye in 1998, who in
conjunction with others bought it from the PRC government in 2003 and, in the
years that followed, transformed it into a profitable private enterprise. Erye
had approximately 739 employees as of December 31, 2009, of which approximately
536 were full-time.
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Erye was
founded more than 50 years ago and represents an established,
vertically-integrated pharmaceutical business, focused primarily on the
manufacturing and sale of antibiotics. Historically, Erye has concentrated its
efforts on the manufacturing and distribution of generic antibiotic products and
has received more than 160 production certificates from the SFDA covering both
antibiotic prescription drugs and active pharmaceutical intermediates, or APIs.
Erye’s revenue for 2009 was approximately $61.
Industry
China has
a large population with a rapidly growing demand for pharmaceutical drugs and
has committed to providing increased governmental insurance to provide a larger
segment of the population greater access to pharmaceuticals. The antibiotics
market in China was approximately $8.8 billion in 2007, with an annual average
growth rate of approximately 24 percent for the previous three years. The
overall pharmaceuticals market is forecasted to triple in size by 2013, becoming
the third largest drug market in the world behind the U.S. and
Japan.
In early
2009, the PRC government announced that improving healthcare for its citizens
would be a major priority and China’s State Council approved the spending of
$124 billion on its healthcare system between 2009 and 2011. This spending
initiative, coupled with a population approaching 1.4 billion, makes China a
large market opportunity for pharmaceutical drugs. As part of this initiative,
China has created the New Rural and Urban Cooperative Medical Insurance System.
More than 60% of the drugs produced by Erye are covered under this new medical
insurance system.
Products
Erye
offers a broad portfolio of anti-infective drugs, with no single product
accounting for more than 10% of total revenues. In 2008, seven of the top 20
antibiotics used in Chinese hospitals were products offered by Erye. Erye’s top
five products, by revenue, for the first nine months of 2009, are set forth in
the following table:
|
Product
Name
|
Product
Type
|
Approximate
Revenue
|
||
|
|
|
(In
Millions)
|
||
|
Acetylspiramycin
|
API
|
$4.0
|
||
|
Oxacillin
Sodium
|
API
|
$3.2
|
||
|
Mezlocillin
Sodium
|
Injectible
Finished Product
|
$3.1
|
||
|
Amoxicillin/Sulbactum
Sodium
|
Injectible
Finished Product
|
$3.0
|
||
|
Cefoperazone/Sulbactum
Sodium
|
Injectible
Finished Product
|
$2.4
|
Erye is
currently focused on bringing more differentiated and higher-margin product
offerings to its portfolio.
Distribution/Customers
In China,
consumers generally receive prescription drugs through hospitals. Antibiotics
are distributed almost exclusively through hospitals. Since pharmaceutical
manufacturers in China are not permitted to sell directly to hospitals, it is
essential to have an effective and extensive distributor network. Erye’s
distributor network covers all of mainland China’s provinces and municipalities
and generates sales principally through three channels:
|
•
|
exclusive
distributors of prescription drugs, referred to as “co-sales teams”: this
distribution channel handles the clinical promotion and distribution of
differentiated, higher-margin product lines, within exclusive
province-based and municipality-based
territories;
|
|
•
|
non-exclusive
distributors of prescription drugs: this distribution channel is devoted
to selling established product lines that require little, if any, clinical
promotion; and
|
|
•
|
exclusive
distributors of APIs: this distribution channel is devoted to selling APIs
to large pharmaceutical manufacturers
nationwide.
|
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Erye has
an internal sales and marketing team of more than 40 individuals that supervise
the distributor network, assist with clinical promotions and manage hospital
relationships. Many of Erye’s sales executives have long-term experience in
pharmaceutical sales and previously held sales positions with state-owned
pharmaceutical companies, where they established long-standing relationships
with large distribution centers in several key regions nationwide and, in
particular, within the Yangzi River Triangle.
Production
Facilities
Erye
currently operates a production facility in the City of Suzhou, containing
approximately 33,490 square meters of offices, dormitories, a food court,
warehouse and production facilities, including eight (cGMP) production lines
certified by the SFDA, workshops and laboratory areas.
In 2005,
the PRC government issued a mandate requiring the relocation of many of Erye’s
existing manufacturing facilities. The government mandate did not require Erye
to relocate by any specific date. In order to comply with this mandate and to
meet the growing demands of its business, Erye acquired land use rights to
approximately 27 acres in the Xiangcheng District of Suzhou and, in 2007,
commenced the construction of a new, state-of-the-art production facility. This
new campus-style facility includes 12 buildings containing a total of
approximately 49,436 square meters of space, for which the external building
construction has been completed and manufacturing equipment is being assembled
and tested. The land use rights end in January of 2058.
Erye
began transferring its operations in January 2010. The relocation will continue
as the new production lines are completed and receive cGMP certification through
2011. In January 2010, Erye received notification that the SFDA has approved
Erye’s application for cGMP certification to manufacture solvent crystallization
sterile penicillin and freeze dried raw sterile penicillin at the new facility,
which provides 50% and 100% greater manufacturing capacity, respectively, than
its existing facility. Historically, these two lines have accounted for
approximately 20% of Erye’s sales.
Once Erye
has completed the transfer of operations to the new facilities, and its new
production lines are fully operational, it will have substantially increased
capacity from the current plant, with the goal of becoming among the largest
antibiotics producers in Eastern China. This dominant market position would
allow us to take advantage of the expected growth and spending in this segment
of the market. Our U.S. based management team intends to work closely with the
management of Erye to identify new pharmaceutical product candidates to further
accelerate revenue growth. We believe that our ownership in Erye, and the
expansion of our stem cell business into China, will create commercial,
financial and scientific opportunities to significantly grow our
business.
The total
cost of the new facility is estimated to be approximately $30 million, of which
approximately $16 million has been paid for through December 31, 2009. The
remaining $14 million is expected to be funded from a combination of proceeds
from the Company’s February 2010 common stock offering in which it
raised net proceeds of approximately $7.1 million, the proceeds from the
exercise by RimAsia in March 2010 of a warrant to purchase 1,000,000 shares of
Common Stock at a per share purchase price of $1.75 resulting in gross proceeds
to the Company of $1,750,000 (in each of the prior two cases such funding would
be in the form of a loan from the Company), an Erye line of credit and Erye’s
operating cash flow. To this end, the owners of Erye have agreed to reinvest a
substantial portion of their respective shares of the earnings of Erye to pay
the costs associated with the completion of, and Erye’s relocation to, the new
production facility.
Research
and Development — Product Pipeline
Erye
provides a well-established and capable platform and network for the
introduction of pharmaceuticals, and other health-related products, to the vast
domestic patient and consumer markets in China.
Currently,
Erye has seven new drug candidates in its pipeline, at varying stages of the
development and commercialization process. Applications for production
certificates for four of these drug candidates have been submitted to and are
pending approval by the SFDA, including Adefovir capsules, Cloxacillin Sodium
(API), Clindamycin Phosphate for injection, and Omeprazole capsules (approved
November 2009). Erye also has three candidates in clinical trials that could be
considered “new drugs” in China, including Faropenem sodium (API), Faropenem
tablets, a broad spectrum antibiotic, and Tiopronin enteric-coated capsules,
used to prevent kidney stones.
Erye’s
recent track record for obtaining SFDA production certificates includes seven
certificates in 2007, four certificates in 2008 and four certificates in 2009
(including Omeprazole capsules).
In
addition to research and development regarding new prescription drugs, we plan
to expand Erye’s product pipeline with health supplements and nutraceutical
products. We believe that the expansive markets in China present opportunities
for these products and that Erye already has extensive capabilities to
accelerate product distribution.
PRC
Corporate Legal Structure
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We
conduct our operations in the PRC through two distinct business units: (i) our
China pharmaceutical business unit which we conduct though our 51% ownership
interest in Erye; and (ii) our China adult stem cell business unit which we
conduct through contractual arrangements that our wholly foreign-owned entity,
or WFOE, NeoStem (China) has with two variable interest entities, or VIEs,
Qingdao Niao Bio-Technology Ltd. and Beijing Ruijieao Biotechnology
Ltd.
China
Pharmaceutical Business
On
October 30, 2009, we completed the Merger with China Biopharmaceuticals
Holdings, Inc., or CBH, through a wholly-owned subsidiary of ours with our
subsidiary as the surviving entity. As a result of the Merger, we acquired a
controlling interest in Suzhou Erye Pharmaceuticals Company Ltd., or Erye, a
Sino-foreign joint venture with limited liability organized under the laws of
the PRC. Suzhou Erye Economy and Trading Co. Ltd., or EET, owns the remaining
49% ownership interest in Erye. An amended joint venture agreement and articles
of association of Erye, the effectiveness of which was subject to approval by
the requisite PRC government authorities, was prepared and approval obtained in
principle on December 28, 2009 from Jiangsu Bureau of Foreign Economic and
Trade. Notwithstanding this approval, we cannot be certain that all
provisions, especially those provisions relating to the distribution and
liquidation preference in the joint venture contract, are in full compliance
with or fully enforceable under PRC law.
China
Adult Stem Cell Business
Because
certain PRC regulations currently restrict or prohibit foreign-invested entities
from holding certain licenses and controlling businesses in certain industries
in China, we created the WFOE, NeoStem (China), to implement our expansion
objectives in China. NeoStem (China) may engage in the research and development,
transfer and technological consultation service of bio-technology, regenerative
medical technology and anti-aging technology, excluding the development or
application of human stem cell, gene diagnosis and treatment technologies;
consultation of economic information; import, export and wholesaling of
machinery and equipment (the import and export do not involve the goods
specifically stipulated in/by state-operated trade, import and export quota
license, export quota bidding, export permit, etc.). To comply with China’s
foreign investment prohibition on stem cell research and development, clinical
trials and related activities, this business is conducted via two VIEs: Qingdao
Niao and Beijing Ruijieao, each a Chinese domestic company controlled by NeoStem
(China) through the VIE documents. Under the VIE documents, the shareholders of
the VIEs are required to transfer their ownership interests in these entities to
NeoStem (China) in China in the event Chinese laws and regulations allow foreign
investors to hold ownership interests in the VIEs, or to our designees at any
time for the amount of, to the extent permitted by Chinese laws, the outstanding
loans to the VIE shareholders. The shareholders of the VIEs have entrusted us to
appoint the directors and senior management personnel of the VIEs on their
behalf. Through NeoStem (China), we have entered into exclusive technical and
management service agreements and other service agreements with the VIEs, under
which NeoStem (China) is providing technical and management services to the VIEs
in exchange for substantially all net income of the VIEs. In addition,
shareholders of the VIEs have pledged their equity interests in the VIEs to
NeoStem (China) as collateral for non-payment of loans or for fees on technical
and management services due to us.
The
capital investment in these VIEs is funded by us through the WFOE and recorded
as interest-free loans to the shareholders of Qingdao Niao and Beijing Ruijieao.
To date, the WFOE has been capitalized in the total amount of approximately $2.9
million with an additional $1,000,000 anticipated in the second quarter of 2010.
As of December 31, 2009, the total amount of interest-free loans to these
shareholders of the VIEs listed as above was approximately 5,500,000 RMB
(approximately $805,000). We expect that the WFOE will require
substantial additional funding in order for us to continue the current expansion
plans in China associated with our stem cell business.
In
December, 2009, in order to facilitate working capital requirements in China,
NeoStem (China) issued a promissory note to the Bank of Rizhao Qingdao Branch
in the amount of 4,400,000 RMB (approximately
$643,700). The note is due on June 21, 2010 and bears an interest rate of 4.05%.
The loan is collateralized by cash in a restricted bank account totaling
5,189,400 RMB (approximately $759,200). In addition, in January, 2010 NeoStem
(China) entered into a pledge agreement with the bank pledging all of its
interest in its VIEs as additional collateral for the loan.
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We expect
to receive benefits, to the extent permitted by PRC laws, through various VIE
contractual agreements in the form of authorized sharing of the ownership of the
know-how and other intellectual property rights derived from the clinical trials
and research and development, and in the form of financial benefits on a basis
of profit sharing mechanisms with participating partner hospitals from the
commercialization of regeneration medical treatments developed successfully from
the clinical trials.
Pursuant
to certain opinions regarding Administration of Not-for-profit Research
Institutions (Trial), or the Opinions, which were promulgated and became
effective on December 19, 2000, not-for-profit research institutions shall have
independent legal person status, and shall operate independently under the
guidance and supervision of corresponding government authorities. Not-for-profit
research institutions shall conduct science, research, technical consulting and
technical service mainly for the purpose of social benefits, and shall not be
operated for profit. No person or institution shall obtain any investment return
from not-for-profit research institutions in any manner, and all of the income
generated by not-for-profit research institutions during their provision of
for-profit services to society, and which is permitted to be kept by the
not-for-profit research institution pursuant to relevant rules, shall be used
for the development of the not-for-profit research institution.
Accordingly,
we are cooperating, through NeoStem (China) with our China consultant, SLSI,
with regard to the formation of a not-for-profit organization under PRC law, to
organize and conduct various clinical trials in China. We have provided funding
through a contractual arrangement with SLSI, and SLSI has taken responsibility
for establishing and structuring clinical trials with third parties, other
research institutes and a number of partner hospitals. Through various VIE or
other contractual agreements, we expect to obtain, directly or indirectly, part
of the management and operation rights and benefits from SLSI. However, if this
contractual arrangement is regarded as breaching any clause in the Opinions, the
contractual agreements we have with SLSI will need to be terminated or modified,
and we may not obtain or continue to obtain benefits, directly or indirectly,
from SLSI as expected.
Further,
pursuant to the Interim Measures for the Administration of Human Genetic
Resources, or the Measures, which was promulgated and took effect on June 10,
1998, China adopted a reporting and registration system on important pedigrees
and genetic resources in specified regions. Whoever is engaged in activities in
China such as sampling, collecting, researching, developing, trading or
exporting human genetic resources or taking such resources outside China shall
abide by the Measures. The term “human genetic resources” in the Measures refers
to the genetic materials such as human organs, tissues, cells, blood specimens,
preparations of any types or recombinant DNA constructs, which contain human
genome, genes or gene products as well as to the information related to such
genetic materials. It is possible that the research and development operations
conducted by SLSI may be regarded by corresponding government authorities in
China as human genetic resources research and development activities, and thus,
the Measures may apply. If the Measures apply to the cooperation between the Lab
and/or the SLSI, and us, such cooperation is subject to approval of competent
government authorities in China. The sharing of patents or other corresponding
intellectual property rights derived from such research and development
operations is also subject to various restriction and approval requirements
established under the Measures. If we are unable to obtain corresponding
approvals on a timely basis, or at all, our operation in China will be
materially adversely affected.
One VIE
will be devoted to adult stem cell related research and development activities
and the other will be devoted to the commercialization of stem cell-based
therapies in collaboration with hospitals.
Intellectual
Property
We are
seeking patent protection for our technology. We acquired and are prosecuting
one pending U.S. patent application which had been filed by our predecessor, NS
California. This patent application is intended to cover the process by which
stem cells from the bone marrow are mobilized, isolated from adult peripheral
blood and stored. In addition, we have filed a patent application covering
low-dose, short course, cytokine induction of stem cell mobilization and patent
applications claiming methods of purifying stem cells. The Company also has
filed two additional U.S. patent applications claiming methods of isolating
adult stem cells using various proprietary techniques.
Pursuant
to our license agreement covering the VSELTM
technology, we acquired the exclusive, world-wide license to patent applications
and know-how relating to very small embryonic-like stem cells. Patent
applications regarding this technology are pending in the U.S., China and
Europe. These patent applications relate specifically to a method of isolating
and using very small embryonic-like stem cells. Under the license for the
VSELTM
technology, we have the right to unpatented inventions and discoveries contained
in certain manuscripts relating to transplantation and mobilization of these
cells in certain circumstances, which has been pursued in subsequently filed
provisional patent applications.
Pursuant
to our license agreement with Vincent Giampapa, M.D., F.A.C.S., we have an
exclusive, world-wide license to a granted U.S. patent, patent applications and
know-how relating to methods and compositions for the restoration of age-related
tissue loss.
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Pursuant
to our license agreement with Vincent Falanga, M.D., F.A.C.P., we have an
exclusive, world-wide license to a U.S. provisional patent application and
corresponding PCT application and know-how relating to the use of autologous
mesenchymal stem cells to treat wounds.
Pursuant
to our license agreement with RSI, we have an exclusive license for Asia to a
patent application pending in Hong Kong and the right to file additional patent
applications throughout Asia, as well as an exclusive license to know-how, all
relating to the isolation and use of mesenchymal stem cells in orthopedic
indications.
There can
be no assurance that any of our patent applications will issue as patents or
should patents issue that they will not be found invalid. The patent position of
biotechnology companies generally is highly uncertain and involves complex
legal, scientific and factual questions.
The
government approval procedure in China for the filing, consideration and
approval of new patent applications is as follows: The applicant prepares
documentation and sends the application to State Intellectual Property Office of
China, or SIPO, usually through patent application agencies. The application is
then examined by SIPO. If the application is approved, SIPO issues and releases
a patent illustration book for challenges by competing claimants. Once the
illustration book is issued, the patent is protected. Within a three-year
period, depending on different categories of the patent, if there are no
challenges against the patent, then SIPO will issue a patent license to the
applicant.
Competition
Pharmaceutical
operations in China are still at an early stage of development due to heavy
state involvement in the past. However, competition from China-based drug
manufacturing companies is growing rapidly. Our direct competitors are domestic
pharmaceutical companies and new drug research and development institutes such
as Harbin Pharmaceutical Group Holding Co., Ltd., Shanghai Asia Pioneer
Pharmaceutical Co., Ltd, Shandong Lukang Pharmaceutical Co., Ltd., Shandong
Luoxin Pharmacy Stock Co. Ltd., China Pharma Holdings, China Biologic Products,
China Sky One Medical, Sinovac Biotech and Tianyin Pharma. We also face
competition from foreign companies who have strong proprietary pipelines and
strong financial resources.
Historically
in the U.S., we have faced competition from other established operators of stem
cell preservation businesses and providers of stem cell storage services. Today,
there is an established and growing market for cord blood stem cell banking. We
are also aware of another company with established stem cell banking services
that processes and stores stem cells collected from adipose, or fat, tissue.
This type of stem cell banking requires harvesting fat by a liposuction
procedure. Embryonic stem cells represent yet another alternative to pre-donated
and stored adult stem cells. As techniques for expanding stem cells improve,
thereby allowing therapeutic doses, the use of embryonic stem cells and other
collection techniques of adult stem cells could increase and compete with our
services. Finally, we are aware that other technologies are being developed to
turn skin cells into cells that behave like embryonic stem cells or to harvest
stem cells from the pulp of baby teeth. While these and other approaches remain
in early stages of development, they may one day be competitive.
In
addition, cord blood banks such as ViaCord or LifebankUSA easily could enter the
field of adult stem cell collection because of their processing labs, storage
facilities and customer lists. We estimate that there are approximately 43 cord
blood banks in the U.S., approximately 28 of which are autologous, meaning that
the donor and recipient are the same, and approximately 15 of which are
allogeneic, meaning that the donor and recipient are not the same. Hospitals
that have transplant centers to serve cancer patients may elect to provide some
or all of the services that we provide. We estimate that there are approximately
162 hospitals in the U.S. with stem cell transplant centers. These competitors
may have better experience and access to greater financial resources than we do.
In addition, other established companies may enter our markets and compete with
us.
The
provision of stem cell-based therapies and banking services in China is a
nascent industry, with most participants engaging through single facilities on a
small scale. Many of these treatment centers rely on technology taken from
domestic universities, although a few more advanced competitors use technology
licensed from overseas. These small facilities are typically focused on
delivering stem cell treatments in one specific treatment area, such as central
nervous system diseases, ischemia, and cosmetics, with the majority treating
central nervous system diseases. Given limited stem cell operations in China,
the market remains significantly underserved.
Of the
field of stem cell-based therapies and banking services in China, the only
competitor of note of which we are aware is Beike Biotechnology Co Ltd., or
Beike, headquartered in Shenzhen, Guangzhou province, which provides stem
cell-based treatments through collaborations with a network of approximately 20
hospitals. In 2008, Beike established a stem cell storage facility in Jiangsu
province, recently broke ground on an expanded facility and has disclosed that
it plans to eventually house induced pluripotent stem cells (iPS) extraction on
a commercial scale.
Governmental
Regulation
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As we
expand into China, we expect to rely upon the experience of Erye as well as
certain of our other PRC advisors and consultants with the Drug Administration
Law of China, which governs the licensing, manufacturing, marketing and
distribution of pharmaceutical products in China. Additionally, our operations
are subject to various PRC regulations and permit systems.
The
application and approval procedure in China for a newly-developed drug product
is nearly as detailed and lengthy as that for U.S. new drug applicants,
requiring the documentation of pharmacological studies, toxicity studies and
pharmacokinetics and drug metabolism (PKDM) studies and new drug samples.
Documentation and samples are then submitted to a provincial food and drug
administration, or the provincial FDA. The provincial FDA sends its officials to
the applicant to check the applicant’s research and development facilities and
to arrange a new drug examination committee meeting for approval deliberations.
This process usually takes three months. After the documentation and samples are
approved by the provincial FDA, the provincial FDA will submit the approved
documentation and samples to the SFDA. The SFDA examines the documentation and
tests the samples and arranges a new drug examination committee meeting for
approval deliberations. If the application is approved by the SFDA, the SFDA
will issue a clinical trial license to the applicant allowing the applicant to
conduct human clinical trials. The clinical trial license approval typically
takes one year. The applicant completes the clinical trial process and prepares
documentation and files submitted to the SFDA for new drug approval. The
clinical trial process usually takes one or two years depending on the category
and class of the new drug. The SFDA examines the documentation and gives final
approval for the new drug and issues the new drug license to the applicant. This
process usually takes 8 months. As a result, the entire process for new drug
approval, from start to finish, usually takes three to four years.
The PRC
government is in the process of reviewing its industry policies relating to the
pharmaceutical industry and, as a part of this review, has been reviewing drug
permits and licenses that have been issued. As of now, Erye maintains good
standing of its drug permits and licenses. Although the PRC government has
published regulations regarding stem cell clinical applications, there is
currently not implemented guidance. Without guidance, it is difficult
to definitively know how the regulations are to be implemented.
The PRC
Antitrust Law was promulgated on August 30, 2007 and became effective on August
1, 2008. The government authorities in charge of antitrust matters in China are
the Antitrust Commission and other antitrust authorities under the State
Council. The PRC Antitrust Law regulates: (i) monopoly agreements, including
decisions or actions in concert that preclude or impede competition, entered
into by business operators; (ii) abuse of dominant market position by business
operators; and (iii) concentration of business operators that may have the
effect of precluding or impeding competition. Except for the exemptions set
forth under Article 15 of the PRC Antitrust Law, competing business operators
are prohibited from entering into monopoly agreements that fix or change
commodity prices, restrict the production volume or sales volume of commodities,
divide markets for sales or procurement of raw materials, restrict procurement
of new technologies or new equipment or development of new technologies or new
equipment, result in joint boycott of transactions or constitute monopoly
agreements as determined by the antitrust authority.
In
addition, business operators with the ability to control the price or quantity
of commodities or other trading conditions or those with the ability to block or
affect other business operators into the relevant markets are prohibited from
engaging in certain business conducts that would result in abuse of their
dominant market position.
Moreover,
concentration of business operators refers to: (i) merger with other business
operators; (ii) gaining control over other business operators through
acquisition of equity interest or assets of other business operators; and (iii)
gaining control over other business operators through exerting influence on
other business operators through contracts or other means. In the event of
occurrence of any concentration of business operators and to the extent required
by the Antitrust Law, the relevant business operators must file with the
antitrust authority under the State Council prior to conducting the contemplated
business concentration. If the antitrust authority decides not to further
investigate whether the contemplated business concentration has the effect of
precluding or impeding competition or fails to make a decision within 30 days
from receipt of relevant materials, the relevant business operators may proceed
to consummate the contemplated business concentration.
It is
widely expected that a set of detailed implementing rules of the PRC Antitrust
Law will be issued by the PRC government. We are now in the process of reviewing
our current business model and business operation against the PRC Antitrust Law.
However, before the promulgation of such implementing rules, we are unable to
determine whether we might be in violation of any aspects of the PRC Antitrust
Law.
The
services that we provide to individuals are relatively new. Our adult stem cell
collection, processing and storage service is not a medical treatment, although
it involves medical procedures. Our stem cell-related business is not addressed
by many of the regulations applicable to our field and as a result, there is
often considerable uncertainty as to the applicability of regulatory
requirements. Although we have devoted significant resources to ensuring
compliance with those laws that we believe to be applicable, it is possible that
regulators may disagree with our interpretations, prompting additional
compliance requirements or even enforcement actions.
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We
believe that the adult stem cells collected, processed and stored through our
collection services are properly classified under the FDA’s human cells, tissues
and cellular- and tissue-based products, or HCT/P, regulatory paradigm and
should not be classified as a medical device, biologic or drug.
Relationships
with licensed professionals such as physicians may be subject to state and
federal laws restricting the referral of business, prohibiting certain payments
to physicians, or otherwise limiting such collaborations. If our services become
approved for reimbursement by government or private insurers, we could be
subject to additional regulation and perhaps additional limitations on our
ability to structure relationships with physicians. Additionally, state
regulators may impose restrictions on the business activities and relationships
of licensed physicians or other licensed professionals. For example, many states
restrict or prohibit the employment of licensed physicians by for-profit
corporations, or the “corporate practice of medicine.” If we fail to structure
our relationships with physicians in accordance with applicable laws or other
regulatory requirements it could have a material adverse effect on our business.
Even if we do enter into these arrangements, we may not be able to maintain
these relationships or establish new ones in the future on acceptable
terms.
Some
states also impose additional regulation and oversight of clinical laboratories
operating within their borders and impose regulatory compliance obligations on
out-of-state laboratories providing services to their residents. Many of the
states in which we, our strategic partners or members of our collection network
engage in collection, processing or storage activities have licensing
requirements that must be complied with. Additionally, there may be state
regulations impacting the use of blood products that would impact our business.
There can be no assurance that we, our strategic partners or members of our
collection center network will be able to obtain or maintain any necessary
licenses required to conduct business in any states or that the cost of
compliance will not materially and adversely affect our ability to market or
perform our services or our ability to do so profitably. Certain licensing
requirements require employment of medical directors and others with certain
training and technical backgrounds and there can be no assurance that such
individuals can be retained or will remain retained or that the cost of
retaining such individuals will not materially and adversely affect our ability
to market or perform our services or our ability to do so
profitably. The Cambridge laboratory has established a quality
program based on Occupational Safety and Health Administration (“OSHA”)
laboratory safety standards and American Association of Blood Bank (“AABB”)
standards
Since
January of 2004, registration with the FDA is required by facilities engaged in
the recovery, processing, storage, labeling, packaging or distribution of any
HCT/Ps, or the screening or testing of a donor. Any third party retained by us
to process our samples must be similarly registered with the FDA and comply with
HCT/P regulations. The FDA also adopted rules in May 2005 that regulate current
Good Tissues Practices, or cGTP. Additionally, adverse events in the field of
stem cell therapy that may occur could result in greater governmental regulation
of our business, creating increased expenses and potential delays relating to
the approval or licensing of any or all of the processes and facilities involved
in our stem cell collection and storage services.
In the
U.S., our planned stem cell biomarker screening panels may be subject to
regulation as a medical device by the FDA under the Federal Food, Drug and
Cosmetic Act. These domestic regulations govern many of the commercial
activities we plan to perform, including the purposes for which our proposed
immunodiagnostic assays can be used, the development, testing, labeling, storage
and use of our proposed assays with other products, and the manufacturing,
advertising, promotion, sales and distribution of our proposed assays for the
approved purposes. Compliance with these regulations could prove expensive and
time-consuming and render such panels commercially impractical.
We are
subject to state and federal privacy laws related to the protection of our
customers’ personal health information and state and federal laws related to the
security of such personal health information and other personal data to which we
would have access through the provision of our services. Currently, we are
obligated to comply with privacy and security standards adopted under HIPAA.
Certain of these regulatory obligations will be changing over the next year as a
result of amendments to HIPAA under the American Recovery and Reinvestment Act
of 2009. Consequently, our compliance burden will increase, and we will be
subject to audit and enforcement by the federal government and, in some cases,
enforcement by state authorities. We will also be obligated to publicly disclose
wrongful disclosures or losses of personal health information. We may be
required to spend substantial amounts of time and money to comply with these
requirements, any regulations and licensing requirements, as well as any future
legislative and regulatory initiatives. Failure by us or our business partners
to comply with these or other applicable regulatory requirements or any delay in
compliance may result in, among other things, injunctions, operating
restrictions, and civil fines and criminal prosecution, a material adverse
effect on the marketing and sales of our services and impair our ability to
operate profitably or at all.
We
also are subject to state and federal laws regulating the proper disposal of
biohazardous materials. Accordingly, we are subject to and seek to comply with,
applicable regulations under federal, state and local laws regarding employee
safety, environmental protection and hazardous substance control. We have made
and will continue to make expenditures for environmental compliance,
environmental protection and employee safety. Such expenditures have not had,
and in the opinion of management are not expected to have, a material effect on
our financial position, results of operation, capital expenditures or
competitive position. However, these laws may change, our processes may change,
or other facts may emerge which could affect our operations, business or assets
and therefore the amount and timing of expenditures in the future may vary
substantially from those currently anticipated.
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As the
stem cell therapy industry is at an early stage of development in China, new
laws and regulations may be adopted in the future to address new issues that
arise from time to time. As a result, substantial uncertainties exist regarding
the interpretation and implementation of current and any future PRC laws and
regulations applicable to the stem cell therapy industry. There is no way to
predict the content or scope of future Chinese stem cell regulation. There can
be no assurance that the PRC government authorities will not issue new laws or
regulations that impose conditions or requirements with which we cannot comply.
Noncompliance could materially and adversely affect our business, results of
operations and financial condition.
The
Chinese Ministry of Commerce, or MOFCOM, and Ministry of Science and Technology
of China, or MOST, jointly publish the Catalogue of Technologies the Export of
which from China is Prohibited or Restricted, and the Catalogue of Technologies
the Import of which into China Prohibited or Restricted. Stem cell-related
technologies are not listed in the current versions of these catalogues, and
therefore their import or export should not be forbidden or require the approval
of MOFCOM and MOST. However, these catalogues are subject to revision and, as
the PRC authorities develop policies concerning stem cell technologies, it is
possible that the categories would be amended or updated should the PRC
government want to regulate the export or import of stem cell related
technologies to protect material state interests or for other reasons. Should
the catalogues be updated so as to bring any activities of the planned stem cell
processing, storage and manufacturing operation in Beijing and related research
and development activities under their purview, any such limitations or
restrictions imposed on the operations and related activities could materially
and adversely affect our business, financial condition and results of
operations.
Employees
As of
December 31, 2009, NeoStem had 25 full-time, and 3 part-time employees in the
U.S., and 2 employees in China. None of our employees is covered by a collective
bargaining agreement, and we believe our employee relations are good. Erye has
739 employees, of which 536 are full-time employees, all of whom are
located in Jiangsu Province, China. Although a significant number of Erye’s
employees have employment contracts, none of the employees are covered by a
collective bargaining agreement, and employee relations are believed to be
good. It is anticipated with the relocation of the Erye plant, there
will be some attrition of employees though it will not have a significant impact
on Erye.
Former
Business Operations and Corporate Information
NeoStem
was incorporated under the laws of the State of Delaware in September 1980
under the name Fidelity Medical Services, Inc. Under prior management it
engaged in various businesses, including the development and sale of medical
imaging products, the retail sale and wholesale distribution of stationery and
related office products in the United Kingdom, operation of a property and
casualty insurance business, and ultimately through June 2002 the sale of
extended warranties and service contracts over the Internet covering automotive,
home, office, personal electronics, home appliances, computers and garden
equipment. In June 2002, management determined, in light of continuing
operating losses, to discontinue its warranty and service contract business and
to seek new business opportunities for NeoStem. NeoStem entered a new line of
business where it provided capital and guidance to companies in multiple sectors
of the healthcare and life science industries, in return for a percentage of
revenues, royalty fees, licensing fees and other product sales of the target
companies. In addition to such activities, since June 2002 NeoStem
continued to “run off” the sale of its warranties and service contracts. This
run off was completed in March 2007.
We
commenced operations in our adult stem cell business in January 2006. On October
30, 2009, we completed a merger with China Biopharmaceuticals Holdings, Inc., or
CBH, the former owner of the 51% interest in Erye. Our principal executive
offices are located at 420 Lexington Avenue, Suite 450, New York, New York
10170, and our telephone number is (212) 584-4180. We maintain a corporate
website at www.neostem.com. The contents of our website are not part of this
Annual Report on Form 10-K and should not be relied upon in connection
herewith.
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ITEM
1A. RISK FACTORS
THE RISKS DESCRIBED BELOW ARE NOT THE
ONLY RISKS FACING THE COMPANY. ADDITIONAL RISKS THAT WE DO NOT YET KNOW OF OR
THAT WE CURRENTLY THINK ARE IMMATERIAL MAY ALSO IMPAIR OUR BUSINESS OPERATIONS.
THE FOLLOWING RISK
FACTORS SHOULD BE CONSIDERED CAREFULLY, IN ADDITION TO THE OTHER INFORMATION
CONTAINED IN THIS ANNUAL REPORT ON FORM 10-K AND THE DOCUMENTS INCORPORATED
HEREIN BY REFERENCE. THE STATEMENTS CONTAINED IN OR INCORPORATED BY REFERENCE
INTO THIS ANNUAL REPORT ON FORM 10-K THAT ARE NOT HISTORIC FACTS ARE
FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO RISKS AND UNCERTAINTIES THAT
COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE SET FORTH IN OR
IMPLIED BY FORWARD-LOOKING STATEMENTS. IF ANY OF THE RISKS OCCUR, OUR
BUSINESS STRATEGY, FINANCIAL CONDITION OR OPERATING RESULTS COULD BE ADVERSELY
AFFECTED.
Risks
Related to Our Business and Financial Condition
We
are a company with a limited operating history and have incurred substantial
losses and negative cash flow from operations in the past, and we expect to
continue to incur losses and negative cash flow for the near term.
We are a
company with a limited operating history, limited capital, and limited sources
of revenue. Since our inception in 1980, we have incurred net losses of
approximately $71 million through December 31, 2009. We incurred net losses of
approximately $25.0 million for the year ended December 31, 2009 and
approximately $9.2 million for the year ended December 31, 2008, and we expect
to incur additional operating losses and negative cash flow in the future. The
revenues from our adult stem cell collection, processing and storage business
are not sufficient to cover costs attributable to that business. We expect to
incur losses and negative cash flow for the foreseeable future as a result of
our activities under license and sponsored research agreements relating to our
VSELTM
technology and other research and development efforts to advance stem cell and
other therapeutics, both in the U.S. and China. We also expect to continue to
incur significant expenses related to sales, marketing, general and
administrative and product research and development in connection with the
development of our business.
Although
Suzhou Erye Pharmaceuticals Company Ltd., or Erye, a Chinese pharmaceutical
company in which we recently acquired a 51% interest, earned $12.3 million in
net income for the year ended December 31, 2009, it has only a limited history
of earnings. Moreover, Erye is expected to incur significant expenses in the
near term due to: (1) costs related to stabilizing and streamlining its
operations; (2) costs related to the relocation of its production operations to
a new facility currently under construction; (3) research and development costs
related to new drug projects; and (4) costs related to expanding its existing
sales network for new drug distribution. Pursuant to the current joint venture
agreement that governs the ownership and management of Erye, or the Joint
Venture Agreement, which is subject to PRC government approval, for the next
three years (i) 49% of undistributed profits, after tax, will be distributed to
Suzhou Erye Economy and Trading co. Ltd., or EET, which owns the remaining 49%
of Erye, and loaned back to Erye for use in connection with its construction of
the new Erye facility; (ii) 45% of the net profit after tax will be provided to
Erye as part of the new facility construction fund, which will be characterized
as paid-in capital for our 51% interest in Erye; and (iii) only 6% of the net
profit will be distributed to us directly for our operating expenses. As a
result, we will not be able to supplement our cash flow fully from the
operations and income expected to be generated by Erye.
We
will need substantial additional capital to continue operations and additional
capital may not be available on acceptable terms, or at all.
We will
require substantial additional capital to fund our business plan, including
additional research and development activities related to our adult stem cell
technologies and drug development efforts, and to support marketing efforts in
the U.S. and China. Our actual cash requirements may differ materially from
those currently estimated.
At
December 31, 2009, we had a cash balance of $7,159,369. The trading volume of
our common stock, coupled with our history of operating losses and liquidity
problems, may make it difficult for us to raise capital on acceptable terms or
at all. The demand for the equity and debt of small cap biopharmaceutical
companies like ours is dependent upon many factors, including the general state
of the financial markets. As demonstrated over the last year, during times of
extreme market volatility, capital may not be available on favorable terms, if
at all. Our inability to obtain such additional capital on acceptable terms
could materially and adversely affect our business operations and ability to
continue as a going concern.
If
we are unable to manage the growth of our business, our prospects may be limited
and the results of our operations and ability to continue as a going concern may
be materially and adversely affected.
We intend
to expand our sales and marketing programs, manufacturing capacity, and
portfolios of pharmaceutical products and innovative stem cell-based therapies
to meet future demand in the U.S. and China. Any significant expansion may
strain our managerial, financial and other resources. If we are unable to manage
our growth, our business, operating results and financial condition could be
materially adversely affected. We will need to continually improve our
operations, financial and other internal systems to manage our growth
effectively, and any failure to do so may result in slower growth, diminished
operating results and a failure to achieve profitability, which would materially
and adversely affect our ability to continue as a going concern.
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All
acquisitions intended to grow our business may expose us to additional
risks.
We will
continue to review acquisition prospects that could complement our current
business, increase the size and geographic scope of our operations or otherwise
offer revenue generating or other growth opportunities. Any increase in debt in
connection with an acquisition could result in increased interest expense.
Additionally, acquisitions may dilute the interests of our stockholders, place
additional constraints on our available cash and entail other risks, including:
difficulties in assimilating acquired operations, technologies or products; the
loss of key employees from acquired businesses; diversion of management’s
attention from our core business; risks of successor liability for unknown
claims; and risks of entering markets, including international markets, in which
we have limited or no prior experience.
Risks
Related to the Stem Cell Business
The
University of Louisville has the ability to exercise significant influence over
the future development of our VSELTM
technology.
The terms
of our exclusive license of the VSELTM
technology from the University of Louisville provide for a collaborative
approach on development decisions. For example, should we seek to collaborate
with a third party on the VSELTM
technology programs, prior approval of the University of Louisville would be
required for any sublicensing agreement. There can be no assurance they would
grant approval for decisions requiring their consent. In addition, we entered
into a sponsored research agreement with the University of Louisville, pursuant
to which they perform certain research activities for us. Accordingly, although
we have recently begun our own independent research and development activities
with respect to the VSELTM
technology and have entered into an additional sponsored research agreement with
the University of Michigan, we are highly dependent on the University’s
cooperation and performance in developing the VSELTM
technology. Further, the VSELTM
technology license agreement requires the payment of certain license fees,
royalties and milestone payments, payments for patent filings and applications
and the use of due diligence in developing and commercializing the VSELTM
technology. The sponsored research agreement requires other periodic payments.
Our failure to meet our financial or other obligations under the license or
sponsored research agreement in a timely manner could result in the loss of some
or all of our rights to proprietary technology, such as the loss of exclusive
rights or even termination of the agreements, and/or we could lose our right to
have the University of Louisville conduct research and development efforts on
our behalf.
We
have a very limited history of conducting our own research and development
activities.
To
support our own research and development capabilities for our VSELTM
technology and other stem cell technologies, in September 2009 we signed a lease
for approximately 8,000 square feet of office and laboratory space in Cambridge,
Massachusetts that serves as our research and development headquarters. To
pursue our business strategy, we must increase our internal research
capabilities, which we are endeavoring to accomplish at this facility, and by
establishing relationships with third parties. There can be no assurance that we
will be successful in these efforts. Our additional research and development
capacity also will require adequate sources of funding. There can be no
assurance that any of these development efforts will produce a successful
product or technology. Our failure to develop new products would have a material
adverse effect on our business, operating results and financial
condition.
Even
if we are successful in developing a therapeutic application using our VSELTM
technology or other potential stem cell technologies, we still may be
unsuccessful in creating a commercially viable and profitable
business.
The
commercial viability of our VSELTM
technology and other stem cell technologies may depend upon our ability to
successfully expand the number of stem cells collected through adult stem cell
collection processes in order to achieve a therapeutically-viable dose. Today,
the number of very small embryonic-like stem cells that can be isolated from the
peripheral blood of an adult donor is relatively small and this volume of cells
may not be sufficient for therapeutic applications. A critical component of our
adult stem cell collection, processing and storage services relating to the
VSELTM
technology and other potential stem cell technologies could therefore be the
utilization of stem cell expansion processes. There are many biotechnology
laboratories attempting to develop stem cell expansion technology, but to date
stem cell expansion techniques remain very inefficient. There can be no
assurance that such technology will be effective or available at all. The
failure of cost effective and reliable expansion technologies to become
available could severely limit the commercial opportunities of our VSELTM
technology programs and other potential stem cell technologies and limit our
business prospects, which could have a material adverse effect on our business,
operating results and financial condition.
Moreover,
stem cell collection techniques are rapidly developing and could undergo
significant change in the future. Such rapid technological development could
result in our technologies, becoming obsolete. Successful biotechnology
development in general is highly uncertain and is dependent on numerous factors,
many of which are beyond our control. While our VSELTM
technology and other stem cell technologies appear promising, such technologies
may fail to be successfully commercialized for numerous reasons, including, but
not limited to, competing technologies for the same indication. There can be no
assurance that we will be able to develop a commercially successful therapeutic
application for this technology or other potential stem cell
technologies.
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Our
research and development activities using adult stem cells in therapeutic
indications present additional risks.
Our
research and development activities relating to our VSELTM
technology and other populations of adult stem cells are subject to many of the
same risks as our adult stem cell collection, processing and storage business,
and additional risks related to requirements for preclinical and clinical
testing by regulatory authorities including the United States Food and Drug
Administration, or FDA, to demonstrate the safety and efficacy of the underlying
therapy. The development of new drugs and therapies is often a long, expensive
and difficult process and most attempts fail. Our VSELTM
technology is in the very early stages of development and will require many
steps, tests and processes before we will be able to commence clinical testing
in humans. There can be no assurance that a biologics license application, or
BLA, with the FDA will not be required for our VSELTM
technology or our other stem cell technologies. The approval process for a BLA
can take years, require human clinical trials and cost several million dollars.
There also can be no assurance that we independently, or through collaborations,
will successfully develop, commercialize or market our VSELTM
technology or other stem cells for any therapeutic indication. Should we fail to
develop our VSELTM
technology or other adult stem cell technologies pursued by us, our business
prospects, operating results and financial condition will be materially and
adversely affected.
Technological
and medical developments or improvements in conventional therapies could render
the use of stem cells and our services and planned products
obsolete.
Advances
in other treatment methods or in disease prevention techniques could
significantly reduce or entirely eliminate the need for our stem cell services,
planned products and therapeutic efforts. Additionally, technological or medical
developments may materially alter the commercial viability of our technology or
services, and require us to incur significant costs to replace or modify
equipment in which we have a substantial investment. In either event, we may
experience a material adverse effect on our business, operating result and
financial condition.
If
safety problems are encountered by us or others developing new stem cell-based
therapies, our stem cell initiatives could be materially and adversely
affected.
The use
of stem cells for therapeutic indications is still in the very early stages of
development. If an adverse event occurs during clinical trials related to one of
our product candidates or those of others, the FDA and other regulatory
authorities may halt our clinical trials or require additional studies. The
occurrence of any of these events would delay, and increase the cost of, our
product development and may render the commercialization of our product
candidates impractical or impossible.
Future
therapies using adult stem cells may not develop, and demand for adult stem cell
collection, processing and storage may never develop.
The value
of our stem cell collection, processing and storage business and our development
programs could be significantly impaired, and our ability to become profitable
and continue our business could be materially and adversely affected, if adult
stem cell therapies under development by us or by others to treat disease are
not proven effective, demonstrate unacceptable risks or side effects or, where
required, fail to receive regulatory approval. The therapeutic application of
stem cells to treat serious diseases is currently being explored using adult
stem cells like those that are the focus of our business, as well as embryonic
stem cells. Cells collected and used for the same individual are referred to as
autologous cells and those collected from an individual who is not the user of
the cells are referred to as allogeneic cells. To our knowledge, the only
allowed therapeutic use of stem cells in the U.S., other than in connection with
clinical trials, involves hematopoietic stem cell transplants to treat certain
types of blood-based cancers (hematopoietic stem cells are the stem cells from
which all blood cells are made). No other stem cell therapeutic products have
received regulatory approval for sale in the U.S. While stem cell-based therapy
has been reported to be susceptible to various risks, including some undesirable
side effects and immune system responses, these problems have been primarily
associated with allogeneic use. Inadequate therapeutic efficacy also is a risk
that may prevent or limit approval or commercial use of adult stem cells,
whether for autologous use or allogeneic use. In addition, the time and cost
necessary to complete the clinical development and to obtain regulatory approval
of new therapies using stems cells are expected to be significant.
Side
effects or limitations of our stem cell collection process or a failure in the
performance of the cryopreservation storage facility or systems of our service
providers could harm our reputation and business.
Customers
may experience adverse outcomes from our adult stem cell collection and storage
process. These include: (i) the possibility of an infection acquired from the
aphereis process, which is the process of extracting stem cells from a patient’s
whole blood and it is an integral part of our collection process; (ii)
collection of insufficient quantities of stem cells for therapeutic
applications; (iii) failure of the equipment supporting our cryopreservation
storage service to function properly and thus maintain a supply of usable adult
stem cells; and (iv) specimen damage, including contamination or loss in transit
to us. Should any of these events occur, our reputation could be harmed, our
operations could be adversely affected and litigation could be filed against us.
Our systems and operations are vulnerable to damage or interruption from fire,
flood, equipment failure, break-ins, tornadoes and similar events for which we
do not have redundant systems or a formal disaster recovery plan. Any claim of
adverse side effects or limitations or material disruption in our ability to
maintain continued uninterrupted storage systems could have a material adverse
effect on our business, operating results and financial condition.
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State
and other requirements may impact our ability to conduct a profitable
collection, processing and storage business for adult stem cells.
Some
states impose additional regulation and oversight of clinical laboratories
operating within their borders and impose regulatory compliance obligations on
out-of-state laboratories providing services to their residents. Many of the
states in which we, our strategic partners or members of our collection network
engage in collection, processing or storage activities have licensing
requirements that must be complied with. Additionally, there may be state
regulations impacting the use of blood products that would impact our business.
Certain licensing requirements require employment of medical directors and
others with certain training and technical backgrounds and there can be no
assurance that such individuals can be retained or will remain retained or that
the cost of retaining such individuals will not materially and adversely affect
our ability to market or perform our services or our ability to do so
profitably. There can be no assurance that we, our strategic partners or members
of our collection center network will be able to obtain or maintain any
necessary licenses required to conduct business in any states or that the cost
of compliance will not materially and adversely affect our ability to market or
perform our services or our ability to do so profitably.
Our
adult stem cell collection, processing and storage business was not contemplated
by many existing laws and regulations, and our ongoing compliance, therefore, is
subject to interpretation and risk.
Our adult
stem cell collection, processing and storage service is not a medical treatment,
although it involves medical procedures. Our stem cell-related business is
relatively new and is not addressed by many of the regulations applicable to our
field. As a result, there is often considerable uncertainty as to the
applicability of regulatory requirements. Although we have devoted significant
resources to ensuring compliance with those laws that we believe to be
applicable, it is possible that regulators may disagree with our
interpretations, prompting additional compliance requirements or even
enforcement actions.
We
believe that the adult stem cells collected, processed and stored through our
collection services are properly classified under the FDA’s human cells, tissues
and cellular- and tissue-based products, or HCT/P, regulatory paradigm and
should not be classified as a medical device, biologic or drug. There can be no
assurance that the FDA will not reclassify the adult stem cells collected,
processed and stored through our collection services. Any such reclassification
could have adverse consequences for us and make it more difficult or expensive
for us to conduct our business by requiring regulatory clearance, approval
and/or compliance with additional regulatory requirements.
The costs
of compliance with such additional requirements or such enforcement may have a
material adverse effect on our operations or may require restructuring of our
operations or impair our ability to operate profitably.
We
may need to obtain regulatory approval before we can market and sell stem cell
biomarker screening panels in the U.S.
In the
U.S., our planned stem cell biomarker screening panels may be subject to
regulation as a medical device by the FDA under the Federal Food, Drug and
Cosmetic Act. These domestic regulations govern many of the commercial
activities we plan to perform, including the purposes for which our proposed
immunodiagnostic assays can be used, the development, testing, labeling, storage
and use of our proposed assays with other products, and the manufacturing,
advertising, promotion, sales and distribution of our proposed assays for the
approved purposes. Compliance with these regulations could prove expensive and
time-consuming and render such panels commercially impractical.
Ethical
and other concerns surrounding the use of stem cell therapy may negatively
impact the public perception of our stem cell services, thereby suppressing
demand for our services.
Although
our stem cell business pertains to adult stem cells only, and does not involve
the more controversial use of embryonic stem cells, the use of adult human stem
cells for therapy could give rise to similar ethical, legal and social issues as
those associated with embryonic stem cells, which could adversely affect its
acceptance by consumers and medical practitioners. Additionally, it is possible
that our business could be negatively impacted by any stigma associated with the
use of embryonic stem cells if the public fails to appreciate the distinction
between adult and embryonic stem cells. Delays in achieving public acceptance
may materially and adversely affect the results of our operations and
profitability.
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The
market for services related to the preservation and expansion of stem cells has
become increasingly competitive.
Historically,
we have faced competition from other established operators of stem cell
preservation businesses and providers of stem cell storage services. Today,
there is an established and growing market for cord blood stem cell banking. We
are also aware of another company with established stem cell banking services
that processes and stores stem cells collected from adipose, or fat, tissue.
This type of stem cell banking requires harvesting fat by a liposuction
procedure. Embryonic stem cells represent yet another alternative to pre-donated
and stored adult stem cells. As techniques for expanding stem cells improve,
thereby allowing therapeutic doses, the use of embryonic stem cells and other
collection techniques of adult stem cells could increase and compete with our
services. Finally, we are aware that other technologies are being developed to
turn skin cells into cells that behave like embryonic stem cells or to harvest
stem cells from the pulp of baby teeth. While these and other approaches remain
in early stages of development, they may one day be competitive.
In
addition, cord blood banks such as ViaCord or LifebankUSA easily could enter the
field of adult stem cell collection because of their processing labs, storage
facilities and customer lists. We estimate that there are approximately 43 cord
blood banks in the U.S., approximately 28 of which are autologous, meaning that
the donor and recipient are the same, and approximately 15 of which are
allogeneic, meaning that the donor and recipient are not the same. Hospitals
that have transplant centers to serve cancer patients may elect to provide some
or all of the services that we provide. We estimate that there are approximately
162 hospitals in the U.S. with stem cell transplant centers. These competitors
may have better experience and greater financial marketing, technical and
research resources, name recognition, and market presence than we do. In
addition, other established companies may enter our markets and compete with us.
There can be no assurance that we will be able to compete
successfully.
Building
market acceptance of our U.S. autologous adult stem cell collection, processing
and storage services, may be more costly and take longer than we
expect.
The
success of our U.S. autologous adult stem cell business depends on continuing
and growing market acceptance of our collection, processing and storage services
as well as stem cell therapy generally. Increasing the awareness and demand for
our services requires expenditures for marketing and education of consumers and
medical practitioners who, under present law, must order stem cell collection
and treatment on behalf of a potential customer. The time and expense required
to educate and to build awareness of our services and their potential benefits
and about stem cell therapy in general could significantly delay market
acceptance and our ultimate profitability. The successful commercialization of
our services will also require that we satisfactorily address the concerns of
medical practitioners in order to avoid resistance to recommendations for our
services and ultimately reach our potential consumers. No assurances can be
given that our business plan and marketing efforts will be successful, that we
will be able to commercialize our services, or that there will be market or
clinical acceptance of our services by potential customers or physicians,
respectively, sufficient to generate any material revenues for us. To date, only
a minimal number of collections have been performed at the collection centers in
our network.
We
operate in a highly regulated environment and may be unable to comply with
applicable federal regulations, registrations and approvals.
Since
January of 2004, registration with the FDA is required by facilities engaged in
the recovery, processing, storage, labeling, packaging or distribution of any
HCT/Ps, or the screening or testing of a donor. Any third party retained by us
to process our samples must be similarly registered with the FDA and comply with
HCT/P regulations. If we, or any third party processors, fail to register or
update registration information in a timely way, we will be out of compliance
with FDA regulations which could adversely affect our business. The FDA also
adopted rules in May 2005 that regulate current Good Tissues Practices, or cGTP.
Additionally, adverse events in the field of stem cell therapy that may occur
could result in greater governmental regulation of our business, creating
increased expenses and potential delays relating to the approval or licensing of
any or all of the processes and facilities involved in our stem cell collection
and storage services.
We also
are subject to state and federal laws regulating the proper disposal of
biohazardous materials. Although we believe we are currently in compliance with
all such applicable laws, a violation of such laws, or the future enactment of
more stringent laws or regulations, could subject us to liability for
noncompliance and may require us to incur significant costs.
There can
be no assurance that we will be able, or have the resources, to continue to
comply with regulations that govern our operations currently, or that we will be
able to comply with new regulations that govern our operations, or that the cost
of compliance will not materially and adversely affect our ability to market or
perform our services or our ability to do so profitably.
The
Health Insurance Portability and Accountability Act of 1996, or HIPAA, requires
that our business comply with state and federal privacy laws which increase the
cost and administrative burden of providing stem cell banking
services.
We are
subject to state and federal privacy laws related to the protection of our
customers’ personal health information and state and federal laws related to the
security of such personal health information and other personal data to which we
would have access through the provision of our services. Currently, we are
obligated to comply with privacy and security standards adopted under HIPAA.
Certain of these regulatory obligations will be changing over the next year as a
result of amendments to HIPAA under the American Recovery and Reinvestment Act
of 2009. Consequently, our compliance burden will increase, and we will be
subject to audit and enforcement by the federal government and, in some cases,
enforcement by state authorities. We will also be obligated to publicly disclose
wrongful disclosures or losses of personal health information. We may be
required to spend substantial amounts of time and money to comply with these
requirements, any regulations and licensing requirements, as well as any future
legislative and regulatory initiatives. Failure by us or our business partners
to comply with these or other applicable regulatory requirements or any delay in
compliance may result in, among other things, injunctions, operating
restrictions, and civil fines and criminal prosecution, a material adverse
effect on the marketing and sales of our services and impair our ability to
operate profitably or at all.
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Our
success in developing future stem cell therapies will depend in part on
establishing and maintaining effective strategic partnerships and
collaborations, which may impose restrictions on our business and subject us to
additional regulation.
A key
aspect of our business strategy is to establish strategic relationships in order
to gain access to critical supplies, to expand or complement our research and
development or commercialization capabilities, and to reduce the cost of
research and development. There can be no assurance that we will enter into such
relationships, that the arrangements will be on favorable terms or that such
relationships will be successful. If any of our research partners terminate
their relationship with us or fail to perform their obligations in a timely
manner, our research and development activities or commercialization of our
services may be substantially impaired or delayed.
Relationships
with licensed professionals such as physicians may be subject to state and
federal laws restricting the referral of business, prohibiting certain payments
to physicians, or otherwise limiting such collaborations. If our services become
approved for reimbursement by government or private insurers, we could be
subject to additional regulation and perhaps additional limitations on our
ability to structure relationships with physicians. Additionally, state
regulators may impose restrictions on the business activities and relationships
of licensed physicians or other licensed professionals. For example, many states
restrict or prohibit the employment of licensed physicians by for-profit
corporations, or the “corporate practice of medicine.” If we fail to structure
our relationships with physicians in accordance with applicable laws or other
regulatory requirements it could have a material adverse effect on our business.
Even if we do enter into these arrangements, we may not be able to maintain
these relationships or establish new ones in the future on acceptable
terms.
We
are dependent on relationships with third parties to conduct our
business.
Apheresis
is the process through which stem cells are extracted from a patient’s whole
blood and it is an integral part of our collection process. Our process involves
the injection of a “mobilizing agent” which causes the stem cells to migrate
from the bone marrow into the blood stream. The injection of this mobilizing
agent is an integral part of the collection process. There is currently only one
supplier of this mobilizing agent, called Neupogen®. Although we continue to
explore alternative mobilizing agents and methods of stem cell collection, there
can be no assurance that any alternative mobilizing agents will be available or
alternative methods will prove to be successful. In the event that our supplier
is unable or unwilling to continue to supply the mobilizing agent to us on
commercially reasonable terms, and we are unable to identify alternative methods
or find substitute suppliers on commercially reasonable terms, we may not be
able to successfully commercialize our business. In addition, we are currently
using only one outside apheresis provider though we are currently pursuing other
opportunities. Although other third parties, including the centers themselves,
subject to appropriate licensure, are capable of providing apheresis services,
any disruption in the provision of this service would cause a delay in the
delivery of our services. Our failure to maintain relationships with these third
parties or the failure of such parties to provide quality contracted services
would have a material adverse impact on our business.
We
are dependent upon our management, scientific and medical personnel and we may
have difficulty attracting or retaining qualified personnel.
Our
performance and success are dependent upon the efforts and abilities of our
management, and medical and scientific personnel. Furthermore, our growth will
require hiring a significant number of qualified technical, commercial, business
and administrative personnel. If we are unable to attract and retain the
qualified personnel necessary to develop our business, perform contractual
obligations under our University of Louisville and other license agreements and
maintain appropriate licensure, on acceptable terms, we may not be able to
sustain our operations or achieve our commercialization and other business
objectives and we may fail to grow or sustain our business as a going
concern.
There
is significant uncertainty about the validity and permissible scope of patents
in the biotechnological industry and we may not be able to obtain patent
protection.
We own or
hold exclusive rights to one patent and own or hold exclusive rights to fourteen
filed patent applications related to our products and technologies. Given the
nature of our therapeutic programs, our patents cover methods of isolating,
storing and using stem cells, including very small embryonic stem cells. There
can be no assurance that the patent applications to which we hold rights will
result in the issuance of patents, or that any patents issued or licensed to us
will not be challenged and held to be invalid or of a scope of coverage that is
different from what we believe the patent’s scope to be. Our success will
depend, in part, on whether we can: obtain patents to protect our own products
and technologies; obtain licenses to use the technologies of third parties if
necessary, which may be protected by patents; and protect our trade secrets and
know-how. Our inability to obtain and rely upon patents essential to our
business may have a material adverse effect on our business, operating results
and financial condition.
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We
may be unable to protect our intellectual property from infringement by third
parties.
Despite
our efforts to protect our intellectual property, third parties may infringe or
misappropriate our intellectual property. Our competitors may also independently
develop similar technology, duplicate our processes or services or design around
our intellectual property rights. We may have to litigate to enforce and protect
our intellectual property rights to determine their scope, validity or
enforceability. Intellectual property litigation is costly, time-consuming,
diverts the attention of management and technical personnel and could result in
substantial uncertainty regarding our future viability. The loss of intellectual
property protection or the inability to secure or enforce intellectual property
protection would limit our ability to develop or market our services in the
future. This would also likely have an adverse effect on the revenues generated
by any sale or license of such intellectual property. Furthermore, any public
announcements related to such litigation or regulatory proceedings could
adversely affect the price of our common stock.
Third
parties may claim that we infringe on their intellectual property.
We may be
subject to costly litigation in the event our technology is claimed to infringe
upon the proprietary rights of others. Third parties may have, or may eventually
be issued, patents that would be infringed by our technology. Any of these third
parties could make a claim of infringement against us with respect to our
technology. We may also be subject to claims by third parties for breach of
copyright, trademark or license usage rights. Litigation and patent interference
proceedings could result in substantial expense to us and significant diversion
of efforts by our technical and management personnel. An adverse determination
in any such proceeding or in patent litigation could subject us to significant
liabilities to third parties or require us to seek licenses from third parties.
Such licenses may not be available on acceptable terms or at all. Adverse
determinations in a judicial or administrative proceeding or failure to obtain
necessary licenses could prevent us from commercializing our products, which
would have a material adverse affect on our business, operating results and
financial condition.
We
may be unable to maintain our licenses, patents or other intellectual property
and could lose important protections that are material to continuing our
operations and growth and our ability to achieve profitability.
Our
license agreement with the University of Louisville and other license agreements
require us to pay license fees, royalties and milestone payments and fees for
patent filings and applications. Obtaining and maintaining patent protection and
licensing rights also depends, in part, on our ability to pay the applicable
filing and maintenance fees. Our failure to meet financial obligations under our
license agreements in a timely manner or our non-payment or delay in payment of
our patent fees, could result in the loss of some or all of our rights to
proprietary technology or the inability to secure or enforce intellectual
property protection. Additionally, our license agreements require us to meet
certain diligence obligations in the development of the licensed
products. Our failure to meet these diligence obligations under our
license agreements could result in the loss of some or all of our rights under
the license agreements. The loss of any or all of our intellectual
property rights could materially limit our ability to develop and/or market our
services, which would materially and adversely affect our business, operating
results and financial condition.
Our
inability to obtain reimbursement for our therapies from private or governmental
insurers, could negatively impact demand for our services.
Successful
sales of health care services and products generally depends, in part, upon the
availability and amounts of reimbursement from third party healthcare payor
organizations, including government agencies, private healthcare insurers and
other healthcare payors, such as health maintenance organizations and
self-insured employee plans. Uncertainty exists as to the availability of
reimbursement for new therapies such as stem cell-based therapies. There can be
no assurance that such reimbursement will be available in the future at all or
without substantial delay or, if such reimbursement is provided, that the
approved reimbursement amounts will be sufficient to support demand for our
services at a level that will be profitable.
Our
insurance may not be adequate to cover all claims or losses.
We expect
to have insurance coverage against operating risks, including product liability
claims and personal injury claims related to our products and services, but no
assurance can be given that the nature and amount of that insurance will be
sufficient to fully indemnify us against liabilities arising out of pending and
future claims and litigation or available on terms acceptable to us. This
insurance has deductibles or self-insured retentions and contains certain
coverage exclusions. The insurance may not provide complete protection against
losses and risks, and our results of operations and financial condition could be
materially and adversely affected by unexpected claims not covered by
insurance.
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We
have received an informal request for documents in connection with an SEC
investigation of a third party matter, and there is no assurance that the SEC
will not take action against us.
In
connection with the SEC’s investigation of a matter regarding an unaffiliated
third party, we have received an informal request from the SEC, dated December
23, 2008, for the voluntary production of documents and information concerning
the issuance, distribution, registration, purchase, sale and/or offer to sell
our securities from January 1, 2007. The third party served as the lead
underwriter of our public offering that was consummated in August 2007. We are
cooperating fully with the SEC’s request. There has been no indication to date
that we are a target of the investigation. The SEC letter stated that the
request should not be construed as an indication by the SEC or its staff that
any violation of the federal securities laws has occurred, nor should it be
considered a reflection upon any person, entity or security, but that there is
no assurance that the SEC will not take any action against us. A determination
by the SEC to take action against us could be costly and time consuming, could
divert the efforts and attention of our directors, officers and employees from
the operation of our business and could result in sanctions against us, any or
all of which could have a material adverse effect on our business and operating
results.
Risks
Related to the Acquisition of Our Interest in Erye
Erye
has a limited history of earnings.
Erye’s
continued growth and profitability depends on stabilizing and streamlining its
operations, relocating to a new factory that is now under construction,
continuing research and development for new drug products and expanding its
sales network for drug distribution. The failure of Erye to be profitable could
materially and adversely affect its and our operating results, financial
condition and ability to continue as a going concern.
We
may not be able to successfully integrate Erye into our business.
Our U.S.
based management team has limited experience in purchasing and integrating new
businesses in China. Our failure to successfully complete the integration of
Erye could have a material adverse affect on our business, operating results and
financial condition by reason of our failure to realize a sufficient benefit and
financial return on capital expended in connection with the
acquisition.
We expect
to realize increased revenues and market penetration in Erye’s product areas as
a result of the acquisition of our interest in Erye. Achievement of these
expected benefits will depend, in part, on how we manage the integration of the
Erye business into our operations. If we are unsuccessful in integrating the
Erye business in a cost-effective manner, we may not realize the expected
benefits of the acquisition and our business, operating results and financial
condition may be materially and adversely affected.
CBH
and/or its affiliates may have had unknown liabilities that now may be deemed to
be liabilities of NeoStem or its merger subsidiary as a result of the
Merger.
There may
have been liabilities of CBH and/or its affiliates that were unknown at the time
of the Merger. As a result of the Merger, any such unknown liabilities may be
deemed to be liabilities of NeoStem or our merger subsidiary. In the event any
such liability becomes known, it may lead to claims against us or our subsidiary
including, but not limited to, lawsuits, administrative proceedings, and other
claims. Any such liabilities may subject us to increased expenses for attorneys’
fees, fines and litigation and expenses associated with any subsequent
settlements or judgments. There can be no assurance that such unknown
liabilities do not exist. To the extent that such liabilities become known, any
such liability-related expenses may materially and adversely affect our
profitability, operating results and financial condition.
Erye,
and we as the owner of a controlling ownership interest in Erye, may be subject
to tax liability as a result of the transfer of real estate assets from Erye to
EET.
Prior to
the closing of the Merger, CBH was required to cause Erye to transfer certain
real estate assets to EET, or the Split with a leaseback to Erye, the transfer
of which may be deemed a taxable event under PRC tax laws. EET has agreed to
indemnify Erye and us against any tax liability that may result from such
transfer of real estate assets. However, should such transfer of real estate
assets be ultimately determined to be taxable, there is a risk that if EET will
be unable or unwilling to pay the resultant tax liability pursuant to EET’s
indemnification obligations, we would bear the liability to pay such tax
liability, which could materially and adversely affect our business operating
results and financial condition.
Demand
for Erye’s existing pharmaceutical products may not experience significant
growth and new product candidates and technologies we may develop or license may
fail to obtain regulatory approval and market acceptance.
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We cannot
accurately predict the future growth rate or the size of the markets for our
pharmaceutical products and technologies in China. The expansion of these
markets depends on a number of factors, such as:
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the
cost, performance and reliability of the products and technologies being
offered, as compared to the products/technologies offered by
competitors;
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customers’
perceptions regarding the benefits of the products and
technologies;
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public
perceptions regarding the use of the products and
technologies;
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customers’
satisfaction with the products and technologies; and
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marketing
efforts and publicity regarding the products and
technologies.
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The
acquisition of our interest in Erye is intended to provide us with a stable yet
growing business from which to launch new pharmaceutical drugs and other
products in China. Should Erye fail to perform as expected, our business and
results of operations will be materially and adversely affected and our ability
to raise capital and continue as a going concern will be impaired.
Our
ability to manage Erye’s business will be limited.
Pursuant
to the Joint Venture Agreement, Erye’s board of directors is comprised of two
individuals designated by EET and three individuals designated by us; provided,
however, that one of the positions designated by us is to be the member of our
board of directors designated by EET. The affirmative vote of at least 75% of
all of the Erye board of directors is required for all major decisions,
including decisions related to corporate transactions, changes in capital
structure, and the material business strategy, operations and development of
Erye. In addition, under PRC law, an affirmative vote of 100% of Erye’s board of
directors is required to approve certain material matters of Erye such as the
increase or decrease of its registered capital, a merger or spinoff of Erye, any
amendment to its articles of association, and the termination and dissolution of
Erye. We currently own only a 51% interest in Erye. Accordingly, in view of
these provisions, we may have limited ability to exercise control over Erye’s
business strategy, operations and development. Since many of Erye’s officers
will reside in China and most of our executive officers reside in the U.S.,
Erye’s officers will manage the day-to-day operations of Erye with only limited
participation from our executive officers.
Some
terms of the Joint Venture Agreement limit our ability to consummate future
acquisitions and investments in chemical drug manufacturing companies, which
could limit our growth.
Pursuant
to the terms of the Erye Joint Venture Agreement, prior to making an investment
in any other chemical drug manufacturing company that competes directly with the
business of Erye, we must obtain Eyre’s approval. In addition, we are obligated
to consult with Erye prior to introducing any new small molecule drug in China
to determine whether it can be produced less expensively or more efficiently by
Erye. There can be no assurance that Erye will provide such approvals for
acquisitions or new products, which could materially and adversely affect the
growth of our business in China, our operating results and our financial
condition.
An
amendment to the Joint Venture Agreement may be required for a
loan to Erye, and the effectiveness of which is subject to approval
by PRC government authorities.
If we
make a loan to Erye or the joint venture for the purpose of funding a portion of
the cost to complete equipping and Erye’s relocation to Erye’s new production
facility, an amendment to the Joint Venture Agreement may be required in order
to provide for the use and repayment of such funds. The amendment cannot become
effective until it is approved by Jiangsin Provincial Bureau of Foreign Trade
and Economic Cooperation and by any other PRC governmental authority approving
the Joint Venture Agreement. Any delay in obtaining such approval(s) or material
amendments to the terms of the amendment to the Joint Venture Agreement, or
taxes or other payments imposed by the PRC government authorities as a condition
to approval may delay or diminish our realization of benefits of such funding,
which could delay Erye’s relocation and have a material adverse effect on our
business, operating results and financial condition.
The
transactions related to the Merger may not have received all necessary PRC
governmental approvals.
Prior to
the closing of the Merger, CBH was required to cause Erye to transfer certain
real estate assets to EET, or the Split.The Split has been approved by Jiangsin
Provincial Bureau of Foreign Trade and Economic Cooperation, or the JPBFTEC, and
the amended Articles of Association and the amended Joint Venture Agreement have
also been approved by the JPBFTSC in principle. While we believe that we have
complied with applicable PRC laws and sought all requisite approvals with
respect to the transactions related to the Merger (including, but not limited
to, the Split and the amendments to both the Articles of Association and the
Joint Venture Agreement), in light of the uncertainty of PRC laws in this area,
no assurance can be given that all required filings have been made or
that PRC authorities will not take a contrary view, any of which events could
have a material adverse effect on our business, operating results and financial
condition.
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Eyre’s
success is dependent upon its ability to establish and maintain its intellectual
property rights.
Erye’s
success depends, in part, on its ability to protect its current and future
technologies and products and to defend its intellectual property rights. If it
fails to protect its intellectual property adequately, competitors may
manufacture and market products similar to Erye’s. Some patent applications in
China are maintained in secrecy until the patent is issued. Because the
publication of discoveries tends to follow their actual discovery by many
months, Erye may not be the first to invent, or file patent applications on any
of its discoveries. Patents may not be issued with respect to any of Erye’s
patent applications and existing or future patents issued to or licensed by Erye
may not provide competitive advantages for its products. Patents that are issued
may be challenged, invalidated or circumvented by its competitors. Furthermore,
Erye’s patent rights may not prevent its competitors from developing, using or
commercializing products that are similar or functionally equivalent to Erye’s
products.
Erye also
relies on trade secrets, non-patented proprietary expertise and continuing
technological innovation that it seeks to protect, in part, by entering into
confidentiality agreements with licensees, suppliers, employees and consultants.
These agreements may be breached and there may not be adequate remedies in the
event of a breach. Disputes may arise concerning the ownership of intellectual
property or the applicability of confidentiality agreements. Moreover, Erye’s
trade secrets and proprietary technology may otherwise become known or be
independently developed by its competitors. If patents are not issued with
respect to products arising from research, Erye may not be able to maintain the
confidentiality of information relating to these products.
In the
PRC, there has been substantial litigation in the pharmaceutical industry with
respect to the manufacturing, use and sale of new products. These lawsuits
relate to the validity and infringement of patents or proprietary rights of
third parties. Erye may be required to commence or defend against charges
relating to the infringement of patent or proprietary rights. Any such
litigation could: (i) require Erye to incur substantial expense, even if it is
insured or successful in the litigation; (ii) require Erye to divert significant
time and effort of its technical and management personnel; (iii) result in the
loss of its rights to develop or make certain products; and (iv) require Erye to
pay substantial monetary damages or royalties in order to license proprietary
rights from third parties.
An
adverse determination in a judicial or administrative proceeding or a failure to
obtain necessary licenses could prevent Erye from manufacturing and selling some
of its products or increase its costs to market these products, which could have
a material adverse affect on its and our business, operating results and
financial condition.
In
addition, when seeking regulatory approval for some of its products, Erye is
required to certify to regulatory authorities, including the SFDA, that such
products do not infringe upon third party patent rights. Filing a certification
against a patent gives the patent holder the right to bring a patent
infringement lawsuit against Erye. Any lawsuit regarding a particular product
could delay, or result in a denial of, regulatory approval by the SFDA. A claim
of infringement and the resulting delay could result in substantial expenses and
even prevent Erye from manufacturing and selling certain of its products, which
also could have a material adverse effect on its and our business, operating
results and financial condition.
Erye’s
launch of a product prior to a final court decision or the expiration of a
patent held by a third party can expose Erye to a claim of substantial damages.
Depending upon the circumstances, a court may award the patent holder damages
equal to three times its loss of income. If Erye is found to have infringed a
patent held by a third party and become subject to such treble damages, these
damages could have a material adverse effect on its and our operating results
and financial condition.
Erye’s
insurance may not cover all risks or losses related to its drugs, products and
services.
Any of
Erye’s products or services may be defective, ineffective or cause dangerous
side effects and, in certain cases, even fatality, and lead to claims in excess
of the insurance maintained by Erye and us. Uninsured losses could materially
and adversely affect our operating results and financial condition.
The
business of Erye is conducted in a highly competitive industry.
Erye’s
pharmaceutical products consist primarily of prescription antibiotics and active
pharmaceutical intermediates, or APIs, which are chemicals used to manufacture
pharmaceutical products. The market in China for these products is highly
competitive and subject to regulation by the SFDA.
Erye
competes in a large market with many competitors, particularly in the area of
oral antibiotics. Many of its competitors are more established than Erye, and
have significantly greater financial, technical, marketing and other resources
Erye. Some of Erye’s competitors have greater name recognition and a larger
customer base. These competitors may be able to respond more quickly to new or
changing opportunities and customer requirements and may be able to undertake
more extensive promotional activities, offer more attractive terms to customers,
and adopt more aggressive pricing policies. There can be no assurances that Erye
will be able to compete successfully.
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Many
of Erye’s current products are prescription antibiotics that it sells through
distributors, in many cases to state-controlled and private
hospitals.
State-controlled
and private hospitals are the primary users for many of Erye’s current products.
The prices paid by such hospitals and the timing of payment for products
purchased are, to a large extent, dependent on government policy, which is
susceptible to change. Accordingly, there can be no assurance that Erye’s
pricing structure for many of its products or the timing of the revenues from
the sales of those products will continue. A change in government policy
resulting in a reduction to the prices for any of Erye’s injectible antibiotics,
or the timing of payment for products purchased, could have a material adverse
effect on Erye’s, and our, results of operations and financial condition.
Despite the above, payment is typically received by Erye at the time of sale to
the distributor.
Price
control regulations may decrease our profitability.
The list
of medications eligible for reimbursement as well as the prices at which they
are reimbursed are controlled by the PRC government, and are subject to control
by the relevant state or provincial price administration authorities. In
practice, price control with respect to these medicines sets a ceiling on their
retail price. The actual price of such medicines set by manufacturers,
wholesalers and retailers cannot historically exceed the price ceiling imposed
by applicable government price control regulations. Although, as a general
matter, government price control regulations have resulted in drug prices
tending to decline over time, there has been no predictable pattern for such
decreases. Such price controls, especially downward price adjustment, may
negatively affect the revenue and profitability of Erye and, consequently, our
revenue and profitability.
The
bidding process with respect to the purchase of pharmaceutical products may lead
to reduced revenue.
PRC
regulations require non-profit medical organizations established in China to
implement bidding procedures for the purchase of drugs. It is intended that the
implementation of a bidding purchase system will be extended gradually and will
cover, among other drugs, those drugs consumed in large volume and commonly used
for clinical uses. Pharmaceutical wholesalers must have the due authorization of
the pharmaceutical manufacturers in order to participate in the bidding process.
If, for the purpose of reducing the bidding price, pharmaceutical manufacturers
participate in the bidding process on their own and enter into purchase and
sales contracts with medical organizations directly without authorizing a
pharmaceutical distributor, the revenue of Erye may be adversely
affected.
Erye’s
activities related to research, development and marketing new drugs have
inherent risks.
Part of
Erye’s strategy is to expand its portfolio of drugs and therapies. Our U.S.
management team is working with Erye to identify appropriate drug candidates for
the Chinese market. The development of a new drug or therapy requires time,
financial resources and drug development expertise. There is always a risk that
such development efforts will prove unsuccessful. There also is a risk that any
new drugs and technologies developed by Erye may not be compatible with market
needs, may be too expensive or may face competition. Because markets for drugs
differ geographically within China, Erye must develop and manufacture its
products to target specific markets to ensure product sales. Erye’s growth and
survival will depend on its ability to develop and commercialize new products
and effectively market those products. If its efforts are unsuccessful, its and
our business, operating results and financial conditions will be materially and
adversely affected.
Erye’s
success depends on its ability to retain key personnel and manage its
growth.
Erye’s
business is dependent on certain of their key management and technological
personnel. The departure of any of such key personnel may seriously disrupt and
harm Erye’s operations, business and the implementation of Erye’s business plan.
There can be no assurance that Erye can be successful in retaining them or
replacing any personnel without delay in the event of a departure. Given Eyre’s
plans for growth, it will need to attract and retain new executives. The
inability to achieve, maintain and manage growth could have a material adverse
effect on Eyre’s and our business, operating results and financial condition and
our ability to continue as a going concern.
Risks
Related to Doing Business in China
Our
operations are subject to risks associated with emerging markets.
The
Chinese economy is not well established and is only recently emerging and
growing as a significant market for consumer goods and services. Accordingly,
there is no assurance that the market will continue to grow. Perceived risks
associated with investing in China, or a general disruption in the development
of China’s markets could materially and adversely affect the business, operating
results and financial condition of Erye and us.
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A
significant portion of our assets is located in the PRC, and investors may not
be able to enforce federal securities laws or their other legal
rights.
A
substantial portion of our assets is located in the PRC. As a result, it may be
difficult for investors in the U.S. to enforce their legal rights, to effect
service of process upon certain of our directors or officers or to enforce
judgments of U.S. courts predicated upon civil liabilities and criminal
penalties against our directors and officers located outside of the
U.S.
The
PRC government has the ability to exercise significant influence and control
over our operations in China.
In recent
years, the PRC government has implemented measures for economic reform, the
reduction of state ownership of productive assets and the establishment of
corporate governance practices in business enterprises. However, many productive
assets in China are still owned by the PRC government. In addition, the
government continues to play a significant role in regulating industrial
development by imposing business regulations. It also exercises significant
control over the country’s economic growth through the allocation of resources,
controlling payment of foreign currency-denominated obligations, setting
monetary policy and providing preferential treatment to particular industries or
companies.
There can
be no assurance that China’s economic, political or legal systems will not
develop in a way that becomes detrimental to our business, results of operations
and financial condition. Our activities may be materially and adversely affected
by changes in China’s economic and social conditions and by changes in the
policies of the government, such as measures to control inflation, changes in
the rates or method of taxation and the imposition of additional restrictions on
currency conversion.
Additional
factors that we may experience in connection with having operations in China
that may adversely affect our business and results of operations
include:
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our
inability to enforce or obtain a remedy under any material
agreements;
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PRC
restrictions on foreign investment that could impair our ability to
conduct our business or acquire or contract with other entities in the
future;
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restrictions
on currency exchange that may limit our ability to use cash flow most
effectively or to repatriate our investment;
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restrictions
on currency exchange that may limit our ability to use cash flow most
effectively or to repatriate our investment;
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fluctuations
in currency values;
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cultural,
language and managerial differences that may reduce our overall
performance; and
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political
instability in China.
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Cultural,
language and managerial differences may adversely affect of our overall
performance.
While
Chinese mergers and acquisitions activity is increasing in frequency,
assimilating cultural, language and managerial differences remains problematic.
Personnel issues may develop as we endeavor to consolidate management teams from
different cultural backgrounds. In addition, errors arising through language
translations may cause miscommunications relating to material information. These
factors may make the management of our operations in China more difficult.
Should we be unable to coordinate the efforts of our U.S.-based management team
with our China-based management team, our business, operating results and
financial condition could be materially and adversely affected.
We
may not be able to enforce our rights in China.
China’s
legal and judicial system may negatively impact foreign investors. The legal
system in China is evolving rapidly, and enforcement of laws is inconsistent. It
may be impossible to obtain swift and equitable enforcement of laws or
enforcement of the judgment of one court by a court of another jurisdiction.
China’s legal system is based on civil law or written statutes and a decision by
one judge does not set a legal precedent that must be followed by judges in
other cases. In addition, the interpretation of Chinese laws may vary to reflect
domestic political changes.
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There are
substantial uncertainties regarding the interpretation and application to our
business of PRC laws and regulations, since many of the rules and regulations
that companies face in China are not made public. The effectiveness of newly
enacted laws, regulations or amendments may be delayed, resulting in detrimental
reliance by foreign investors. New laws and regulations that apply to future
businesses may be applied retroactively to existing businesses. We cannot
predict what effect the interpretation of existing or new PRC laws or
regulations may have on our business.
The laws
of China are likely to govern many of our material agreements, including,
without limitation the Joint Venture Agreement. We cannot assure you that we
will be able to enforce our interests or our material agreements or that
expected remedies will be available. The inability to enforce or obtain a remedy
under any of our future agreements may have a material adverse impact on our
operations.
Our
businesses in China are subject to government regulation that limit or prohibit
direct foreign investment, limiting our ability to control these businesses, as
well as our ability to pursue new ventures and expand further into the Chinese
market.
The PRC
government has imposed regulations in various industries, including medical
research and the stem cell business, that limit foreign investors’ equity
ownership or prohibit foreign investments altogether in companies that operate
in such industries. As a result, our ability to control our existing China-based
businesses as well as pursue new ventures and expand further into the Chinese
market may be limited.
If new
laws or regulations or policies forbid foreign investment in industries in which
we want to expand or complete a business combination, they could severely impair
our ability to grow our business. Additionally, if the relevant Chinese
authorities find us or such business combination to be in violation of any laws
or regulations, they would have broad discretion in dealing with such violation,
including, without limitation: (i) levying fines; (ii) revoking our business and
other licenses; (iii) requiring that we restructure our ownership or operations;
and (iv) requiring that we discontinue any portion or all of our business.
Accordingly, any of these regulations or violations could have a material
adverse effect on our business, operating results and financial
condition.
The
import into China or export from China of technology relating to stem cell
therapy may be prohibited or restricted.
The
Chinese Ministry of Commerce, or MOFCOM, and Ministry of Science and Technology
of China, or MOST, jointly publish the Catalogue of Technologies the Export of
which from China is Prohibited or Restricted, and the Catalogue of Technologies
the Import of which into China Prohibited or Restricted. Stem cell-related
technologies are not listed in the current versions of these catalogues, and
therefore their import or export should not be forbidden or require the approval
of MOFCOM and MOST. However, these catalogues are subject to revision and, as
the PRC authorities develop policies concerning stem cell technologies, it is
possible that the categories would be amended or updated should the PRC
government want to regulate the export or import of stem cell related
technologies to protect material state interests or for other reasons. Should
the catalogues be updated so as to bring any activities of the planned stem cell
processing, storage and manufacturing operation in Beijing and related research
and development activities under their purview, any such limitations or
restrictions imposed on the operations and related activities could materially
and adversely affect our business, financial condition and results of
operations.
Our
business in China may be adversely affected by inaccurate claims about our
technology.
We
recently learned of an effort by a principal of Shandong New Medicine Research
Institute of Integrated Traditional and Western Medicine Limited Liability
Company, or Shandong New Medicine, to promote our VSELTM
technology as his own in China. While we have no reason to believe that Shandong
New Medicine or such person has any VSELTM
technology or has access to or use of any of our proprietary information, we are
analyzing the available facts and circumstances and have initiated and are
reviewing additional appropriate legal remedies in the U.S. and abroad. We
cannot determine at this time what effect, if any, such actions by Shandong New
Medicine or its principal will have on our reputation in China.
The
PRC government does not permit direct foreign investment in stem cell research
and development businesses. Accordingly, we operate these businesses through
local companies with which we have contractual relationships but in which we do
not have controlling equity ownership.
PRC
regulations prevent foreign companies from directly engaging in stem
cell-related research, development and commercial applications in China.
Therefore, to perform these activities, we operate our current stem cell-related
business in China through two domestic variable interest entities, or VIEs:
Qingdao Niao Bio-Technology Ltd., or Qingdao Niao, and Beijing Ruijieao
Bio-Technology Ltd., or Beijing Ruijieao, each a Chinese domestic company
controlled by the Chinese employees of NeoStem (China), Inc., our wholly
foreign-owned entity, or the WFOE, through various business agreements, referred
to, collectively, as the VIE documents. We control these companies and operate
these businesses through contractual arrangements with the companies and their
individual owners, but we have no direct equity ownership or control over these
companies. Our contractual arrangements may not be as effective in providing
control over these entities as direct ownership. For example, the VIEs could
fail to take actions required for our business or fail to conduct business in
the manner we desire despite their contractual obligation to do so. These
companies are able to transact business with parties not affiliated with us. If
these companies fail to perform under their agreements with us, we may have to
rely on legal remedies under PRC law, which may not be effective. In addition,
we cannot be certain that the individual equity owners of the VIEs would always
act in our best interests, especially if they have no other relationship with
us.
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Although
other foreign companies have used WFOEs and VIE structures similar to ours and
such arrangements are not uncommon in connection with business operations of
foreign companies in China in industry sectors in which foreign direct
investments are limited or prohibited, the application of a VIE structure to
control companies in a sector in which foreign direct investment is specifically
prohibited carries increased risks.
For
example, if our structure is deemed in violation of PRC law, the PRC government
could revoke the business license of the WFOE, require us to discontinue or
restrict our operations, restrict our right to collect revenues, require us to
restructure our business, corporate structure or operations, impose additional
conditions or requirements with which we may not be able to comply, impose
restrictions on our business operations or on our customers, or take other
regulatory or enforcement actions against us. We may also encounter difficulties
in enforcing related contracts. Any of these events could materially and
adversely affect our business, operating results and financial
condition.
Due
to the relationship between the WFOE and the VIEs, the PRC tax authorities may
challenge our VIE structure, including the transfer prices used for related
party transactions among our entities in China.
Substantially
all profits generated from the VIEs will be paid to the WFOE in China through
related party transactions under contractual agreements. We believe that the
terms of these contractual agreements are in compliance with the laws in China.
However, the tax authorities in China have not examined these contractual
agreements. Due to the uncertainties surrounding the interpretation of the
transfer pricing rules relating to related party transactions in China, it is
possible that the tax authorities in China could challenge the transfer prices
that we will use for related party transactions among our entities in China and
this could increase our tax liabilities and diminish the profitability of our
business in China, which would materially and adversely affect our operating
results and financial condition.
We
expect to rely, in part, on dividends paid by our WFOE and/or Erye to supply
cash flow for our U.S. business, and statutory or contractual restrictions may
limit their ability to pay dividends to us.
We expect
to rely partly on dividends paid to us under the Joint Venture Agreement,
attributable to our 51% ownership interest in Erye, to meet our future cash
needs. However, there can be no assurance that the WFOE in China will receive
payments uninterrupted or at all as arranged under our contracts with the VIEs.
In addition, pursuant to the Joint Venture Agreement that governs the ownership
and management of Erye, for the next three years: (i) 49% of undistributed
profits (after tax) will be distributed to EET and loaned back to Erye for use
in connection with its construction of the new Erye facility; (ii) 45% of the
net profit after tax will be provided to Erye as part of the new facility
construction fund, which will be characterized as paid-in capital for our 51%
interest in Erye; and (iii) only 6% of the net profit will be distributed to us
directly for our operating expenses.
The
payment of dividends by entities organized under PRC law to non-PRC entities is
subject to limitations. Regulations in the PRC currently permit payment of
dividends by our WFOE and Erye only out of accumulated distributable earnings,
if any, as determined in accordance with accounting standards and regulations in
China. Moreover, our WFOE and Erye will be required to set aside a certain
percentage of their accumulated after-tax profit each year, if any, to fund
certain mandated reserve funds (for our WFOE, such percentage is at least 10%
each year until its reserves have reached at least 50% of its registered
capital), and these reserves are not payable or distributable as cash dividends.
In addition, Erye is also required to reserve a portion of its after-tax profits
for its employee welfare and bonus fund, the amount of which is subject to the
discretion of the Erye board of directors. In addition, if Erye incurs debt on
its own behalf in the future, the instruments governing the debt may restrict
Erye’s or the joint venture’s ability to pay dividends or make other
distributions to us. This may diminish the cash flow we receive from Erye’s
operations, which would have a material adverse effect on our business,
operating results and financial condition.
Restrictions
on currency exchange may limit our ability to utilize our cash flow
effectively.
Our
interests in China will be subject to China’s rules and regulations on currency
conversion. In particular, the initial capitalization and operating expenses of
the two VIEs are funded by our WFOE. In China, the State Administration for
Foreign Exchange, or the SAFE, regulates the conversion of the Chinese Renminbi
into foreign currencies. Currently, foreign investment enterprises are required
to apply to the SAFE for Foreign Exchange Registration Certificates, or IC Cards
of Enterprises with Foreign Investment. Foreign investment enterprises holding
such registration certificates, which must be renewed annually, are allowed to
open foreign currency accounts including a “basic account” and “capital
account.” Currency translation within the scope of the “basic account,” such as
remittance of foreign currencies for payment of dividends, can be effected
without requiring the approval of the SAFE. However, conversion of currency in
the “capital account,” including capital items such as direct investments,
loans, and securities, require approval of the SAFE. According to the Notice of the General Affairs
Department of the State Administration of Foreign Exchange on the Relevant
Operating Issues Concerning the Improvement of the Administration of Payment and
Settlement of Foreign Currency Capital of Foreign-invested
Enterprises promulgated on August
29, 2008, or the SAFE Notice 142, to apply to a bank for settlement of foreign
currency capital, a foreign invested enterprise shall submit the documents
certifying the uses of the RMB funds from the settlement of foreign currency
capital and a detailed checklist on use of the RMB funds from the last
settlement of foreign currency capital. It is stipulated that only if the funds
for the settlement of foreign currency capital are of an amount not more than
US$50,000 and are to be used for enterprise reserve, the above documents may be
exempted by the bank. This SAFE Notice 142, along with the recent practice of
Chinese banks of restricting foreign currency conversion for fear of “hot money”
going into China, have limited and may continue to limit our ability to channel
funds to the two VIE entities for their operation. We are exploring options with
our PRC counsels and banking institutions in China as to acceptable methods of
funding the operation of the two VIEs, including advances from Erye, but there
can be no assurance that acceptable funding alternatives will be identified.
Further, even if we find an acceptable funding alternative, there can be no
assurance that the PRC regulatory authorities will not impose further
restrictions on the convertibility of the Chinese currency. Future restrictions
on currency exchanges may limit our ability to use our cash flow for the
distribution of dividends to our stockholders or to fund operations we may have
outside of China, which could materially adversely effect our business and
operating results.
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Fluctuations
in the value of the Renminbi relative to the U.S. dollar could affect our
operating results.
We
prepare our financial statements in U.S. dollars, while our underlying
businesses operate in two currencies, U.S. dollars and Chinese Renminbi. It is
anticipated that our Chinese operations will conduct their operations primarily
in Renminbi and our U.S. operations will conduct their operations in dollars. At
the present time we do not expect to have significant cross currency
transactions that will be at risk to foreign currency exchange rates.
Nevertheless, the conversion of financial information using a functional
currency of Renminbi will be subject to risks related to foreign currency
exchange rate fluctuations. The value of Renminbi against the U.S. dollar and
other currencies may fluctuate and is affected by, among other things, changes
in China’s political and economic conditions and supply and demand in local
markets. As we have significant operations in China, and will rely principally
on revenues earned in China, any significant revaluation of the Renminbi could
materially and adversely affect our financial results. For example, to the
extent that we need to convert U.S. dollars we receive from an offering of our
securities into Renminbi for our operations, appreciation of the Renminbi
against the U.S. dollar could have a material adverse effect on our business,
financial condition and results of operations.
Beginning
in July of 2005, the PRC government changed its policy of pegging the value of
Renminbi to the U.S. dollar. Under the new policy, the value of the Renminbi has
fluctuated within a narrow and managed band against a basket of certain foreign
currencies. However, the Chinese government has come under increasing U.S. and
international pressure to revalue the Renminbi or to permit it to trade in a
wider band, which many observers believe would lead to substantial appreciation
of the Renminbi against the U.S. dollar and other major currencies. There can be
no assurance that Renminbi will be stable against the U.S. dollar.
If
China imposes economic restrictions to reduce inflation, future economic growth
in China could be severely curtailed, reducing the profitability of our
operations in China.
Rapid
economic growth can lead to growth in the supply of money and rising inflation.
If prices for any products or services in China are unable, for any reason, to
increase at a rate that is sufficient to compensate for any increase in the
costs of supplies, materials or labor, it may have an adverse effect on the
profitability of Erye and our operations in China would be adversely affected.
In order to control inflation in the past, China has imposed controls on bank
credits, limits on loans for fixed assets and restrictions on state bank lending
and could adopt additional measures to further combat inflation. Such measures
could harm the economy generally and hurt our business by (i) limiting the
income of our customers available to spend on our products and services, (ii)
forcing us to lower our profit margins, and (iii) limiting our ability to obtain
credit or other financing to pursue our expansion plans or maintain our
business. We cannot predict with any certainty the degree to which our business
will be adversely affected by slower economic growth in China.
Erye’s
manufacturing operations in China may be adversely affected by changes in PRC
government policies regarding ownership of assets and allocation of resources to
various industries and companies.
While the
PRC government has implemented economic and market reforms, a substantial
portion of productive assets in China are still owned by the PRC government. The
PRC government also exercises significant control over China’s economic growth
through the allocation of resources, controlling payment of foreign currency and
providing preferential treatment to particular industries or companies. Should
the PRC government change its policies regarding economic growth and private
ownership of manufacturing and other assets of Erye, we may be unable to execute
our business plan, we may lose rights to certain business assets and our
business, operating results and financial condition may be materially
harmed.
If
there are any adverse public health developments in China, our business and
operations may be disrupted and medical tourism in China may decline, which
could delay the launch of our stem cell therapies in China.
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Any
prolonged occurrence of avian flu, severe acute respiratory syndrome, or SARS,
or other adverse public health developments in China or other regions where we
operate could disrupt our business and have a material adverse effect on our
business and operating results. These could include the ability of our personnel
to travel or to promote our services within China or in other regions where we
operate, as well as temporary closure of our facilities.
Any
closures or travel or other operational restrictions would severely disrupt our
business operations and adversely affect our results of operations.
If
the anticipated growth of medical tourism in China does not occur, or if fewer
people travel abroad for the purpose of cosmetic or medical therapies for any
reason, including limitations imposed by governmental authorities, we may not
achieve our revenue and profit expectations.
One part
of our business plan involves launching innovative, safe, and effective adult
stem cell-based therapies in China that have not yet been approved in the U.S.,
to generate sales revenues in advance of obtaining U.S. regulatory approvals.
Different countries have different regulatory requirements and pathways
resulting in the availability of therapeutics in one market prior to another.
This phenomenon has led to the growth of an industry called “medical tourism”
where patients travel to foreign locations and receive treatments that have not
yet been approved in their home countries.
If the
anticipated growth of medical tourism in China does not occur, or if fewer
people travel abroad for the purpose of cosmetic or medical therapies for any
reason, including limitations imposed by governmental authorities,we may not
achieve our revenue and profit expectations. Any setbacks to the implementation
of our business plan could materially and adversely affect our business,
operating results and financial condition.
China
is a developing nation governed by a one-party communist government and
susceptible to political, economic, and social upheaval that could disrupt the
economy.
China is
a developing country governed by a one-party government. China is also a country
with an extremely large population, wide income gaps between rich and poor and
between urban and rural residents, minority ethnic and religious populations,
and growing access to information about the different social, economic, and
political systems found in other countries. China has also experienced extremely
rapid economic growth over the last decade, and its legal and regulatory systems
have had to change rapidly to accommodate this growth. If China experiences
political or economic upheaval, labor disruptions or other organized protests,
nationalization of private businesses, civil strife, strikes, acts of war and
insurrections, this may disrupt China’s economy and could materially and
adversely affect our financial performance.
If
political relations between China and the U.S. deteriorate, our business in
China may be materially and adversely affected.
The
relationship between China and the U.S. is subject to periodic tension.
Relations may also be compromised if the U.S. becomes a more active advocate of
Taiwan or pressures the PRC government regarding its monetary, economic or
social policies. Changes in political conditions in China and changes in the
state of Sino-U.S. relations are difficult to predict and could adversely affect
our operations or financial condition. In addition, because of our involvement
in the Chinese market, any deterioration in political relations might cause a
public perception in the U.S. or elsewhere that might cause the goods or
services we may offer to become less attractive. If any of these events were to
occur, it could materially and adversely affect our business, operating results
and financial condition.
China’s
State Food and Drug Administration’s regulations may limit our ability to
develop, license, manufacture and market our products and services.
Some or
all of our operations in China will be subject to oversight and regulation by
the SFDA. Government regulations, among other things, cover the inspection of
and controls over testing, manufacturing, safety and environmental
considerations, efficacy, labeling, advertising, promotion, record keeping and
sale and distribution of pharmaceutical products. Such government regulations
may increase our costs and prevent or delay the licensing, manufacturing and
marketing of any of our products or services. In the event we seek to license,
manufacture, sell or distribute new products or services, we likely will need
approvals from certain government agencies such as the SFDA. The future growth
and profitability of any operations in China would be contingent on obtaining
the requisite approvals. There can be no assurance that we will obtain such
approvals.
In 2004,
the SFDA implemented new guidelines for the licensing of pharmaceutical
products. All existing manufacturers with licenses were required to apply for
the Good Manufacturing Practices, or cGMP, certifications. Erye has received the
requisite certifications. However, should Erye fail to maintain its cGMP
certifications or fail to obtain cGMP and other certifications for its new
production facilities, this would have a material adverse effect on Erye’s and
our business, results of operations and financial condition.
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In
addition, delays, product recalls or failures to receive approval may be
encountered based upon additional government regulation, legislative changes,
administrative action or changes in governmental policy and interpretation
applicable to the Chinese pharmaceutical industry. Our pharmaceutical activities
also may subject us to government regulations with respect to product prices and
other marketing and promotional related activities. Government regulations may
substantially increase our costs for developing, licensing, manufacturing and
marketing any products or services, which could have a material adverse effect
on our business, operating results and financial condition.
The SFDA
and other regulatory authorities in China have implemented a series of new
punitive and stringent measures regarding the pharmaceuticals industry to
redress certain past misconducts in the industry and certain deficiencies in
public health reform policies. Given the nature and extent of such new
enforcement measures, the aggressive manner in which such enforcement is being
conducted and the fact that newly-constituted local level branches are
encouraged to issue such punishments and fines, there is the possibility of
large scale and significant penalties being levied on manufacturers. These new
measures may include fines, restriction and suspension of operations and
marketing and other unspecified penalties. This new regulatory environment has
added significantly to the risks of our businesses in China and may have a
material adverse effect on our business, operating results and financial
condition.
In
China, we plan to conduct research and development activities related to stem
cells in cooperation with two domestic Chinese companies. If these activities
are regarded by PRC government authorities as “human genetic resources research
and development activities,” additional approvals by PRC government authorities
will be required.
Our
research and development activities in adult stem cells in China are conducted
in cooperation with the Beijing Stem Cell Research Center, or Lab, and a
consultant, the Shandong Life Science Institute and Technology Research, or
SLSI. Pursuant to the Interim Measures for the Administration of Human Genetic
Resources, or the Measures, that took effect on June 10, 1998, China maintains a
reporting and registration system on important pedigrees and genetic resources
in specified regions. All entities and individuals involved in sampling,
collecting, researching, developing, trading or exporting human genetic
resources or taking such resources outside China must abide by the Measures.
“Human genetic resources” refers to genetic materials such as human organs,
tissues, cells, blood specimens, preparations or any type of recombinant DNA
constructs, which contain human genome, genes or gene products as well as to the
information related to such genetic materials.
It is
possible that our research and development activities conducted by the Lab or
SLSI in cooperation with us in China may be regarded by PRC government
authorities as human genetic resources research and development activities, and
thus will be subject to approval by PRC government authorities. The sharing of
patents or other corresponding intellectual property rights derived from such
research and development operations is also subject to various restrictions and
approval requirements established under the Measures.
With
regard to the ownership of intellectual property rights derived from human
genetic resources research and development, the Measures provide that the
China-based research and development institution shall have priority access to
information about the human genetic resources within China, particularly the
important pedigrees and genetic resources in the specified regions and the
relevant data, information and specimens and any transfer of such human genetic
resources to other institutions shall be prohibited without obtaining
corresponding approval from the Human Genetic Resource Administration Office of
China, among other governmental authorities or agencies. No foreign
collaborating institution or individual that has access to the above-mentioned
information may publicize, publish, apply for patent rights or disclose it by
any other means without obtaining government approval. In a collaborative
research and development project involving human genetic resources of China
between any Chinese and foreign institutions, intellectual property rights shall
be allocated according to the following principles: (i) patent rights shall be
jointly applied for by both parties and the resulting patent rights shall be
owned by both parties if an achievement resulting from the collaboration is
patentable; (ii) either party has the right to exploit such patent separately or
jointly in its own country, subject to the terms of the collaboration; however,
the transfer of such patent to any third party or authorizing any third party to
implement such patent shall be carried out upon agreement of both parties, and
the benefits obtained thereof shall be shared in accordance with their
respective contributions; and (iii) the right of utilizing, transferring and
sharing any other scientific achievement resulted from the collaboration shall
be specified in the collaborative contract or agreement signed by both parties.
Both parties are equally entitled to make use of the achievement which is not
specified in the collaborative contract or agreement; however, the transfer of
such achievement to any third party shall be carried out upon agreement of both
parties, and the benefits obtained thereof shall be shared in accordance with
their respective contributions.
If the
research and development operations conducted by the Lab or SLSI in cooperation
with us in China are regarded by PRC government authorities as human genetic
resources research and development activities, we may be required to obtain
approval from PRC governmental authorities to continue such operations and the
Measures may adversely affect our rights to intellectual property developed from
such operations. Our inability to access intellectual property, or our inability
to obtain required on a timely basis, or at all, could materially and adversely
affect our operations in China, and our operating results and financial
condition.
Erye
will lose certain preferential tax concessions, which may cause our tax
liabilities to increase and its profitability to decline.
The
National People’s Congress of China enacted a new PRC Enterprise Income Tax Law,
or the EIT Law, that went into effect on January 1, 2008. Domestic-invested
enterprises and foreign-invested entities now are subject to enterprise income
tax at a uniform rate of 25% unless they qualify for limited exceptions. During
the transition period for enterprises established before March 16, 2007, the tax
rate will gradually increase starting in 2008 and will be equal to the new tax
rate in 2012. As a result, Erye will lose its preferential tax
rates.
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- -
Because
of the EIT Law, we expect that the tax liabilities of Erye will increase. Any
future increase in the enterprise income tax rate applicable to Erye or other
adverse tax treatments could increase Erye’s tax liabilities and reduce its net
income, which could have a material adverse effect on Erye’s and our results of
operations and financial condition.
Some
of the laws and regulations governing our business in China are vague and
subject to risks of interpretation.
Some of
the PRC laws and regulations governing our business operations in China are
vague and their official interpretation and enforcement may involve substantial
uncertainty. These include, but are not limited to, laws and regulations
governing our business and the enforcement and performance of our contractual
arrangements in the event of the imposition of statutory liens, death,
bankruptcy and criminal proceedings. Despite their uncertainty, we will be
required to comply.
New laws
and regulations that affect existing and proposed businesses may be applied
retroactively. Accordingly, the effectiveness of newly enacted laws, regulations
or amendments may not be clear. We cannot predict what effect the interpretation
of existing or new PRC laws or regulations may have on our
business.
In
addition, pursuant to China’s Administrative Measures on the Foreign Investment
in Commercial Sector, foreign enterprises are permitted to establish or invest
in wholly foreign-owned enterprises or joint ventures that engage in wholesale
or retail sales of pharmaceuticals in China subject to the implementation of
relevant regulations. However, no specific regulations in this regard have been
promulgated to date, which creates uncertainty. If specific regulations are not
promulgated, or if any promulgated regulations contain clauses that cause an
adverse impact to our operations in China, then our business, operating results
and financial condition could be materially and adversely affected.
The
laws and regulations governing the therapeutic use of stem cells in China are
evolving. New PRC laws and regulations may impose conditions or requirements
with which could materially and adversely affect our business.
As the
stem cell therapy industry is at an early stage of development in China, new
laws and regulations may be adopted in the future to address new issues that
arise from time to time. As a result, substantial uncertainties exist regarding
the interpretation and implementation of current and any future PRC laws and
regulations applicable to the stem cell therapy industry. There is no way to
predict the content or scope of future Chinese stem cell regulation. There can
be no assurance that the PRC government authorities will not issue new laws or
regulations that impose conditions or requirements with which we cannot comply.
Noncompliance could materially and adversely affect our business, results of
operations and financial condition.
Until
implementing rules are issued with regard to the PRC Antitrust Law, we are
unable to determine whether our operations comply.
It is
expected that a set of detailed implementing rules of the PRC Antitrust Law will
be issued by the PRC government. We are now in the process of reviewing our
current business model and business operation against the current PRC Antitrust
Law. However, before the promulgation of such implementing rules, we are unable
to determine whether we might be in violation of any aspects of the PRC
Antitrust Law. A violation of the PRC Antitrust law could subject our operations
to sanctions, fines and other governmental enforcement action any of which could
have a material adverse effect on our business, results of operations and
financial condition.
We
may be subject to fines and legal sanctions imposed by the SAFE or other PRC
government authorities if we or our PRC employees fail to comply with recent PRC
regulations relating to employee stock options granted by offshore listed
companies to PRC citizens.
On April
6, 2007, the SAFE issued the “Operating Procedures for
Administration of Domestic Individuals Participating in the Employee Stock
Ownership Plan or Stock Option Plan of An Overseas Listed Company,”
referred to as Circular 78. It is not clear whether Circular 78 covers all forms
of equity compensation plans or only those which provide for the granting of
stock options. For any plans which are so covered and are adopted by a non-PRC
listed company after April 6, 2007, Circular 78 requires all participants who
are PRC citizens to register with and obtain approvals from the SAFE prior to
their participation in the plan. In addition, Circular 78 also requires PRC
citizens to register with the SAFE and make the necessary applications and
filings if they participated in an overseas listed company’s covered equity
compensation plan prior to April 6, 2007. The 2009 Non-U.S. Plan authorizes the
grant of certain equity awards to our officers, directors and employees, some of
whom are PRC citizens. Circular 78 may require our officers, directors and
employees who receive option grants and are PRC citizens to register with the
SAFE. We believe that the registration and approval requirements contemplated in
Circular 78 will be burdensome and time consuming. If it is determined that any
of our equity compensation plans are subject to Circular 78, failure to comply
with such provisions may subject us and participants of our equity incentive
plan who are PRC citizens to fines and legal sanctions and prevent us from being
able to grant equity compensation to our PRC employees. In that case, our
ability to compensate our officers, directors and employees through equity
compensation would be hindered and our business operations may be adversely
affected.
- 36
- -
Failure
to comply with the U.S. Foreign Corrupt Practices Act could subject us to
penalties and other adverse consequences.
We are
subject to the U.S. Foreign Corrupt Practices Act, which generally prohibits
U.S. companies from engaging in bribery or other prohibited payments to foreign
officials for the purpose of obtaining or retaining business. Foreign companies,
including some that may compete with us, are not subject to these prohibitions.
Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices
occur from time-to-time in the PRC. There can be no assurance, however, that our
employees or other agents will not engage in such conduct for which we might be
held responsible. If our employees or other agents are found to have engaged in
such practices, we could suffer severe penalties and other consequences that may
have a material adverse effect on our business, financial condition and results
of operations.
Under
the EIT Law, we may be classified as a “resident enterprise” of the PRC, which
could result in unfavorable tax consequences to us and to non-PRC
stockholders.
Under the
EIT Law, an enterprise established outside of China with “de facto management
bodies” within China is considered a “resident enterprise,” meaning that it can
be treated in a manner similar to a Chinese enterprise for enterprise income tax
purposes, although the dividends paid to one resident enterprise from another
may qualify as “tax-exempt income.” The implementing rules of the EIT Law define
de facto management as “substantial and overall management and control over the
production and operations, personnel, accounting, and properties” of the
enterprise. The EIT Law and its implementing rules are relatively new and
ambiguous in terms of some definitions, requirements and detailed procedures,
and currently no official interpretation or application of this new “resident
enterprise” classification, other than for enterprises established outside of
China whose main holding investor/s is/are enterprise/s established in China, is
available; therefore, it is unclear how tax authorities will determine tax
residency based on the facts of each case.
If the
PRC tax authorities determine that we are a “resident enterprise” for PRC
enterprise income tax purposes, the PRC could impose a 10% PRC tax on dividends
we pay to our non-PRC stockholders and gains derived by our non-PRC stockholders
from transferring our shares, if such income is considered PRC-sourced income by
the relevant PRC authorities. In addition, we could be subject to a number of
unfavorable PRC tax consequences, including: (a) we could be subject to
enterprise income tax at a rate of 25% on our worldwide taxable income, as well
as PRC enterprise income tax reporting obligations; and (b) although under the
EIT Law and its implementing rules, dividends paid to us from our PRC
subsidiaries through our sub-holding companies may qualify as “tax-exempt
income,” we cannot guarantee that such dividends will not be subject to
withholding tax. Any increase in the taxation of our PRC-based revenues could
materially and adversely affect our business, operating results and financial
condition.
Taxing
authorities in the PRC may attempt to impose a capital gains tax on the transfer
of the ownership of the 51% ownership interest in Erye.
Transactions
involving the Merger of two non-PRC companies, but that result in the change in
ownership of joint venture interests in the PRC, historically have not been
taxed by the taxing authorities in the PRC. However, recently the taxing
authorities in the PRC have levied capital gains tax at the rate of
approximately 10% of the gain on a few real estate and mining transactions that
resulted in a change in ownership in joint ventures located in the PRC. There
can be no assurance that the PRC taxing authorities will not impose a capital
gains tax of approximately 10% of the gain on the transfer to us of ownership of
the 51% equity interests in Erye.
Risks
Related to Our Securities
Our
common stock has had limited trading volume.
Our
common stock is currently listed on the NYSE Amex and has had limited trading
volume since its listing on August 9, 2007. Low volumes can result in
fluctuating prices and downward pressure on the price per share should there
develop an imbalance between the shares available for sale and the number of
shares sought to be purchased. We cannot assure you that the liquidity of our
common stock will improve or that it will not decline from current levels. Our
Class A Warrants also trade on the NYSE Amex, but have had very limited trading
volume. Investors holding our common stock may find it difficult to dispose of
such shares.
Our
stock price has been and may continue to be volatile.
The price
of our common stock has fluctuated widely in the past and may be more volatile
in the future. In addition to our low stock trading volume, some of the other
factors contributing to our stock’s price volatility include announcements of
government regulation, new products or services introduced by us or by our
competition, healthcare legislation, trends in health insurance, litigation,
fluctuations in operating results, our success in commercializing our business,
market conditions for healthcare stocks in general as well as economic
recession. Any of these factors could have a significant impact on the price of
our common stock.
- 37
- -
Failure
to maintain effective internal control over financial reporting in accordance
with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect
on our business and stock price.
CBH
reported several material weaknesses in its internal control over financial
reporting and concluded that it did not have effective internal control over
financial reporting as of December 31, 2008 and September 30, 2009. If we fail
to (1) remediate the material weaknesses identified in CBH’s internal control
over financial reporting that are continuing with regard to Erye, and integrate
CBH’s internal control over financial reporting pertaining to Erye with ours, or
(2) we fail to maintain the adequacy of internal control over our financial
reporting with regard to the financial condition and results of operations of
Erye, we may not be able to ensure that we can conclude on an ongoing basis that
we have effective internal control over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act, as such standards are modified,
supplemented or amended from time to time.
During
the course of testing our disclosure controls and procedures and internal
control over financial reporting, we may identify and disclose material
weaknesses or significant deficiencies in internal control over financial
reporting that will have to be remedied. Implementing any appropriate changes to
our internal control may require specific compliance training of our directors,
officers and employees, entail substantial costs in order to modify our existing
accounting systems, and take a significant period of time to complete. Such
changes may not, however, be effective in maintaining the adequacy of our
internal control over financial reporting, and any failure to maintain that
adequacy or inability to produce accurate financial statements on a timely basis
could result in our financial statements being unreliable, increase our
operating costs and materially impair our ability to operate our
business.
Failure
to achieve and maintain effective internal control over financial reporting
could result in a loss of investor confidence in our financial reports and could
have a material adverse effect on our stock price. Additionally, failure to
maintain effective internal control over our financial reporting could result in
government investigation or sanctions by regulatory
authorities. Please see Item 9A – Management’s Annual Report in
Internal Control Over Financial Reporting for a discussion of material
weaknesses and the Company’s remediation efforts.
We
have a significant number of securities convertible into, or allowing the
purchase of our common stock. Investors could be subject to increased dilution.
Also, the issuance of additional shares as a result of such conversion or
purchase, or their subsequent sale, could adversely affect the price of our
common stock.
Investors
in our company will be subject to increased dilution upon conversion of our
preferred stock and upon the exercise of outstanding stock options and warrants.
There were 43,946,031 shares of our common stock outstanding as of March 24,
2010. As of that date, preferred stock outstanding could be converted into
9,086,124 shares of our common stock and stock options and warrants outstanding
that are exercisable represented an additional 19,838,802 shares of our
common stock that could be issued (for which cash would need to be remitted to
us for exercise) in the future. Most of the outstanding shares of our common
stock, as well as the vast majority of the shares of our common stock that may
be issued under our outstanding options and warrants, are not restricted from
trading or have the contractual right to be registered.
Any
significant increase in the number of shares offered for sale could cause the
supply of our common stock available for purchase in the market to exceed the
purchase demand for our common stock. Such supply in excess of demand could
cause the market price of our common stock to decline.
Actual
and beneficial ownership of large quantities of our common stock by our
executive officers, directors, and other substantial stockholders, may
substantially reduce the influence of other stockholders.
As of
March 15, 2010, our executive officers, directors, and 5%-or-more stockholders
collectively beneficially owned 35,763,482 shares of our common stock. These
beneficial holdings represent 58.7% of our common stock on a fully-diluted
basis. As a result, such persons may have the ability to exercise enhanced
control over the approval process for actions that require stockholder approval,
including: the election of our directors and the approval of mergers, sales of
assets or other significant corporate transactions or other matters submitted
for stockholder approval. Because of the beneficial ownership position of these
persons and entities, other stockholders may have less influence over matters
submitted for stockholder approval. Furthermore, at certain times the interests
of our substantial stockholders may conflict with the interests of our other
stockholders.
Some of our
directors and officers have positions of responsibility with other entities, and
therefore have loyalties and fiduciary obligations to both our company and such
other entities. These dual positions subject such persons to conflicts of
interest in related party transactions which may cause such related party
transactions to have consequences to the our company that are less favorable
than those which our Company could have attained in comparable transactions with
unaffiliated entities.
Eric H.C.
Wei, a member of our Board of Directors, is also the Managing Partner of RimAsia
Capital Partners, L.P., or RimAsia. RimAsia, a substantial stockholder of our
company, beneficially owns 46.3% of our common stock as of March 15, 2010. Shi
Mingsheng (who became a director of our company in March 2010) and Madam Zhang
Jian (the General Manager of Erye), together with certain other persons, have
shared voting and dispositive power over the shares of our common stock held by
Fullbright Finance Limited, or Fullbright. Fullbright is a substantial
stockholder of our company, beneficially owning 9.9% of our common stock as of
March 15, 2010. These relationships create, or, at a minimum, appear to create
potential conflicts of interest when members of our company’s senior management
are faced with decisions that could have different implications for our company
and the other entities with which our directors or officers are
associated.
- 38
- -
Although
our company has established procedures designed to ensure that material related
party transactions are fair to the company, no assurance can be given as to how
potentially conflicted board members or officers will evaluate their fiduciary
duties to our company and to other entities that they may owe fiduciary duties,
respectively, or how such individuals will act in such circumstances.
Furthermore, the appearance of conflicts, even if such conflicts ultimately do
not harm our company, might adversely affect the public’s perception of our
business, as well as its relationship with its existing customers, licensors,
licensees and service providers and its ability to enter into new relationships
in the future.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
2. PROPERTIES
Effective
April 1, 2009, we leased executive offices at 420 Lexington Avenue, New York, NY
10170, which serve as our headquarters. The lease has a current term that
extends through June 2013 and is believed to be sufficient space for the
foreseeable future.
In
September 2009, we leased office and laboratory space at 840 Memorial Drive,
Cambridge, Massachusetts for approximately three years, or the Cambridge Space.
The Cambridge Space will be used for general office, research and development,
and laboratory purposes (inclusive of an adult stem cell collection center). The
base rent under the Cambridge Lease is $283,850 for the first year, $356,840 for
the second year and $369,005 for the third year.
The
current operations of Erye are located in Suzhou City. All buildings are fully
occupied and used by Erye. The ages of all buildings are over 25 years. The land
on which the facilities are situated is located at the heart of city and is
restricted by government regulation from any new building development. In 2005,
the government issued a mandate requiring the relocation of many of Suzhou’s
existing manufacturing facilities. To comply with this mandate, and to meet the
growing demands of its business, Erye acquired land use rights to approximately
27 acres in the Xiangcheng District of Suzhou for $1.8 million and, in 2007,
commenced the construction of a new, state-of-the-art production facility. This
new campus-style facility includes 12 buildings containing a total of
approximately 49,436 square meters, for which the external building construction
has been completed. Portions of the new facility are expected to be operational
in the first quarter of 2010 and the relocation is expected to be completed by
the end of 2011. The land use rights end in January of 2058.
The total
cost of the new facility is estimated to be approximately $30 million, of which
approximately $16 million has been paid for through December 31, 2009. The
remaining $14 million is expected to be funded from a combination of proceeds
from the Company’s February 2010 public offering in which it raised net proceeds
of approximately $7.1 million, the proceeds from the exercise by RimAsia in
March 2010 of a warrant to purchase 1,000,000 shares of Common Stock at a per
share purchase price of $1.75 resulting in gross proceeds to the
Company of $1,750,000 (in each of the prior two cases such funding would be in
the form of a loan from the Company), an Erye line of credit and Erye’s
operating cash flow. To this end, the owners of Erye have agreed to reinvest a
substantial portion of their respective shares of the earnings of Erye to pay
the costs associated with the completion of, and Erye’s relocation to, the new
production facility.
In 2008,
CBH, the then 51% owner of Erye, and EET, as the owner of the remaining 49% of
Erye, and RimAsia, entered into a Memorandum of Understanding, or MOU, which
established, among other things, certain terms and conditions concerning the
operation and relocation of Erye. The MOU calls for all proceeds associated with
the relocation of the current facility in which Erye manufactures product to be
sold, to the new facilities currently under construction, to be paid to EET. In
September 2009, Erye agreed to transfer the land and building for its principal
manufacturing facility to a new joint venture beneficially owned by EET.
Erye and the new joint venture, which was approved by the Jiangsu Provincial
Bureau of Commerce on December 28, 2009, have agreed to Erye’s continued
use of the land and buildings for a nominal fee until the construction of the
new plant and Erye’s relocation are completed.
ITEM
3. LEGAL PROCEEDINGS
We
may be subject to litigation in the ordinary course. Currently, we are not a
party to any litigation that could have a material adverse effect on our
financial condition.
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- -
ITEM
4. REMOVED AND RESERVED
ITEM
5(a). MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET
FOR OUR COMMON EQUITY
Our
Common Stock is presently traded on the NYSE Amex (previously known as the
American Stock Exchange) under the trading symbol “NBS.” From August
31, 2006 to August 8, 2007, it traded on the Over-the-Counter Bulletin Board
(OTC.BB) under the symbol “NEOI” and from July 24, 2003 to
August 30, 2006 traded under the symbol “PHSM.” The prices, as
presented below, represent the highest and lowest intra-day prices for our
common stock as quoted on the OTC.BB through August 8, 2007 and the high and low
sales prices on the NYSE Amex thereafter. The OTC.BB market quotations may
reflect inter-dealer prices without retail mark-up, mark-down, or commission,
and may not necessarily represent actual transactions. On March 26, 2010, as
reported on the NYSE Amex, the last sale price of our common stock was $1.68 per
share, and the high and low sale prices of our common stock were $1.72 and $1.66
, respectively.
|
2009
|
High
|
Low
|
||||||
|
First
Quarter
|
$
|
1.08
|
$
|
0.43
|
||||
|
Second
Quarter
|
2.72
|
0.80
|
||||||
|
Third
Quarter
|
2.33
|
1.40
|
||||||
|
Fourth
Quarter
|
2.50
|
1.28
|
||||||
|
2008
|
High
|
Low
|
||||||
|
First
Quarter
|
$
|
2.24
|
$
|
1.18
|
||||
|
Second
Quarter
|
1.48
|
0.41
|
||||||
|
Third
Quarter
|
1.80
|
0.70
|
||||||
|
Fourth
Quarter
|
2.15
|
0.41
|
||||||
|
2007
|
High
|
Low
|
||||||
|
First
Quarter
|
$
|
8.00
|
$
|
2.50
|
||||
|
Second
Quarter
|
6.40
|
3.70
|
||||||
|
Third
Quarter
|
7.65
|
3.65
|
||||||
|
Fourth
Quarter
|
4.75
|
1.28
|
||||||
HOLDERS
As of
March 15, 2010, there were approximately 1,476 holders of record of our common
stock which does not include beneficial owners for whom Cede & Co. or others
act as nominees.
DIVIDENDS
AND DIVIDEND POLICY
Holders
of our common stock are entitled to dividends when, as, and if declared by our
Board of Directors out of funds legally available therefore. We have never paid
any cash dividends on our capital stock and do not anticipate paying any cash
dividends in the foreseeable future. We currently intend to retain
any future earnings to fund the development and growth of our business. Future
dividend policy is subject to the discretion of our Board of Directors, subject
to certain qualifications described below.
As long
as any shares of our Series C Preferred Stock are outstanding, no dividend may
be declared or paid or set apart for payment on any junior stock, unless there
has been declared and paid or set apart for payment on the shares of Series C
Preferred Stock, all accrued and unpaid annual dividends; provided, however,
that the foregoing does not apply to (i) dividends payable solely in shares of
any class or series of junior stock, or (ii) the purchase, redemption or
conversion of shares of any junior stock, in exchange solely for shares of
junior stock.
Furthermore,
we rely on dividend payments from our subsidiaries, NeoStem (China), Inc., or
NeoStem (China) and CBH Acquisition LLC, or Merger Sub, now China
Biopharmaceuticals Holdings, Inc., that is the holder of our 51% interest in
Erye, which may, from time to time, be subject to certain additional
restrictions on their ability make distributions to us. PRC accounting standards
and regulations currently permit payment of dividends only out of accumulated
profits, a portion of which must be set aside to fund certain reserve funds. Our
inability to receive all of the revenues from NeoStem (China) and Merger Sub may
in turn provide an additional obstacle to our ability to pay dividends on our
common stock in the future. Additionally, because the PRC government imposes
controls on the convertibility of RMB into foreign currencies and, in certain
cases, the remittance of currency out of the PRC, shortages in the availability
of foreign currency may occur, which could restrict our ability to remit
sufficient foreign currency to pay dividends.
- 40
- -
Finally,
any distributions we may receive by reason of our ownership of a 51% interest in
Erye will be subject to the provisions of the Joint Venture Agreement, which
presently provides that, for the next three years, we will receive annual
distributions of only six percent of Erye’s net profit.
EQUITY
COMPENSATION PLAN INFORMATION
The
following table gives information about our common stock that may be issued upon
the exercise of options, warrants and rights under our equity compensation
plans. In the following table, the equity compensation plans approved by
stockholders include the NeoStem, Inc. 2003 Equity Participation Plan (the “2003
Plan”), the NeoStem, Inc. 2009 Equity Compensation Plan (the “2009 Plan”) and
the NeoStem, Inc. 2009 Non-U.S. Based Equity Compensation Plan (the “2009
Non-U.S. Plan”) as of December 31, 2009. These plans were our only
equity compensation plans in existence as of December 31, 2009.
|
Plan
Category
|
(a)
Number
of Securities to be Issued Upon Exercise of Outstanding Options, Warrants
and Rights
|
(b)
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights
|
(c)
Number
of Securities Remaining Available For Future Issuance Under Equity
Compensation Plans (Excluding Securities Reflected In Column
(a))
|
|||||||||
|
Equity
Compensation Plans Approved by Security Holders
|
9,990,574
|
$
|
1.95
|
3,955,970
|
||||||||
|
Equity
Compensation Plans Not Approved by Security Holders
|
0
|
0
|
0
|
|||||||||
|
TOTAL
|
9,990,574
|
$
|
1.95
|
3,955,970
|
||||||||
Effective
as of October 9, 2009, the Company entered into an agreement with a financial
advisor who has previously provided services to the Company, pursuant to which
this advisor was retained to provide additional financial advisory services for
a two month period. In consideration for providing services under this
agreement, the Company agreed to issue to the consultant an aggregate of 50,000
shares of restricted Common Stock, to vest as to one-half of the shares at the
end of each monthly period during the term, and a five year warrant to purchase
25,000 shares of restricted Common Stock at a per share exercise price of $2.10
(with cashless exercise provisions), to vest in its entirety at the end of the
term. The issuance of such securities is subject to the approval of the NYSE
Amex, which approval was obtained in December 2009.
Effective
as of November 20, 2009, the Company entered into an agreement with a consultant
who has previously provided services to the Company, pursuant to which this
consultant was retained to provide additional consulting services for a three
month period. In consideration for providing services under this agreement, the
Company agreed to issue to the consultant an aggregate of 50,000 shares of
restricted common stock, to vest as to one-third of the shares at the end of
each monthly period during the term. The issuance of such securities is subject
to the approval of the NYSE Amex, which approval was obtained in December
2009.
Effective
as of January 4, 2010 the Company entered into a one-year agreement with a
consultant to provide investor relations services to the Company. In
consideration for providing services under this agreement, the Company agreed to
pay a retainer of $8,000 per month, at the beginning of the month and each month
thereafter during the primary term of the agreement and issue to the consultant
a five year warrant to purchase 200,000 shares of restricted common stock at a
per share exercise price of $2.00 to vest 50,000 each of the last day of each of
the fiscal quarters. The issuance of such securities is subject to the approval
of the NYSE Amex, which approval was obtained in January 2010.
- 41
- -
Effective
as of February 26, 2010, the Company entered into an agreement with a consultant
to provide to the Company necessary information for designing a successful
marketing plan and product list for the penetration (Phase II) of Federal, State
and local government markets. In consideration for providing the
services, the Company agreed to pay a retainer of $20,000 each month and a five
year warrant in the Company's standard form to purchase 275,000 shares of Common
Stock which shall have a per share exercise price $1.42 and shall vest and
become exercisable in its entirety on such date after the Effective Date that
certain milestones in performance have been achieved; provided that if such date
is prior to May 14, 2010 then the warrant shall vest on May 14,
2010. The issuance of such securities is subject to the approval of
the NYSE Amex.
Effective
as of March 11, 2010, the Company entered into an agreement with a law firm
which has been providing legal services to the Company since 2006, pursuant to
which this firm was retained to provide additional legal services with regard to
negotiation, drafting and finalization of contracts; in the development of
strategic plans; with regard to funding from various agencies of the State of
New Jersey and the Federal government. In consideration for providing
the services, the Company agreed to issue a five year warrant to purchase 52,000
shares of restricted Common Stock at a per share exercise price of $1.42,
vesting as to one-half of the shares on June 30, 2010 and one-half of the shares
on December 31, 2010. The issuance of such securities is subject to
the approval of the NYSE Amex.
- 42
- -
Not
applicable.
ITEM
5(c) REPURCHASES OF EQUITY SECURITIES
There
were no repurchases of equity securities by or on behalf of the Company or any
affiliated purchaser during the fourth quarter of the fiscal year ended December
31, 2009 as to which information is required to be
furnished.
- 43
- -
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND
RESULTS OF OPERATIONS
The following Management’s
Discussion and Analysis of Financial Condition and Results of Operations
contains forward-looking statements that involve risks and uncertainties. Our
actual results could differ materially from those anticipated in these
forward-looking statements as a result of various factors, including those set
forth under “Cautionary Note Regarding Forward-Looking Statements” and under
“Risk Factors” and elsewhere in this annual report. The following discussion
should be read in conjunction with our consolidated financial statements and
related notes thereto included elsewhere in this annual
report.
The
Merger
As
reported on our Current Report on Form 8-K dated November 6, 2008, on November
2, 2008 we entered into the Merger Agreement with CBH. On October 30, 2009, the
Merger was consummated, the effect of which was our acquisition of CBH’s 51%
ownership interest in Erye. In connection with the Merger we established a
wholly owned subsidiary through which we acquired our interest in
Erye.
Erye was
founded more than 50 years ago and represents an established,
vertically-integrated pharmaceutical business, focused primarily on antibiotics.
Suzhou Erye Economy and Trading Co. Ltd., or EET, owns the remaining 49%
ownership interest in Erye. We and EET have negotiated a revised joint venture
agreement, or the Joint Venture Agreement and will govern our ownership of
Erye.
Pursuant
to the terms and conditions of the Joint Venture Agreement, dividend
distributions to EET and Merger Sub will be made in proportion to their
respective ownership interests in Erye; provided, however, that for the
three-year period commencing on the first day of the first fiscal quarter after
the Joint Venture Agreement becomes effective distributions will be made as
follows: (i) the 49% of undistributed profits (after tax) of the joint venture
due EET will be distributed to EET and lent back to Erye to help finance costs
in connection with their construction of and relocation to a new facility and;
(ii) of the net profit (after tax) of the joint venture due Merger Sub, 45% will
be provided to Erye as part of the new facility construction fund and will be
characterized as paid-in capital for Merger Sub’s 51% interest in Erye, and 6%
will be distributed to Merger Sub directly. In 2009 and as of
December 31, 2009 distributions totaling approximately $7,158,000 had been
deferred and EET has received and lent back approximately
$7,688,000.
The
Overview
In 2009,
through our expansion efforts within China and with the acquisition of a
controlling interest in Suzhou Erye Pharmaceuticals Ltd., or Erye, we
transitioned into a multi-dimensional international biopharmaceutical company
with product and service revenues, global research and development capabilities
and operations in three distinct business units: (i) U.S. adult stem cells, (ii)
China adult stem cells, and (iii) China pharmaceuticals. These business units
are expected to provide platforms for the accelerated development and
commercialization of innovative technologies and products in both the U.S. and
China.
|
•
|
U.S.
adult stem cells — We will continue to focus on growing our stem
cell collection, processing and storage business and expanding our
research and development activities for diagnostic and therapeutic
applications.
|
|
•
|
China
adult stem cells — We are in the process of launching several
stem cell-focused initiatives which include therapeutic applications, as
well as related collection, processing and
storage.
|
|
•
|
China
pharmaceuticals — Our ownership interest in Erye, a leading
antibiotics producer in China, positions us to take advantage of China’s
growth in healthcare spending through Erye’s existing pharmaceutical
product portfolio, as well as from products we may develop or
license.
|
NeoStem — Critical
Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts of NeoStem, Inc. (a
Delaware corporation) and its wholly-owned and partially owned subsidiaries as
listed below:
- 44
- -
|
Entity
|
Percentage
of Ownership
|
Location
|
||
|
NeoStem
Inc.
|
Parent Company
|
United
States of America
|
||
|
NeoStem
Technologies, Inc.
|
100%
|
United
States of America
|
||
|
Stem
Cell Technologies, Inc.
|
100%
|
United
States of America
|
||
|
NeoStem
(China) Inc.
|
100%
|
People’s
Republic of China
|
||
|
Qingdao
Niao Bio-Technology Ltd.*
|
*
|
People’s
Republic of China
|
||
|
Beijing
Ruijiao Bio-Technology Ltd.*
|
*
|
People’s
Republic of China
|
||
|
China
Biopharmaceuticals Holdings, Inc. (Merger Sub)
|
100%
|
United
States of America
|
||
|
Suzhou
Erye Pharmaceuticals Company Ltd.
|
51%
owned by Merger Sub
|
People’s
Republic of China
|
||
* Because certain PRC regulations
currently restrict foreign entities from holding certain licenses and
controlling certain businesses in China, we have created a wholly
foreign-owned entity, or WFOE, NeoStem (China), to implement our expansion
initiatives in China. To comply with China’s foreign investment
regulations with respect to stem cell-related activities, these business
initiatives in China are conducted via two Chinese domestic entities, Qingdao
Niao Bio-Technology Ltd., or Qingdao Niao, and Beijing Ruijieao Bio-Technology
Ltd., or Beijing Ruijieao, that are controlled by the WFOE through various
contractual arrangements
and under the principles of consolidation we consolidate 100% of their
operations.
Noncontrolling
interests:
Effective January 1, 2009, the Company adopted Financial Accounting Standard
Board (“FASB”) accounting standard regarding non-controlling interest in
consolidated financial statements. Certain provisions of this accounting
standard are required to be adopted retrospectively for all periods presented.
Such provisions include a requirement that the carrying value of non-controlling
interests (previously referred to as minority interests) be removed from the
mezzanine section of the balance sheet and reclassified as equity. Further, as a
result of adoption this accounting standard, net income attributable to
non-controlling interests is now excluded from the determination of consolidated
net income.
Use of Estimates: The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Concentrations of Risk:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash. Cash includes cash on
hand and demand deposits in accounts maintained with banks within the People’s
Republic of China and the United States. The Company places its cash accounts
with high credit quality financial institutions, which at times may be in excess
of the FDIC insurance limit. Total cash in these banks at December 31, 2009 and
2008 amounted to $7,159,369 and $430,786 of which $431,717 and $27,740 deposits
are federally-insured, respectively of which $296,989 and 28,955 are covered by
such insurance. The Company has not experienced any losses in such
accounts and believes it is not exposed to any risks on its cash in bank
accounts. At December 31, 2009 the Company had invested approximately $1,031,000
in money market accounts
As of
October 31, 2009 the Company was selling pharmaceutical products to pharmacies
and hospitals. There is no sales concentration risk for the Company since there
are no sales to one customer individually accounting for more than 10% of the
total sales revenue for the twelve months ended December 31, 2009 and the two
months ended December 31, 2009.
For the
two months ended December 31, 2009 as a result of the acquisition of CBH, two
major suppliers provided approximately 23.0% of the Company’s purchases of raw
materials with each supplier individually accounting for 12% and 11%,
respectively. As of December 31, 2009, the total accounts payable to the two
major suppliers was $789,000, 10% of the total accounts payable.
For the
twelve months ended December 31, 2008 there were no suppliers which supplied
more than 10% of the Company’s supplies or raw materials.
Restricted Cash: Restricted cash represents
cash required to be deposited with banks for the balance of bank notes payable
but are subject to withdrawal with restrictions according to the agreement with
the bank and saving accounts. The required deposit rate is approximately 30-50%
of the notes payable. Given the nature of the restricted cash, it is
reclassified as a financing activity in Statement of Cash Flows.
Accounts Receivable: Accounts receivable are
carried at original invoice amount less an estimate made for doubtful
receivables. Management’s judgment and estimates are made in connection with
establishing the allowance for doubtful accounts. Specifically, the Company
analyzes the aging of accounts receivables balances, historical bad debts,
customer concentration and credit-worthiness, current economic trends and
changes in the Company’s customer payment terms. Significant changes in customer
concentrations or payment terms, deterioration of customer credit-worthiness or
weakening economic trends could have a significant impact on the collectability
of the receivables and the Company’s operating results. If the financial
condition of the Company’s customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowance may be
required. Management regularly reviews aging of receivables and changes in
payment trends by its customers, and records a reserve when they believe
collection of amounts due are at risk. There were allowance for doubtful
accounts necessary at December 31, 2009 and 2008 in the amount of $273,600 and
$0 respectively.
- 45
- -
Inventories: Inventories are stated
at the lower of cost or market using the first-in, first-out basis. The Company
reviews its inventory periodically for possible obsolescence or to determine if
any reserves are necessary.
Property and Equipment: The
cost of property and equipment is depreciated over the estimated useful lives of
the related assets of 3 to 10 years. The cost of computer software programs are
amortized over their estimated useful lives of five years. Depreciation is
computed on the straight-line method. Repairs and maintenance expenditures that
do not extend original asset lives are charged to expense as
incurred.
Income Taxes: The Company, in
accordance with ASC 740-10 (formerly SFAS 109, “Accounting for Income Taxes,”)
recognizes (a) the amount of taxes payable or refundable for the current year
and (b) deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in an enterprise’s financial statement or tax
returns. We continue to evaluate under guidance provided by the ASC, the
accounting for uncertainty in tax positions. The guidance requires
companies to recognize in their financial statements the impact of a tax
position if the position is more likely than not of being sustained on audit.
The position ascertained inherently requires judgment and estimates by
management. For the twelve months ended December 31, 2009 and 2008,
we do not believe we have any material uncertain tax positions that
would require us to measure and reflect the potential lack of
sustainability of a position on audit in our financial statements. We will
continue to evaluate our tax positions in future periods to determine if
measurement and recognition in our financial statements.
- 46
- -
Goodwill: Goodwill represents
the excess of the purchase price over the fair value of the net assets acquired
in a business combination. The Company reviews recorded goodwill for potential
impairment annually or upon the occurrence of an impairment indicator. The
Company performed its annual impairment tests as of December 31, 2009 and
determined no impairment exists. The Company will perform its future annual
impairment as of the end of each fiscal year, or earlier if circumstances would
indicate. Below is a recap of the changes in Goodwill for the twelve months
ended 12/31/2009:
|
Balance
12/31/2008
|
$ | 558,169 | ||
|
Increase
in Goodwill due to Acquisition of CBH
|
29,303,954 | |||
|
Balance
12/31/2009
|
$ | 29,862,123 |
Accounting for Stock Based
Compensation: In December 2004, the FASB issued ASC 718-10, 718-20 and
505-50 formerly, (SFAS No. 123(R), "Share-Based Payment" ("SFAS No. 123(R)")).
ASC 718-10, 718-20 and 505-50 establish standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
ASC 718-10, 718-20 and 505-50 requires that the fair value of such equity
instruments be recognized as an expense in the historical financial statements
as services are performed. Prior to ASC 718-10, 718-20 and 505-50, only certain
pro forma disclosures of fair value were required. The Company has adopted ASC
718-10, 718-20 and 505-50 effective January 1, 2006. The Company determines
value of stock options by the Black-Scholes option pricing model. The value of
options issued since January 1, 2006 or that were unvested at January 1, 2006
are being recognized as an operating expense ratably on a monthly basis over the
vesting period of each option. With regard to stock options and warrants issued
to non-employees the Company has adopted ASC 505-50 formerly (EITF 96-18
“Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring or in Conjunction with Selling Goods and Services.”)
- 47
- -
Revenue Recognition: The
Company initiated the collection and banking of autologous adult stem cells in
the fourth quarter of 2006. The Company recognizes revenue related to the
collection and cryopreservation of autologous adult stem cells when the
cryopreservation process is completed which is generally twenty four hours after
cells have been collected. Revenue related to advance payments of storage fees
is recognized ratably over the period covered by the advanced payments. The
Company earns revenue, in the form of license fees, from physicians seeking to
establish autologous adult stem cell collection centers. These license fees are
typically billed upon signing of the collection center agreement and
qualification of the physician by the Company’s credentialing committee and at
various times during the term of license agreement based on the terms of the
specific agreement. During the quarter ended June 30, 2009, the Company modified
its revenue recognition policy relative to these license fees to recognize such
fees as revenues ratably over the appropriate period of time to which the
revenue element relates. Previously these license fees were recognized in full
when agreements were signed and the physician had been qualified by the
Company’s credentialing committee. This modification of our revenue recognition
policy did not have a material impact on our results of operations. The Company
also receives licensing fees from a licensee for use of our technology and
knowledge to operate an adult stem cell banking operation in China, which
licensing fees are recognized as revenues ratably over the appropriate period of
time to which the revenue element relates. In addition, the Company earns
royalties for the use of its name and scientific information in connection with
its License and Referral Agreement with Promethean Corporation (see “Related
Party Transactions” below), which royalties are recognized as revenue when they
are received.
The
Company recognizes revenue from product sales when title has passed, the risks
and rewards of ownership have been transferred to the customer, the fee is fixed
and determinable, and the collection of the related receivable is probable which
is generally at the time of shipment.
Revenue
was made up of the following product categories.
|
For
the year ended
|
||||||||||||
|
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenue
|
||||||||||||
|
Prescription
drugs and intermediary pharmaceutical products
|
$ | 11,347,949 | $ | - | $ | - | ||||||
|
Stem
Cell Revenues
|
172,078 | 83,541 | 231,664 | |||||||||
|
Other
Revenues
|
45,091 | - | - | |||||||||
| $ | 11,565,118 | $ | 83,541 | $ | 231,664 | |||||||
Fair Value
Measurements: We follow the provisions of ASC 820, Fair Value Measurements and
Disclosures related to financial assets and liabilities that are being
measured and reported on a fair value basis. Fair value is the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the principal market at the
measurement date (exit price). We are required to classify fair value
measurements in one of the following categories:
Level 1
inputs which are defined as quoted prices (unadjusted) in active markets for
identical assets or liabilities that the reporting entity has the ability to
access at the measurement date.
Level 2
inputs which are defined as inputs other than quoted prices included within
Level 1 that are observable for the assets or liabilities, either directly or
indirectly.
- 48
- -
Level 3
inputs are defined as unobservable inputs for the assets or
liabilities. Financial assets and liabilities are classified based on the
lowest level of input that is significant to the fair value measurement. Our
assessment of the significance of a particular input to the fair value
measurement requires judgment, and may effect the valuation of the fair value of
assets and liabilities and their placement within the fair value hierarchy
levels.
The
Company determined the fair value of funds invested in short term investments,
which are available for sale and included in prepaid and other current assets on
the balance sheet at December 31, 2009, to be level 1 inputs measured
by quoted prices of the securities in active markets. The Company determined the
fair value of funds invested in money market funds to be level 2 inputs, which
does not entail material subjectivity because the methodology employed does not
necessitate significant judgment, and the pricing inputs are observed from
actively quoted markets. The following table sets forth by level within the fair
value hierarchy our financial assets and liabilities that were accounted for at
fair value on a recurring basis as of December 31, 2009.
|
Carrying
Value
|
Fair
Value Measurements Using Fair Value Hierarchy
|
|||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||||
|
Money
Market Funds
|
$ | 1,030,980 | $ | - | 1,030,980 | - | ||||||||||
|
Short
term investments
|
$ | 287,333 | $ | 287,333 | - | - | ||||||||||
Foreign Currency
Translation: As the Company’s Chinese
pharmaceutical business is a self-contained and integrated entity, and the
Company’s Chinese stem cell business’ future cash flow is expected to be
sufficient to service its additional financing requirements, the Chinese
subsidiaries’ functional currency is the Renminbi (“RMB”), and the Company’s
reporting currency is the US dollar. Results of foreign operations
are translated at the average exchange rates during the period, assets and
liabilities are translated at the unified exchange rate as quoted by the
People’s Bank of China at the end of each reporting period. Cash flows are also
translated at average translation rates for the period, therefore, amounts
reported on the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheet.
This
quotation of the exchange rates does not imply free convertibility of RMB to
other foreign currencies. All foreign exchange transactions continue to take
place either through the People’s Bank of China or other banks authorized to buy
and sell foreign currencies at the exchange rate quoted by the People’s Bank of
China.
Translation
adjustments resulting from this process are included in accumulated other
comprehensive income in the consolidated statement of shareholders’ equity and
amounted to $67,917 and $0 as of December 31, 2009 and 2008, respectively.
Assets and liabilities at December 31, 2009 were translated at 6.826 RMB to 1 US
dollar. The average translation rates applied to income statement accounts and
the statement of cash flows for the two months ended December 31, 2009 were
6.818 RMB to 1 US dollar.
Economic and Political
Risks: The
Company faces a number of risks and challenges since a significant amount of its
assets are located in China and its revenues are derived primarily from its
operations in China. China is a developing country with a young economic market
system overshadowed by the state. Its political and economic systems are very
different from the more developed countries and are still in the stage of
change. China also faces many social, economic and political challenges that may
produce major shocks and instabilities and even crises, in both its domestic
arena and its relationship with other countries, including but not limited to
the United States. Such shocks, instabilities and crises may in turn
significantly and negatively affect the Company’s performance.
Research and Development
Costs: Research and development
(“R&D”) expenses include salaries, benefits, and other headcount related
costs, clinical trial and related clinical manufacturing costs, contract and
other outside service fees, and facilities and overhead costs. R&D costs are
expensed when incurred.
Under the
guidance of the FASB’s accounting standard regarding research and development
costs, the Company expenses the costs associated with the research and
development activities when incurred.
Results
of Operations
Year
Ended December 31, 2009 Compared to Year Ended December 31, 2008
Revenue
- 49
- -
For
the year ended December 31, 2009, total revenues were $11,565,100 compared to
$83,500 for the year ended December 31, 2008. Revenues for 2009 were comprised
of $11,386,700 of pharmaceutical product sales and $178,400 related to stem cell
collections, license fees and royalties. The pharmaceutical product sales of
$11,386,700 represents two months’ sales generated by Erye given the Merger
closed on October 30, 2009. The stem cell revenues generated in the
years ended December 31, 2009 and 2008 were derived from a combination of
revenues from the collection of autologous adult stem cells and license fees
collected from collection centers in our collection center network. For the year
ended December 31, 2009, we earned $143,700 from the collection and storage of
autologous adult stem cells and $34,700 of license fees. For the year ended
December 31, 2008, we earned $51,900 from the collection and storage of
autologous adult stem cells and $31,000 from license fees. The increase in stem
cell collection and storage revenue in 2009 compared to 2008 was due primarily
to our efforts on recruiting clients into the existing network in the Northeast
and Southern California. Cost of Sales is comprised of Cost of Goods sold of
$7,474,300 related to the sale of our pharmaceutical products, and $112,900 of
direct costs related to the cost of collecting autologous stem cells from
clients.
Gross
margin totaled $3,978,000 of which 98% is attributable to the sale of
pharmaceutical products and the balance is attributable to our stem cell
collection operations.
Operating
Expenses
For the
year ended December 31, 2009 operating expenses totaled $27,778,400 compared to
$9,285,000 for the year ended December 31, 2008, representing an increase of
$18,493,400 or 199%.
Historically,
to minimize our use of cash, we have used a variety of equity and equity-linked
instruments to pay for services and to incentivize employees, consultants
and other service providers. The use of these instruments has resulted in
significant charges to the results of operations. In general, these equity and
equity-linked instruments were used to pay for employee and consultant
compensation, director fees, marketing services, investor relations and other
activities. For the year ended December 31, 2009 the use of equity and
equity-linked instruments to pay for such expenses resulted in charges to
selling, general, administrative and research expenses of $12,324,000
representing an increase of $8,434,800 over the year ended December 31,
2008.
The
composition of our charges for the use of equity and equity linked instruments
are as follows:
|
·
|
$6,263,600
relate to nonrecurring expenses associated with the vesting of stock
options and issuance of common and restricted stock related to employees,
directors and consultants which were tied to the completion of the Merger
and related events;
|
|
·
|
$4,230,400
relate to recurring expenses associated with options issued to employees
and consultants that vest over
time;
|
|
·
|
$102,800
relate to expenses associated with options issued to employees and
consultants that vest upon achievement of certain business
milestones;
|
|
·
|
$1,458,100
relate to expenses associated with the issuance of common stock and the
vesting of restricted stock to consultants for providing services;
and
|
|
·
|
$269,100
relate to expenses associated with warrants issued to consultants for the
payment of business services.
|
For the
year ended December 31, 2009, our selling, general, administrative were
$23,459,600 compared to $8,492,800 for the year ended December 31, 2008,
representing an increase of $14,966,800, which was the result of:
|
•
|
The
activities related to our merger with CBH totaled $1,578,000 and increased
our expenses by $771,900 primarily from the legal and professional
services utilized to prepare for public filings and stockholder approval
of our merger and related matters.
|
|
•
|
Our
efforts to establish a stem cell operation in China to provide advanced
therapies, related processing and storage, as well as research and
development capabilities totaled $5,209,500. Such expenses included
expenditures for the rental of laboratory space, legal expenses associated
with establishing our subsidiary company and related operations in China,
consultants retained to support our implementation and introduction of
advanced therapies in China, recruiting fees for identifying senior
managers for our operation in China and travel. In addition these
operating expenses reflect charges resulting from issuing various equity
instruments to incentivize staff members and consultants totaling
$2,163,900.
|
- 50
- -
|
•
|
Administrative
expenses increased by approximately $8,213,600 Approximately $850,000 of
this increased operating expense was the result of the Merger with Erye
and the attendant operating expenses of this operation and
amortization costs associated with amortizing intangible assets that were
capitalized as part of accounting for the Merger. The
Company’s US administrative operating expenses increased by
$7,363,200. The use of equity instruments to incentivize staff ,
compensate directors and pay for services totaled $7,521,700, an increase
of $4,404,200 over 2008. Salaries and wages increased by $1,586,900 as the
result of increased staffing levels required to absorb the acquisition of
Erye, contractual salary increases and tax payments and tax withholdings
we paid on behalf of certain executive and other staff members in
connection with common stock grants made during year. Professional fees,
including legal and accounting fees increased by $603,500 as the result of
our expanded operations in China and related professional services
required to evaluate the Company’s internal controls and preparation work
for the common stock offering that closed in February 2010. Investor
relations services increased by $165,300, fees for preparing documents for
various SEC filings and production of reports and materials needed
for shareholder meetings in connection with the
Merger together increased operating expenses by
$212,900. Additionally, travel and entertainment increased by
$121,900 primarily as a result of the Company’s expanded operations in
China, rent increased by $22,700 as a result of the leasing of office
space in New York , franchise taxes increased $155,000 and the
majority of the balance of the increase in administrative expense resulted
from increases and decreases in office expenses, insurance and other
expenses.
Sales
and marketing expenses increased by $772,000 over 2008. Approximately
$373,300 of this increased operating expense was the result of the Merger
with Erye and the attendant sales and marketing expenses of the
Erye operation. The use of equity instruments to incentivize
staff, and pay for services totaled $897,700 an increase of $360,900 over
2008 and other US sales and marketing costs increased by
approximately $37,800.
For
the year ended December 31,2009, our research and development expenses
totaled $4,318,800 compared to $792,200 for the year ended
December 31, 2008, representing an increase of $3,526,600, which was the
result of:
The
use of equity instruments to incentivize research staff totaled
$1,374,300, an increase of $1,138,000 over 2008. Research related to our
VSELTM
technology increased operating expenses by $1,376,500. In particular, the
operation of our Cambridge research laboratory and related staff increased
operating expenses by $859,300, fees paid to consultants to support our
research efforts increased VSELTM technology
research expense by $168,000, clinical studies initiated during the period
increased our operating expenses by $162,000, patents and other legal
expenses increased our research expense by $159,000, and increases in a
variety of other areas increased our research expenses by $28,200.
During 2009 we initiated efforts to create a research facility in
China and incurred fees and expenses totaling $773,000 related to this
effort. Our acquisition of Erye added $132,000 of research and development
expense to our operating expenses. The balance of the increase in research
and development expense is related to costs associated with our wound
healing research.
|
Dividends on Convertible Redeemable
Series C Preferred Stock.
In
connection with the Merger, the Company issued 8,177,512 shares of Convertible
Redeemable Series C Preferred Stock (“Series C Preferred Stock”) which calls for
annual dividend of 5% based on the stated value of the preferred stock. For the
year 2009 we recorded a dividend of $69,500 as the prorated dividend due at
December 31, 2009. In addition in connection with the issuance of the Series C
Preferred Stock a dividend of $5,542,500 was recognized as the value of the
beneficial conversion feature of the Series C Preferred Stock. The conversion
feature does not require any minimum holding period or vesting before the
preferred stock is converted. Because the preferred shareholder is not required
to hold the preferred stock for any length of time before conversion we have
accreted the value of the beneficial conversion feature as a dividend of
$5,542,500.
Non-Controlling
Interests
When the
Company acquired China Biopharmaceutical Holdings, Inc it acquired a 51%
interest in Erye Pharmaceutical Co. Ltd.(“Erye”). In preparing our
financial statements the full operations of Erye are reflected in
these results as of October 30, 2009. We account for the 49% minority
shareholder share of Erye’s net income with a charge to Non-Controlling
Interests. For the year ended December 31, 2009 Erye’s minority shareholders’
share of net income (for the two months ended December 31, 2009) totaled
$1,088,700.
Other
Income and Expense
Interest
expense increased $79,600 primarily due accrued interest on dividends paid to
Erye’s minority shareholder in 2009 which were loaned back to Erye to provide
funds to continue the construction of Erye’s new production facility. This loan
calls for interest to accrue at rate of 5% annually and at December 31, 2009
this loan totaled approximately $7,954,443, including accrued interest. Interest
accrued on this loan was offset by capitalization of interest on construction of
approximately $61,000
- 51
- -
Provision
for taxes
The
provision for taxes of $344,200 represents income taxes due on income of Erye
for the two months ended December 31, 2009.
Year
Ended December 31, 2008 Compared to Year Ended December 31, 2007
For the
year ended December 31, 2008, total revenues were $83,500 compared to $232,000
for the year ended December 31, 2007. The revenues generated in the years ended
December 31, 2008 and 2007 were derived from a combination of revenues from the
collection of autologous adult stem cells, license fees collected from
collection centers in our collection center network and additionally, for the
year ended December 31, 2007, the recognition of fees received in prior years
from the sale of extended warranties and service contracts via the Internet,
which were deferred and recognized over the life of such contracts. For the year
ended December 31, 2008, we earned $52,500 relating to the collection and
storage of autologous adult stem cells and $31,000 of license fees. For the year
ended December 31, 2007, we earned $41,000 from the collection and storage of
autologous adult stem cells and $189,000 from start-up fees. The reduction in
start-up fees from 2007 to 2008 was due primarily to reduced activity in
establishing collection centers and a concentration of our efforts on recruiting
clients into the existing network in the Greater New York area, Southern
California and Coral Gables, Florida. In addition, license fees were reduced
because we opted to help support the launch of our new centers by waiving or
reducing start-up fees. We recognized revenues from the sale of extended
warranties and service contracts via the Internet of $1,700 for the year ended
December 31, 2007. Since we had not been in the business of offering extended
warranties since 2002, this revenue source declined and the recognition of these
revenues ended in March 2007.
Direct
costs are comprised of the cost of collecting autologous stem cells from clients
and, as it relates to the prior business of offering extended warranties, the
pro-rated cost of reinsurance purchased at the time an extended contract was
sold to underwrite the potential obligations associated with such warranties.
For the year ended December 31, 2008, the direct costs of collecting autologous
stem cells were $32,000. For the year ended December 31, 2007, the direct costs
of collecting autologous stem cells were $24,000 and $1,000 was associated with
the pro-rata cost of reinsurance purchased for associated extended
warranties.
Our
selling, general and administration expenses for the year ended December 31,
2008 decreased by $2,153,200 or 20% over the year ended December 31, 2007, from
$10,646,000 to $8,492,800. The decrease in selling, general and administrative
expenses was primarily due to an overall decrease in operating expenses as we
made a concerted effort to reduce staff and trim expenses.
In an
effort to preserve cash in 2008 and 2007, we continued to utilize our common
stock, common stock options and warrants to pay for certain services. In 2008,
we incurred $3,654,400 of expense related to the use of various equity and
equity-linked instruments compared to 2007 when we incurred $4,619,000 of
expense from such use, an overall reduction of $964,400. Equity and
equity-linked instruments have been used for compensation purposes for
management and other staff, consultants and directors and to pay for investment
banking fees, investor relations, marketing expenses as well as other expenses.
The compensatory element of the vesting of stock options and common stock
granted to staff and directors was reduced by $1,553,400 in 2008 principally
because the fair value of the options and common stock vesting in 2008 was
significantly lower in comparison to 2007. Our use of equity and equity-linked
instruments to pay for investment banking fees, investor relations, marketing
expense as well as other expenses increased by $589,000. Other selling, general
and administrative expenses decreased $1,191,400, or 11%, when compared to 2007.
The decrease in selling, general and administrative expenses funded by cash in
2008 was primarily related to a decrease in legal expense of $646,000, investor
relations expense of $312,000, consulting fees of $326,800, salary and benefits
of $338,000, travel and entertainment of $108,000, validation expenses required
for New York licensing of $60,000, the conclusion of severance payments to a
former staff member of $54,000, stock exchange fees, filing fees and other
related fees of $42,800, reduced attendance at conferences of $29,500 and
laboratory expenses of $14,000. These decreases were offset by increases in
expenses and activities associated with the Merger of $806,000 changes in other
expenses resulted in an overall reduction of $66,300.
In 2007
we licensed our VSELTM
technology from the University of Louisville. As a result we started a Research
and development initiative to develop this technology. Overall for
2008 our research and development expenditures
totaled $792,100. There were no similar efforts in
2007. The use of equity instruments to incentivize staff totaled
$236,200, salary and benefits were $237,400 and consulting fees totaled
$143,400. Expenditures related to fees due the University of Louisville in
connection with our VSELTM
technology license totaled $50,000 and expenses for applying for scientific
grants and other activities to support VSELTM
technology research totaled $18,000 and expenses for rent,
intangible asset amortization, and laboratory expenses account for the balance
of research and development expenses in 2008.
NeoStem — Liquidity
and Capital Resources
At
December 31, 2009 we had a cash balance of $7,159,369, working capital of
$6,305,658 and stockholders’ equity of $24,800,051.
- 52
- -
Twelve
months ended December 31, 2009
We
incurred a net loss of $24,183,850 for the twelve months ended December 31,
2009. The following chart represents the net funds provided by or used in
operating, financing and investment activities for each period
indicated:
|
The
Twelve Moths Ended
|
||||||||
|
|
December
31, 2009
|
December
31, 2008
|
||||||
|
Cash
(used) in operating activities
|
$
|
(8,648,022
|
)
|
$
|
(4,732,165
|
)
|
||
|
Cash
provided/(used) in investing activities
|
$
|
(1,691,099
|
)
|
$
|
(9,785
|
)
|
||
|
Cash
provided by financing activities
|
$
|
17,067,704
|
$
|
2,868,509
|
||||
Operating
Activities
Our cash
used for operating activities in the twelve months December 31, 2009 totaled
$8,648,022, which is the sum of (i) our net loss, adjusted for non-cash expenses
totaling $12,901,040 which includes common stock, common stock options and
common stock purchase warrants issued for services rendered in the amount of
$12,323,997 and depreciation and amortization of $577,043; (ii) an increase in
cash provided from unearned revenue from advance payments from customers and
licensees of $1,991,816, increases in accounts payable and accrued expenses of
$1,274,621, a reduction in accounts receivable of $571,689, a reduction in
prepaid and other current assets $1,796,691; (iii) cash used for payments of
other assets of $238,941 and increases in inventory of $2,427,095.
In
November 2007, we acquired the exclusive, worldwide rights to the VSELTM
technology developed by researchers at the University of Louisville. Concurrent
with acquiring these rights, we also entered into a sponsored research
agreement, or SRA, with the University of Louisville Research Foundation, or
ULRF, which has been amended from time to time. Under the license agreement, we
agreed to engage in a diligent program to develop the VSELTM
technology. Certain license fees, milestone payments and royalties, and
specified payments in the event of sublicensing are to be paid to ULRF, and we
are responsible for all payments for patent filings and related applications.
Under the SRA, NeoStem will support additional research relating to the
VSELTM
technology to be carried out in the laboratory of Mariusz Ratajczak, M.D.,
Ph.D., a co-inventor of the VSELTM
technology and head of the Stem Cell Biology Program at the James Graham Brown
Cancer Center at the University of Louisville. In return, NeoStem will receive
the exclusive first option to negotiate a license to the research results. The
cost of the research to NeoStem is $120,859, although we are receiving a credit
towards these costs in the amount of approximately $25,000. NeoStem is also
supporting the costs of a post doctoral fellow in the laboratory of Dr.
Ratajczak. Through December 31, 2009, we have paid a total of $181,337 under the
license agreement and the SRA.
Investing
Activities
In 2009,
we opened a research laboratory in Cambridge, MA to support the research and
development requirements of our VSELTM
technology as well as our other research efforts regarding adult stem cells. The
outfitting of this laboratory required us to purchase approximately $592,700 of
laboratory equipment during the period. As development projects expand, the need
for additional capital expenditures for our research laboratory will increase.
Erye is building a new production facility and during the two months ended
December 31, 2009 $1,057,000 was spent on construction. This plant is
expected to be fully operational in 2011. Our expansion into China also resulted
in the purchase of several specialized medical instruments and office equipment
totaling approximately $82,600 of capital expenditures that will be used to
deliver advanced therapies in China. The balance of our capital expenditures was
spent on scaling the company’s internal infrastructure to accommodate the CBH
acquisition and integration of the additional offices in China and
Boston.
Financing
Activities
During
the year ended December 31, 2009, we met our immediate cash requirements through
existing cash balances, short-term loans, the Funding Agreement with RimAsia and
offerings of preferred stock and warrants, in addition to the use of equity and
equity-linked instruments to pay for services and compensation.
During
the first quarter of 2009, we issued promissory notes to RimAsia, or the RimAsia
Notes, which aggregated $1,150,000. In April 2009, we completed a private
placement financing totaling $11 million, or the April 2009 Private Placement,
of which approximately $1,162,000 was used to repay the RimAsia Notes and
accrued interest. The April 2009 Private Placement consisted of the issuance of
880,000 units priced at $12.50 per unit, with each unit consisting of one share
of our Series D Convertible Redeemable Preferred Stock, or Series D Stock
(convertible into 10 shares of our common stock) and ten warrants, or the Series
D Warrants, with each Series D Warrant to purchase one share of our common
stock. In June 2009, and with a final closing on July 6, 2009, we completed an
additional private placement financing with net proceeds of $4,679,220, or the
June 2009 Private Placement. The June 2009 Private Placement consisted of the
issuance of 400,280 Series D Units priced at $12.50 per unit. A total of 400,280
Series D Preferred Stock and 4,002,800 Series D Warrants were issued. We paid
$324,280 in fees and issued 12,971 Series D Units to agents that facilitated the
June 2009 Private Placement. The Series D Units issued to the selling agents
were comprised of 12,971 shares of Series D Stock and 129,712 Series D Warrants.
In total, in the April 2009 and June 2009 Private Placements, the number of
shares of Series D Stock issued was 1,293,251 and the number of Series D
Warrants issued was 12,932,512. Upon the affirmative vote of holders of a
majority of the voting power of our common stock, the Series D Stock was
automatically converted into 12,932,510 shares of our common stock at a
conversion price of $1.25 per share. The Series D Warrants have a per share
exercise price equal to $2.50 and are callable by us if our common stock trades
at a price greater than or equal to $3.50 for a specified period of time. Upon
the affirmative vote of our stockholders and in accordance with the rules of the
NYSE Amex, the Series D Warrants became exercisable for five years.
- 53
- -
In July
of 2009, in order to facilitate working capital requirements in China, NeoStem
(China) issued a promissory note to China Xingye Bank in the amount of RMB
1,000,000, or $146,700. The note is due on January 1, 2010 and bears an interest
rate of 4.86%. The note was paid off in December 2009 and replaced with a
promissory note to the Bank of Rizhao Qingdao Branch in the amount of RMB
4,400,000 ($643,700). The note is due on June 21, 2010 and bears an interest
rate of 4.05%. The loan is collateralized by cash in a restricted bank account
totaling 5,189,400 RMB (approximately $759,200).
Pursuant
to the terms and conditions of the Joint Venture Agreement, dividend
distributions to EET and Merger Sub will be made in proportion to their
respective ownership interests in Erye; provided, however, that for the
three-year period commencing on the first day of the first fiscal quarter after
the Joint Venture Agreement becomes effective distributions will be made as
follows: (i) the 49% of undistributed profits (after tax) of the joint venture
due EET will be distributed to EET and lent back to Erye to help finance costs
in connection with their construction of and relocation to a new facility and;
(ii) of the net profit (after tax) of the joint venture due Merger Sub, 45% will
be provided to Erye as part of the new facility construction fund and will be
characterized as paid-in capital for Merger Sub’s 51% interest in Erye, and 6%
will be distributed to Merger Sub directly and at December 31, 2009 this loan
totaled approximately $7,954,443, including accrued interest.
The
Company’s subsidiary Erye has 62,457,000 RMB ($9,793,700) of notes payables as
of December 31, 2009. Notes are payable to the banks who issue bank notes to
Erye’s creditors. Notes payable are interest free and usually mature after a
three to six months period. In order to issue notes payable on behalf
of the Company, the banks required collateral, such as cash deposit which was
approximately 30%-50% of notes to be issued, or properties owned by companies.
At December 31, 2009, 26,999,300 RMB (approximately $3,955,400) of restricted
cash were put up for collateral for the balance of notes payable, respectively,
which was approximately 40.0% of the notes payable the Company issued, and the
remaining of the notes payable is collateralized by pledging the land use right
the Company owns. The use of notes payable to pay creditors is a feature of the
money and banking system of China and we expect these types of notes to be a
continuing feature of Erye’s capital structure.
Liquidity
and Capital Requirements Outlook
With our
acquisition of a controlling interest in Erye and expansion into China, we have
transitioned from being a one-dimensional U.S. service provider with nominal
revenues to being a multi-dimensional international biopharmaceutical company
with current revenues and operations in three distinct business
units — U.S. adult stem cells, China adult stem cells and China
pharmaceuticals. The following is an overview of our collective liquidity and
capital requirements.
Erye is
constructing a new pharmaceutical manufacturing facility and began transferring
its operations in January 2010. The relocation will continue as the
new production lines are completed and receive cGMP certification through 2011.
The new facility is estimated to cost approximately $30 million, of which
approximately $16 million has been paid for through December 31, 2009. To date,
construction has been self-funded by Erye and EET, the holder of the minority
joint venture interest in Erye. The remaining $14 million is expected to be
funded from a combination of proceeds from the Company’s February 2010 common
stock offering in which it raised net proceeds of approximately $7.1 million,
the proceeds from the exercise by RimAsia in March 2010 of a warrant to purchase
1,000,000 shares of Common Stock at a per share purchase price of $1.75
resulting in gross proceeds to the Company of $1,750,000 (in each of the prior
two cases such funding would be in the form of a loan from the Company), an Erye
line of credit and the reinvestment of certain dividends by Erye’s shareholders.
We have agreed for a period of three years to reinvest in Erye approximately 90%
of the net earnings we would be entitled to receive under the Joint Venture
Agreement by reason of our 51% interest in Erye.
- 54
- -
We are
also engaged in other initiatives to expand our operations into China including
with respect to technology licensing, establishment of stem cell processing and
storage capabilities and research and clinical development. In June 2009 we
established NeoStem (China) as our wholly foreign-owned subsidiary. To comply
with PRC’s foreign investment regulations regarding stem cell research and
development, clinical trials and related activities, we conduct our current stem
cell business in the PRC through two domestic variable interest entities. We
have incurred and expect to continue to incur substantial expenses in connection
with our China activities.. In order to implement the establishment of the
Beijing Facility, as of December 31, 2009, our Company, our
WFOE subsidiary NeoStem (China), and PCT entered into the PCT
Agreement, whereby NeoStem and NeoStem (China) engaged PCT to perform the
services necessary (1) to construct the Beijing Facility, consisting of a clean
room for adult stem cell clinical trial processing and other stem cell
collections which will have the processing capacity on an annual basis
sufficient for at least 10,000 samples, research and development laboratory
space, collection and stem cell storage area and offices, together with the
furnishings and equipment, and (2) to effect the installation of quality control
systems consisting of materials management, equipment maintenance and
calibration, environmental monitoring and compliance and adult stem cell
processing and preservation which comply with cGMP standards and regulatory
standards that would be applicable in the United States under GTP standards, as
well as all regulatory requirements applicable to the program under the laws of
the PRC. The aggregate cost of the program, including the Phase 1
equipment purchases, is expected to be approximately $3,000,000. The project
will commence on April 1, 2010, and is anticipated to take approximately seven
months to complete. We have the option to terminate the PCT Agreement without
cause upon providing no less than 60 days written notice to PCT, subject to our
obligation to pay for any services performed up to the date of termination and
certain costs and expenses incurred by PCT.
We expect
to rely partly on dividends paid to us under the Joint Venture Agreement,
attributable to our 51% ownership interest in Erye, to meet our future cash
needs. However, there can be no assurance that the WFOE in China will receive
payments uninterrupted or at all as arranged under our contracts with the VIEs.
In addition, pursuant to the Joint Venture Agreement that governs the ownership
and management of Erye, for the next three years: (i) 49% of undistributed
profits (after tax) will be distributed to EET and loaned back to Erye for use
in connection with its construction of the new Erye facility; (ii) 45% of the
net profit after tax will be provided to Erye as part of the new facility
construction fund, which will be characterized as paid-in capital for our 51%
interest in Erye; and (iii) only 6% of the net profit will be distributed to us
directly for our operating expenses.
The
payment of dividends by entities organized under PRC law to non-PRC entities is
subject to limitations. Regulations in the PRC currently permit payment of
dividends by our WFOE and Erye only out of accumulated distributable earnings,
if any, as determined in accordance with accounting standards and regulations in
China. Moreover, our WFOE and Erye will be required to set aside a certain
percentage of their accumulated after-tax profit each year, if any, to fund
certain mandated reserve funds (for our WFOE, such percentage is at least 10%
each year until its reserves have reached at least 50% of its registered
capital), and these reserves are not payable or distributable as cash dividends.
In addition, Erye is also required to reserve a portion of its after-tax profits
for its employee welfare and bonus fund, the amount of which is subject to the
discretion of the Erye board of directors. In addition, if Erye incurs debt on
its own behalf in the future, the instruments governing the debt may restrict
Erye’s or the joint venture’s ability to pay dividends or make other
distributions to us. This may diminish the cash flow we receive from Erye’s
operations, which would have a material adverse effect on our business,
operating results and financial condition.
Our
interests in China will be subject to China’s rules and regulations on currency
conversion. In particular, the initial capitalization and operating expenses of
the two VIEs are funded by our WFOE. In China, the State Administration for
Foreign Exchange, or the SAFE, regulates the conversion of the Chinese Renminbi
into foreign currencies. Currently, foreign investment enterprises are required
to apply to the SAFE for Foreign Exchange Registration Certificates, or IC Cards
of Enterprises with Foreign Investment. Foreign investment enterprises holding
such registration certificates, which must be renewed annually, are allowed to
open foreign currency accounts including a “basic account” and “capital
account.” Currency translation within the scope of the “basic account,” such as
remittance of foreign currencies for payment of dividends, can be effected
without requiring the approval of the SAFE. However, conversion of currency in
the “capital account,” including capital items such as direct investments,
loans, and securities, require approval of the SAFE. According to the Notice of the General Affairs
Department of the State Administration of Foreign Exchange on the Relevant
Operating Issues Concerning the Improvement of the Administration of Payment and
Settlement of Foreign Currency Capital of Foreign-invested
Enterprises promulgated on August
29, 2008, or the SAFE Notice 142. To apply to a bank for settlement
of foreign currency capital, a foreign invested enterprise shall submit the
documents certifying the uses of the RMB funds from the settlement of foreign
currency capital and a detailed checklist on use of the RMB funds from the last
settlement of foreign currency capital. It is stipulated that only if the funds
for the settlement of foreign currency capital are of an amount not more than
US$50,000 and are to be used for enterprise reserve, the above documents may be
exempted by the bank. This SAFE Notice 142, along with the recent practice of
Chinese banks of restricting foreign currency conversion for fear of “hot money”
going into China, have limited and may continue to limit our ability to channel
funds to the two VIE entities for their operation. We are exploring options with
our PRC counsels and banking institutions in China as to acceptable methods of
funding the operation of the two VIEs, including advances from Erye, but there
can be no assurance that acceptable funding alternatives will be
identified.
- 55
- -
Neither
Erye nor our other expansion activities into China are expected to generate
sufficient excess cash flow to support our platform business or our initiatives
in China in the near term.
In
October 2008, we were advised that we would receive Federal funding from the
Department of Defense to evaluate the potential use of adult stem cell therapy
for wound healing. Our budget for the project must not exceed $681,000 and the
funds must be distributed to us by October 2010. No funds have been received to
date. In January 2010, we received a Grand Opportunities grant in the
amount of $108,746 from the National Institutes of Health to fund research at
the University of Michigan to evaluate bone defect repair.
On
February 18, 2010, the Company completed a public offering of 5,750,000 shares
of the Company's common stock, par value $0.001 per share, (the "Common Stock"),
at a price of $1.35 per share for aggregate proceeds of approximately $7,089,125
(net of underwriting discounts, commissions, fees and expenses).
We
believe that we will need to raise additional capital to fund the development of
advanced stem cell technologies and therapies in the U.S. and China, including
the VSELTM
technology licensed from the University of Louisville and other regenerative
technologies. In the U.S., we currently intend to fund our operating activities
through additional financings, including potentially additional warrant and
option exercises, the 6% of net profits to which we are entitled from Erye, and,
ultimately, the growth of our revenue generating activities in China. In
addition, we will continue to seek grants for scientific and clinical studies
from the National Institutes of Health and other governmental agencies, but
there can be no assurance that we will be successful in obtaining such grants.
Our history of losses and liquidity problems may make it difficult to raise
additional funds. There can be no assurance that we will be successful in
obtaining additional funding on terms acceptable to us or otherwise. Any equity
financing may be dilutive to stockholders and debt financing, if available, may
involve significant restrictive covenants. If we are not able to
raise additional capital we will need to cut back on certain current planned
intiatives.
At
October 31, 2009 Erye had a statutory reserve of $1,126,300. The
laws and regulations of the PRC require that
before foreign invested enterprise can legally
distribute profits, it must first satisfy all tax
liabilities, provide for losses in previous years, and
make allocations, in proportions determined at the
discretion of the board of directors, after the statutory reserves.
To fund its statutory reserve requirement Erye is required to set aside a
certain percentage of their accumulated after-tax profit each year, if any, to
fund certain mandated reserve funds of at least 10% each year until its reserves
have reached at least 50% of its registered capital, The statutory reserves
include the surplus reserve fund and the common welfare fund. The amount of
statutory reserve at December 31, 2009 was determined to be $1,126,300 and no
further allocations were required.
The
following table reflects a summary of NeoStem’s contractual cash obligations as
of December 31, 2009:
|
Total
|
Less
than 1 Year
|
1- 3
Years
|
3-5
Years
|
More
than 5 Years
|
||||||||||||||||
|
Employement
Agreements
|
$ | 3,468,796 | $ | 1,900,430 | $ | 1,568,366 | $ | - | $ | - | ||||||||||
|
Facility
Leases
|
2,370,788 | 883,287 | 1,487,501 | - | - | |||||||||||||||
|
License
Fees
|
210,000 | 30,000 | 60,000 | 60,000 | 60,000 | |||||||||||||||
|
Sponsored
Research Agreement with the University of Louisville
|
75,000 | 75,000 | - | - | - | |||||||||||||||
|
Consulting
Agreements
|
1,560,082 | 995,582 | 564,500 | - | - | |||||||||||||||
|
Design
& Construction of Laboratory
|
2,714,100 | 2,633,570 | 80,530 | - | - | |||||||||||||||
|
Director
Fees
|
360,000 | 360,000 | ||||||||||||||||||
| $ | 10,758,767 | $ | 6,877,870 | $ | 3,760,897 | $ | 60,000 | $ | 60,000 | |||||||||||
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
financial statements and notes thereto required to be filed under this Item are
presented commencing on page F-1 of this Annual Report on Form
10-K.
- 56
- -
NeoStem,
Inc. and Subsidiaries
Table of
Contents
|
Page
|
||||||||
|
Report
of Independent Registered Public Accounting Firm -
|
||||||||
|
Holtz
Rubenstein Reminick LLP
|
F –
1
|
|||||||
|
Financial
Statements:
|
||||||||
|
Consolidated
Balance Sheets at December 31, 2009 and 2008
|
F –
2
|
|||||||
|
Consolidated Statements
of Operations
|
||||||||
|
Years
Ended December 31, 2009, 2008 and 2007
|
F –
3
|
|||||||
|
Consolidated Statements
of Stockholders’ Equity/ (Deficit)
|
||||||||
|
Years
Ended December 31, 2009, 2008 and 2007
|
F –
4 – F–5
|
|||||||
|
Consolidated Statements
of Cash Flows
|
||||||||
|
Years
Ended December 31, 2009, 2008 and 2007
|
F –
6 – F–7
|
|||||||
|
Notes
to Consolidated Financial Statements
|
F
–8 – F – 29
|
|||||||
- 57
- -
Report of Independent
Registered Public Accounting Firm
To the
Board of Directors and Stockholders
NeoStem,
Inc. and Subsidiaries
We have
audited the accompanying consolidated balance sheets of NeoStem, Inc. and
Subsidiaries as of December 31, 2009 and 2008 and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for each
of the years in the three-year period ended December 31, 2009. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, audits of its
internal control over financial reporting. Our audits include consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of NeoStem, Inc. and
Subsidiaries as of December 31, 2009 and 2008 and the results of their
operations and cash flows for each of the years in the three year period ended
December 31, 2009 in conformity with accounting principles generally accepted in
the United States of America.
/s/ Holtz Rubenstein Reminick LLP
Melville,
New York
March 31,
2010
F-1
NEOSTEM,
INC. AND SUBSIDIARIES
Consolidated
Balance Sheets
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 7,159,369 | $ | 430,786 | ||||
|
Restricted
Cash
|
4,714,610 | - | ||||||
|
Accounts
receivable trade, less allowances for doubtful accounts
|
||||||||
|
of
$273,600 and $0, respectively
|
5,725,241 | 7,193 | ||||||
|
Inventories
|
12,979,008 | - | ||||||
|
Prepaid
expenses and other current assets
|
1,220,990 | 92,444 | ||||||
|
Total
current assets
|
31,799,218 | 530,423 | ||||||
|
Property,
plant and equipment, net
|
21,299,381 | 99,490 | ||||||
|
Intangible
assets, net
|
||||||||
|
Goodwill
|
29,862,123 | 558,169 | ||||||
|
Land
use rights, net
|
4,698,567 | - | ||||||
|
Lease
rights
|
633,136 | - | ||||||
|
Customer
list, net
|
16,756,147 | - | ||||||
|
Other
intangible assets, net
|
747,288 | 636,234 | ||||||
|
Total
intangible assets
|
52,697,261 | 1,194,403 | ||||||
|
Other
assets
|
238,941 | - | ||||||
| $ | 106,034,801 | $ | 1,824,316 | |||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY/(DEFICIT)
|
||||||||
|
Current
liabilities:
|
||||||||
|
Bank
loans
|
$ | 2,197,500 | $ | - | ||||
|
Notes
payable
|
9,793,712 | - | ||||||
|
Accounts
payable
|
8,263,719 | 508,798 | ||||||
|
Accrued
liabilities
|
2,965,525 | 427,767 | ||||||
|
Unearned
revenues
|
2,273,105 | 9,849 | ||||||
|
Current
portion of capitalized lease obligation
|
- | 14,725 | ||||||
|
Total
current liabilities
|
25,493,560 | 961,139 | ||||||
|
Long-term
liabilities
|
||||||||
|
Amount
due related party
|
7,234,291 | - | ||||||
|
COMMITMENTS
AND CONTINGENCIES
|
||||||||
|
Convertible
Redeemable Series C Preferred stock;
|
13,720,048 | - | ||||||
|
8,177,512
shares designated, liquidation value $12.50 per share;
|
||||||||
|
8,177,512
shares issued and outstanding at December 31, 2009
|
||||||||
|
and
0 shares issued and outstanding at December 31, 2008
|
||||||||
|
EQUITY
|
||||||||
|
Shareholders'
equity:
|
||||||||
|
Preferred
stock; authorized, 20,000,000 shares
|
||||||||
|
Series
B convertible redeemable preferred stock,
|
100 | 100 | ||||||
|
liquidation
value, 1 share of common stock, $.01 par value;
|
||||||||
|
825,000
shares designated; issued and outstanding,
|
||||||||
|
10,000
shares at December 31, 2009 and 2008
|
||||||||
|
Common
stock, $.001 par value; authorized, 500,000,000 shares;
|
37,193 | 7,715 | ||||||
|
issued
and outstanding, 37,193,491 December 31, 2009
|
||||||||
|
and
7,715,006 shares at December 31, 2008
|
||||||||
|
Additional
paid-in capital
|
95,709,491 | 40,849,670 | ||||||
|
Accumulated
deficit
|
(70,878,816 | ) | (39,994,309 | ) | ||||
|
Accumulated
other comprehensive loss
|
(67,917 | ) | - | |||||
|
Total
shareholders' equity
|
24,800,051 | 863,176 | ||||||
|
Non
controlling interests
|
34,786,851 | - | ||||||
|
Total
equity
|
59,586,902 | 863,176 | ||||||
| $ | 106,034,801 | $ | 1,824,316 | |||||
The
accompanying notes are an integral part of these consolidated financial
statements
F-2
NEOSTEM,
INC. AND SUBSIDIARIES
Consolidated
Statements of Operations
|
Years
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenues
|
$ | 11,565,118 | $ | 83,541 | $ | 231,664 | ||||||
|
Direct
Costs
|
7,587,175 | 31,979 | 24,847 | |||||||||
|
Gross
Profit
|
3,977,943 | 51,562 | 206,817 | |||||||||
|
Research
and Development (Including non-cash share-based payment charges totaling
$1,374,272 in 2009, $219,982 in 2008, and $0 in 2007)
|
4,318,805 | 792,182 | - | |||||||||
|
Selling,
general and administrative (Including non-cash share-based payment charges
totaling $10,949,725 in 2009, $3,670,437 in 2008, and $4,590,256 in
2007)
|
23,459,600 | 8,492,833 | 10,645,653 | |||||||||
|
Operating
loss
|
(23,800,462 | ) | (9,233,453 | ) | (10,438,836 | ) | ||||||
|
Other
income (expense):
|
||||||||||||
|
Other
income
|
52,073 | 3,044 | 15,331 | |||||||||
|
Interest
expense
|
(91,261 | ) | (11,662 | ) | (21,968 | ) | ||||||
| (39,188 | ) | (8,618 | ) | (6,637 | ) | |||||||
|
Loss
from operations before provision for income taxes and non-controlling
interests
|
(23,839,650 | ) | (9,242,071 | ) | (10,445,473 | ) | ||||||
|
Provision
for taxes
|
344,200 | - | - | |||||||||
|
Net
Loss
|
(24,183,850 | ) | (9,242,071 | ) | (10,445,473 | ) | ||||||
|
Less
- Net income attributable to non-controlling
interests
|
1,088,667 | - | - | |||||||||
|
Net
Loss attributable to controlling interests
|
(25,272,517 | ) | (9,242,071 | ) | (10,445,473 | ) | ||||||
|
Preferred
Dividends
|
5,611,989 | - | - | |||||||||
|
Net
Loss attributable to common shareholders
|
$ | (30,884,506 | ) | $ | (9,242,071 | ) | $ | (10,445,473 | ) | |||
|
Basic
and diluted loss per share
|
$ | (2.37 | ) | $ | (1.53 | ) | $ | (3.18 | ) | |||
|
Weighted
average common shares outstanding
|
13,019,518 | 6,056,886 | 3,284,116 | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements
F-3
NEOSTEM,
INC. AND SUBSIDIARIES
Consolidated
Statements of Stockholders’ Equity/(Deficit)
|
Series
B Convertible
|
||||||||||||||||||||||||||||||||||||
|
Preferred
Stock
|
Common
Stock
|
|||||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Additional
Paid in Capital
|
Accumulated
Other Comprehensive Income
|
Accumulated
Deficit
|
Non-Controlling
Interest in Subsidiary
|
Total
|
||||||||||||||||||||||||||||
|
Balance
at December 31, 2007
|
10,000 | $ | 100 | 4,826,055 | $ | 4,826 | $ | 34,063,506 | $ | - | $ | (30,752,238 | ) | - | $ | 3,316,194 | ||||||||||||||||||||
|
Issuance
of common stock for cash net of offering costs
|
- | - | 2,359,152 | 2,359 | 2,894,401 | - | $ | 2,896,760 | ||||||||||||||||||||||||||||
|
Issuance
of common stock to officers and directors
|
- | - | 83,780 | 84 | 86,499 | - | - | - | $ | 86,583 | ||||||||||||||||||||||||||
|
Issuance
of restricted common stock for services
|
- | - | 40,000 | 40 | (40 | ) | - | - | - | $ | - | |||||||||||||||||||||||||
|
Vesting
of unearned compensation related to restricted common stock issued for
services
|
- | - | - | - | 173,331 | - | - | - | $ | 173,331 | ||||||||||||||||||||||||||
|
Issuance
of common stock to staff for compensation
|
- | - | 42,014 | 42 | 52,909 | - | - | - | $ | 52,951 | ||||||||||||||||||||||||||
|
Vesting
of unearned compensation related to restricted common stock issued to
officers and directors
|
- | - | - | - | 573,146 | - | - | - | $ | 573,146 | ||||||||||||||||||||||||||
|
Issuance
of common stock for services
|
- | - | 384,157 | 384 | 499,900 | - | - | - | $ | 500,284 | ||||||||||||||||||||||||||
|
Issuance
of common stock purchase warrants for services
|
- | - | - | - | 613,766 | - | - | - | $ | 613,766 | ||||||||||||||||||||||||||
|
Compensatory
element of stock options issued to staff
|
- | - | - | - | 1,986,103 | - | - | - | $ | 1,986,103 | ||||||||||||||||||||||||||
|
Exercise
of common stock options
|
- | - | 2,500 | 2 | 1,873 | - | - | - | $ | 1,875 | ||||||||||||||||||||||||||
|
Issuance
of common stock to pay debt
|
- | - | 3,529 | 4 | 5,643 | - | - | - | $ | 5,647 | ||||||||||||||||||||||||||
|
Forfeiture
of restricted common stock
|
- | - | (26,250 | ) | (26 | ) | (125,336 | ) | - | - | - | $ | (125,362 | ) | ||||||||||||||||||||||
|
Vesting
of unearned compensation related to restricted common stock issued to
empoyees
|
- | - | - | - | 23,969 | - | - | - | $ | 23,969 | ||||||||||||||||||||||||||
|
Other
adjustments
|
- | - | 69 | - | - | - | - | - | $ | - | ||||||||||||||||||||||||||
|
Net
loss
|
- | (9,242,071 | ) | - | $ | (9,242,071 | ) | |||||||||||||||||||||||||||||
|
Balance
at December 31, 2008
|
10,000 | $ | 100 | 7,715,006 | $ | 7,715 | $ | 40,849,670 | $ | - | $ | (39,994,309 | ) | $ | - | $ | 863,176 | |||||||||||||||||||
F-4
NEOSTEM,
INC. AND SUBSIDIARIES
Consolidated
Statements of Stockholders’ Equity/(Deficit) – (Con’t.)
|
Series
B Convertible
|
||||||||||||||||||||||||||||||||||||
|
Preferred
Stock
|
Common
Stock
|
|||||||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Additional
Paid in Capital
|
Accumulated
Other Comprehensive Income
|
Accumulated
Deficit
|
Non-Controlling
Interest in Subsidiary
|
Total
|
||||||||||||||||||||||||||||
|
Issuance
of common stock to officers and directors
|
- | - | 650,000 | 650 | 1,172,600 | - | - | - | 1,173,250 | |||||||||||||||||||||||||||
|
Vesting
of unearned compensation related to restricted common stock issued for
services
|
- | - | - | - | 174,250 | - | - | - | 174,250 | |||||||||||||||||||||||||||
|
Issuance
of common stock to staff for compensation
|
- | - | 105,000 | 105 | 200,095 | - | - | - | 200,200 | |||||||||||||||||||||||||||
|
Issuance
of restricted common stock for compensation
|
- | - | 200,000 | 200 | (200 | ) | - | - | - | - | ||||||||||||||||||||||||||
|
Vesting
of unearned compensation related to restricted common stock issued to
officers and directors
|
- | - | - | - | 342,000 | - | - | - | 342,000 | |||||||||||||||||||||||||||
|
Issuance
of common stock for services
|
- | - | 1,658,392 | 1,658 | 2,783,396 | - | - | - | 2,785,054 | |||||||||||||||||||||||||||
|
Issuance
of restricted common stock for services
|
- | - | 182,416 | 182 | (182 | ) | - | - | - | - | ||||||||||||||||||||||||||
|
Issuance
of common stock purchase warrants for services
|
- | - | - | - | 202,710 | - | - | - | 202,710 | |||||||||||||||||||||||||||
|
Compensatory
element of stock options issued to staff
|
- | - | - | - | 7,098,220 | - | - | - | 7,098,220 | |||||||||||||||||||||||||||
|
Option
expense due to extension of term options
|
- | - | - | - | 245,152 | - | - | - | 245,152 | |||||||||||||||||||||||||||
|
Option
expense due to repricing of options
|
- | - | - | - | 36,836 | - | - | - | 36,836 | |||||||||||||||||||||||||||
|
Warrant
expense due to repricing of Warrants
|
- | - | - | - | 66,325 | - | - | - | 66,325 | |||||||||||||||||||||||||||
|
Value
assigned warrants issued in Series D Preferred stock
|
- | - | - | - | 7,931,772 | - | - | - | 7,931,772 | |||||||||||||||||||||||||||
|
Foreign
exchange gain or loss on Assets/Liabilities
|
- | - | - | - | - | (67,917 | ) | - | - | (67,917 | ) | |||||||||||||||||||||||||
|
Conversions
of Series D Preferred
|
- | - | 12,932,510 | 12,933 | 7,724,515 | - | - | - | 7,737,448 | |||||||||||||||||||||||||||
|
Acquisition
of CBH with non-controlling interest
|
- | - | - | - | - | - | - | 33,698,184 | 33,698,184 | |||||||||||||||||||||||||||
|
Beneficial
Conversion Feature of Series C Convertible Preferred stock
|
- | - | - | - | 5,542,536 | - | (5,542,536 | ) | - | - | ||||||||||||||||||||||||||
|
Exchange
of exisitng CBH Warrants for Series E Warrants
|
- | - | - | - | 590,790 | - | - | - | 590,790 | |||||||||||||||||||||||||||
|
Common
stock issued in CBH Merger
|
- | - | 13,750,167 | 13,750 | 20,749,006 | - | - | - | 20,762,756 | |||||||||||||||||||||||||||
|
Non-controlling
interest
|
- | - | - | - | - | - | - | 1,088,667 | 1,088,667 | |||||||||||||||||||||||||||
|
Dividends
on Series C Preferred
|
(69,454 | ) | - | (69,454 | ) | |||||||||||||||||||||||||||||||
|
Net
loss attributable to controlling interests
|
- | - | - | - | - | - | (25,272,517 | ) | - | (25,272,517 | ) | |||||||||||||||||||||||||
|
Balance
at December 31, 2009
|
10,000 | $ | 100 | 37,193,491 | $ | 37,193 | $ | 95,709,491 | $ | (67,917 | ) | $ | (70,878,816 | ) | $ | 34,786,851 | $ | 59,586,902 | ||||||||||||||||||
The
accompanying notes are an integral part of these consolidated financial
statements
F-5
NEOSTEM,
INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows
|
Years
ended December 31,
|
||||||||||||
|
Cash
flows from operating activities:
|
2009
|
2008
|
2007
|
|||||||||
|
Net
Loss
|
(24,183,850 | ) | (9,242,071 | ) | (10,445,473 | ) | ||||||
|
Adjustments
to reconcile net loss to net cash used in
|
||||||||||||
|
operating
activities:
|
||||||||||||
|
Common
Stock, stock options and warrants issued
|
||||||||||||
|
as
payment for compensation, services rendered and interest
expense
|
12,323,997 | 3,890,419 | 4,590,256 | |||||||||
|
Depreciation
and amortization
|
577,043 | 115,961 | 53,778 | |||||||||
|
Bad
debt expense / (recovery)
|
(90,216 | ) | 21,500 | 19,500 | ||||||||
|
Unearned
revenues
|
- | 6,947 | 482 | |||||||||
|
Deferred
acquisition costs
|
- | - | 1,254 | |||||||||
|
Changes
in operating assets and liabilities:
|
||||||||||||
|
Prepaid
expenses and other current assets
|
1,796,691 | (46,197 | ) | 34,810 | ||||||||
|
Accounts
receivable
|
571,689 | (4,088 | ) | (35,055 | ) | |||||||
|
Inventory
|
(2,427,095 | ) | - | - | ||||||||
|
Other
assets
|
(238,941 | ) | - | - | ||||||||
|
Unearned
revenues
|
1,991,816 | - | - | |||||||||
|
Payments
to related party
|
(243,777 | ) | - | - | ||||||||
|
Accounts
payable, accrued expenses
|
||||||||||||
|
and
other current liabilities
|
1,274,621 | 525,364 | (351,976 | ) | ||||||||
|
Net
cash used in operating activities
|
(8,648,022 | ) | (4,732,165 | ) | (6,132,424 | ) | ||||||
|
Cash
flows from investing activities:
|
||||||||||||
|
Cash
received in connection with acquisition of technology
|
- | - | 271,000 | |||||||||
|
Cash
associated with Merger
|
696,456 | - | - | |||||||||
|
Acquisition
of property and equipment
|
(2,387,555 | ) | (9,785 | ) | (117,893 | ) | ||||||
|
Net
cash provided by/(used) in investing activities
|
(1,691,099 | ) | (9,785 | ) | 153,107 | |||||||
|
Cash
flows from financing activities:
|
||||||||||||
|
Net
proceeds from issuance of Series D Preferred Stock
|
15,669,220 | - | - | |||||||||
|
Net
proceeds from issuance of capital stock
|
- | 2,898,635 | 7,939,306 | |||||||||
|
Proceeds
from bank loan
|
2,197,500 | - | - | |||||||||
|
Restricted
cash pledged as collateral for bank loan
|
(959,890 | ) | - | - | ||||||||
|
Proceeds
from notes payable
|
2,918,269 | 131,617 | 337,120 | |||||||||
|
Repayment
of notes payable
|
- | (136,337 | ) | (408,712 | ) | |||||||
|
Payment
of capitalized lease obligations
|
(14,726 | ) | (25,406 | ) | (20,829 | ) | ||||||
|
Proceeds
from sale of convertible debentures
|
(2,742,669 | ) | - | - | ||||||||
|
Net
cash provided by financing activities
|
17,067,704 | 2,868,509 | 7,846,885 | |||||||||
|
Net
increase/(decrease) in cash and cash
equivalents
|
6,728,583 | (1,873,441 | ) | 1,867,568 | ||||||||
|
Cash
and cash equivalents at beginning of year
|
430,786 | 2,304,227 | 436,659 | |||||||||
|
Cash
and cash equivalents at end of year
|
$ | 7,159,369 | $ | 430,786 | $ | 2,304,227 | ||||||
The
accompanying notes are an integral part of these consolidated financial
statements
F-6
NEOSTEM,
INC. AND SUBSIDIARIES
Consolidated
Statements of Cash Flows - continued
|
Years
ended December 31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Supplemental
disclosures of cash flow information:
|
||||||||||||
|
Cash
paid during the year for:
|
||||||||||||
|
Interest
|
$ | 23,137 | $ | 11,662 | $ | 21,968 | ||||||
|
Supplemental
schedule of non-cash investing and financing
activities
|
||||||||||||
|
Issuance
of Common Stock for services rendered
|
2,785,054 | 500,284 | 386,514 | |||||||||
|
Compensatory
element of stock options
|
7,321,106 | 1,986,103 | 2,207,816 | |||||||||
|
Issuance
of non-vested restricted Common Stock for compensation
|
- | - | 1,446,957 | |||||||||
|
Shares
issued to Officers and Directors for Compensation
|
1,173,250 | - | - | |||||||||
|
Issuance
of Common Stock for compensation
|
200,200 | 139,534 | 55,410 | |||||||||
|
Expense
related to restricted shares vesting
|
516,250 | 770,447 | 1,561,730 | |||||||||
|
Forfeiture
of restricted stock grant
|
(125,362 | ) | - | |||||||||
|
Issuance
of Common Stock purchase warrants for services
|
269,035 | 613,767 | 213,786 | |||||||||
|
Issuance
of non-vested restricted Common Stock for services
|
- | 72,800 | 481,910 | |||||||||
|
Issuance
of Common Stock for purchase of Stem Cell Technologies,
Inc.
|
- | - | 940,000 | |||||||||
|
Issuance
of Common Stock for capital commitment
|
- | - | 165,000 | |||||||||
|
Issuance
of Common Stock for debt
|
- | 5,646 | - | |||||||||
|
Issuance
of common stock for CBH acquisition
|
20,762,753 | - | - | |||||||||
|
Issuance
of warrants for CBH acquisition
|
590,790 | - | - | |||||||||
|
Issuance
of common stock for the conversion of the Series D preferred
stock
|
15,669,220 | - | - | |||||||||
|
Issuance
of Series C preferred stock for CBH acquisition
|
8,177,512 | |||||||||||
|
Modification
of the terms of options and warrants outstanding
|
59,102 | - | - | |||||||||
| Preferred Stock Dividend | 5,611,989 | - | - | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements
Note 1 – The
Company
NeoStem,
Inc. (“NeoStem” or the “Company”) was incorporated under the laws of the
State of Delaware in September 1980 under the name Fidelity Medical Services,
Inc. Our corporate headquarters is located at 420 Lexington Avenue, Suite
450, New York, NY 10170, our telephone number is (212) 584-4180 and our website
address is www.neostem.com.
In 2009,
through our expansion efforts within China 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 including
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. 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. Each collection center agreement is effectively a
license that grants a physician practice the right to participate in our stem
cell collection network and access to our stem cell banking technology, which
includes our know-how, trade secrets, copy rights and other intellectual
property rights owned by us and utilized in connection with the delivery of stem
cell collection services. Our stem cell banking technology is
proprietary and the subject of pending patent applications. The terms
of NeoStem’s collection center agreements are substantially similar. NeoStem
grants to each physician practice serving as a collection center a non-exclusive
license to use its trademarks and intellectual property but otherwise retains
all rights thereto, and each collection center is bound by confidentiality
obligations to NeoStem and non-competition provisions. NeoStem provides adult
stem cell processing and storage services, as well as expertise and certain
business, management and administrative services of a non-clinical nature in
support of each physician practice serving as a collection center. In each case,
the physician practice agrees that NeoStem will be its exclusive provider of
adult stem cell processing and storage, management and other specified services.
The agreements also make clear that since NeoStem is not licensed to practice
medicine, NeoStem cannot and does not participate in clinical care or clinical
decision making, both of which are exclusively the responsibility of the
collection center (i.e., the responsibility of the physician or the medical
practice). The agreements provide for the payment to NeoStem by the
collection center of specified fees that typically include upfront licensing
fees and license maintenance fees. As part of the licensing program,
NeoStem also provides marketing and administrative support services. NeoStem
does not have any equity or other ownership interest in any of the physician
medical practices that serve as collection centers. Each of the
agreements is for a multi-year period, depending on the particular center, and
typically has an automatic renewal provision for consecutive one year periods at
the end of the initial term that also permits either party to terminate prior to
renewal. The agreements may also relate to a territory from which patients seek
collection services. The agreements contain insurance obligations and
indemnification provisions, limitations on liability, non-compete provisions and
other standard provisions. Generally, the agreements may be terminated by either
party with prior written notice in the event of an uncured material breach by
the other party and may be terminated by either party in the event of the other
party’s bankruptcy, insolvency, receivership or other similar circumstances, or,
depending on the agreement, certain other specified occurrences.
F-7
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. On October 30, 2009, China
Biopharmaceuticals Holdings, Inc. (“CBH”) merged with and into CBH Acquisition
LLC (“Merger Sub”), a wholly-owned subsidiary of NeoStem, with Merger Sub
as the surviving entity (the “Merger”). As a result of the Merger, NeoStem
acquired CBH’s 51% ownership interest in Erye, a Sino-foreign joint venture with
limited liability organized under the laws of the People’s Republic of
China. 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 (“SFDA”), covering both
antibiotic prescription drugs and active pharmaceutical
intermediates.
Note 2 – Summary of
Significant Accounting Policies
Principles of Consolidation:
The consolidated financial statements include the accounts of NeoStem, Inc. (a
Delaware corporation) and its wholly-owned and partially owned subsidiaries as
listed below:
|
Entity
|
Percentage
of Ownership
|
Location
|
||
|
NeoStem
Inc.
|
Parent Company
|
United
States of America
|
||
|
NeoStem
Technologies, Inc.
|
100%
|
United
States of America
|
||
|
Stem
Cell Technologies, Inc.
|
100%
|
United
States of America
|
||
|
NeoStem
(China) Inc.
|
100%
|
People’s
Republic of China
|
||
|
Qingdao
Niao Bio-Technology Ltd.*
|
*
|
People’s
Republic of China
|
||
|
Beijing
Ruijiao Bio-Technology Ltd.*
|
*
|
People’s
Republic of China
|
||
|
China
Biopharmaceuticals Holdings, Inc. (Merger Sub)
|
100%
|
United
States of America
|
||
|
Suzhou
Erye Pharmaceuticals Company Ltd.
|
51%
owned by Merger Sub
|
People’s
Republic of China
|
||
* Because certain PRC regulations
currently restrict foreign entities from holding certain licenses and
controlling certain businesses in China, we have created a wholly foreign-owned
entity, or WFOE, NeoStem (China), to implement our expansion initiatives in
China. To comply with China’s foreign investment regulations with respect to
stem cell-related activities, these business initiatives in China are conducted
via two Chinese domestic entities, Qingdao Niao Bio-Technology Ltd., or Qingdao
Niao, and Beijing Ruijieao Bio-Technology Ltd., or Beijing Ruijieao, that are
controlled by the WFOE through various contractual arrangements and under the
principles of consolidation we consolidate 100% of their
operations.
Noncontrolling
interests:
Effective January 1, 2009, the Company adopted Financial Accounting Standard
Board (“FASB”) accounting standard regarding non-controlling interest in
consolidated financial statements. Certain provisions of this accounting
standard are required to be adopted retrospectively for all periods presented.
Such provisions include a requirement that the carrying value of non-controlling
interests (previously referred to as minority interests) be removed from the
mezzanine section of the balance sheet and reclassified as equity. Further, as a
result of adoption this accounting standard, net income attributable to
non-controlling interests is now excluded from the determination of consolidated
net income.
F-8
Use of Estimates: The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Cash Equivalents: Short-term
cash investments, which have a maturity of ninety days or less when purchased,
are considered cash equivalents.
Concentrations of Risk:
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash. Cash includes cash on
hand and demand deposits in accounts maintained with banks within the People’s
Republic of China and the United States. The Company places its cash accounts
with high credit quality financial institutions, which at times may be in excess
of the FDIC insurance limit. Total cash in these banks at December 31, 2009 and
2008 amounted to $7,159,369 and $430,786 of which $431,717 and $27,740 deposits
are federally-insured, respectively of which $296,989 and 28,955 are covered by
such insurance. The Company has not experienced any losses in such
accounts and believes it is not exposed to any risks on its cash in bank
accounts. At December 31, 2009 the Company had invested approximately $1,031,000
in money market accounts
As of
October 31, 2009 the Company was selling pharmaceutical products to pharmacies
and hospitals. There is no sales concentration risk for the Company since there
are no sales to one customer individually accounting for more than 10% of the
total sales revenue for the twelve months ended December 31, 2009 and the two
months ended December 31, 2009.
For the
two months ended December 31, 2009 as a result of the acquisition of CBH, two
major suppliers provided approximately 23.0% of the Company’s purchases of raw
materials with each supplier individually accounting for 12% and 11%,
respectively. As of December 31, 2009, the total accounts payable to the two
major suppliers was $789,000, 10% of the total accounts payable.
For the
twelve months ended December 31, 2008 there were no suppliers which supplied
more than 10% of the Company’s supplies or raw materials.
Restricted Cash: Restricted cash represents
cash required to be deposited with banks for the balance of bank notes payable
but are subject to withdrawal with restrictions according to the agreement with
the bank and saving accounts. The required deposit rate is approximately 30-50%
of the notes payable. Given the nature of the restricted cash, it is
reclassified as a financing activity in Statement of Cash Flows.
Accounts Receivable: Accounts receivable are
carried at original invoice amount less an estimate made for doubtful
receivables. Management’s judgment and estimates are made in connection with
establishing the allowance for doubtful accounts. Specifically, the Company
analyzes the aging of accounts receivables balances, historical bad debts,
customer concentration and credit-worthiness, current economic trends and
changes in the Company’s customer payment terms. Significant changes in customer
concentrations or payment terms, deterioration of customer credit-worthiness or
weakening economic trends could have a significant impact on the collectability
of the receivables and the Company’s operating results. If the financial
condition of the Company’s customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowance may be
required. Management regularly reviews aging of receivables and changes in
payment trends by its customers, and records a reserve when they believe
collection of amounts due are at risk. There were allowance for doubtful
accounts necessary at December 31, 2009 and 2008 in the amount of $273,600 and
$0 respectively.
Inventories: Inventories are stated
at the lower of cost or market using the first-in, first-out basis. The Company
reviews its inventory periodically for possible obsolescence or to determine if
any reserves are necessary.
Inventories
consisted of the following:
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
Raw
materials and supplies
|
$ | 6,338,826 | $ | - | ||||
|
Work
in process
|
666,720 | - | ||||||
|
Finished
goods
|
5,973,462 | - | ||||||
|
Total
inventory
|
$ | 12,979,008 | $ | - | ||||
F-9
Property and Equipment: The
cost of property and equipment is depreciated over the estimated useful lives of
the related assets of 3 to 10 years. The cost of computer software programs are
amortized over their estimated useful lives of five years. Depreciation is
computed on the straight-line method. Repairs and maintenance expenditures that
do not extend original asset lives are charged to expense as
incurred.
Property
and equipment consisted of the following:
|
December
31, 2009
|
December
31, 2008
|
|||||||
|
Machinery
and Equipment
|
$ | 3,317,309 | $ | - | ||||
|
Lab
Equipment
|
704,154 | 102,295 | ||||||
|
Furniture
and Fixtures
|
273,171 | 72,288 | ||||||
|
Vehicles
|
75,317 | - | ||||||
|
Software
|
81,704 | 77,244 | ||||||
|
Leasehold
Improvements
|
58,425 | - | ||||||
|
Construction
in Progress
|
17,075,057 | - | ||||||
| 21,585,137 | 251,827 | |||||||
|
Accumulated
Depreciation
|
(285,756 | ) | (152,337 | ) | ||||
| $ | 21,299,381 | $ | 99,490 | |||||
Construction-In-Progress: Construction-in-progress
represents the costs incurred in connection with the construction of buildings
or new additions to the Company’s plant facilities. Interest incurred during the
period of construction, if material, is capitalized. Construction-in-progress is
not depreciated until the assets are completed and placed into
service.
Erye is
constructing a new factory and will relocate to the new place after the entire
project is completed. Construction in progress is related this production
facility and is being built in accordance with the PRC’s Good Manufacturing
Practices (“GMP”) Standard. The Company expects that the construction will be
completed in 2011 however certain elements of the project will be completed and
put into service in 2010, the estimated additional cost to be completed will be
approximately $13.0 million. No depreciation is provided for
construction-in-progress until such time the assets are completed and placed
into service.
As of
December 31, 2009, the Company had construction-in-progress amounted to
$17,075,057 and. For the two months ended December 31, 2009 the Company
capitalized interest as part of construction-in-progress amounted to
$61,700.
Income Taxes: The Company, in
accordance with ASC 740-10 (formerly SFAS 109, “Accounting for Income Taxes,”)
recognizes (a) the amount of taxes payable or refundable for the current year
and (b) deferred tax liabilities and assets for the future tax consequences of
events that have been recognized in an enterprise’s financial statement or tax
returns. We continue to evaluate under guidance provided by the ASC, the
accounting for uncertainty in tax positions. The guidance requires
companies to recognize in their financial statements the impact of a tax
position if the position is more likely than not of being sustained on audit.
The position ascertained inherently requires judgment and estimates by
management. For the twelve months ended December 31, 2009 and 2008,
we do not believe we have any material uncertain tax positions that
would require us to measure and reflect the potential lack of
sustainability of a position on audit in our financial statements. We will
continue to evaluate our tax positions in future periods to determine if
measurement and recognition in our financial statements.
Comprehensive Income (Loss):
Refers to revenue, expenses, gains and losses that under generally
accepted accounting principles are included in comprehensive income but are
excluded from net income as these amounts are recorded directly as an adjustment
to stockholders’ equity. At December 31, 2009 a $67,917 exchange rate
loss was recognized which has been reflected on the balance sheet as accumulated
other comprehensive loss as a separate component of stockholder’s equity, in
accordance with the consolidation of a foreign operation. At December
31, 2008 there were no such adjustments required.
Goodwill: Goodwill represents
the excess of the purchase price over the fair value of the net assets acquired
in a business combination. The Company reviews recorded goodwill for potential
impairment annually or upon the occurrence of an impairment indicator. The
Company performed its annual impairment tests as of December 31, 2009 and
determined no impairment exists. The Company will perform its future annual
impairment as of the end of each fiscal year, or earlier if circumstances would
indicate. Below is a recap of the changes in Goodwill for the twelve months
ended 12/31/2009:
F-10
|
Balance
12/31/2008
|
$ | 558,169 | ||
|
Increase
in Goodwill due to Acquisition of CBH
|
29,303,954 | |||
|
Balance
12/31/2009
|
$ | 29,862,123 |
Intangible Asset - patent
rights: ASC 350-10 requires purchased intangible assets other than
goodwill to be amortized over their useful lives unless those lives are
determined to be indefinite. Purchased intangible assets are carried at cost
less accumulated amortization. Definite-lived intangible assets, which consist
of patents and rights associated primarily with the VSELTM Technology
which constitutes the principal assets acquired in the acquisition of Stem Cell
Technologies, Inc., have been assigned a useful life and are amortized on a
straight-line basis over a period of twenty years.
Intangible asset - Land Use
Rights: According to Chinese
law, the government owns all the land in China. Companies or individuals are
authorized to possess and use the land only through land use rights granted by
the Chinese government. Land use rights are being amortized using the
straight-line method over the lease term of 40 to 50 years.
Intangible asset – product rights -
approved Drugs: The Company obtained
various official registration certificates or official approvals for clinical
trials representing patented pharmaceutical formulas. No amortization is
recorded when the Company intends to and has the ability to sell the patent or
formulas within two months; otherwise the patent costs will be subject to
amortization over its estimated useful life period, generally fifteen years.
Such costs comprise purchase costs of patented pharmaceutical formulas and costs
incurred for patent application. Product rights are accounted for on an
individual basis.
Impairment of Long-lived
Assets: We
review long-lived assets and certain identifiable intangibles to be held and
used for impairment on an annual basis and whenever events or changes in
circumstances indicate that the carrying amount of an asset exceeds the fair
value of the asset. If other events or changes in circumstances indicate that
the carrying amount of an asset that we expect to hold and use may not be
recoverable, we will estimate the undiscounted future cash flows expected to
result from the use of the asset or its eventual disposition, and recognize an
impairment loss. The impairment loss, if determined to be necessary, would be
measured as the amount by which the carrying amount of the assets exceeds the
fair value of the assets.
Accounting for Stock Based
Compensation: In December 2004, the FASB issued ASC 718-10, 718-20 and
505-50 formerly, (SFAS No. 123(R), "Share-Based Payment" ("SFAS No. 123(R)")).
ASC 718-10, 718-20 and 505-50 establish standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods or
services. This statement focuses primarily on accounting for transactions in
which an entity obtains employee services in share-based payment transactions.
ASC 718-10, 718-20 and 505-50 requires that the fair value of such equity
instruments be recognized as an expense in the historical financial statements
as services are performed. Prior to ASC 718-10, 718-20 and 505-50, only certain
pro forma disclosures of fair value were required. The Company has adopted ASC
718-10, 718-20 and 505-50 effective January 1, 2006. The Company determines
value of stock options by the Black-Scholes option pricing model. The value of
options issued since January 1, 2006 or that were unvested at January 1, 2006
are being recognized as an operating expense ratably on a monthly basis over the
vesting period of each option. With regard to stock options and warrants issued
to non-employees the Company has adopted ASC 505-50 formerly (EITF 96-18
“Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring or in Conjunction with Selling Goods and Services.”)
Earnings Per Share: Basic
(loss)/earnings per share is based on the weighted effect of all common shares
issued and outstanding, and is calculated by dividing net (loss)/income
available to common stockholders by the weighted average shares outstanding
during the period. Diluted (loss)/earnings per share, which is calculated by
dividing net (loss)/income available to common stockholders by the weighted
average number of common shares used in the basic earnings per share calculation
plus the number of common shares that would be issued assuming conversion of all
potentially dilutive securities outstanding, is not presented as it is
anti-dilutive in all periods presented. For the twelve months
ended December 31, 2009 and 2008 the Company incurred net losses and
therefore no common stock equivalents were utilized in the calculation of
earnings per share. At December 31, 2009 and 2008 the Company had common stock
equivalents outstanding as follows:
|
|
December 31,
|
December 31,
|
||||||
|
2009
|
2008
|
|||||||
|
Stock
Options
|
9,990,574 | 1,725,300 | ||||||
|
Warrants
|
19,838,802 | 5,322,333 | ||||||
|
Series
C Preferred Stock, Common stock equivalents
|
9,086,124 | - | ||||||
Advertising Policy: All
expenditures for advertising are charged against operations as incurred.
Advertising costs for the twelve months ended December 31, 2009 and 2008
amounted to $180,758 and $264,148, respectively.
F-11
Revenue Recognition: The
Company initiated the collection and banking of autologous adult stem cells in
the fourth quarter of 2006. The Company recognizes revenue related to the
collection and cryopreservation of autologous adult stem cells when the
cryopreservation process is completed which is generally twenty four hours after
cells have been collected. Revenue related to advance payments of storage fees
is recognized ratably over the period covered by the advanced payments. The
Company earns revenue, in the form of license fees, from physicians seeking to
establish autologous adult stem cell collection centers. These license fees are
typically billed upon signing of the collection center agreement and
qualification of the physician by the Company’s credentialing committee and at
various times during the term of license agreement based on the terms of the
specific agreement. During the quarter ended June 30, 2009, the Company modified
its revenue recognition policy relative to these license fees to recognize such
fees as revenues ratably over the appropriate period of time to which the
revenue element relates. Previously these license fees were recognized in full
when agreements were signed and the physician had been qualified by the
Company’s credentialing committee. This modification of our revenue recognition
policy did not have a material impact on our results of operations. The Company
also receives licensing fees from a licensee for use of our technology and
knowledge to operate an adult stem cell banking operation in China, which
licensing fees are recognized as revenues ratably over the appropriate period of
time to which the revenue element relates. In addition, the Company earns
royalties for the use of its name and scientific information in connection with
its License and Referral Agreement with Promethean Corporation (see “Related
Party Transactions” below), which royalties are recognized as revenue when they
are received.
The
Company recognizes revenue from product sales when title has passed, the risks
and rewards of ownership have been transferred to the customer, the fee is fixed
and determinable, and the collection of the related receivable is probable which
is generally at the time of shipment.
Revenue
was made up of the following product categories.
|
For
the year ended
|
||||||||||||
|
December
31,
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Revenue
|
||||||||||||
|
Prescription
drugs and intermediary pharmaceutical products
|
$ | 11,347,949 | $ | - | $ | - | ||||||
|
Stem
Cell Revenues
|
172,078 | 83,541 | 231,664 | |||||||||
|
Other
Revenues
|
45,091 | - | - | |||||||||
| $ | 11,565,118 | $ | 83,541 | $ | 231,664 | |||||||
Fair Value
Measurements: We follow the provisions of ASC 820, Fair Value Measurements and
Disclosures related to financial assets and liabilities that are being
measured and reported on a fair value basis. Fair value is the price that would
be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants in the principal market at the
measurement date (exit price). We are required to classify fair value
measurements in one of the following categories:
Level 1
inputs which are defined as quoted prices (unadjusted) in active markets for
identical assets or liabilities that the reporting entity has the ability to
access at the measurement date.
Level 2
inputs which are defined as inputs other than quoted prices included within
Level 1 that are observable for the assets or liabilities, either directly or
indirectly.
Level 3
inputs are defined as unobservable inputs for the assets or
liabilities. Financial assets and liabilities are classified based on
the lowest level of input that is significant to the fair value measurement. Our
assessment of the significance of a particular input to the fair value
measurement requires judgment, and may effect the valuation of the fair value of
assets and liabilities and their placement within the fair value hierarchy
levels.
The
Company determined the fair value of funds invested in short term investments,
which are available for sale and included in prepaid and other current assets on
the balance sheet at December 31, 2009, to be level 1 inputs measured
by quoted prices of the securities in active markets. The Company determined the
fair value of funds invested in money market funds to be level 2 inputs, which
does not entail material subjectivity because the methodology employed does not
necessitate significant judgment, and the pricing inputs are observed from
actively quoted markets. The following table sets forth by level within the fair
value hierarchy our financial assets and liabilities that were accounted for at
fair value on a recurring basis as of December 31, 2009.
F-12
|
Carrying
Value
|
Fair
Value Measurements Using Fair Value Hierarchy
|
|||||||||||||||
|
Level
1
|
Level
2
|
Level
3
|
||||||||||||||
|
Money
Market Funds
|
$ | 1,030,980 | $ | - | 1,030,980 | - | ||||||||||
|
Short
term investments
|
$ | 287,333 | $ | 287,333 | - | - | ||||||||||
Foreign Currency
Translation: As the Company’s Chinese
pharmaceutical business is a self-contained and integrated entity, and the
Company’s Chinese stem cell business’ future cash flow is expected to be
sufficient to service its additional financing requirements, the Chinese
subsidiaries’ functional currency is the Renminbi (“RMB”), and the Company’s
reporting currency is the US dollar. Results of foreign operations
are translated at the average exchange rates during the period, assets and
liabilities are translated at the unified exchange rate as quoted by the
People’s Bank of China at the end of each reporting period. Cash flows are also
translated at average translation rates for the period, therefore, amounts
reported on the statement of cash flows will not necessarily agree with changes
in the corresponding balances on the balance sheet.
This
quotation of the exchange rates does not imply free convertibility of RMB to
other foreign currencies. All foreign exchange transactions continue to take
place either through the People’s Bank of China or other banks authorized to buy
and sell foreign currencies at the exchange rate quoted by the People’s Bank of
China.
Translation
adjustments resulting from this process are included in accumulated other
comprehensive income in the consolidated statement of shareholders’ equity and
amounted to $67,917 and $0 as of December 31, 2009 and 2008, respectively.
Assets and liabilities at December 31, 2009 were translated at 6.826 RMB to 1 US
dollar. The average translation rates applied to income statement accounts and
the statement of cash flows for the two months ended December 31, 2009 were
6.818 RMB to 1 US dollar.
Economic and Political
Risks: The
Company faces a number of risks and challenges since a significant amount of its
assets are located in China and its revenues are derived primarily from its
operations in China. China is a developing country with a young economic market
system overshadowed by the state. Its political and economic systems are very
different from the more developed countries and are still in the stage of
change. China also faces many social, economic and political challenges that may
produce major shocks and instabilities and even crises, in both its domestic
arena and its relationship with other countries, including but not limited to
the United States. Such shocks, instabilities and crises may in turn
significantly and negatively affect the Company’s performance.
Research and Development
Costs: Research and development
(“R&D”) expenses include salaries, benefits, and other headcount related
costs, clinical trial and related clinical manufacturing costs, contract and
other outside service fees, and facilities and overhead costs. R&D costs are
expensed when incurred.
Under the
guidance of the FASB’s accounting standard regarding research and development
costs, the Company expenses the costs associated with the research and
development activities when incurred.
Shipping and Handling
Costs; Shipping and handling
costs related to costs of goods sold are included in cost of goods and were
$83,217 and $0 for the twelve months ended December 31, 2009 and 2008,
respectively.
Note 3 – Recent Accounting
Pronouncements
In April
2009, the FASB issued ASC 805-10,805-20 and 805-30 (formerly FASB Staff Position
No. 141(R)-1, Accounting for
Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies) (“ASC 805”). ASC 805 amends and clarifies ASC 805
(formerly SFAS No. 141(R)). ASC 805 requires an acquirer to recognize at fair
value, at the acquisition date, an asset acquired or a liability assumed in a
business combination that arises from a contingency if the acquisition-date fair
value of that asset or liability can be determined during the measurement
period. If the fair value cannot be determined during the measurement period, an
asset or a liability shall be recognized at the acquisition date if the asset or
liability can be reasonably estimated and if information available before the
end of the measurement period indicates that it is probable that an asset
existed or that a liability had been incurred at the acquisition date ASC 805
amends the disclosure requirements of ASC 805 to include business
combinations that occur either during the current reporting period or after the
reporting period but before the financial statements are issued. ASC 805 is
effective for fiscal years beginning after December 15, 2008 and interim periods
within those years. The adoption of ASC 805 has resulted in NeoStem
expensing currently pre-merger costs associated with the proposed merger with
China Biopharmaceuticals Holdings, Inc., which amounted to $2,778,000 for the
year ended December 31, 2009.
F-13
In April
2009, the FASB issued ASC 820-10 (formerly FASB Staff Position No. 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly) (“ASC 820”).
ASC 820 provides additional guidance for estimating fair value in accordance
with SFAS No. 157 when the volume and level of activity for the asset or
liability have significantly decreased. ASC 820 also includes guidance on
identifying circumstances that indicate a transaction is not orderly. ASC 820
requires the disclosure of the inputs and valuation technique used to measure
fair value and a discussion of changes in valuation techniques and related
inputs, if any, during the period. ASC 820 also requires that the entity define
major categories for equity securities and debt securities to be major security
types. ASC 820 is effective for interim and annual reporting periods ending
after June 15, 2009. The adoption of ASC 820 did not have a material
impact on our financial position or results of operations.
In April
2009, the FASB issued ASC 320-10 (formerly FASB Staff Position No. 115-2 and FAS
124-2, Recognition and
Presentation of Other-Than-Temporary Impairments) (“ASC 320”). This FSP
amends the other-than-temporary impairment guidance in U.S. GAAP for debt
securities to make the guidance more operational and to improve the presentation
and disclosure of other-than-temporary impairments on debt and equity securities
in the financial statements. This FSP does not amend existing recognition and
measurement guidance related to other-than-temporary impairments of equity
securities. ASC 320 requires the entity to assess whether the impairment is
other-than-temporary if the fair value of a debt security is less than its
amortized cost basis at the balance sheet date. This statement also provides
guidance to assessing whether or not the impairment is other-than-temporary and
guidance on determining the amount of the other-than-temporary impairment that
should be recognized in earnings and other comprehensive income. ASC 320 also
requires an entity to disclose information that enables users to understand the
types of securities held, including those investments in an unrealized loss
position for which the other-than-temporary impairment has or has not been
recognized. ASC 320 is effective for interim and annual reporting periods ending
after June 15, 2009. The adoption of ASC 320 did not have a material impact on
our financial position or results of operations.
In
May 2009, the FASB issued ASC 855-10 (formerly Statement No. 165, Subsequent Events) (“ASC
855”). ASC 855
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before the financial statements are
issued or are available to be issued. The adoption of ASC 855 did not have a
material impact on our financial position or results of operations.
In June
2009, the FASB issued Statement No. 166, Accounting for Transfers of
Financial Assets, an amendment of FASB Statement No. 140. Statement
166 eliminates the concept of a “qualifying special-purpose entity” from
Statement 140 and changes the requirements for derecognizing financial assets.
We will adopt Statement 166 in 2010 and are currently evaluating the impact of
its pending adoption on our consolidated financial statements.
In June
2009, the FASB issued Statement No. 167, Amendments to FASB Interpretation
No. 46(R). Statement 167 amends the evaluation criteria to identify
the primary beneficiary of a variable interest entity provided by FASB
Interpretation No. 46(R) , Consolidation of Variable Interest
Entities—An Interpretation of ARB No. 51 . Additionally, Statement
167 requires ongoing reassessments of whether an enterprise is the primary
beneficiary of the variable interest entity. We will adopt Statement 167 in 2010
and are currently evaluating the impact of its pending adoption on our
consolidated financial statements.
In
June 2009, the FASB approved the “FASB Accounting Standards Codification”
(“ASC”) as the single source of authoritative nongovernmental U.S. GAAP to be
launched on July 1, 2009. The ASC does not change current U.S. GAAP, but is
intended to simplify user access to all authoritative U.S. GAAP by providing all
the authoritative literature related to a particular topic in one place. All
existing accounting standard documents will be superseded and all other
accounting literature not included in the ASC will be considered
nonauthoritative. The Codification is effective for interim and annual periods
ending after September 15, 2009. The ASC was effective for us during our
interim period ending September 30, 2009 and did not have an impact on our
financial condition or results of operations.
Note 4 –
Acquisitions
In
November 2007, the Company entered into an acquisition agreement with UTEK
Corporation ("UTEK") and Stem Cell Technologies, Inc., a wholly-owned
subsidiary of UTEK ("SCTI"), pursuant to which
the Company acquired all the
issued and outstanding common Stock
of SCTI in a stock-for-stock exchange. Pursuant to a
license agreement (the "License Agreement") between SCTI
and the University of Louisville Research
Foundation ("ULRF"), SCTI owns an exclusive, worldwide
license to a technology developed by researchers at the University of
Louisville to identify and isolate rare stem cells from adult human bone marrow,
called VSELs (very small embryonic like) stem
cells. Concurrent with the SCTI acquisition, NeoStem entered into a
sponsored research agreement (the "SRA") with ULRF, which has been amended from
time to time,under which NeoStem is supporting further research in the
laboratory of Mariusz Ratajczak, M.D., Ph.D., a co-inventor of the VSEL
technology and head of the Stem Cell Biology Program at the James Graham Brown
Cancer Center at the University of Louisville. SCTI was funded with
$271,000, in cash, by UTEK. In consideration for the acquisition, the Company
issued to UTEK 400,000 unregistered shares of its Common Stock, par value $0.001
per share for all the issued and outstanding common stock of SCTI. The total
value of the transaction was $940,000 and $669,000 was capitalized as an
intangible asset. SCTI was founded in November 2007 for the express purpose of
acquiring this technology and there were no other significant operations
conducted by SCTI before NeoStem acquired the company from its
shareholder.
F-14
On
October 30, 2009, China Biopharmaceuticals Holdings, Inc. (“CBH”) merged
with and into CBH Acquisition LLC (“Merger Sub”), a wholly-owned subsidiary of
NeoStem, with Merger Sub as the surviving entity (the “Merger”) in
accordance with the terms of the Agreement and Plan of Merger, dated November 2,
2008, as amended (“Merger Agreement”) by and between NeoStem, Merger Sub, CBH
and China Biopharmaceuticals Corp., a wholly-owned subsidiary of CBH
(“CBC”). As a result of the Merger, NeoStem acquired CBH’s 51%
ownership interest in Suzhou Erye Pharmaceuticals Company Ltd. (“Erye”), a
Sino-foreign joint venture with limited liability organized under the laws of
the People’s Republic of China. Erye specializes in research and
development, production and sales of pharmaceutical products, as well as
chemicals used in pharmaceutical products. Erye, which was founded more
than 50 years ago, currently manufactures and has received more than 160
production certifications from the SFDA covering both antibiotic prescription
drugs and active pharmaceutical intermediaries. Suzhou Erye
Economy and Trading Co. Ltd. (“EET”) owns the remaining 49% ownership interest
in Erye. Merger Sub and EET have negotiated a revised joint venture
agreement, which, has been approved by the requisite PRC governmental
authorities.
Pursuant
to the terms of the Merger Agreement, NeoStem issued an aggregate of 13,608,009
shares of Common Stock and 8,177,512 shares of Series C Convertible Preferred
Stock in exchange for outstanding CBH securities. All of the shares
of common stock of CBH issued and outstanding immediately prior to the effective
time of the Merger were converted into the right to receive, in the aggregate,
7,150,000 shares of common stock of NeoStem, or an exchange ratio of 0.1921665,
the fair value of these shares were $10,796,500.
All of
the shares of CBH Series B Convertible Preferred Stock issued and outstanding
immediately prior to the merger (which shares were held by Rim Asia Capital
Partners L.P. (“RimAsia”)) were converted into the right to receive, in the
aggregate, (i) 6,458,009 shares of NeoStem Common Stock and (ii) 8,177,512
shares of Series C Convertible Preferred Stock of NeoStem, each with a
liquidation preference of $1.125 per share and initially convertible into
9,086,124 shares of NeoStem Common Stock at an initial conversion price of $0.90
per share (the 6,458,009 shares of Common Stock and the 8,177,512 shares of
Series C Convertible Preferred Stock being included in the aggregate numbers set
forth in the prior paragraph). In connection therewith, all
outstanding warrants to purchase shares of CBH Common Stock held by RimAsia
immediately prior to the Effective Time were cancelled. Warrants to
purchase shares of CBH Common Stock (other than warrants held by RimAsia) were
replaced with new NeoStem Class E warrants or were otherwise cancelled in
accordance with the terms of such holder’s existing warrant. Class E
warrants to purchase an aggregate of 192,308 shares of NeoStem common stock at
an exercise price of $6.50 per share and an aggregate of 1,410,883 shares of
NeoStem common stock at an exercise price of $6.56 per share,
are effectively outstanding as of October 30, 2009 were scheduled to expire
no later than March 10, 2010, with a fair value of $590,800 The fair value of
the common stock issued to RimAsia was $9,751,600 and the fair value of the
Series C Preferred Stock was $13,720,012. The fair value of the Series C
Convertible Preferred Stock has been allocated to the two economic elements of
the Series C Convertible Preferred stock; the fair value of the beneficial
conversion feature of the preferred stock to NeoStem Common Stock is $5,542,500
and the fair value of the preferred stock is $8,177,512.
The fair
value of the identifiable net assets acquired in the merger was $39,467,800. The
equities issued as consideration by NeoStem was $35,073,600, the fair value of
the non-controlling interests of Erye was $33,698,200 and the Company recorded
goodwill in the amount of $29,303,900. The goodwill that has been created by
this acquisition is reflective of values and opportunities of expanded access to
healthcare in the Peoples Republic of China, the designation of certain
antibiotics as essential medicines in China, and that a majority of Erye’s
antibiotics are on the central or provincial governments’ drug formularies. Due
to the structure of the transaction none of the Goodwill is expected to be tax
deductible.
F-15
The
summary of assets acquired and liabilities assumed on October 30, 2009 are as
follows:
|
Cash
& Restricted Cash
|
$ | 4,451,200 | ||
|
Accounts
Receivabe
|
6,199,500 | |||
|
Inventory
|
10,551,900 | |||
|
Other
Current Asset
|
2,925,805 | |||
|
Property,
Plant & Equipment
|
18,946,200 | |||
|
Intangibles
|
22,642,095 | |||
|
Goodwill
|
29,304,000 | |||
|
Accounts
Payable
|
$ | 6,256,800 | ||
|
Other
Liabilities
|
2,895,900 | |||
|
Notes
Payable
|
9,618,100 | |||
|
Amounts
due Related Party
|
7,478,100 |
The total
cost of the acquisition has been allocated to the assets acquired and the
liabilities assumed based upon their estimated fair values at the date of the
acquisition. The estimated purchase price allocation is subject to
revision based on additional valuation work that is being
conducted. The final allocation is pending the receipt of this
valuation work and the completion of the Company’s internal review, which is
expected during fiscal 2010.
Presented
below is the unaudited proforma information as if the acquisition had occurred
at the beginning of the years ended December 31, 2009, 2008 and 2007,
respectively:
|
2009
|
2008
|
2007
|
||||||||||
|
Revenue
|
$ | 61,627,969 | $ | 49,811,084 | $ | 31,724,661 | ||||||
|
Net
Loss
|
(26,434,988 | ) | (6,720,254 | ) | (10,418,121 | ) | ||||||
|
Net
loss per share
|
$ | (1.07 | ) | $ | (0.34 | ) | $ | (0.60 | ) | |||
Note 5 – Intangible
Asset
At
December 31, 2009 our intangible assets consisted of patent applications and
rights associated with the VSEL Technology which constitutes the principal
assets acquired in the acquisition of Stem Cells Technologies, Inc.; patent
rights owned by Erye, land use rights associated with the Eyre’s new
manufacturing plant currently under construction, a lease right between Erye and
Erye Economic Trade (the 49% shareholder of Erye) for the use of Erye’s current
manufacturing plant in Suzhou and Erye’s customer list. In connection with
determining the fair value of the assets of CBH and Erye the fair value of
certain assets, not previously recorded on the balance sheet of Erye, was
determined and include the lease right between Eyre and Erye Economic Trading
for the use of the current production facility and Erye’s customer
list.
|
As
of December 31, 2009 and 2008, the Company’s intangible assets and related
accumulated amortization consisted of the following:
|
|||||||||||
|
Useful
Life
|
December
31, 2009
|
December
31, 2008
|
|||||||||
|
Intangible
assets obtained in the CBH acquisition
|
|||||||||||
|
Land
use rights
|
49
|
$ 4,753,004
|
$ (54,437)
|
$ 4,698,567
|
$ -
|
$ -
|
$ -
|
||||
|
Lease
rights
|
2
|
690,694
|
(57,558)
|
633,136
|
-
|
-
|
-
|
||||
|
Customer
list
|
10
|
17,040,149
|
(284,002)
|
16,756,147
|
-
|
-
|
-
|
||||
|
Patents
|
9
|
150,332
|
(2,733)
|
147,599
|
-
|
-
|
-
|
||||
|
Intangible
assets obtained in the Stem Cell Technologies, Inc.
|
|||||||||||
|
VSEL
patent rights
|
15
|
672,777
|
(73,088)
|
599,689
|
672,777
|
(36,544)
|
636,233
|
||||
|
Total
Intangible Assets
|
$
23,306,956
|
$ (471,818)
|
$
22,835,138
|
$ 672,777
|
$ (36,544)
|
$ 636,233
|
|||||
F-16
Estimated
amortization expense for the five years subsequent to December 31, 2009 is as
follows:
|
Years
Ending December 31,
|
||||
|
2010
|
$ | 2,198,848 | ||
|
2011
|
2,141,273 | |||
|
2012
|
1,852,389 | |||
|
2013
|
1,852,389 | |||
|
2014
|
1,852,389 | |||
|
Thereafter
|
$ | 12,937,850 | ||
The
remaining weighted-average amortization period as of December 31, 2009 is 11
years.
Note 6– Accrued
Liabilities
Accrued
liabilities are as follows:
|
December
31,
|
||||||||
|
2009
|
2008
|
|||||||
|
Professional
fees
|
$ | 116,787 | $ | 136,843 | ||||
|
Salaries
and related taxes
|
531,655 | 250,000 | ||||||
|
Taxes
payable
|
1,842,007 | - | ||||||
|
Franchise
Taxes
|
138,982 | - | ||||||
|
Dividends
Payable
|
69,453 | - | ||||||
|
Rent
Expense
|
69,111 | - | ||||||
|
Warrant
liability
|
35,995 | - | ||||||
|
Collection
Cost
|
85,163 | - | ||||||
|
Other
|
76,372 | 40,924 | ||||||
| $ | 2,965,525 | $ | 427,767 | |||||
Note 7 – Notes
Payable
In order
to move forward certain research and development activities, strategic
relationships in various clinical and therapeutic areas as well as to support
activities related to the Company’s proposed merger (the “Merger”) with China
Biopharmaceuticals Holdings, Inc., other initiatives in China as well as other
ongoing obligations of the Company, on February 25, 2009 and March 6, 2009,
respectively, the Company issued promissory notes to RimAsia Capital Partners
L.P. (“RimAsia”), a principal stockholder of the Company, in the principal
amounts of $400,000 and $750,000, respectively. The notes bore
interest at the rate of 10% per annum and were due and payable on October 31,
2009, except that all principal and accrued interest on the Notes was
immediately due and payable in the event the Company raised over $10 million in
equity financing prior to October 31, 2009. The notes contained
standard events of default and in the event of a default that was not
subsequently cured or waived, the interest rate would increase to a rate of 15%
per annum and, at the option of RimAsia and upon notice, the entire unpaid
principal balance together with all accrued interest thereon would be
immediately due and payable. The notes or any portion thereof could
be prepaid at any time and from time to time at the discretion of the Company
without premium or penalty. On April 9, 2009 these notes and the related accrued
interest were repaid from the proceeds of an $11 million offering of units
consisting of shares of the Company’s Series D Convertible Redeemable Preferred
Stock and warrants to purchase shares of Common Stock.
In
December, 2009, in order to facilitate working capital requirements in China,
NeoStem (China) issued a promissory note to the Bank of Rizhao Qingdao Branch in
the amount of RMB 4,400,000 ($643,700). The note is due on June 21, 2010 and
bears an interest rate of 4.05%. The loan is collateralized by cash in a
restricted bank account totaling 5,189,400 RMB (approximately $759,200). In
addition, in January, 2010 NeoStem (China) entered into a pledge agreement with
the bank pledging all of its interest in its VIE’s as additional collateral for
the loan.
The
Company’s subsidiary Erye has 62,457,000 RMB ($9,150,000) of notes payables as
of December 31, 2009. Notes are payables to the banks who issue bank notes to
Erye’s creditors. Notes payable are interest free and usually mature after a
three to six months period. In order to issue notes payable on behalf
of the Company, the banks required collateral, such as cash deposit which was
approximately 30%-50% of notes to be issued, or properties owned by companies.
As December 31, 2009, 26,999,300 RMB (approximately $3,955,400) of restricted
cash were put up for collateral for the balance of notes payable which was
approximately 40.4% of the notes payable the Company issued, and the remaining
of the notes payable is collateralized by pledging the land use right the
Company owned amounted to approximately $1,840,000 as of December 31,
2009.
F-17
Note 8 – Convertible
Redeemable Series C Preferred Stock
On
October 30, 2009 pursuant to the terms of the Merger Agreement, the Company
issued 8,177,512 shares of Series C Convertible Preferred Stock in exchange for
certain outstanding CBH securities. The terms and conditions of the
Series C Preferred Stock are as follows:
The
holders of shares of Convertible Redeemable Series C Preferred Stock (“Series C
Preferred Stock”) are entitled to receive an annual dividend of 5% of the Agreed
Stated Value, 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. In the event of a liquidation of NeoStem, 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. 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, subject to adjustment. 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. 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 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 of 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. Based on these terms the Company has classified
the Series C Preferred Stock as temporary equity on its balance sheet. The total
fair value of the Series C Preferred Stock was approximately $13,720,000. The
value of the Series C Convertible Preferred Stock has been allocated to the two
economic elements of the Series C Convertible Preferred stock; the value of the
beneficial conversion feature of the preferred stock to NeoStem Common Stock is
$5,542,500 and the value of the preferred stock is $8,177,500. The Series C
Convertible Preferred shareholders are not required to hold the preferred stock
for any minimum period of time before exercising the conversion feature
therefore the value of the beneficial conversion feature has been recognized
immediately as a dividend of $5,542,500.
Note 9 – Series D
Mandatorily Redeemable Convertible Preferred Stock
In April
2009, the Company completed a private placement financing totaling $11 million
(the “April 2009 Private Placement”). This financing consisted of the
issuance of 880,000 units priced at $12.50 per unit, with each unit (the “Series
D Units”) consisting of one share of the Company’s Series D Convertible
Redeemable Preferred Stock (the “Series D Stock”) and ten warrants with each
warrant to purchase one share of Common Stock (the “Series D Warrants”). A total
of 880,000 shares of Series D Stock and 8,800,000 Series D Warrants were
issued. RimAsia, a principal stockholder in the Company, purchased
$5,000,000 in Series D Units in the April 2009 Private Placement and thus
acquired 400,000 shares of Series D Stock and 4,000,000 Series D Warrants. In
June 2009, with a final closing on July 6, 2009, the Company completed an
additional private placement financing totaling approximately $5 million with
net proceeds of $4,679,220 (the “June 2009 Private Placement”). This
financing consisted of the issuance of 400,280 Series D Units priced at $12.50
per unit, and a total of 400,280 shares of Series D Stock and 4,002,800 Series D
Warrants were issued. The Company paid $324,280 in fees and issued 12,971 Series
D Units to agents that facilitated the June 2009 Private Placement. The Series D
Units issued to the selling agents were comprised of 12,971 shares of the Series
D Stock and 129,712 Series D Warrants. Fullbright Finance Limited, a beneficial
holder of more than 5% of the Company’s stock, purchased an aggregate of
$800,000 in Series D Units in the June 2009 Private Placement and thus acquired
64,000 shares of Series D Stock and 640,000 Series D Warrants; the Company
understands that all securities purchased by Fullbright in the June 2009 Private
Placement were pledged to RimAsia and subsequently, to the
Company. In total, in the April 2009 and June 2009 Private
Placements, the number of shares of Series D Stock issued was 1,293,251
(converted into 12,932,510 shares of Common Stock upon stockholder approval on
October 29, 2009) and the number of Series D Warrants issued was
12,932,512.
F-18
Note 10 – Stockholders’
Equity
Common
Stock:
The
authorized Common Stock of the Company is 500 million shares, par value $0.001
per share.
In June
and July 2007, the Company issued, under the 2003
EPP, 3,000 shares of its Common Stock, in each month, with a total
fair value of $16,410, to a consultant for certain management
services rendered to the Company, resulting in a charge to operations of $1,410
and $15,000 respectively. In August 2007, this consultant was hired as an
executive officer of the Company and in connection with this hiring was issued
by the Company, under the 2003 EPP, 10,000 shares of its Common Stock as a
hiring incentive. One half of these shares vested immediately and the
remainder was scheduled to vest in one year on the anniversary date of the
hiring date. The issuance of these shares thus resulted in a charge to
operations of $28,896 and $4,375 in 2007 and 2008, respectively. In 2008 this
executive officer left the Company and forfeited 5,000 of such shares, and as a
result the Company credited operations for $8,020 of compensation expense
previously recognized relating to these forfeited shares
In August
2007, the Company issued, under the 2003 EPP, 24,000 shares of its Common Stock,
with a fair value of $120,000, to a consultant for certain management services
rendered to the Company, 18,000 of which shares vested monthly over the next
twelve months and the remainder vest ratably for three years on the anniversary
date of the agreement and resulted in a charge to operations of $41,667 in 2007,
$62,500 in 2008 and $10,000 in 2009. In December 2007 an additional 12,353
shares with a fair value of $21,000 were issued to this consultant in lieu of a
$3,500 monthly fee due from December 2007 thru May 2008.
In
September 2007, the Company issued, under the 2003 EPP, an aggregate of 154,500
shares of its Common Stock to certain employees, including an aggregate of
125,000 shares to certain of its executive officers. In general, one
half of these shares issued vested immediately and the remainder vest in one
year on the anniversary date of the stock issuance. The issuance of these shares
resulted in a charge to operations of $499,346 and $225,833 in 2007 and 2008,
respectively. In November 2007, an employee that was a recipient of 7,000 shares
of this award left the Company and forfeited 3,500 shares (one-half of this
award). In December 2007, the Company cancelled 10,000 shares issued to an
employee who did not satisfy the condition precedent to receipt of paying the
tax withholding obligation. In 2008, two employees (including an executive
officer) that were recipients of 12,500 shares of this award left the Company
and forfeited 6,250 shares (one-half of the awards). In addition, an executive
officer that was a recipient of 40,000 shares of this award declined to accept
the portion that vested to him in September 2008 because of the tax obligations
associated with the award and returned 20,000 shares to the
Company.
In
September 2007, the Company issued, under the 2003 EPP, an aggregate of 135,000
shares of its Common Stock, with a fair value of $671,338, to the independent
members of its Board of Directors. One half of these shares vested
immediately and the remainder vested in one year on the anniversary date of the
stock issuance. The issuance of these shares resulted in a charge to operations
of $445,505 and $225,833 in 2007 and 2008, respectively.
In
September 2007, the Company issued, under the 2003 EPP, 10,000 shares of its
Common Stock, with a fair value of $49,800, to a consultant to the Company. One
half of these shares issued vested immediately and the remainder vested in one
year on the anniversary date of the stock issuance. The issuance of these shares
resulted in a charge to operations of $33,002 and $16,498 in 2007 and 2008,
respectively.
Effective
January 1, 2008, the Company entered into a one year consulting agreement with a
financial services firm, pursuant to which this firm was to provide
consulting services during the term to the Company consisting of (i) reviewing
the Company's financial requirements; (ii) analyzing and assessing alternatives
for the Company's financial requirements; (iii) providing introductions to
professional analysts and money managers; (iv) assisting the Company in
financing arrangements to be determined and governed by separate and distinct
financing agreements; (v) providing analysis of the Company's industry and
competitors in the form of general industry reports provided directly to the
Company; and (vi) assisting the Company in developing corporate partnering
relationships. As consideration for these services, in February 2008, the
Company issued to the consultant, (i) 50,000 shares of Common Stock, with a fair
value of $80,000; and (ii) two warrants to purchase an aggregate of 120,000
shares of Common Stock, with a fair value of $141,304, (see “Warrants below”).
This issuance of this stock resulted in a charge to operations of $80,000 in
2008. The issuance of these securities was subject to the approval of the
American Stock Exchange, which approval was obtained in February
2008.
In
January 2008, the Company entered into a letter agreement with Dr. Robin L.
Smith, its Chairman of the Board and Chief Executive Officer, pursuant to which
Dr. Smith's employment agreement dated as of May 26, 2006 and amended as of
January 26, 2007 and September 27, 2007 was further amended to provide that, in
response to the Company’s efforts to conserve cash, $50,000 of her 2008 salary
would be paid in shares of the Company’s Common Stock, the number of shares to
be issued reduced by the amount of cash required to pay the withholding taxes
associated with this amount of salary. Accordingly, Dr. Smith was issued 16,574
shares of the Company’s Common Stock, with a fair value of $28,176, pursuant to
the Company’s 2003 EPP resulting in a charge to operations of
$28,176.
F-19
In
January 2008, the Company entered into a letter agreement with Catherine M.
Vaczy, its Vice President and General Counsel, pursuant to which Ms. Vaczy’s
employment agreement dated as of January 26, 2007 was amended to provide that,
in response to the Company’s efforts to conserve cash, Ms. Vaczy would be paid
$11,250 of her 2008 salary in shares of the Company’s Common Stock, the number
of shares to be issued reduced by the amount of cash required to pay the
withholding taxes associated with this amount of salary. Accordingly, Ms. Vaczy
was issued 3,729 shares of the Company’s Common Stock, with a fair value of
$6,339, pursuant to the 2003 EPP resulting in a charge to operations of
$6,339.
In
February 2008, the Company entered into a one year consulting agreement with a
law firm to assist in funding efforts from the State and Federal Governments as
well as other assignments from time to time, in consideration for which it
issued to the firm 40,000 restricted shares of Common Stock that vest
ratably on a monthly basis during 2008. The issuance of the shares was subject
to the approval of the American Stock Exchange, such approval was obtained in
March 2008, and following this approval the shares were issued. The shares
issued in connection with this agreement had a value of $72,800 which is being
recognized as an operating expense over the term of the agreement, and has
resulted in a charge to operations of $6,067 and $66,733 for 2009 and 2008,
respectively.
In
February 2008, the Company entered into a six month engagement agreement with a
financial advisor pursuant to which they were acting as the Company’s exclusive
financial advisor for the term in connection with a potential acquisition of a
revenue generating business, in the United States or abroad, or similar
transaction. As partial consideration, the Company issued restricted shares
of its Common Stock with a $45,000 value based on the five day
average of the closing prices of the Common Stock preceding the date of issuance
which was to be paid on a pro rata basis during the term of the agreement. The
issuance of such securities was subject to the approval of the American Stock
Exchange. Such approval was obtained in March 2008, and following that approval
the Company issued to the financial advisor in 2008 payments in Common Stock
under the agreement totaling 38,861 shares, resulting in a charge to operations
of $ 45,650.
In
February 2008, the Company issued 20,000 shares of the Company’s Common Stock,
with a fair value of $32,000, to the Company’s Director of Government Affairs
pursuant to the 2003 EPP resulting in a charge to operations of $32,000. The
issuance of the shares was in lieu of salary payable in connection with such
individual serving as the vice president of the Stem for Life Foundation
(“SFLF”), a not for profit corporation which the Company participated in
founding and is considered by the Company as a defacto contribution to the
foundation. In April 2008, this individual resigned from her position as
Director, Government Affairs with the Company and VP of SFLF.
In
February 2008, the Company entered into a six month advisory services agreement
with a financial securities firm whereby this firm was providing financial
consulting services and advice to the Company pertaining to its business
affairs. In consideration for such services, the Company agreed to
issue 150,000 restricted shares of its Common Stock, with a fair value of
$139,200, to be issued over the term of the advisory services agreement,
provided that the advisory services agreement continued to be in
effect. The issuance of such securities was subject to the approval
of the American Stock Exchange, which approval was obtained on March 20, 2008,
and on that date the Company issued under the advisory services agreement the
initial payments in Common Stock totaling 50,000 shares. A total of
90,000 shares were issued in 2008, resulting in a charge to operations of
$139,200. The Company has terminated this Agreement and the remaining 60,000
shares will not be issued.
In
February 2008, the Company entered into a six month consulting agreement with an
investor relations advisor who has provided investor relations and media
services to the Company since 2005. In consideration for providing
services under the consulting agreement, the Company agreed to issue to the
advisor an aggregate of 50,000 restricted shares of its Common Stock, with a
fair value of $85,000. The issuance of such securities was subject to
the approval of the American Stock Exchange. Such approval was
obtained on March 20, 2008 and on that date these shares were issued, resulting
in a charge to operations of $85,000.
In April
2008, the Company entered into a one month non-exclusive investment banking
agreement in connection with the possible issuances by the Company of equity,
debt and/or convertible securities. In partial consideration for such services,
the Company agreed to issue 9,146 restricted shares of its Common Stock, with a
fair value of $7,408, as a retainer. The term of this agreement was
extended. The issuance of the securities under this agreement was subject
to the approval of the American Stock Exchange, which approval was obtained
and on May 21, 2008 the 9,146 retainer shares were issued. This bank
participated in the May 2008 private placement (as described below). The value
of this Common Stock was $7,408.
In May
2008, the Company completed a private placement of securities pursuant to which
$900,000 in gross proceeds was raised (the “May 2008 private placement”). On May
20 and May 21, 2008, the Company entered into Subscription Agreements (the
"Subscription Agreements") with 16 accredited investors (the "Investors").
Pursuant to the Subscription Agreements, the Company issued to each Investor
units (the "Units") comprised of one share of its Common Stock, par value $.001
per share (the "Common Stock") and one redeemable five-year warrant to purchase
one share of Common Stock at a purchase price of $1.75 per share (the
"Warrants"), at a per-Unit price of $1.20. The Warrants are not exercisable for
a period of six months and are redeemable by the Company if the Common Stock
trades at a price equal to or in excess of $2.40 for a specified period of time
(see “Warrants” below). In the May 2008 private placement, the Company issued an
aggregate of 750,006 Units to Investors consisting of 750,006 shares of Common
Stock and 750,006 redeemable Warrants, with a value of $404,817, for an
aggregate purchase price of $900,000. Dr. Robin L. Smith, the Company’s Chairman
and Chief Executive Officer, purchased 16,667 Units for a purchase price of
$20,000 and Catherine M. Vaczy, the Company’s Vice President and General
Counsel, purchased 7,500 Units for a purchase price of $9,000. New England
Cryogenic Center, Inc. (“NECC”), one of the largest full-service cryogenic
laboratories in the world, also participated in the offering. In
connection with the May 2008 private placement, the Company paid as finders’
fees to accredited investors, cash in the amount of $3,240 and issued five year
warrants to purchase an aggregate of 35,703 shares of Common Stock with a value
of $23,671 (see “Warrants,” below). Cash in the amount of 4% of the proceeds
received by the Company from the future exercise of 30,000 of the Investor
Warrants is also payable to one of the finders.
F-20
In May
2008, the Company entered into a two month agreement with a sales and marketing
consultant pursuant to which the consultant was to provide consultation services
to the Company relating to business development, operations and staffing
matters. In consideration for such services, the Company agreed to
issue to the Consultant pursuant to the 2003 EPP: (i) 20,000 shares of Common
Stock, with a fair value of $27,600, to vest as to 10,000 shares on
the last day of each 30 day period during the term of the consulting agreement;
and (ii) an option to purchase 20,000 shares of Common Stock, with a fair value
of $22,870, at a per share purchase price equal to the closing price
of the Common Stock on the date of grant to vest and become exercisable as to
10,000 shares of Common Stock on the last day of each 30 day period during the
term of the consulting agreement, subject in each case to the continued
effectiveness of the agreement. All of such shares were subject to a six month
period during which Consultant agreed none of these shares would be sold. The
issuance of these shares resulted in a charge to operations of $27,600 and the
issuance of the options resulted in a charge to operations of $ 22,870. In July
2008, the Company entered into a two month extension of this agreement pursuant
to which the consultant was to continue to provide consultation services to the
Company relating to business development, operations and staffing
matters. In consideration for such services, the Company has agreed
to issue to the Consultant pursuant to the 2003 EPP (i) 20,000 shares of Common
Stock, with a fair value of $16,400, to vest as to 10,000 shares on
the last day of each 30 day period during the term of the extended consulting
agreement; and (ii) an option to purchase 20,000 shares of Common Stock, with a
fair value of $13,926, at a per share purchase price equal to the
closing price of the Common Stock on the date of execution of the extended
agreement to vest and become exercisable as to 10,000 shares of
Common Stock on the last day of each 30 day period during the extended term of
the consulting agreement, subject in each case to the continued effectiveness of
the extended agreement. In the event of full time employment of the
consultant this vesting would be accelerated. All of such shares were subject to
a six month period during which Consultant agreed none of these shares would be
sold. The issuance of these shares has resulted in a charge to operations of
$16,400 and the issuance of the options resulted in a charge to operations of
$13,926.
In May
2008, the Company entered into a two month agreement with a consultant pursuant
to which the consultant was to provide services to the Company relating to
government affairs and related areas. In consideration for such
services, the Company agreed to issue to the Consultant pursuant to the 2003
EPP: (i) 20,000 shares of Common Stock, with a fair value of
$26,000, to vest as to 10,000 shares on the last day of
each 30 day period during the term of the consulting agreement; and (ii) an
option to purchase 20,000 shares of Common Stock, with a fair value of
$23,620, at a per share purchase price equal to the closing price of
the Common Stock on the date of grant to vest and become exercisable as to
10,000 shares of Common Stock on the last day of each 30 day period during the
term of the consulting agreement, subject in each case to the continued
effectiveness of the agreement. All of such shares were subject to a
six month period during which Consultant agreed none of the shares would be
sold. The issuance of these shares resulted in a charge to operations of $26,000
and the issuance of the options resulted in a charge to operations of
$23,620.
In May
2008, the Company issued to a business development consultant for services
previously rendered, 1,000 shares of Common Stock, with a fair value of $960,
under the 2003 EPP which vested immediately. The issuance of these
shares resulted in a charge to operations of $960.
In May
2008, the Company entered into a three month consulting agreement with a public
relations and communications consultant focusing on specific consumer
demographics. As partial consideration for these services, the
Company agreed to issue: (i) 20,000 restricted shares of its Common Stock on
each of (a) the date of execution of the agreement (the “Execution Date”), (b)
thirty days after the Execution Date, and (c) sixty days after the Execution
Date; and (ii) a five year warrant to purchase up to 30,000 shares of Common
Stock (as described under “Warrants,” below), exercisable as to 10,000 shares
each at $3.00, $4.00 and $5.00, respectively. These warrants have a value of
$19,828. The issuance of the securities under this agreement was
subject to the approval of the American Stock Exchange, which approval was
obtained on September 20, 2008 and the initial payments in Common Stock and the
Warrant were issued. In 2008 the Company issued a total of 40,000
restricted shares of its Common Stock pursuant to this agreement resulting in a
charge to operations of $36,800. In July 2008, the Company terminated this
Agreement and the final 20,000 shares were not issued.
In June
2008, the Company entered into a six month consulting agreement with an investor
relations advisor. As consideration for these services, the Company issued (i)
50,000 restricted shares of its Common Stock, vesting as to 25,000 shares on the
date of execution of the consulting agreement and 25,000 shares 91 days
thereafter, which resulted in a charge to operations of $42,500 and (ii) a five
year warrant to purchase an aggregate of 250,000 shares of Common Stock, with a
value of $179,485 (as described under “Warrants” below). The issuance
of such securities was subject to the approval of the American Stock Exchange,
which approval was obtained on June 20, 2008 and the initial payment in Common
Stock and the Warrant were issued.
F-21
In August
2008, the Company entered into letter agreements with Dr. Robin L. Smith, its
Chairman of the Board and Chief Executive Officer, Larry A. May, its Chief
Financial Officer and Catherine M. Vaczy, its Vice President and General
Counsel, pursuant to which, in response to the Company’s efforts to conserve
cash, each of these officers agreed to accept shares of the Company’s Common
Stock in lieu of unpaid accrued salary. Dr. Smith agreed to accept in lieu of
$24,437.50 in unpaid salary accrued during the period July 15, 2008 through
August 31, 2008, 33,941 shares of the Company's Common Stock with a value of
$27,848. Mr. May agreed to accept in lieu of $10,687.50 in unpaid salary accrued
during the period July 15, 2008 through August 31, 2008, 14,844 shares of the
Company's Common Stock with a value of $12,172. Ms. Vaczy agreed to accept in
lieu of $10,578.50 in unpaid salary accrued during the period July 15, 2008
through August 31, 2008, 14,692 shares of the Company's Common Stock with a
value of $12,047. In addition certain other senior members of the staff agreed
to accept Common Stock in lieu of cash compensation resulting in the issuance of
17,014 shares of Common Stock with a value of $13,951. The number of shares so
issued to each officer and senior staff member was based on the closing price of
the Common Stock on August 27, 2008, $.72, for which the Company agreed to pay
total withholding taxes. All such shares were issued under the Company's 2003
EPP, as amended. In addition, the vesting of an aggregate of 52,500 shares of
the Company’s Common Stock granted to such persons under the 2003 EPP on
September 27, 2007 was authorized to be accelerated from September 27, 2008 to
August 28, 2008. All such arrangements were approved by the Compensation
Committee of the Board of Directors.
In
September 2008, the Company completed a private placement of securities pursuant
to which $1,250,000 in gross proceeds was raised (the “September 2008 private
placement”). On September 2, 2008, the Company entered into a Subscription
Agreement (the "Subscription Agreement") with RimAsia Capital Partners, L.P., a
pan-Asia private equity firm (the "Investor"). Pursuant to the Subscription
Agreement, the Company issued to the Investor one million units (the "Units") at
a per-unit price of $1.25, each Unit comprised of one share of Common Stock and
one redeemable five-year warrant to purchase one share of Common Stock at a
purchase price of $1.75 per share (the "Warrants"). The Warrants are not
exercisable for a period of six months and are redeemable by the Company if the
Common Stock trades at a price equal to or in excess of $3.50 for a specified
period of time or the dollar value of the trading volume of the Common Stock for
each day during a specified period of time equals or exceeds $100,000 (see
“Note 10,
Stockholders’ Equity -- Warrants” below). In the September 2008 private
placement, the Company thus issued 1,000,000 Units to the Investor consisting of
1,000,000 shares of Common Stock and 1,000,000 redeemable Warrants, with a value
of $583,031, for an aggregate purchase price of $1,250,000. The
Warrants also provide that in no event may they be net cash
settled.
In
October 2008, the Company issued, under the 2003 EPP, 5,000 shares of its Common
Stock to an employee, its new Director of Stem Cell Research and Laboratory
Operations. The issuance of these shares resulted in a charge to
operations of $7,000.
In October 2008, the Company completed
a private placement of securities pursuant to which $250,000 in gross proceeds
was raised (the “October 2008 private placement”). On October 15, 2008, the
Company entered into a Subscription Agreement (the "Subscription Agreement")
with an accredited investor listed therein (the "Investor"). Pursuant to the
Subscription Agreement, the Company issued to the Investor 200,000 units (the
"Units") at a per-unit price of $1.25, each Unit comprised of one share of its
Common Stock and one five-year warrant to purchase one share of Common Stock at
a purchase price of $1.75 per share, with a value of $121,157 (the "Warrants").
The Warrants are not exercisable for a period of six months (see “Note 10,
Stockholders’ Equity --
Warrants” below). In the
October 2008 private placement, the Company thus issued 200,000 Units to the
Investor consisting of 200,000 shares of Common Stock and 200,000 Warrants, for
an aggregate purchase price of $250,000. The issuance of the Units was subject
to the prior approval of the American Stock Exchange (now known as the NYSE
Alternext US LLC), which approval was obtained on October 23, 2008, and on that
date the Units were issued. The Warrants also provide that in no event may they
be net cash settled.
In November 2008, the Company completed
a private placement of securities pursuant to which $500,000 in gross proceeds
was raised (the “November 2008 private placement”). On November 7, 2008, the
Company entered into a Subscription Agreement (the "Subscription Agreement")
with an accredited investor listed therein (the "Investor"). Pursuant to the
Subscription Agreement, the Company issued to the Investor 400,000 units (the
"Units") at a per-unit price of $1.25, each Unit comprised of one share of its
Common Stock "Common Stock" and one redeemable five-year warrant to purchase one
share of Common Stock at a purchase price of $1.75 per share, with a value of
$243,063 (the "Warrants"). The Warrants are not exercisable for a period of six
months and are redeemable by the Company if the Common Stock trades at a price
equal to or in excess of $3.50 for a specified period of time (see “Note 10,
Stockholders’ Equity --Warrants” below). In the November 2008 private
placement, the Company thus issued 400,000 Units to the Investor consisting of
400,000 shares of Common Stock and 400,000 redeemable Warrants, for an aggregate
purchase price of $500,000. The issuance of the Units was subject to the prior
approval of the NYSE Alternext US LLC. The Warrants also provide that in no
event may they be net cash settled.
In
January 2009, the Company entered into an agreement with a physician who was
retained as a consultant. The term of this agreement is January 2009
through December 31, 2011. As part of the consideration for providing
services, the physician is to receive $24,000 annually, by the issuance of
shares of the Company’s Common Stock under the Company’s 2003 Equity
Participation Plan, as amended (the “2003 Equity Plan”) in equal monthly
installments of $2,000 on the last day of each month during the term of the
agreement at a per share purchase price equal to the closing price of the Common
Stock on the last day of each month, which payment shall be made in cash in the
event shares under the 2003 Equity Plan or any successor plan are
unavailable. During the year ended December 31, 2009, 18,804
shares of Common Stock were issued to the physician pursuant to this agreement.
The fair value of the common shares issued was $24,000 and resulted in charges
to operations for the year ended December 31, 2009 of $24,000.
F-22
In
January 2009, the Company entered into an agreement with a consultant which has
been providing investor relations services to the Company since 2005, pursuant
to which this consultant was retained to provide additional investor
relations/media relations services from January 1, 2009 to May 31,
2009. In consideration for providing services under this agreement,
the Company agreed to issue to the consultant an aggregate of 40,000 shares of
restricted Common Stock, to vest as to 8,000 shares on the last day of each
month of January through May 2009. The issuance of such securities was subject
to the approval of the NYSE Amex, which approval was obtained in May 2009. The stock issued to this
consultant had a value of $27,600 of which $27,600 was charged to operations
during the year ended December 31, 2009 based on the vesting of the Common
Stock.
In
January 2009, the Company issued to its grant consultant, 20,000 shares of
restricted Common Stock, with a value of $13,800 as a bonus under the
consultant’s Consulting Agreement with the Company dated February 8, 2008, in
consideration for such consultant being instrumental in the Company receiving a
Congressionally Directed Grant which was included in the Department of Defense
Fiscal Year 2009 Appropriations Bill. The issuance of such securities
was approved by the NYSE Amex, which approval was obtained in January
2009. The Company has entered into a new consulting agreement with
this grant consultant for a one-year term commencing as of January 1,
2009. In consideration for services, the consultant was issued shares
of the Company’s restricted Common Stock equal to a value of $60,000 based on
the closing price of the Company’s Common Stock on the date of execution of the
agreement, which has been determined to be 67,416 shares, to vest as to one-half
of such shares on September 30, 2009 and the remaining one-half of such shares
on December 31, 2009. The issuance of such securities was approved by the
NYSE Amex, which approval was obtained in May 2009. For the year ended
December 31, 2009 the Company has recognized a total of $73,800 as an operating
expense relating to these shares.
In
January 2009, the Company issued to a marketing consultant 12,000 shares of
restricted Common Stock, with a fair value of $8,280, pursuant to the terms of a
three month consulting agreement entered into in October 2008, scheduled to vest
pursuant to the agreement as to 4,000 shares at the end of each 30 day period
during the term. The issuance of such securities was approved by the
NYSE Amex, which approval was obtained in January 2009. The issuance of Common
Stock resulted in a charge to operations for the year ended December 31, 2009 of
$8,280.
In
January 2009, the Company issued to a member of its Scientific Advisory Board
20,000 shares of Common Stock under the 2003 Equity Plan, with a fair value of
$15,000, in consideration of this individual’s contribution to a special project
related to the design of a cardiac stem cell clinical trial for end stage
cardiomiopathy anticipated to be conducted in the People’s Republic of China.
The issuance of Common Stock resulted in a charge to operations for the year
ended December 31, 2009 of $15,000.
In
February 2009, the Company entered into a consulting agreement with a one year
term commencing March 1, 2009, with a physician to provide services to the
Company including providing medical expertise in the areas of apheresis and
laboratory medicine and to serve (as needed) as medical director for centers in
the Company’s stem cell collection center network as well as other related
activities, in partial consideration for which the physician is to receive a
one-time payment of 10,000 shares of Common Stock under the 2003 EPP, which
shares were issued as of February 2009. These shares had a fair value
of $8,000. The issuance of Common Stock a charge to operations for the year
ended December 31, 2009 of $8,000.
In March
2009, the Company entered into an agreement with a consultant, pursuant to which
this consultant was retained to provide additional financial market related
services for a three month period. In partial consideration for
providing services under this agreement, the Company agreed to issue to the
consultant an aggregate of 25,000 shares of restricted Common Stock, with a fair
value of $17,250, to vest as to one-third of the shares at the end of each
monthly period during the term. The issuance of such securities was approved by
the NYSE Amex, which approval was obtained in May 2009. Based on these vesting
terms, the Company has recognized $17,250 as an operating expense during the
year ended December 31, 2009. This consultant was also issued a five
year warrant to purchase 25,000 shares of restricted Common Stock at a per share
exercise price of $1.00, with a fair value of $16,867. (See Warrants
below).
In April
2009, the Company entered into an agreement with a consultant to provide
financial market related services to the Company. In partial
consideration for providing services under this agreement, the Company agreed to
issue to the consultant an aggregate of 20,000 shares of Common Stock, with a
fair value of $19,800. The issuance of such securities was approved by the NYSE
Amex, which approval was obtained in May 2009. The Company has
recognized $19,800 as an operating expense in during the year ended December 31,
2009.
F-23
In April
2009, the Company entered into an agreement with a consultant to provide support
services in connection with the Merger to the Company. In partial
consideration for providing services under this agreement, the Company agreed to
issue to the consultant an aggregate of 10,000 shares of Common Stock, with a
fair value of $11,800. The issuance of such securities was approved by the NYSE
Amex, which approval was obtained in May 2009. The Company has
recognized $11,800 as an operating expense during the year ended December 31,
2009.
In May
2009, the Compensation Committee of the Board of Directors approved awards under
a Board of Directors Compensation Plan to members of the Board acting in their
capacity as Board members and to the Board Secretary, which included the
issuance of options under the Company’s newly adopted 2009 Equity
Compensation Plan (the “2009 Equity Plan”) and the authorization for the Chairs
of the Board and Board Committees to be issued for each Chair they
hold, either $25,000 or 25,000 shares of fully vested Common Stock under the
2009 Equity Plan. As a result, an aggregate of $50,000 was paid and
50,000 shares of Common Stock were awarded with a fair value of $97,500. In
November 2009, 180,000 common shares were issued to members of the board in
connection with Board of Directors Compensation plan with a fair value of
$298,800. A total of $396,300 was charged to operations during the year
ended December 31, 2009 in connection with the issuance of these
shares.
In May
2009, the Company entered into a one month agreement with a consultant to
provide consulting services in the area of pharmaceutical research and the
development of strategic transactions. In partial consideration for
providing services under this agreement, the Company issued to the consultant
6,250 shares of Common Stock. The Common Stock issued had a fair
value of $11,876; $11,876 was charged to during the year ended December 31,
2009. The consultant joined the Company as its Vice President, Drug
Development and Regulatory Affairs in July 2009.
In July
2009, the Company granted under its 2009 Equity Plan, to the Company’s Chief
Executive Officer 500,000 shares of Common Stock. The common stock had a
fair value of $855,000; 300,000 shares vested immediately and 200,000 will vest
upon achievement of a business milestone; the business milestone was achieved on
October 30, 2009. In November 2009, in connection with the successful
completion of the Merger 175,000 shares of Common Stock were issued to the
Company’s Chief Executive Office with a fair value of $332,500. A total of
$1,187,500 was charged to operations during the year ended December 31, 2009 in
connection with the issuance of these shares.
In July
2009, The Company’s Vice President and General Counsel received 25,000 shares of
Common Stock with a fair value of $42,750, which vested immediately, in
connection with an extension of her employment agreement. In October 2009, in
connection with the successful completion of the Merger 150,000 shares of Common
Stock were issued to the Company’s General Counsel with a fair value of
$285,000. A total of $327,750 was charged to operations during the year
ended December 31, 2009 in connection with the issuance of these
shares.
In August
2009, the Company entered into a two year Consulting Agreement with the Chairman
of its Scientific Advisory Board. In partial consideration for
providing services under this Agreement, the Company issued to this advisor
50,000 shares of Common Stock under the 2009 Equity Plan with a fair value of
$94,500. In addition, in November 2009, the Company issued 100,000 shares
of Common Stock was issued with a fair value of $190,000. A total of $284,500
was charged to operations during the year ended December 31, 2009 in connection
with the issuance of these shares.
In August
2009, the Company entered into a two and one-half month agreement with a
consultant to provide web-based and other corporate promotional services to the
Company. In partial consideration for providing services under this
agreement, the Company agreed to issue to the consultant an aggregate of 8,000
restricted shares of Common Stock, with a fair value of $14,960. The issuance of
such securities was approved by the NYSE Amex, which approval was obtained in
September 2009. The Company has recognized $14,960 as an operating
expense during the year ended December 31, 2009.
On
October 30, 2009, NeoStem acquired China Biopharmaceuticals Holdings, Inc.
(“CBH”) in accordance with the terms of the Agreement and Plan of Merger, dated
November 2, 2008, as amended (“Merger Agreement. Pursuant to the terms of the
Merger Agreement, NeoStem issued an aggregate of 13,953,505 shares of Common
Stock and 8,177,512 shares of Series C Convertible Preferred Stock in exchange
for outstanding CBH securities. The Common Stock issued pursuant to the
merger agreements consisted of the following:
|
1)
|
All
of the shares of common stock of CBH issued and outstanding immediately
prior to the effective time of the Merger were converted into the right to
receive, in the aggregate, 7,150,000 shares of common stock of NeoStem
with the fair value of $10,796,500.
|
|
2)
|
All
of the shares of CBH Series B Convertible Preferred Stock issued and
outstanding immediately prior to the merger (which shares were held by Rim
Asia Capital Partners L.P. (“RimAsia”)) were converted into the right to
receive, in the aggregate, (i) 6,458,009 shares of NeoStem Common Stock
and (ii) 8,177,512 shares of Series C Convertible Preferred Stock of
NeoStem, The fair value of the Common Stock issued was
$9,751,594.
|
F-24
|
3)
|
NeoStem
also issued 9,532 shares of NeoStem Common Stock to Stephen Globus, a
director of CBH, and 7,626 shares of NeoStem Common Stock to Chris Peng
Mao, the Chief Executive Officer of CBH, in exchange for the cancellation
and the satisfaction in full of certain indebtedness, plus any and all
accrued but unpaid interest thereon, and other obligations of CBH to
Messrs. Globus and Mao. The fair value of these shares is
$25,909.
|
|
4)
|
For
assistance in effecting the merger, 125,000 shares of NeoStem Common Stock
were issued to Fullbright Finance Limited (“Fullbright”) as the designee
of EET, of which Fullbright is a wholly-owned subsidiary, the fair value
of these shares was
$188,750.
|
|
5)
|
An
aggregate of 203,338 shares of NeoStem Common Stock were issued to
Fullbright as the designee of Shi Mingsheng (the Chairman of the Board of
Directors of Erye and a owner of approximately two-thirds of EET) and
Madam Zhang Jian (General Manager of Erye and a holder of approximately
10% of EET) in connection with the transactions contemplated by the Merger
to assist in obtaining the receipt of all applicable approvals of the
People’s Republic of China. The fair value of these shares was $307,040
which was charged to operations as compensation
expense.
|
In
October 2009 in connection with the hiring of a staff member the Company granted
under its 2009 Equity Plan a total of 5,000 shares of Common Stock with a fair
value of $10,200 and the Company has recognized $10,200 as an operating expense
during the year ended December 31, 2009.
In
October 2009 in connection with the hiring of a staff member the Company granted
under the Non-US Plan a total of 300,000 shares of Common Stock with a fair
value of $612,000 and the Company has recognized $612,000 as an operating
expense during the year ended December 31, 2009.
In
October 2009, the Company issued 12,932,510 shares of Common Stock, upon the
approval by the shareholders on October 29, 2009, for the conversion of
1,293,251 Series D Mandatorily Redeemable Convertible Preferred Stock to common
stock. (See Note 9 –
Series D Mandatorily Redeemable Convertible Preferred Stock)
In
December, 2009 the Company issued 175,000 shares of Common Stock with a fair
value of $497,000 upon receipt of PRC approval of the Merger to each of Mr. Shi
Mingsheng and Madame Zhang Jian under the Non-US Plan. The Company has
recognized $497,000 as an operating expense during the year ended December 31,
2009.
In
December 2009, the Company entered into an agreement with a consultant to
provide financial advisory services and other corporate services to the
Company. In partial consideration for providing services under this
agreement, the Company agreed to issue to the consultant an aggregate of 50,000
shares of Common Stock, with a fair value of $80,000. The issuance of such
securities was approved by the NYSE Amex. The Company has recognized
$80,000 as an operating expense during the year ended December 31,
2009.
In
December 2009, the Company entered into an agreement with a consultant to
provide investor relations and other corporate services to the
Company. In partial consideration for providing services under this
agreement, the Company agreed to issue to the consultant an aggregate of 25,000
shares of Common Stock, with a fair value of $40,000. The issuance of such
securities was approved by the NYSE Amex. The Company has recognized
$40,000 as an operating expense during the year ended December 31,
2009.
In
December 2009, the Company entered into an agreement with a consultant to
provide corporate services to the Company. In partial consideration
for providing services under this agreement, the Company agreed to issue to the
consultant an aggregate of 50,000 shares of Common Stock, with a fair value of
$80,000. The issuance of such securities was approved by the NYSE
Amex. The Company has recognized $80,000 as an operating expense
during the year ended December 31, 2009.
Warrants:
The
Company has issued common stock purchase warrants from time to time to investors
in private placements, certain, vendors, underwriters, and directors and
officers of the Company. A total of 19,838,802 shares of Common Stock are
reserved for issuance upon exercise of outstanding warrants as of December 31,
2009 at prices ranging from $0.50 to $6.56 and expiring through June
2014.
In
January 2008, the Company entered into a one year consulting agreement with a
financial services firm (as described under “Common Stock” above). As
consideration for these services, in February 2008, the Company issued to the
consultant, (i) 50,000 shares of Common Stock; and (ii) two warrants to purchase
an aggregate of 120,000 shares of Common Stock. The first warrant grants the
consultant the right to purchase up to 20,000 shares of Common Stock at a per
share purchase price equal to $2.00; and the second Warrant grants the
consultant the right to purchase up to 100,000 shares of Common Stock at a per
share purchase price equal to $5.00, all as set forth in the warrants. The total
combined fair value of these warrants was $141,304. The warrants shall vest on a
pro rata basis so long as services continue to be provided under the agreement
and are exercisable until January 1, 2013. The issuance of these Warrants
resulted in a charge to operations of $105,855 for the year ended December 31,
2008 and $35,449 for the year ended December 31, 2009. The
issuance of such securities was subject to the approval of the American Stock
Exchange, which approval was obtained in February 2008.
F-25
In May
2008, the Company completed a private placement of securities pursuant to which
$900,000 in gross proceeds was raised (as described under “Common Stock,”
above). Pursuant to the May 2008 private placement, the Company issued to each
Investor Units comprised of one share of Common Stock and one
redeemable five-year warrant to purchase one share of Common Stock at a purchase
price of $1.75 per share (the "Warrants"), at a per-Unit price of $1.20. The
Warrants to purchase an aggregate of 750,006 shares of Common Stock issued in
the May 2008 private placement are not exercisable for a period of six months
and thereafter are exercisable through May 19, 2013, and are redeemable by the
Company at its option, at a redemption price of $.0001 per share, if the Common
Stock trades at a price equal to or in excess of $2.40 for a specified period of
time. The value of these warrants is $403,817. As also described, the
Company issued warrants to purchase an aggregate of 35,703 shares of Common
Stock, with a value of $23,671, in partial payment of finder’s fees (the
“Finder’s Warrants”), which Finder’s Warrants contain generally the same terms
as the Warrants except they contain a cashless exercise feature and have
piggyback registration rights for the resale of the shares underlying the
Finder’s Warrants.
In May
2008, the Company entered into a three month consulting agreement with a public
relations and communications consultant focusing on specific consumer
demographics (as described under “Common Stock,” above). As partial
consideration for these services, the Company issued a five year warrant to
purchase up to 30,000 shares of Common Stock, exercisable as to 10,000 shares
each at $3.00, $4.00 and $5.00, respectively, all as set forth in the Warrant
with a fair value of $19,828. The issuance of the securities under
this agreement was subject to the approval of the American Stock Exchange,
which approval was obtained on June 20, 2008 and the initial payments in Common
Stock and the Warrant were issued. The Warrant is exercisable through
June 19, 2013. The issuance of the Warrant resulted in a charge to
operations of $19,828 during the twelve months ended December 31,
2008.
In June
2008, the Company entered into a six month consulting agreement with an investor
relations advisor (as described under “Common Stock,” above). As
partial consideration for these services, the Company issued to the advisor a
five year warrant (the “Warrant”) to purchase up to 250,000 shares of Common
Stock, with a fair value of $179,485, vesting as to 41,667 shares on
the date of execution of the consulting agreement (the “Execution Date”) and
each of the first, second, third, fourth and fifth monthly anniversaries of the
Execution Date (each, a “Vesting Date”) (except it shall vest as to 41,666
shares on the fourth and fifth anniversaries); provided, that on each Vesting
Date the consulting agreement shall continue to be in effect, at an exercise
price per share as follows: (a) as to 50,000 shares at an exercise price of
$1.00 per share, (b) as to an additional 50,000 shares at an exercise price of
$1.30 per share, (c) as to an additional 50,000 shares at an exercise price of
$1.75 per share; (d) as to an additional 50,000 shares at an exercise price of
$2.00 per share, and (e) as to an additional 50,000 shares at an exercise price
of $3.00 per share, all as set forth in the Warrant. The issuance of
the securities under this agreement was subject to the approval of the
American Stock Exchange, which approval was obtained in June 2008 and the
initial payments in Common Stock and the Warrant were
issued. The Warrant is exercisable until June 19,
2013. Pursuant to the terms of the agreement, and as described under
“Common Stock,” above, the Company was required to prepare and file (and did so
on a timely basis) no later than July 3, 2008, a Registration Statement with the
SEC to register the resale of the shares of Common Stock issued to the
consultant and the shares of Common Stock underlying the Warrant. The issuance
of the Warrant resulted in a charge to operations of $179,485 in
2008.
In July,
2008, in furtherance of the Company’s desire to increase its presence in the
health and wellness industry, the Company entered into a two year consulting
agreement with Margula Company LLC (“Margula”), pursuant to which Margula will
provide various promotional services to the Company, including various speaking
engagements (the “Margula Consulting Agreement”). These services will
be primarily provided through Suzanne Somers. In consideration
therefor, the Company issued to Margula a five year warrant (the “Warrant”) to
purchase up to an aggregate of 600,000 shares of Common Stock at $0.78 per share
(the closing price of the Common Stock on the American Stock Exchange on the
commencement date of the agreement) (the “Commencement Date”), to vest and
become exercisable as to: (i) 200,000 shares upon the completion of a stated
milestone; (ii) 100,000 shares upon the earlier of the completion of a stated
milestone and December 31, 2008; (iii) 100,000 shares upon the earlier of the
completion of an additional stated milestone and December 31, 2008; (iv) 100,000
shares upon the earlier of the completion of a stated milestone and September
30, 2009; and (v) 4,167 shares on each monthly anniversary of the Commencement
Date through July 28, 2010 (with the final monthly vesting being 4,159), so long
as on the respective vesting date the Margula Consulting Agreement shall not
have been terminated. By the close of the year ended December 31,
2008, 400,000 shares had vested based on the achievement of certain milestones
or reaching December 31, 2008 and a total of 16,668 shares had vested on the
monthly anniversaries of the Commencement Date. The effectiveness of the Warrant
was subject to the prior approval of the American Stock Exchange, which was
obtained in September 2008. The value of this Warrant is $387,204 and
the vested portion of this Warrant resulted in a charge to operations of $66,610
and $283,539 in 2009 and 2008, respectively.
In
September 2008, the Company completed the September 2008 private placement (as
described under “Common Stock” above) pursuant to which $1,250,000 in gross
proceeds was raised (the “September 2008 private placement”). Pursuant to the
September 2008 private placement, the Company issued to the Investor, RimAsia
Capital Partners, L.P., one million units (the "Units") at a per-unit
price of $1.25, each Unit comprised of one share of its Common Stock and one
redeemable five-year warrant to purchase one share of Common Stock at a purchase
price of $1.75 per share (the "Warrants"). The Warrants to purchase 1,000,000
shares of the Company’s Common Stock issued in the September 2008 private
placement are not exercisable for a period of six months and are redeemable by
the Company at its option, at a redemption price of $.0001 per share, if the
Common Stock trades at a price equal to or in excess of $3.50 for a specified
period of time or the dollar value of the trading volume of the Common Stock for
each day during a specified period of time equals or exceeds $100,000.The value
of these Warrants is $583,031. The Warrant also provides that in no event may
they be net cash settled.
F-26
In
October 2008, the Company completed the October 2008 private placement pursuant
to which $250,000 in gross proceeds was raised. Pursuant to the October 2008
private placement, the Company issued to the Investor 200,000 units (the
"Units") at a per-unit price of $1.25, each Unit comprised of one share of its
Common Stock and one five-year warrant to purchase one share of Common Stock at
a purchase price of $1.75 per share, with a value of $121,157 (the "Warrants").
The Warrants to purchase 200,000 shares of the Company’s Common Stock issued in
the October 2008 private placement are not exercisable for a period of six
months. The Warrants also provide that in no event may they be net
cash settled.
In
November 2008, Company completed the November 2008 private placement of
securities pursuant to which $500,000 in gross proceeds was raised. Pursuant to
the November 2008 private placement, the Company issued to the Investor 400,000
units (the "Units") at a per-unit price of $1.25, each Unit comprised of one
share of its Common Stock and one redeemable five-year warrant to purchase one
share of Common Stock at a purchase price of $1.75 per share, with a value of
$243,063 (the "Warrants"). The Warrants to purchase an aggregate of 400,000
shares of Common Stock issued in the November 2008 private placement are not
exercisable for a period of six months and the warrants are redeemable by the
Company at its option, at a redemption price of $.0001 per share, if the
underlying Common Stock reaches a trading value of $3.50 for at specified period
of time. The Warrants also provide that in no event may they be net
cash settled.
In
February 2009, the Company issued to a consultant a five year warrant to
purchase 5,000 shares of Common Stock at a purchase price of $1.40 per share,
with a value of $3,338. This warrant was issued in consideration of services
rendered after the expiration of an October 2007 consulting agreement with the
Company pursuant to which this consultant was engaged to create marketing
materials for our sales and marketing staff. The issuance of this warrant was
approved by the NYSE Amex and vested on issuance. The issuance of this warrant
the Company recognized $3,338 as an operating expense during the year ended
December 31, 2009.
In March
2009, the Company entered into an agreement with a consultant to provide
financial market related services for a three month period beginning March
2009. As partial consideration for providing services under this
agreement, the Company agreed to issue to the consultant a five year warrant to
purchase 25,000 shares of restricted Common Stock at a per share exercise price
of $1.00, with a value of $16,867, vesting in its entirety at the end of the
term. The issuance of such securities was approved by the NYSE
Amex, which approval was obtained in May 2009. The Company recognized
$16,867 as an operating expense for during the year ended December 31,
2009.
In the
April and June 2009 Private Placements (described in Note 9 - Redeemable
Preferred Stock, above), as part of the Series D Units issued at $12.50 per
unit, the Company issued 8,800,000 Series D Warrants, and 4,002,800 Series D
Warrants, respectively, to investors, each to purchase one share of Common
Stock. The Company also issued 129,712 Series D Warrants to selling
agents that facilitated the June 2009 Private
Placement. The Series D Warrants have a per share exercise
price equal to $2.50 and are callable by the Company if the Common Stock trades
at a price equal to not less than $3.50 for a specified period of
time. Subject to the affirmative vote of the Company’s shareholders
and the rules of the NYSE Amex, the Series D Warrants are exercisable for a
period of five years. The exercisability of all 12,932,512 Series D
Warrants was submitted for stockholder approval at the NeoStem Special Meeting
of Stockholders held on October 29, 2009, was approved and the Series D Warrants
became exercisable through October 2014. The combined net proceeds
from the two private placements were $15,679,220. Since the April and June 2009
Private Placements represent a combination of equities we are required to
account for the value of all equity securities associated with these private
placements and assign a portion of the net proceeds received to each equity
instrument. We apportioned and assigned the net proceeds of the two private
placements as follows: the value assigned to the Series D Stock was $7,685,768,
which includes the contingent value of the beneficial conversion to common stock
of $6,618,000, and the value assigned to the Series D Warrants was
$7,983,452.
On May
2009, the Company entered into a three year consulting agreement effective March
3, 2009 (the “Effective Date”) whereby the consultant would provide to the
Company consulting services in the area of stem cell therapy in orthopedics for
the development of business in Asia. Pursuant to this agreement, as
partial compensation for such services, the Company agreed to issue to this
consultant a warrant to purchase up to an aggregate of 24,000 shares of Common
Stock at an exercise price of $0.50 (the closing price of the Common Stock on
the Effective Date) which shall vest and become exercisable as to one-third of
such shares on each of the first, second and third anniversaries of the
Effective Date. The value of such warrants is approximately
$27,163. The issuance of such securities was approved by the NYSE
Amex. The Company has recognized $6,036 as an operating expense during the year
ended December 31, 2009.
F-27
In
October 2009, in connection with the Merger, warrants to purchase shares of CBH
Common Stock (other than warrants held by RimAsia) were replaced with new
NeoStem Class E warrants or were otherwise cancelled in accordance with the
terms of such holder’s existing warrant. Class E warrants to purchase an
aggregate of 192,308 shares of NeoStem common stock at an exercise price of
$6.50 per share and an aggregate of 1,410,883 shares of NeoStem common stock at
an exercise price of $6.56 per share, are effectively outstanding as of
October 30, 2009. The fair value of these warrants was $590,790.
On
October 30, 2009, NeoStem repriced privately issued warrants (warrants issued
other than to the public or the underwriters in NeoStem’s August 2007 public
offering) to purchase approximately 1,203,890 shares of Common Stock with
exercise prices ranging from $4.00 to $8.00, to a range of approximately $3.82
to $6.18. Certain named executive officers of NeoStem are holders of
warrants to purchase shares of NeoStem Common Stock at $8.00 per share for which
their exercise prices were reduced to approximately $6.18 per share. An
aggregate of 27,427 of such warrants are held by named executive officers in the
following quantities: NeoStem’s Chief Executive Officer 25,427 warrants and
NeoStem’s General Counsel 2,000 warrants; and an aggregate of 34,092 of such
warrants are held by two non-employee directors. This repricing of warrants
resulted in a charge of $66,325 to operations for the year ended December 31,
2009.
Warrant
activity is as follows:
|
Number of
Shares
|
Weighted
Average Exercise Price
|
Weighted
Average Remaining Contractual Term (years)
|
Aggregate
Intrinsic Value
|
|||||||||||||
|
Balance
December 31, 2008
|
5,322,333 | $ | 3.31 | |||||||||||||
|
Granted
|
14,639,703 | 2.94 | ||||||||||||||
|
Exercised
|
- | |||||||||||||||
|
Expired
|
(123,234 | ) | 7.86 | |||||||||||||
|
Cancelled
|
- | |||||||||||||||
|
Balance
December 31, 2009
|
19,838,802 | $ | 3.00 | 3.73 | $ | 541,700 | ||||||||||
At
December 31, 2009 the outstanding warrants by range of exercise prices are as
follows:
|
Weighted
Average
|
||||||
|
Number
Outstanding
|
Remaining
|
Number
Exercisable
|
||||
|
Exercise
Price
|
December
31, 2009
|
Contractual
Life (years)
|
December
31, 2009
|
|||
|
$0.50
to $2.80
|
16,242,221
|
4.20
|
16,189,060
|
|||
|
$2.80
to $5.10
|
311,511
|
2.85
|
311,511
|
|||
|
$5.10
to $6.56
|
3,285,070
|
1.49
|
3,285,070
|
|||
|
19,838,802
|
3.00
|
19,785,641
|
||||
Options:
The
Company’s 2003 Equity Participation Plan (the “2003 EPP”) permits the grant of
share options and shares to its employees, Directors, consultants and advisors
for up to 2,500,000 shares of Common Stock as stock compensation. All
stock options under the 2003 EPP are generally granted at the fair market value
of the Common Stock at the grant date. Employee stock options vest ratably over
a period determined at time of grant and generally expire 10 years from the
grant date.
On May 8,
2009, the stockholders of the Company at its annual meeting of stockholders
adopted the 2009 Equity Plan, which previously had been approved by the Board of
Directors subject to stockholder approval on April 9, 2009. The 2009
Equity Plan makes up to 3,800,000 shares of Common Stock of the Company
available for issuance to employees, consultants, advisors and directors of the
Company and its subsidiaries pursuant to incentive or non-statutory stock
options, restricted and unrestricted stock awards and stock appreciation
rights.
F-28
On
October 29, 2009, the stockholders of NeoStem approved and the Company amended
its 2009 Equity Compensation Plan (the "2009 Plan") to increase the number of
shares of common stock available for issuance under the 2009 Plan from
3,800,000, to 9,750,000.
The
2003 Equity Plan and the 2009 Equity Plan are sometimes collectively referred to
as the Company’s “U.S. Equity Plan.”
On
October 29, 2009, the stockholders of NeoStem adopted the Non-US Based Equity
Compensation Plan (“Non-US Plan”) at the special meeting of NeoStem stockholders
and authorized that 4,700,000 shares be reserved for this
plan. Persons eligible to receive restricted and unrestricted stock
awards, warrants, stock appreciation rights or other awards under the Non-U.S.
Plan are those service providers to NeoStem and its subsidiaries and affiliates
providing services outside of the United States, including employees and
consultants of NeoStem and its subsidiaries and affiliates, who, in the opinion
of the Compensation Committee, are in a position to contribute to NeoStem’s
success. On October 29, 2009, upon the adoption of the Non-US
Plan, NeoStem issued 100,000 shares of common stock and warrants (option-like
equity grants) to purchase an aggregate of 1,350,000 shares of common
stock.
Effective
January 1, 2006, the Company’s option plans have been accounted for in
accordance with the recognition and measurement provisions of ASC 718-10,
718-20 and 505-50. ASC 718-10, 718-20 and 505-50 require compensation costs
related to share-based payment transactions, including employee stock options,
to be recognized in the financial statements. In addition, the Company adheres
to the guidance set forth within Securities and Exchange Commission ("SEC")
Staff Accounting Bulletin ("SAB") No. 107, which provides the Staff's views
regarding the interaction between ASC 718-10, 718-20 and 505-50 and certain SEC
rules and regulations and provides interpretations with respect to the valuation
of share-based payments for public companies.
The
twelve month periods ended December 31, 2009, 2008 and 2007 include share-based
compensation expense totaling $7,380,208, $1,986,103 and $2,207,816,
respectively. Stock option compensation expense in 2008, 2007 and 2006 is the
estimated fair value of options granted amortized on a straight-line basis over
the requisite service period for entire portion of the award and those options
that vested upon the accomplishment of business milestones. Options vesting on
the accomplishment of business milestones will not be recognized for
compensation purposes until such milestones are accomplished. At December 31,
2009 there were options to purchase 973,575 shares outstanding that will vest on
the accomplishment of certain business milestones.
The
weighted average estimated fair value of stock options granted in the years
ended December 31, 2009, 2008 and 2007 were $1.96, $1.45 and $2.27. The fair
value of options at the date of grant was estimated using the Black-Scholes
option pricing model. The expected volatility is based upon historical
volatility of our stock and other contributing factors. The expected term is
based upon observation of actual time elapsed between date of grant and exercise
of options for all employees. Previously such assumptions were
determined based on historical data.
The range
of assumptions made in calculating the fair values of options are as follows
(the same assumptions were used for warrants):
|
Year Ended
|
Year Ended
|
Year
Ended
|
||||
|
December
31, 2009
|
December
31, 2008
|
December
31, 2007
|
||||
|
Expected
term (in years)
|
10
|
10
|
10
|
|||
|
Expected
volatility
|
149%
- 217%
|
100%
- 181%
|
118%
- 346%
|
|||
|
Expected
dividend yield
|
0%
|
0%
|
0%
|
|||
|
Risk-free
interest rate
|
2.98%
- 3.81%
|
3.64%
- 4.19%
|
4.06%
- 4.95%
|
F-29
Stock
option activity under the U.S. Equity Plan is as follows:
|
Number
of Shares
(1)
|
Weighted
Average
Exercise
Price
|
Weighted
Average Remaining
Contractual
Term
|
Average
Intrinsic Value
|
|||||||||||||
|
Balance
at December 31, 2007
|
1,113,800 | $ | 5.66 | |||||||||||||
|
Granted
|
928,000 | $ | 1.52 | |||||||||||||
|
Exercised
|
(2,500 | ) | $ | 0.75 | ||||||||||||
|
Expired
|
- | |||||||||||||||
|
Cancelled
|
(314,000 | ) | $ | 2.82 | ||||||||||||
|
Balance
at December 31, 2008
|
1,725,300 | $ | 3.96 | |||||||||||||
|
Granted
|
6,727,274 | $ | 1.85 | |||||||||||||
|
Exercised
|
- | |||||||||||||||
|
Expired
|
(2,000 | ) | ||||||||||||||
|
Cancelled
|
(110,000 | ) | ||||||||||||||
|
Balance
at December 31, 2009
|
8,340,574 | $ | 1.93 | 8.91 | $ | 66,210 | ||||||||||
|
Vested
and Exercisable at December 31, 2009
|
4,087,944 | $ | 60,285 | |||||||||||||
|
Number
Outstanding 12/31/2009
|
Weighted
Average Remaining
|
Number
Exercisable 12/31/2009
|
||||
|
Exercise Price
|
||||||
|
$ 0.71
to $ 3.57
|
8,168,524
|
9.0
|
3,919,894
|
|||
|
$ 3.57
to $ 6.43
|
146,700
|
2.5
|
144,700
|
|||
|
$ 6.43
to $ 9.28
|
6,750
|
6.9
|
4,750
|
|||
|
$ 9.28
to $12.14
|
7,500
|
4.4
|
7,500
|
|||
|
$12.14
to $15.00
|
11,100
|
4.1
|
11,100
|
|||
|
8,340,574
|
4,087,944
|
Stock
option activity under the Non U.S. Equity Plan is as follows
|
Number
of
Shares
(1)
|
Range
of
Exercise
Price
|
Weighted
Average
Exercise
Price
|
Weighted
Average
Remaining
Contractual
Term
|
Average
Intrinsic
Value
|
||||||||||||||||
|
Balance
at December 31, 2008
|
- | $ | - | |||||||||||||||||
|
Granted
|
1,650,000 | 2.04 | 2.04 | |||||||||||||||||
|
Exercised
|
- | - | ||||||||||||||||||
|
Expired
|
- | - | ||||||||||||||||||
|
Cancelled
|
- | - | ||||||||||||||||||
|
Balance
at December 31, 2009
|
- | - | - | |||||||||||||||||
| 1,650,000 | $ | 2.04 | $ | 2.04 | 9.8 | $ | - | |||||||||||||
|
Exercise
Price
|
Number
Outstanding
December
31, 2009
|
Weighted
Average
Remaining
Contractual Life
(years)
|
Number
Exercisable
December
31, 2009
|
|||
|
2.04
|
1,650,000
|
9.8
|
50,000
|
|||
|
1,650,000
|
9.8
|
50,000
|
F-30
The
summary of options vesting during 2009 is as follows:
|
U.S.
Equity Plan
|
Non
U.S. Equity Plan
|
|||||||||||||||
|
Options
|
Weighted
Average Grant Date Fair Value
|
Options
|
Weighted
Average Grant Date Fair Value
|
|||||||||||||
|
Non-Vested
at December 31, 2008
|
435,250 | $ | 2.93 | - | $ | - | ||||||||||
|
Issued
|
6,727,271 | 1.83 | 1,650,000 | $ | 2.01 | |||||||||||
|
Canceled
|
(112,000 | ) | 1.73 | - | $ | - | ||||||||||
|
Vested
|
(2,797,894 | ) | 1.98 | (50,000 | ) | $ | 2.01 | |||||||||
|
Exercised
|
- | - | - | $ | - | |||||||||||
|
Non-Vested
at December 31, 2009
|
4,252,627 | $ | 1.85 | 1,600,000 | $ | 2.01 | ||||||||||
(1) --
All options are exercisable for a period of ten years.
Options
exercisable at December 31, 2008 – 1,290,050 at a weighted average exercise
price of $4.29.
Options
exercisable at December 31, 2009 – 4,137,944 at a weighted average exercise
price of $2.01.
The total
value of shares vested during the year ended December 31, 2009 was
$7,380,208.
The
number of remaining shares authorized to be issued under the various equity
plans are as follows:
|
US
Equity Plan
|
Non
US Equity Plan
|
|||||||
|
Shares
Authorized for Issuance under 2003 Equity Plan
|
2,500,000 | |||||||
|
Shares
Authorized for Issuance under 2009 Equity Plan
|
9,750,000 | |||||||
|
Shares
Authorized for Issuance under Non US Equity Plan
|
4,700,000 | |||||||
| 12,250,000 | 4,700,000 | |||||||
|
Outstanding
Options - US Equity Plan
|
(8,343,074 | ) | ||||||
|
Outstanding
Options - Non US Equity Plan
|
(1,650,000 | ) | ||||||
|
Common
shares issued under the option plans
|
(2,125,956 | ) | (875,000 | ) | ||||
|
Total
Common Shares remaining to be issued under the Option
Plans
|
1,780,970 | 2,175,000 | ||||||
Options
are usually granted at an exercise price at least equal to the fair value of the
Common Stock at the grant date and may be granted to employees, Directors,
consultants and advisors of the Company. As of December 31, 2009,
there was approximately $9,520,000 of total unrecognized compensation costs
related to unvested stock option awards of which $7,609,000 of unrecognized
compensation expense is related to stock options that vest over a weighted
average life of 1.6 years. The balance of unrecognized compensation costs,
$1,911,000, is related to stock options that vest based on the accomplishment of
business milestones.
On
October 30, 2009, NeoStem amended its 2003 Equity Participation Plan (the “2003
Plan”) to grant the NeoStem Board of Directors or an appropriate committee
thereof the authority to reprice options, (ii) a one-time repricing of the
exercise price of certain NeoStem options and warrants to purchase shares of
NeoStem Common Stock (the “Repricing”) and (iii) giving the Board of Directors
or an appropriate committee thereof discretion to issue certain cash or equity
awards in connection with the Repricing. On October 30, 2009, NeoStem
implemented the Repricing. NeoStem repriced an aggregate of 754,250
outstanding options (of which 500,500 were held by executive officers and none
were held by non-employee directors) with an original range of exercise prices
from $2.39 to $25.00 to an exercise price of $1.90. As a result of this
repricing the Company recognized an additional expense of
$36,836.
F-31
Note 11 – Income
Taxes
Net
deferred tax assets consisted of the following as of December 31:
|
2009
|
2008
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Net
operating loss carryforwards
|
$ | 11,760,000 | $ | 12,582,000 | ||||
|
Stock
option compensation
|
5,388,000 | 2,059,000 | ||||||
|
Other equity
compensation
|
894,000 | 649,000 | ||||||
|
Provision
for doubtful accounts
|
13,000 | 18,000 | ||||||
|
Deferred
revenue
|
121,000 | 4,000 | ||||||
|
Deferred
legal and other fees
|
38,000 | 37,000 | ||||||
|
Deferred
tax assets
|
18,214,000 | 15,349,000 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Amortization of
Goodwill
|
(65,000 | ) | (47,000 | ) | ||||
|
Depreciation
and amortization
|
(29,000 | ) | (5,000 | ) | ||||
|
Non-employee
equity compensation
|
(913,000 | ) | (611,000 | ) | ||||
|
Deferred
tax liability
|
(1,007,000 | ) | (663,000 | ) | ||||
|
Net
deferred tax assets before valuation allowance
|
17,207,000 | 14,686,000 | ||||||
|
Net
deferred tax asset valuation allowance
|
(17,207,000 | ) | (14,686,000 | ) | ||||
| - | - | |||||||
The
provision for income taxes is different than the amount computed using the
applicable statutory federal income tax rate with the difference for each year
summarized below:
|
2009
|
2008
|
2007
|
||||||||||
|
Federal
tax benefit at statutory rate
|
(34.0 | %) | (34.0 | %) | (34.0 | %) | ||||||
|
State
and local tax benefit at statutory rate
|
(10.2 | %) | (9.5 | %) | (9.5 | %) | ||||||
|
Permanent
non deductible expenses
|
12.7 | % | ||||||||||
|
Foreign
tax differential
|
1.1 | % | ||||||||||
|
Writedown
due of NOL's due section 382 limitations
|
23.4 | % | ||||||||||
|
Change
in valuation allowance
|
8.4 | % | 43.5 | % | 43.5 | % | ||||||
|
Provision
for income taxes
|
1.4 | % | 0.00 | % | 0.00 | % | ||||||
The Tax
Reform Act of 1986 enacted a complex set of rules limiting the utilization of
net operating loss carryforwards to offset future taxable income following a
corporate ownership change. The Company’s ability to utilize its NOL
carryforwards is limited following a change in ownership in excess of fifty
percentage points during any three-year period.
Since the
year 2000 the Company has had several changes in ownership which has resulted in
a limitation on the Company’s ability to apply net operating losses to future
taxable income as of December 31 2009 approximately $7,000,000 of net operating
losses had expired due these limitations. At December 31, 2009, the Company had
net operating loss carryforwards of approximately $26,450,000 applicable to
future Federal income taxes. The tax loss carryforwards are subject to annual
limitations and expire at various dates through 2029. The Company has recorded a
full valuation allowance against its net deferred tax asset because of the
uncertainty that the utilization of the net operating loss and deferred revenue
and fees will be realized. The change in valuation allowance for 2009
is $2,521,000.
F-32
Note 12 – Segment
Information
Historically,
the Company’s operations have been conducted in only one geographical segment
and since March 31, 2007 the Company has realized revenue only from the banking
of adult autologous stem cells. In September, 2009 the Company established
NeoStem (China), Inc. (“NeoStem China” or the “WFOE”) as a wholly foreign owned
subsidiary of NeoStem. The WFOE is domiciled in Qingdao and under its scope of
business approved by the Chinese regulatory authorities, the WFOE may engage in
the research & development, transfer and technological consultation service
of bio-technology, regenerative medical technology and anti-aging technology
(excluding the development or application of human stem cell, gene diagnosis and
treatment technologies); consultation of economic information; import, export
and wholesaling of machinery and equipments (the import and export do not
involve the goods specifically stipulated in/by state-operated trade, import
& export quota license, export quota bidding, export permit, etc.). In
furtherance of complying with PRC’s foreign investment prohibition on stem cell
research and development, clinical trials and related activities, we conduct our
current business in the PRC via two domestic variable interest entities. To date
these operations in China have been limited. On October 30, 2009, the Company
acquired China Biopharmaceuticals Holdings, Inc. CBH’s principal
asset is a 51% ownership interest in Suzhou Erye Pharmaceuticals Company Ltd.
(“Erye”), a Sino-foreign joint venture with limited liability organized under
the laws of the People’s Republic of China. Erye specializes in
research and development, production and sales of pharmaceutical products, as
well as chemicals used in pharmaceutical products.
Our
segment data is as follows:
|
For
the twelve months
|
||||||||||||
|
ended
December 31
|
||||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
United
States
|
||||||||||||
|
Stem
Cell Revenues
|
$ | 172,078 | $ | 83,541 | $ | 231,664 | ||||||
|
Other
Revenues
|
6,320 | - | - | |||||||||
|
China
|
||||||||||||
|
Prescription
drugs and intermediary pharmaceutical products
|
11,347,949 | - | - | |||||||||
|
Other
Revenues
|
38,771 | - | - | |||||||||
| $ | 11,565,118 | $ | 83,541 | $ | 231,664 | |||||||
|
Income/(loss)
from operations:
|
||||||||||||
|
United
States
|
$ | (18,089,802 | ) | $ | (9,233,453 | ) | $ | (10,438,836 | ) | |||
|
China
|
(5,710,660 | ) | - | - | ||||||||
| $ | (23,800,462 | ) | $ | (9,233,453 | ) | $ | (10,438,836 | ) | ||||
|
Total
Assets
|
||||||||||||
|
United
States
|
$ | 43,998,687 | $ | 1,824,316 | $ | 3,775,149 | ||||||
|
China
|
62,036,114 | |||||||||||
Note 13 – Modification of
Revenue Recognition Policy
During
the quarter ended June 30, 2009, the Company modified its revenue recognition
policy relative to the license fees it recognizes from physicians seeking to
establish autologous adult stem cell collection centers, to recognize such fees
as revenues ratably over the appropriate period of time to which the revenue
element relates. Previously these license fees were recognized in full when
agreements were signed and the physician had been qualified by the Company’s
credentialing committee. In previous reports we have described these fees as
“start-up” fees. Effective with the filing of the Form 10-Q for the quarterly
period ended June 30, 2009, we have re-characterized these fees as license fees
in order to better describe the nature of the relationship between NeoStem and
these physicians and physician practices and the nature of the fees received. If
this modified revenue recognition policy had been in place during the year ended
December 31, 2006 and in each subsequent reporting period, the impact of
accounting for revenues and its corresponding impact on net loss for each of the
years ended December 31, 2009, 2008 and 2007 would have been as follows,
reflecting for each such period the relevant amounts as reported and as if
adjusted:
F-33
|
2009
|
2008
|
2007
|
||||||||||
|
Total
Stem Cell Revenue and other license revenue as reported
|
$ | 178,398 | $ | 83,541 | $ | 231,664 | ||||||
|
Total
Stem Cell Revenue and other license revenue if adjusted
|
200,662 | 145,924 | 57,148 | |||||||||
|
Bad
Debt Expense as Reported
|
- | 21,500 | 19,500 | |||||||||
|
Bad
Debt Expense if Adjusted
|
- | 9,450 | 4,500 | |||||||||
|
Net
Loss as Reported
|
(24,183,850 | ) | (9,242,071 | ) | (10,445,473 | ) | ||||||
|
Net
Loss if Adjusted
|
(24,161,586 | ) | (9,167,638 | ) | (10,604,989 | ) | ||||||
|
Change
|
$ | 22,264 | $ | 74,433 | $ | (159,516 | ) | |||||
|
%
of Net Loss
|
.09 | % | 0.81 | % | 1.53 | % | ||||||
The
Company has determined that this modification of our revenue recognition policy
does not require a retroactive application to our previously issued financial
statements for the periods set forth above because the impact on the financial
statements taken as a whole during such periods is not
material.
Note 14 – Related Party
Transactions
In
October 2007, the Company entered into a three month consulting agreement with
Matthew Henninger pursuant to which he agreed to provide services as a business
consultant in areas requested by the Company, including financial analysis
projects and acquisition target analysis. As compensation for these
services, pursuant to the agreement he was entitled to receive a cash fee of
$8,333 payable each month during the term of the agreement as well as a fee in
the event a transaction was effected during the term as a result of the
performance of the consultant’s services. In January 2008, the
Company and the consultant entered into an agreement whereby the consultant
agreed to accept in satisfaction of his final payment under the agreement, 4,902
shares of the Company’s Common Stock issued under and pursuant to the terms of
the Company’s 2003 EPP based on the fair market value of the Common Stock on the
date of approval by the Compensation Committee of the Company’s Board of
Directors. The fair value of these shares was $8,333 and charged to consulting
expense in 2008. No other fee was paid. The consultant is
currently in an exclusive relationship with the Company’s Chief Executive
Officer.
Pursuant
to the terms and subject to the conditions set forth in the Merger Agreement,
all of the shares of common stock, par value $.01 per share, of CBH, or CBH
Common Stock, issued and outstanding immediately prior to the effective time of
the Merger, or the Effective Time, were converted into the right to receive, in
the aggregate, 7,150,000 shares of our Common Stock. Additionally, subject to
the cancellation of outstanding warrants to purchase shares of CBH Common Stock
held by RimAsia (a beneficial holder of more than 5% of our voting securities),
and the sole holder of shares of Series B Convertible Preferred Stock, par value
$0.01 per share, of CBH, or the CBH Series B Preferred Stock, all of the shares
of CBH Series B Preferred Stock issued and outstanding immediately prior to the
Effective Time were converted into the right to receive, in the aggregate, (i)
6,458,009 shares of our common stock (having an approximate value of $12,270,217
as of the Effective Time) and (ii) 8,177,512 shares of our Series C Preferred
Stock (having an approximate value of $17,263,600 as of the Effective Time),
each with a liquidation preference of $1.125 per share and convertible into
9,086,124 shares of our common stock at an initial exercise price of
$0.90.
At the
Effective Time, we issued 9,532 shares of our common stock (having an
approximate value of $18,110) to Stephen Globus, a director of CBH, and 7,626
shares of our common stock (having an approximate value of $14,489) to Chris
Peng Mao, then the Chief Executive Officer of CBH, in exchange for the
cancellation and the satisfaction in full of indebtedness in the aggregate
principal amount of $90,000, plus any and all accrued but unpaid interest
thereon, and other obligations of CBH to Messrs. Globus and Mao. Additionally,
we agreed to bear 50% of up to $450,000 of CBH’s expenses post-Merger, and
satisfaction of the liabilities of Messrs. Globus and Mao will count toward that
obligation.
For
assistance in effecting the Merger, 125,000 shares of our common stock (having
an approximate value of $237,500) were issued to EET, the holder of a 49%
interest in Erye. In addition, an aggregate of 203,338 shares of our common
stock (having an approximate value of $386,350) is being issued to Shi Mingsheng
(an officer and director of Erye and the majority shareholder of EET and
nominated as our director) and Madam Zhang Jian (an officer and director of CBH,
an officer of Erye and a significant shareholder of EET).
As a
result of the Merger, we own 51% of Erye, and EET owns the remaining 49%
ownership interest. In connection with the Merger, we and EET negotiated a
revised joint venture agreement which, subject to finalization and approval by
the requisite PRC governmental authorities, will govern our respective rights
and obligations with respect to Erye. Pursuant to the terms and conditions of
the revised joint venture agreement, dividend distributions to EET and NeoStem
will be made in proportion to their respective ownership interests in Erye;
provided, however, that for the three-year period commencing on the first day of
the first fiscal quarter after the joint venture agreement becomes effective,
(i) 49% of undistributed profits (after tax) will be distributed to EET and lent
back to Erye by EET for use by Erye in connection with the construction of a new
plant for Erye; (ii) 45% of the net profit (after tax) will be provided to Erye
as part of the new plant construction fund, which will be characterized as
paid-in capital for our 51% interest in Erye; and (iii) 6% of the net profit
will be distributed to us directly for our operating expenses. In the event of
the sale of all of the assets of Erye or liquidation of Erye, we will be
entitled to receive the return of such additional paid-in capital before
distribution of Eyre’s assets is made based upon the ownership percentages of
NeoStem and EET, and upon an initial public offering of Erye which raises at
least 50,000,000 RMB (or approximately U.S. $7,300,000), we will be entitled to
receive the return of such additional paid-in capital.
F-34
In
connection with the Merger, the exercise price of certain of our outstanding
warrants was reduced. Certain of our executive officers and directors held
warrants to purchase our common stock at $8.00 per share, and following the
Merger, the exercise price of such warrants was reduced to approximately $6.18
per share. These warrants are held by our Chairman and CEO - Robin L. Smith
(25,427), our Vice President and General Counsel - Catherine M. Vaczy (2,000),
and our directors - Richard Berman (11,364) and Steven Myers
(22,728).
In
connection with the Merger, each of the then officers and directors of CBH, and
each of RimAsia (then a beneficial holder of more than 5% of our voting
securities), Erye and EET, as well as certain holders of CBH Common Stock at the
Effective Time, entered into a lock-up and voting agreement, pursuant to which
they agreed to vote their shares of CBH Common Stock in favor of the Merger and
to the other transactions contemplated by the Merger Agreement and agreed
not to sell their CBH Common Stock and/or our common stock from November 2, 2008
through the expiration of the six-month period immediately following the
consummation of the Merger . Similarly, our officers and directors entered into
a lock-up and voting agreement, pursuant to which they agreed to vote their
shares of our common stock in favor of the Merger and to the other transactions
contemplated by the Merger Agreement and agreed not to sell their shares of our
common stock during the same period.
Robin L.
Smith, our Chairman and Chief Executive Officer, and Steven Myers, a member of
our Board of Directors and Audit, Compensation and Nominating Committees (of
which Nominating Committee Mr. Myers became Chairman in March 2009), were
holders of CBH Common Stock at the time. Dr. Smith was the beneficial owner of
389,966 shares of CBH Common Stock that were acquired commencing in 2005. Mr.
Myers was the beneficial owner of 285,714 shares of CBH Common Stock that were
acquired in 2005. Based on the $2.03 closing price of our common stock on
September 18, 2009 and the conversion of CBH Common Stock into our Common Stock
in the Merger, the approximate transaction value of the holdings in CBH of each
of Dr. Smith and Mr. Myers was $152,126 and $111,457, respectively.
In our
private placement of units in November 2008, Fullbright (then a beneficial
holder of more than 5% of our voting securities), a corporation organized in the
British Virgin Islands, and the principal shareholders of which are Madam Zhang
Jian, then an officer and director of CBH and an officer of Erye, Shi Mingsheng,
then an officer and director of CBH, a director of Erye and Chairman of
Fullbright, and Ding Weihua, then a director of CBH, purchased 400,000 units for
an aggregate consideration of $500,000. The per unit price was $1.25 and each
unit was comprised of one share of our common stock and one redeemable five-year
warrant to purchase one share of our common stock at a purchase price of $1.75
per share. In connection with Fullbright’s purchase of the units, EET, the
principal shareholders of which are also the principal shareholders of
Fullbright, borrowed $500,000 from RimAsia, and the units acquired by Fullbright
were pledged to RimAsia as collateral therefor. Further, in our June/July 2009
private placement, Fullbright acquired, for a purchase price of $800,000, 64,000
shares of our Series D Stock, together with warrants to purchase 640,000 shares
of our common stock.
In the
November 2008 private placement (see Note 10, Common Stock, above), Fullbright
Finance Limited, a corporation organized in the British Virgin Islands, the
principal shareholders of which are Liu Xiaohao, former Senior Vice President of
CBH, Shi Mingsheng, former Chief Operating Officer of CBH and a director of the
Company commencing in March 2010 and Ding Weihua, a former director of CBH,
purchased 400,000 units for an aggregate consideration of $500,000, each unit
comprised of one share of NeoStem Common Stock and one redeemable five-year
warrant to purchase one share of NeoStem Common Stock at a purchase price of
$1.75 per share, at a per-unit price of $1.25. In connection with
Fullbright's purchase of the units, EET, the principal shareholders of which are
also the principal shareholders of Fullbright, borrowed $500,000 from RimAsia
Capital Partners, L.P. (a principal stockholder of the Company), and the units
acquired by Fullbright were pledged to RimAsia as collateral
therefor.
On
February 25, 2009 and March 6, 2009, respectively, we issued promissory notes,
or the Notes, to RimAsia (then a beneficial holder of more than 5% of our voting
securities) in the principal amounts of $400,000 and $750,000, respectively. The
Notes had an interest rate of 10% per annum and were due and payable on October
31, 2009 or earlier, in the event we raised over $10 million through an equity
financing. The Notes contained standard events of default and in the event of a
default that is not subsequently cured or waived, the interest rate would have
increased to a rate of 15% per annum and, at the option of RimAsia and upon
notice, the entire unpaid principal balance together with all accrued interest
thereon would have been immediately due and payable. The Notes or any portion
thereof could have been prepaid at any time and from time to time at our
discretion without premium or penalty.
F-35
In April
2009, RimAsia (then a beneficial holder of more than 5% of our voting
securities) purchased our Series D Convertible Redeemable Preferred Stock and
warrants for aggregate consideration of $5,000,000. A portion of the proceeds
were used to repay the principal and interest on the Notes issued to RimAsia in
February and March 2009 and certain other costs advanced by RimAsia in
connection with our expansion activities in China. Mr. Wei, now our director, is
managing partner of RimAsia.
On April
23, 2009, we entered into a Consulting Agreement with Shandong Life Science and
Technology Research Institute, or SLSI, of which Ms. Cai Jianqian is President.
Ms. Cai is the mother of former CBH Chief Executive Officer Chris Peng Mao who
is currently the Company’s Director, Asian Expansion and Strategic Development.
Ms. Cai also was CBH stockholder at the time we entered into the Consulting
Agreement. Pursuant to the Consulting Agreement, Ms. Cai will provide consulting
services to us in the area of business development, strategic planning and
government affairs in the healthcare industry in the PRC. In return for the
consulting services, we have agreed to pay SLSI an annual fee of $100,000 and we
issued SLSI 250,000 warrants under our 2009 Non-U.S. Plan, to become exercisable
over approximately a two year period. In addition, in connection with expanding
our relationship with SLSI in July 2009, we agreed to grant to SLSI an
additional 100,000 shares under the 2009 Non-U.S. Plan (having an approximate
value of $204,000). Grants under the 2009 Non-U.S. Plan will be subject to,
among other things, applicable law including any required registration in the
PRC.
Robin
Smith, the Company’s Chairman and Chief Executive Officer, and Steven Myers, a
member of the Company’s Board of Directors and Audit, Compensation and
Nominating Committees, are holders of CBH Common Stock. Accordingly,
a special committee of the Company’s Board of Directors (comprised of Mark
Weinreb, Richard Berman and Joseph Zuckerman) approved on behalf of the Company
the execution of the Merger Agreement and the transactions contemplated
thereby.
On April
30, 2009 the Company entered into a License and Referral Agreement with
Promethean Corporation (“Promethean”) through its subsidiary Ceres Living, Inc.
(“Ceres”) to use certain Company marks and publications in connection with
certain sales and marketing activities relating to its nutritional supplement
known as AIO Premium Cellular (the “Product”); and in connection with the
license, Ceres will pay to the Company or the Stem for Life Foundation specified
fees for each unit of the Product sold; and Ceres shall
engage in a referral service with respect to the Company’s adult stem cell
collection and storage activities. Ceres will receive a specified fee from the
Company for each client referred who completes and pays for a stem cell
collection. The term of the agreement is three years with each party having the
right to renew annually, thereafter. The CEO of Promethean is in an exclusive
relationship with the CEO of the Company. The Company has earned $6,320 in
royalties in connection with this agreement.
As part
of the stem cell initiatives undertaken by NeoStem, on June 15, 2009, NeoStem
signed a ten-year, exclusive, royalty bearing agreement with Enhance BioMedical
Holdings Limited (“Enhance”) to provide Enhance with the training, technical,
and other assistance required for Enhance to offer stem cell based therapies in
Taiwan, Shanghai, and five other provinces in eastern China including Jiangsu,
Zhejiang, Fujian, Anhui and Jiangxi. This agreement also gives NeoStem the
option to acquire up to a 20% fully diluted equity interest in Enhance for a
period of five years. NeoStem will receive certain milestone payments as well as
be entitled to a stated royalty on the revenues derived from Enhance’s offering
these stem cell based therapies. Enhance was an investor in the April
2009 Private Placement, pursuant to which it purchased $5 million of Series D
Units, and thus acquired 400,000 shares of Series D Stock (convertible into
4,000,000 shares of Common Stock upon stockholder approval) and 4,000,000 Series
D Warrants, each to purchase one share of Common Stock at an exercise price of
$2.50 per share (to become exercisable upon stockholder approval).
Pursuant
to the terms and conditions of the Joint Venture Agreement, dividend
distributions to EET and Merger Sub will be made in proportion to their
respective ownership interests in Erye; provided, however, that for the
three-year period commencing on the first day of the first fiscal quarter after
the Joint Venture Agreement becomes effective distributions will be made as
follows: (i) the 49% of undistributed profits (after tax) of the joint venture
due EET will be distributed to EET and lent back to Erye to help finance costs
in connection with their construction of and relocation to a new facility and;
(ii) of the net profit (after tax) of the joint venture due Merger Sub, 45% will
be provided to Erye as part of the new facility construction fund and will be
characterized as paid-in capital for Merger Sub’s 51% interest in Erye, and 6%
will be distributed to Merger Sub directly.
At
December 31, 2009, Erye owed EET $7,234,293. Included in the amount
owed to EET are:
|
·
|
Dividends
paid and loaned back to Erye amounting to $7,692,265 and accrued interest
of $334,988, the interest rate on this loan is
5.31%.
|
|
·
|
A
second note related to a 2008 loan in the amount of
$409,997,
|
|
·
|
Advances
to EET of $1,026,965, and
|
|
·
|
A
receivable due from EET of
$175,992.
|
The 2008
note is a non-interest bearing note. Total interest for the two
months that the Company owned Erye amounted to $68,077.
F-36
Note 15 – Commitments and
Contingencies
On
May 26, 2006, the Company entered into an employment agreement with
Dr. Robin L. Smith, pursuant to which Dr. Smith serves as the Chief
Executive Officer of the Company. This agreement was for a period of
two years, which term could be renewed for successive one-year terms unless
otherwise terminated by Dr. Smith or the Company. The effective date of
Dr. Smith’s employment agreement was June 2, 2006, the date of the
initial closing under the securities purchase agreement for the June 2006
private placement.
On
January 26, 2007, in connection with the January 2007 private placement, the
Company entered into a letter agreement with Dr. Smith, pursuant to which Dr.
Smith’s employment agreement dated as of May 26, 2006 was amended to provide
that: (a) the term of her employment would be extended to December
31, 2010; (b) upon the first closings in the January 2007 private placement, Dr.
Smith’s base salary would be increased to $250,000; (c) her base salary would be
increased by 10% on each one year anniversary of the agreement; (d) no cash
bonus would be paid to Dr. Smith for 2007; and (e) cash bonuses and stock awards
under the Company’s 2003 EPP would be fixed at the end of 2007 for 2008, in an
amount to be determined. Other than as set forth therein, Dr. Smith’s
original employment agreement and all amendments thereto remain in full force
and effect.
Per Dr.
Smith’s January 26, 2007 letter agreement with the Company, upon termination of
Dr. Smith’s employment by the Company without cause or by Dr. Smith with good
reason, the Company shall pay to Dr. Smith her base salary at the time of
termination for the two year period following such termination. In addition, per Dr.
Smith’s May 26, 2006 employment agreement, upon termination of Dr. Smith’s
employment by the Company without cause or by Dr. Smith for good reason, Dr.
Smith is entitled to: (i) a pro-rata bonus based on the annual bonus received
for the prior year; (ii) medical insurance for a one year period; and (iii) have
certain options vest. Upon termination of Dr. Smith’s employment by the Company
for cause or by Dr. Smith without good reason, Dr. Smith is entitled to: (i) the
payment of all amounts due for services rendered under the agreement up until
the termination date; and (ii) have certain options vest. Upon
termination for death or disability, Dr. Smith (or her estate) is entitled to:
(i) the payment of all amounts due for services rendered under the agreement
until the termination date; (ii) family medical insurance for the applicable
term; and (ii) have certain options vest.
Upon a
change in control of the Company, per Dr. Smith’s May 26, 2006 employment
agreement, Dr. Smith is entitled to: (i) the payment of base salary
for one year; (ii) a pro-rata bonus based on the annual bonus received for the
prior year; (iii) medical insurance for a one year period; and (iv) have certain
options vest.
Effective
as of September 27, 2007, the Company entered into a letter agreement with Dr.
Smith, pursuant to which Dr. Smith's employment agreement dated as of May 26,
2006 and amended as of January 26, 2007, was further amended to provide that:
(a) Dr. Smith's base salary would be increased to $275,000 (the amount to which
Dr. Smith would have been entitled under her original employment agreement prior
to her agreement on January 26, 2007 to accept a reduced salary of $250,000);
(b) her base salary would be increased by 10% on each one year anniversary of
the agreement; (c) a cash bonus of $187,500 (an amount equal to 75% of her base
salary) would be paid October 1, 2007; (d) Dr. Smith's bonus for 2008 is set in
the amount of $250,000 (an amount equal to 100% of her base salary) to be paid
October 1, 2008; (e) the Company will pay membership and annual fees
for a club in New York of Dr. Smith's choice for business entertaining and
meetings and (f) any severance payments will be paid out over 12 months . Other
than as set forth therein, Dr. Smith's original employment agreement and all
amendments thereto remain in full force and effect. Dr. Smith elected to defer
the payment of her 2008 bonus, which was earned on October 1, 2008, in an effort
to help conserve the Company’s cash. The bonus was fully paid in
2009. The Company recognized this bonus as compensation in 2008.
Pursuant
to Dr. Smith’s September 27, 2007 letter agreement, Dr. Smith’s salary was
increased annually on the one year anniversary of the letter agreement to an
annual salary of $302,500 effective as of September 27, 2008 and to an annual
salary of $332,750 effective as of September 27, 2009.
On July
29, 2009, we amended the terms of our employment agreement with Dr. Smith by
means of a letter agreement to extend the term of Dr. Smith’s employment to
December 31, 2011 and subject to the consummation of the Merger with CBH, award
Dr. Smith a $275,000 cash bonus for 2009 and comparable minimum annual bonuses
for 2010 and 2011. As of December 31, 2009, $225,000 of the bonus for
2009 was due Dr. Smith. We maintain key-man life insurance on Dr.
Smith in the amount of $3,000,000. As of October 30, 3009, the
Compensation Committee approved the reimbursement to Dr. Smith of premiums, up
to $4000 annually, for disability insurance covering Dr. Smith.
On
January 26, 2007, the Company entered into an employment agreement with
Catherine M. Vaczy pursuant to which Ms. Vaczy would continue to serve as
the Company’s Vice President and General Counsel. This
agreement superseded Ms. Vaczy’s original employment agreement dated as of April
20, 2005 and all amendments thereto. Subject to the terms and
conditions of the letter agreement, the term of Ms. Vaczy’s employment in
such capacity would continue through December 31, 2008. In
consideration for her services under the letter agreement, Ms. Vaczy would
be entitled to receive a minimum annual salary of $150,000 during 2007 (such
amount being 20% less than the annual salary to which Ms. Vaczy would have been
entitled commencing April 20, 2007 pursuant to the terms of her original
employment agreement) and a minimum annual salary of $172,500 during
2008. In consideration for such salary concessions and agreement to
extension of her employment term, Ms. Vaczy was also entitled to receive a cash
bonus upon the occurrence of certain milestones and was also be eligible for
additional cash bonuses in certain circumstances, in each case as may be
approved by the Compensation Committee of the Board of Directors.
F-37
Ms. Vaczy
was also entitled to payment of certain perquisites and/or reimbursement of
certain expenses incurred by her in connection with the performance of her
duties and obligations under the letter agreement, and to participate in any
incentive and employee benefit plans or programs which may be offered by the
Company and in all other plans in which the Company executives
participate.
Pursuant
to Ms. Vaczy’s employment agreement dated January 26, 2007, in the
event Ms. Vaczy’s employment is terminated prior to the end of the term,
for any reason, earned but unpaid cash compensation and unreimbursed expenses
due as of the date of such termination would be payable in full. In addition, in
the event Ms. Vaczy’s employment is terminated prior to the end of the term
for any reason other than by the Company with cause or Ms. Vaczy without
good reason, Ms. Vaczy or her executor of her last will or the duly
authorized administrator of her estate, as applicable, would be entitled to
receive certain specified severance payments, paid in accordance with the
Company’s standard payroll practices for executives. In no event
would such payments exceed the remaining salary payments in the
term. In the event her employment is terminated prior to the end of
the term by the Company without cause or by Ms. Vaczy for good reason, all
options granted by the Company will immediately vest and become exercisable in
accordance with their terms.
Ms.
Vaczy’s January 26, 2007 employment agreement, as amended on January 9, 2008 and
August 29, 2008, or the Original Agreement, expired by its terms on December 31,
2008. However, effective July 8, 2009, we entered into another letter agreement,
or the Extension, with Ms. Vaczy pursuant to which the Original Agreement was
extended, subject to certain different and additional terms. The Extension
provides that Ms. Vaczy’s base salary during the one-year term will be $182,500.
The Extension additionally provides for (i) a 25,000 share stock award upon
execution under the 2009 Plan where we also pay the associated payroll taxes;
and (ii) a $5,000 cash bonus upon each of two milestone objectives established
by the Board of Directors (one of which was met as of December 31, 2009). Any
severance payments set forth in the Original Agreement to which Ms. Vaczy may
become entitled shall be based on Ms. Vaczy’s then salary for a three month and
not an annual period.
As of
October 29, 2009, the Compensation Committee of our Board (i) awarded Ms. Vaczy
a $50,000 cash bonus, 50% of which was payable currently and the remaining 50%
payable upon the achievement of a business milestone (which was achieved in
February 2010), (ii) increased Ms. Vaczy’s salary from $182,500 to $191,000
effective as of November 1, 2009, and (iii) approved the payment of dues to a
private club of Ms. Vaczy’s choosing for business entertaining and meetings (not
to exceed $6,000 annually).
On
October 29, 2009, the Compensation Committee adopted that certain Additional
Compensation Plan providing that contingent cash bonuses, in the total amount of
$200,806, would be payable upon the occurrence of a “Cash Flow
Event”. Of such amounts, two members of the Company’s Board of
Directors, one former member of the Company’s Board of Directors, the Company’s
CEO, CFO and General Counsel participated in a total of $134,232 of such
amount.
Pursuant
to the terms of the Director Compensation Plan adopted on November 4, 2009, as
amended, each non-employee director of the Company, including employees of
partially owned joint ventures, are entitled to quarterly cash compensation
equal to $15,000, payable in arrears. Based on the current Board
structure, this will equal approximately $360,000 annually.
The
Company has entered into an agreement for the lease of executive office space
from SLG Graybar Sublease LLC (the “Landlord”) at Suite 450, 420 Lexington
Avenue, New York, NY 10170 with a lease term effective April 1, 2009
through June 30, 2013 (the “Lease”). Rental and utility payments are
currently in the aggregate approximate monthly amount of $20,100. To
help defray the cost of the Lease, the Company licensed to third parties the
right to occupy certain of the offices in Suite 450 and use certain business
services. Such license payments currently total approximately $5,000
per month and the license agreements are for periods of less than one
year. The Lease was entered into pursuant to an assignment and
assumption of the original lease from the original lessor thereof, DCI Master
LDC (the lead investor in a private placement by the Company in June 2006) and
affiliates of DCI Master LDC and Duncan Capital Group LLC (a former financial
advisor to and an investor in the Company), for which original lease a principal
of such entities acted as guarantor (the “Guarantor”), a consent to such
assignment from the Landlord and a lease modification agreement between the
Company and the Landlord, such documents being dated April 13, 2009 with
effective delivery April 17, 2009. The Company was credited with an
amount remaining as a security deposit with the Landlord from such original
lessor (the “Security Deposit Credit”), was required to deposit an additional
amount with the Landlord to replenish the original amount of security for the
Lease and pay an amount equal to the Security Deposit Credit to the Guarantor of
the original lease. The total payments made by the Company for such
security deposit and payment of the Security Deposit Credit to the Guarantor
were in the approximate aggregate amount of $157,100. Pursuant to the
Lease, the Company is obligated to pay on a monthly basis fixed annual rent and
certain items as additional rent including utility payments. The
Lease requires the Company to maintain insurance in specified types and amounts,
contains certain other standard commercial terms such as tenant’s assumption of
its pro-rata share of certain Landlord costs, tenant’s reimbursement obligations
for certain other Landlord costs including insurance, provision for certain
additional charges and maintenance of certain systems within the premises,
contains restrictions on subletting and provisions for costs and payments
relating thereto and notice, recapture and Landlord leaseback provisions
relating to subletting, permits licensing by tenant of up to five offices or
workstations with notice to Landlord, requires the tenant to maintain and repair
certain systems, contains default and liquidated and other damage provisions
(including acceleration of all rent and additional rent due for the remainder of
the term upon a Landlord termination due to a tenant default and double payments
on a holdover after expiration or termination), interest on late payments,
tenant waivers and indemnity of Landlord, Landlord right of relocating tenant
within the building, Landlord right of termination provisions including on five
days’ notice if rent is not timely paid, on 15 days’ notice if other defaults
are uncured and also in certain insolvency related instances, and requires
consent of the Landlord in certain circumstances and provides for tenant to pay
the costs associated therewith. In January 2005, NS
California began leasing space at Good Samaritan Hospital in Los Angeles,
California at an annual rental of approximately $26,000 for use as its stem cell
processing and storage facility. The lease expired on December 31, 2005,
but the Company continued to occupy the space on a month-to-month until it
closed the facility in April 2009 and transferred its processing and
storage operations to state of the art facilities operated by leaders in cell
processing. The Company utilizes Progenitor Cell Therapy
LLC, with whom the Company entered into a Cell Processing and Storage Customer
Agreement in January 2009, to process and store for commercial purposes at the
cGMP level at its California and New Jersey facilities. In September
2009, NeoStem, Inc. entered into an agreement for the lease of space from
Rivertech Associates II, LLC, c/o The Abbey Group (the “Landlord”) at 840
Memorial Drive, Cambridge, Massachusetts with a lease term effective September
1, 2009 through August 31, 2012 (the “Lease”). The space is being
used for general office, research and development, and laboratory space
(inclusive of an adult stem cell collection center). The base rent
under the Lease is $283,848 for the first year, $356,840 for the second year and
$369,005 for the third year. In addition, the Company is responsible
for certain costs and charges specified in the Lease, including utilities,
operating expenses and real estate taxes. The security deposit is
$84,141, which may be reduced to $56,094 if Company has not defaulted in the
performance of its obligations under the lease prior to the second lease
year.
F-38
In
May 2009, Qingdao Niao, the Chinese domestic company controlled by NeoStem
(China), Inc. through various business arrangements, entered into
leases with Beijing Zhong-guan-cun Life Science Park Development Corp., Ltd.
pursuant to which Qingdao Niao is leasing laboratory, office and storage space
in Beijing for the aggregate monthly amount of approximately
$23,000. Lease payments are due quarterly in advance, and upon
entering into the lease a three month security deposit was required in addition
to the first quarterly payment. The term of the leases is for
approximately three years.
Rent for
these facilities for the twelve months ended December 31, 2009, 2008 and 2007,
was approximately $538,600, $202,000 and $215,000, respectively.
In
November, 2007, the Company entered into
an acquisition agreement with
UTEK Corporation ("UTEK") and Stem
Cell Technologies, Inc., a wholly-owned
subsidiary of UTEK ("SCTI"), pursuant to which
the Company acquired all the issued and outstanding common
stock of SCTI in a stock-for-stock exchange. SCTI
contains an exclusive, worldwide license to a technology developed by
researchers at the University of Louisville to
identify and isolate rare stem cells from adult human
bone marrow, called very
small embryonic like
stem cells. Concurrent with the
SCTI acquisition, NeoStem entered into
a sponsored research agreement (“SRA”) with
the University of Louisville under which
NeoStem has been supporting further research in the laboratory of Mariusz
Ratajczak, M.D., Ph.D. a co-inventor of the VSEL™ technology and head of the
Stem Cell Biology Program at the James Brown Cancer Center at the University of
Louisville. The SRA, which has been periodically amended, called for
payments in 2008 of $50,000 and 2009 of $65,337.
Under the
License Agreement, SCTI agreed to engage in a diligent program to develop the
VSEL technology. Certain license fees and royalties are to be paid to University
of Louisville Research Foundation (“ULRF”) from SCTI, and SCTI is responsible
for all payments for patent filings and related
applications. Portions of the license may be
converted to a non-exclusive license if SCTI does
not diligently develop the VSEL™ technology or terminated
entirely if SCTI chooses to not pay for the filing
and maintenance of any
patents thereunder. The License Agreement, which has an
initial term of 20 years, calls for the following specific
payments: (i) reimbursement of $29,000 for all expenses related to
patent filing and prosecution incurred before the effective date (“Effective
Date”) of the license agreement; (ii) a non-refundable prepayment of $20,000
creditable against the first $20,000 of patent expenses incurred after the
Effective Date; (iii) a non-refundable license issue fee of $46,000; (iv) a
non-refundable annual license maintenance fee of $10,000 upon issuance of the
licensed patent in the United States; (v) a royalty of 4% on net
sales; (vi) specified milestone payments; and (vii) specified payments in the
event of sublicensing. Pursuant to a February 2009 amendment to
the License Agreement the payments under (ii) and (iii) became due and were paid
in March 2009. The License Agreement also contains certain provisions relating
to "stacking," permitting SCTI to pay royalties to ULRF at
a reduced rate in the event it
is required to also pay royalties to third parties
exceeding a specified threshold for other technology
in furtherance of the exercise of
its patent rights or the manufacture of
products using the VSEL technology.
As of
December 31, 2009, NeoStem, Inc. (the “Company”), NeoStem (China) , Inc., its
subsidiary and Progenitor Cell Therapy, LLC, a Delaware limited liability
company ("PCT”), entered into an Agreement (the “Agreement”) whereby NeoStem and
NeoStem China engaged PCT to perform the services necessary to construct in
Beijing, China a facility consisting of a clean room for adult stem cell
clinical trial processing and other stem cell collections which will have the
processing capacity on an annual basis sufficient for at least 10,000 samples,
research and development laboratory space, collection and stem cell storage area
and offices, together with the furnishings and equipment and (2) the
installation of quality control systems consisting of materials management,
equipment maintenance and calibration, environmental monitoring and compliance
and adult stem cell processing and preservation which comply with cGMP standards
and regulatory standards that would be applicable in the United
States under GTP standards, as well as all regulatory requirement applicable to
the program under the laws of the People's Republic of China. The
aggregate cost of the program, including the phase 1 equipment purchases, is
expected to be approximately $3 million. The project is anticipated
to take approximately 7 months to complete. PCT has agreed to provide
at least 90 days of support services to NeoStem for an additional fee after
completion of the project, which is renewable at NeoStem's request for an
additional 90 days.
F-39
In
connection with the issuance to investors and service providers of many of the
shares of the Company’s Common Stock and Warrants to purchase Common Stock
described herein, the Company granted the holders registration rights providing
for the registration of such shares of Common Stock and shares of Common Stock
underlying warrants on a registration statement to be filed with the Securities
and Exchange Commission so as to permit the resale of those
shares. Certain of the registration rights agreements provided for
penalties for failure to file or failure to obtain an effective registration
statement. With respect to satisfying our obligations to the holders
of these registration rights, we are in various positions. We filed a
registration statement as required for some of the holders, but to date, we have
not had such registration statement declared effective. As to some
holders we have not yet satisfied our obligation to file. Certain
holders with outstanding registration rights have waived their registration
rights. No holder has yet asserted any claim against us with respect
to a failure to satisfy any registration obligations. Were someone to
assert a claim against us for breach of registration obligations, we believe we
have several defenses that would result in relieving us from any liability,
although no assurances can be given. We also note that damage claims
may be limited, as (i) all shares of Common Stock as to which registration
rights attached are currently salable under Rule 144 of the Securities Act and
(ii) during the relevant periods the warrants with registration rights generally
have been out of the money. Accordingly, were holders to assert
claims against us based on breach of our obligations to register, we believe
that our maximum exposure from non-related parties would not be
material.
At
October 31, 2009 Erye had a statutory reserve of $1,126,300. The
laws and regulations of the PRC require that
before foreign invested enterprise can legally
distribute profits, it must first satisfy all tax
liabilities, provide for losses in previous years, and
make allocations, in proportions determined at the
discretion of the board of directors, after the statutory reserves.
To fund its statutory reserve requirement Erye is required to set aside a
certain percentage of their accumulated after-tax profit each year, if any, to
fund certain mandated reserve funds of at least 10% each year until its reserves
have reached at least 50% of its registered capital, The statutory reserves
include the surplus reserve fund and the common welfare fund. The amount of
statutory reserve at December 31, 2009 was determined to be $1,126,300 and no
further allocations were required.
The
minimum future lease payments under our lease and license commitments are as
follows:
|
Total
|
Less
than 1 Year
|
1-
3 Years
|
3-5
Years
|
More
than 5 Years
|
||||||
|
Facility
Leases
|
2,370,788
|
883,287
|
1,487,501
|
-
|
-
|
|||||
|
License
Fees
|
285,000
|
105,000
|
60,000
|
60,000
|
60,000
|
|||||
|
$ 2,655,788
|
$ 988,287
|
$ 1,547,501
|
$ 60,000
|
$ 60,000
|
||||||
Note 16 - Subsequent
Events
Effective
as of January 4, 2010 the Company entered into a one-year agreement with a
consultant to provide investor relations services to the Company. In
consideration for providing services under this agreement, the Company agreed to
pay a retainer of $8,000 per month, at the beginning of the month and each month
thereafter during the primary term of the agreement and issue to the consultant
a five year warrant to purchase 200,000 shares of restricted common stock at a
per share exercise price of $2.00 to vest 50,000 each of the last day of each of
the fiscal quarters. The issuance of such securities is subject to the approval
of the NYSE Amex, which approval was obtained in January 2010.
On
February 18, 2010, the Company completed a public offering of 5,750,000 shares
of the Company's common stock, par value $0.001 per share, (the "Common Stock"),
at a price of $1.35 per share for aggregate proceeds of approximately $7,089,125
(net of underwriting discounts, commissions, fees and expenses). Roth Capital
Partners, LLC served as sole book-running manager and Maxim Group and Gilford
Securities acted as co-managers for the offering. This offering was made
pursuant to the Company's effective registration statement (the "Registration
Statement") on Form S-1, as amended, (File No. 333-163741) filed with the
Securities and Exchange Commission.
F-40
Effective
as of February 23, 2010, we entered into Amendment No. 3 to our SRA with the
University of Louisville which amends the research plan and currently provides
for additional payments during 2010 of up to $72,342 of which $68,725 was paid
upon execution of Amendment No. 3. No later than April 30, 2010, the
parties shall agree on any desired revisions to the research or research period
under Amendment No. 3.
Effective
as of February 26, 2010, the Company entered into an agreement with a consultant
to provide to the Company necessary information for designing a successful
marketing plan and product list for the penetration (Phase II) of Federal, State
and local government markets. In consideration for providing the
services, the Company agreed to pay a retainer of $20,000 each month and a five
year warrant in the Company's standard form to purchase 275,000 shares of Common
Stock which shall have a per share exercise price $1.42 and shall vest and
become exercisable in its entirety on such date after the Effective Date that
certain milestones in performance are achieved; provided that if such date is
prior to May 14, 2010 then the warrant shall vest on May 14,
2010. The issuance of such securities is subject to the approval of
the NYSE Amex.
Effective
as of March 11, 2010, the Company entered into an agreement with a law firm
which has been providing legal services to the Company since 2006, pursuant to
which this firm was retained to provide additional legal services with regard to
negotiation, drafting and finalization of contracts; in the development of
strategic plans; with regard to funding from various agencies of the State of
New Jersey and the Federal government. In consideration for providing
the services, the Company agreed to issue a five year warrant to purchase 52,000
shares of restricted Common Stock at a per share exercise price of $1.42,
vesting as to one-half of the shares on June 30, 2010 and one-half of the shares
on December 31, 2010. The issuance of such securities is subject to
the approval of the NYSE Amex.
On March
15, 2010, the Company and RimAsia agreed that in consideration for RimAsia
currently exercising its warrant to purchase 1,000,000 shares of the Company’s
common stock, exercisable at a per share exercise price of $1.75 and issued to
RimAsia in a private placement completed by the Company in September 2008 (the
“September 2008 Warrant”) the Company would extend the term of, and
increase the price at which the Company may redeem at its option (as further
described below), RimAsia’s warrant to purchase 4,000,000 shares of Common
Stock, issued to RimAsia in a private placement completed by the Company in
April 2009 (the “Series D Warrant”). Gross proceeds to be received by
the Company from the exercise are $1,750,000. The expiration date of
the September 2008 Warrant was September 1, 2013. RimAsia is subject to the
terms of a lock-up agreement through August 2010. The agreement was discussed
and approved by the Company’s Board of Directors and Audit Committee at meetings
held on March 11, 2010. The closing price of the Common Stock on
March 11, 2010 was $1.42. The Company intends to put the
proceeds from the exercise of the warrant towards the funding of the Company’s
various initiatives, including assisting in the funding of the
relocation of the manufacturing facility of Suzhou Erye Pharmaceutical Co. Ltd.,
the Company’s 51% owned subsidiary. The Series D Warrant is being amended solely
to provide for (i) a three (3) year extension of the Termination Date (as
defined in the Series D Warrant) and (ii) an increase in the average closing
price that triggers the Company’s redemption option under the Series D Warrant
from $3.50 to $5.00 (the Series D Warrant so amended and restated, the “Amended
and Restated Warrant”).
On
October 29, 2009, the Compensation Committee adopted that certain Additional
Compensation Plan providing that contingent cash bonuses, in the total amount of
$200,806, would be payable upon the occurrence of a “Cash Flow Event” and on
March 31, 2010 such contingent bonuses were paid. Of such amounts,
two members of the Company’s Board of Directors, one former member of the
Company’s Board of Directors, the Company’s CEO, CFO and General Counsel
participated in a total of $134,232 of such amount.
F-41
None.
(a) Disclosure Controls
and Procedures
Disclosure
controls and procedures are the Company’s controls and other procedures that are
designed to ensure that information required to be disclosed in the reports that
the Company files or submits under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”) is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s
rules and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in the reports that the Company files under the Exchange Act is
accumulated and communicated to management, including the Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding required disclosure. Due to the inherent limitations of
control systems, not all misstatements may be detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty and the breakdowns can occur because of a simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, or by management override of the
control. Controls and procedures can only provide reasonable, not absolute,
assurance that the above objectives have been met.
As of the
end of the Company's fourth fiscal quarter ended December 31, 2009 covered by
this report, the Company carried out an evaluation, with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the Company's disclosure
controls and procedures pursuant to Rule 13a-15 of the Exchange
Act. Based on that evaluation, the Company's Chief Executive Officer
and Chief Financial Officer concluded that due to the material weaknesses
discussed below in Management’s Annual Report on Internal Control over Financial
Reporting the Company's disclosure controls and procedures were not effective,
at the reasonable assurance level, in ensuring that information required to be
disclosed by the Company in the reports that it files or submits under the
Securities Exchange Act is recorded, processed, summarized and reported, within
the time periods specified in the SEC's rules and forms and is accumulated and
communicated to management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.
(b) Management’s
Annual Report on Internal Control over Financial Reporting
The
Company’s management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined in Exchange
Act Rule 13a-15(f). Under the supervision and with the participation of the
Company’s management, including the Company’s Chief Executive Officer along with
the Company’s Chief Financial Officer, the Company conducted an evaluation of
the effectiveness of internal control over financial reporting based on the
framework in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway
Commission. Based on the evaluation under the framework in Internal
Control — Integrated Framework, management concluded that the Company’s
internal control over financial reporting was not effective as of
December 31, 2009 due to the material weaknesses previously identified by
China Biopharmaceuticals, Inc. (“CBH”), which was acquired by the Company on
October 30, 2009. Because the acquisition was completed in the fourth
quarter, the Company has not had sufficient time to remediate the material
weaknesses previously identified by CBH.
As a
result of the Merger with CBH, the Company acquired cash and CBH’s 51% ownership
interest in Suzhou Erye Pharmaceuticals Company Ltd. (“Erye”), a Sino-foreign
joint venture with limited liability organized under the laws of the People’s
Republic of China. Erye represents 98% of the consolidated revenue of
11,565,118 reported for the year ended December 31, 2009 and offset the
Company’s net loss of $30,884,506 with net income of 2,386,541 for the year
ended December 31, 2009 (Note, Erye’s net income were only for the two months
following the acquisition).
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management
and directors of the company; and (3) provide reasonable assurance regarding
prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial
statements.
- 58
- -
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A
material weakness is a deficiency, or combination of deficiencies, in internal
control over financial reporting, such that there is a reasonable possibility
that a material misstatement of the company’s annual or interim financial
statements will not be prevented or detected on a timely basis.
Prior to
the merger, in its assessment of its internal control over financial reporting
as of December 31, 2008, CBH identified in substance the material weaknesses set
forth below. As of September 30, 2009, CBH reported that such
material weaknesses had not been remediated and continued to exist.
1.
Insufficient U.S.GAAP qualified accounting and finance personnel.
As U.S.
GAAP closing process relates to non-routine transactions and estimates, CBH did
not have sufficient US GAAP qualified accounting and finance personnel necessary
to close its books at its subsidiaries in China. CBH's subsidiaries
in China did not maintain books and records in accordance with US GAAP and had
to make adjusting entries to prepare and report financial statements in
accordance with US GAAP. Because the accounting personnel were not
familiar with U.S.GAAP non-routine transactions and estimates were not properly
accounted for under US GAAP. This material weakness resulted in adjustments to
several significant accounts and disclosures and contributed to other material
weakness described below.
2. Lack
of Internal Audit System.
CBH did
not have an internal audit department and therefore was unable to effectively
prevent and detect control lapses and errors in
the accounting of certain key areas like
revenue recognition, purchase
approvals, inter-company
transactions, cash receipt and
cash disbursement authorizations, inventory
safeguard and proper accumulation for cost of products, in
accordance with the appropriate costing method used by CBH.
3.
Financial Statement Closing Process.
CBH's
controls over the financial statement close process related to account
reconciliation and analyses, including bank accounts, certain long-lived assets
and accrued liabilities, were not effective. As a result, a large volume of
adjustments were necessary to completely and accurately present the financial
statements in accordance with US GAAP.
In its
assessment of internal control over financial reporting as of December 31, 2009,
the Company was unable to conclude that the above material weaknesses previously
reported by CBH had been fully remediated and therefore concluded that the
Company's internal control over financial reporting was not effective as of
December 31, 2009.
Since the
acquisition of CBH in the fourth quarter, the Company is in the process of
implementing the following remediation plans.
While the
Company has sufficient US GAAP qualified accounting and financial personnel at
the parent level, the accounting and financial accounting personnel at Company’s
subsidiary, Erye, continue to need additional training on US
GAAP. The Company plans to remediate this by deploying its finance
and accounting personnel to Erye to account for non-routine, complex
transactions at the Erye level and to assist with Erye’s closing processes from
time to time and use the services of another accounting firm for this role as
well as provide additional training of Erye’s personnel so they can do the
accounting for Erye without significant participation from the Company’s finance
and accounting personnel.
The
Company does not believe its size warrants an internal audit
staff. The Company intends to use the services of another public
accounting firm as an internal accounting staff in 2010 to audit key risk areas
such as revenue recognition, purchase
approvals, inter-company
transactions, cash receipt and
cash disbursement authorizations, inventory
safeguard and proper accumulation for cost of products as well as complex,
non-routine transactions and will participate in the closing
processes.
The
parent Company’s Chief Financial Officer and Vice President of Finance, each of
whom is US GAAP qualified, will participate in the quarterly financial statement
closing process at the Erye subsidiary. The Company will establish a
process whereby the accounting reconciliation and analyses prepared as part of
the financial statement closing process are reviewed by the parent Company’s
Chief Financial Officer and its Vice President of Finance.
In
addition, the Company believes that the oversight provided by its audit
committee, which, unlike CBH's audit committee, is comprised of three
independent and financially sophisticated members, at least one of whom
qualifies as an “audit committee financial expert” as defined in applicable SEC
rules, will support and further the remediation steps set forth
above.
- 59
- -
(c) Attestation
Report of Registered Public Accounting Firm
This
annual report does not include an attestation report of the Company's registered
public accounting firm regarding internal control over financial reporting.
Management's report was not subject to attestation by the Company's registered
public accounting firm pursuant to temporary rules of the Securities and
Exchange Commission that permit the Company to provide only management's report
in this annual report.
(d)
Changes in Internal Control over Financial Reporting
There
have been no changes in the Company's internal controls over financial
reporting, as such term is defined in Exchange Act Rule 13a-15, that occurred
during the Company's last fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting, except that during the last
fiscal quarter we extended the parent company internal controls to our new
operations in China.
ITEM
9B. OTHER INFORMATION
SUBMISSION
OF MATTERS TO A VOTE OF SECUIRTYHOLDERS
At
a special meeting of stockholders held on October 29, 2009 (the “NeoStem Special
Meeting”), the Company submitted the following proposals to a vote of the
security holders:
|
•
|
PROPOSAL
NO. 1: Approval of the issuance of NeoStem securities in
connection with the Merger pursuant to the Agreement and Plan of Merger
among NeoStem, China Biopharmaceuticals Holdings, Inc., CBH Acquisition
LLC and China Biopharmaceuticals Corp., as
amended.
|
|
•
|
PROPOSAL
NO. 2: Approval of an amendment to NeoStem’s Amended and
Restated Certificate of Incorporation to increase the aggregate number of
shares of preferred stock authorized for issuance from 5,000,000 shares to
20,000,000 shares (and a corresponding increase in the total number of
shares authorized for issuance 505,000,000 to
520,000,000).
|
|
•
|
PROPOSAL
NO. 3: Authorization to issue 9,086,124 shares of NeoStem
Common Stock upon the potential conversion of the Series C Convertible
Preferred Stock issued to RimAsia in the
Merger.
|
|
•
|
PROPOSAL
NO. 4: Authorization to issue NeoStem Common Stock in order to
permit (i) the potential exercise of up to 13,932,512 warrants and (ii)
the automatic conversion of the Series D Convertible Preferred Stock into
12,932,510 shares of NeoStem Common Stock, together with the approval of
the elimination of certain restrictions regarding certain warrant
exercises and stock conversions.
|
|
•
|
PROPOSAL
NO. 5: Approval of an amendment to NeoStem’s Amended and
Restated Certificate of Incorporation to authorize a reverse stock split
of NeoStem Common Stock at a ratio within the range of 1:2 to 1:5 as
determined by the NeoStem Board of Directors, solely in the event it is
deemed by the NeoStem Board of Directors necessary to maintain the
Company’s listing with the NYSE Amex or to list NeoStem Common Stock on
any other exchange.
|
|
•
|
PROPOSAL
NO. 6: Approval of an amendment to the NeoStem, Inc. 2009
Equity Compensation Plan (the “2009 Plan”) to increase the number of
shares of NeoStem Common Stock authorized for issuance thereunder from
3,800,000 shares to 9,750,000
shares.
|
|
•
|
PROPOSAL
NO. 7: Adoption of the NeoStem, Inc. 2009 Non-U.S. Based Equity
Compensation Plan (the “2009 Non-U.S. Plan”) with respect to the 4,700,000
shares of NeoStem Common Stock authorized for issuance
thereunder.
|
|
•
|
PROPOSAL
NO. 8: Approval of an amendment to NeoStem’s Amended and
Restated Certificate of Incorporation to provide for the classification of
the Board of Directors into three classes, pursuant to which the terms of
Class I directors will expire in 2010, the terms of Class II directors
will expire in 2011, and the terms of Class III directors will expire in
2012..
|
|
•
|
PROPOSAL
NO. 9: Approval of (i) an amendment to NeoStem’s 2003 Equity
Participation Plan (the “2003 Plan”) to grant the NeoStem Board of
Directors or an appropriate committee thereof the authority to reprice
options, (ii) a one-time repricing of the exercise price of certain
NeoStem options and warrants to purchase shares of NeoStem Common Stock
and (iii) giving the Board of Directors or an appropriate committee
thereof discretion to issue certain cash or equity awards in connection
with the one-time repricing.
|
- 60
- -
All
of the proposals submitted to a vote of the security holders were approved. The
votes cast for, against or abstaining from, and the broker non-votes were as
follows with respect to each of the above-described proposals:
|
No. of Shares
Voted For:
|
No. of Shares
Voted Against:
|
No. of
Abstentions:
|
No. of Broker
Non-Votes:
|
|
|
PROPOSAL
NO. 1
|
5,255,917
|
15,305
|
5,730
|
None
|
|
PROPOSAL
NO. 2
|
5,133,387
|
134,283
|
9,282
|
None
|
|
PROPOSAL
NO. 3
|
5,140,387
|
132,291
|
4,274
|
None
|
|
PROPOSAL
NO. 4
|
5,137,994
|
132,681
|
6,277
|
None
|
|
PROPOSAL
NO. 5
|
5,193,165
|
80,864
|
2,923
|
None
|
|
PROPOSAL
NO. 6
|
4,966,033
|
193,946
|
116,973
|
None
|
|
PROPOSAL
NO. 7
|
5,075,789
|
191,519
|
9,644
|
None
|
|
PROPOSAL
NO. 8
|
5,115,303
|
48,675
|
112,974
|
None
|
|
PROPOSAL
NO. 9
|
4,824,973
|
411,998
|
39,981
|
None
|
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
The
information required by this Item is incorporated into this Annual Report on
Form 10-K by reference to the definitive Proxy Statement for our 2010 Annual
Meeting of Stockholders, to be filed not later than April 30, 2010 (120 days
after the close of our fiscal year ended December 31, 2009).
The
information required by this Item is incorporated into this Annual Report on
Form 10-K by reference to the definitive Proxy Statement for our 2010 Annual
Meeting of Stockholders, to be filed not later than April 30, 2010 (120 days
after the close of our fiscal year ended December 31, 2009).
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
The
information required by this Item is incorporated into this Annual Report on
Form 10-K by reference to the definitive Proxy Statement for our 2010 Annual
Meeting of Stockholders, to be filed not later than April 30, 2010 (120 days
after the close of our fiscal year ended December 31, 2009).
The
information required by this Item is incorporated into this Annual Report on
Form 10-K by reference to the definitive Proxy Statement for our 2010 Annual
Meeting of Stockholders, to be filed not later than April 30, 2010 (120 days
after the close of our fiscal year ended December 31, 2009).
The
information required by this Item is incorporated into this Annual Report on
Form 10-K by reference to the definitive Proxy Statement for our 2010 Annual
Meeting of Stockholders, to be filed not later than April 30, 2010 (120 days
after the close of our fiscal year ended December 31, 2009).
The
following documents are being filed as part of this Report:
Reference
is made to the Index to Financial Statements and Financial Statement Schedule on
Page F-1.
- 61
- -
(a)(2)
FINANCIAL STATEMENT SCHEDULE:
Reference
is made to the Index to Financial Statements and Financial Statement Schedule on
Page F-1.
All other
schedules have been omitted because the required information is not present or
is not present in amounts sufficient to require submission of the schedule, or
because the information required is included in the Financial Statements or
Notes thereto.
(a)(3)
EXHIBITS:
|
Exhibit(1)
|
Description
|
Reference
|
||
|
2(a)
|
Agreement
and Plan of Merger, dated as of November 2, 2008, by and among NeoStem,
Inc., China Biopharmaceuticals Holdings, Inc., China Biopharmaceuticals
Corp., and CBH Acquisition LLC (included in Annex A to the
Registration Statement on Form S-4/A filed by registrant on October 6,
2009 and effective October 7, 2009).
|
Annex
A
|
||
|
(b)
|
Amendment
No. 1 to Agreement and Plan of Merger, made and entered into as of the 1st
day of July, 2009, by and among NeoStem, Inc., CBH Acquisition LLC, China
Biopharmaceuticals Holdings, Inc., and China Biopharmaceuticals Corp.
(included in Annex
A to the Registration Statement on Form S-4/A filed by registrant
on October 6, 2009 and effective October 7, 2009).
|
Annex
A
|
||
|
(c)
|
Amendment
No. 2 to Agreement and Plan of Merger, made and entered into as of the
27th
day of August, 2009, by and among NeoStem, Inc., CBH Acquisition LLC,
China Biopharmaceuticals Holdings, Inc., and China Biopharmaceuticals
Corp. (included in Annex
A to the Registration Statement on Form S-4/A filed by registrant
on October 6, 2009 and effective October 7, 2009).
|
Annex
A
|
||
|
3(i)(a)
|
Amended
and Restated Certificate of Incorporation with Certificate of Designations
for Series D Preferred Stock as Certified June 23, 2009, filed with the
Securities and Exchange Commission as an exhibit, numbered as indicated
above, to the registrant’s Post-Effective Amendment No. 1 to Registration
Statement on Form S-8, File No. 333-159282, which exhibit is incorporated
here by reference.
|
4.3
|
||
|
3.2
|
||||
|
(b)
|
Certificate
of Amendment of Amended and Restated Certificate of Incorporation of
NeoStem, Inc., filed with the Secretary of State of the State of Delaware
on October 30, 2009, incorporated by reference to exhibit 3.2 of
registrant’s current report on Form 10-Q filed on November 6,
2009.
|
3.2
|
||
|
(c)
|
Certificate
of Amendment of Amended and Restated Certificate of Incorporation of
NeoStem, Inc., filed with the Secretary of State of the State of Delaware
on October 30, 2009, incorporated by reference to exhibit 3.3 of
registrant’s current report on Form 10-Q filed on November 6,
2009.
|
3.3
|
||
|
(d)
|
Certificate
of Designations of Series C Convertible Preferred Stock, filed with the
Secretary of State of the State of Delaware on October 30, 2009,
incorporated by reference to exhibit 3.4 of registrant’s current report on
Form 10-Q filed on November 6, 2009.
|
3.4
|
||
|
(e)
|
Certificate
of Merger, filed with the Secretary of State of the State of Delaware on
October 30, 2009, incorporated by reference to exhibit 3.5 of registrant’s
current report on Form 10-Q filed on November 6, 2009.
|
3.5
|
||
|
3(ii)(a)
|
Amended
and Restated By-Laws dated August 1, 2006*
|
3(ii)(a)
|
||
|
4(a)
|
Form
of Underwriters’ Warrant dated August 14, 2007(1)
|
10.2
|
||
|
(b)
|
Form
of Underwriter Warrant Clarification Agreement among NeoStem, Inc. and
certain members of its Underwriting Group(2)
|
10.4
|
||
|
(c)
|
Form
of Class A Warrant Agreement and Certificate from August 2007(3)
|
4.2
|
||
|
(d)
|
Form
of Warrant Clarification Agreement between NeoStem, Inc. and Continental
Stock Transfer and Trust Company(2)
|
10.3
|
- 62
- -
|
(e)
|
Form
of Warrant(4)
|
99.1
|
||
|
(f)
|
Restated
Warrant Agreement dated August 14, 2007(1)
|
10.1
|
|
(g)
|
Registration
Rights Agreement, dated June 2, 2006, between Phase III Medical, Inc. and
certain investors listed therein(6)
|
10.2
|
||
|
(h)
|
Form
of Warrant to Purchase Shares of Common Stock of Phase III Medical, Inc
from June 2006(6)
|
10.3
|
||
|
(i)
|
Form
of Phase III Medical, Inc. Registration Rights Agreement from July/August
2006(7)
|
10.2
|
||
|
(j)
|
Form
of Phase III Medical, Inc. Warrant to Purchase Shares of Common Stock from
July/August 2006(7)
|
10.3
|
||
|
(k)
|
Form
of Redeemable Warrant to Purchase Shares of Common Stock of NeoStem, Inc.
from January/February 2007(8)
|
10.2
|
||
|
(l)
|
Form
of Non-Redeemable Warrant to Purchase Shares of Common Stock of NeoStem,
Inc. from January/February 2007(8)
|
10.3
|
||
|
(m)
|
Form
of Redeemable Warrant to Purchase Shares of Common Stock of NeoStem, Inc.
from May 2008(9)
|
10.1
|
||
|
(n)
|
Form
of Redeemable Warrant to Purchase Shares of Common Stock of NeoStem, Inc.
issued to RimAsia Capital Partners L.P. in September 2008(10)
|
10.2
|
||
|
(o)
|
Letter
Agreement dated December 18, 2008 between NeoStem, Inc. and RimAsia
Capital Partners, L.P.(11)
|
4.1
|
||
|
(p)
|
Form
of Warrant to Purchase Shares of Common Stock of NeoStem, Inc. from
October 2008(11)
|
4.2
|
||
|
(q)
|
Form
of Redeemable Warrant to Purchase Shares of Common Stock of NeoStem, Inc.
from November 2008(11)
|
4.3
|
||
|
(r)
|
Specimen
Certificate for Common Stock(12)
|
4.1
|
||
|
(s)
|
Form
of Warrant issued in connection with April and July 2009 private
placements(13)
|
4.2
|
||
|
(t)
|
Form
of Class E Common Stock Purchase Warrant (included as Annex J to the
Registration Statement on Form S-4/A filed by registrant on October 6,
2009 and effective October 7, 2009)
|
Annex
J
|
||
|
10(a)
|
NeoStem,
Inc. 2003 Equity Participation Plan, as amended+(14)
|
10.2
|
||
|
(b)
|
NeoStem,
Inc. 2009 Equity Compensation Plan+(42)
|
Annex
F
|
||
|
(b)-1
|
NeoStem,
Inc. 2009 Non-U.S. Based Equity Compensation Plan+(43)
|
Annex
G
|
||
|
(c)
|
Form
of Stock Option Agreement+(5)
|
10.2
|
||
|
(d)
|
Form
of Option Agreement dated July 20, 2005+(15)
|
10.5
|
|
(e)
|
Stock
Option Agreement dated as of February 6, 2003 between Corniche Group
Incorporated and Mark Weinreb+(16)
|
99.3
|
||
|
(f)
|
Restricted
Stock Agreement with Mark Weinreb+(17)
|
10.8
|
||
|
(g)
|
Form
of Promissory Note Extension dated April 20, 2005(15)
|
10.6
|
||
|
(h)
|
Securities
Purchase Agreement, dated June 2, 2006, between Phase III Medical, Inc.
and certain investors listed therein(6)
|
10.1
|
||
|
(i)
|
Form
of Phase III Medical, Inc. Securities Purchase Agreement from July/August
2006(19)
|
10.1
|
||
|
(j)
|
Form
of Amendment Relating to Purchase by December 2005 and January 2006
Investors in Private Placement of Convertible Notes and Warrants (19)
|
10.4
|
||
|
(k)
|
Second
Form of Amendment Relating to Purchase by December 2005 and January 2006
Investors in Private Placement of Convertible Notes and Warrants (14)
|
10.1
|
- 63
- -
|
(l)
|
Form
of Subscription Agreement from January/February 2007 among NeoStem, Inc.,
Emerging Growth Equities, Ltd. And certain investors listed therein(8)
|
10.1
|
||
|
(m)
|
Form
of Subscription Agreement from May 2008 among NeoStem, Inc. and certain
investors listed therein(9)
|
10.1
|
||
|
(n)
|
Form
of Subscription Agreement between NeoStem, Inc. and RimAsia Capital
Partners, L.P. dated September 2, 2008(10)
|
10.1
|
||
|
(o)
|
Form
of Subscription Agreement from October 2008 between NeoStem, Inc. and an
investor listed therein(11)
|
10.1
|
||
|
(p)
|
Form
of Subscription Agreement from November 2008 between NeoStem, Inc. and an
investor listed therein(11)
|
10.2
|
||
|
(q)
|
Form
of Subscription Agreement from the April 2009 private placement(13)
|
4.3
|
||
|
(r)
|
Agreement
and Plan of Acquisition among NeoStem, Inc., Stem Cell Technologies, Inc.
and UTEK Corporation(21)
|
10.1
|
||
|
(s)
|
License
Agreement between Stem Cell Technologies, Inc. and the University of
Louisville Research Foundation, Inc.(21)
|
10.2
|
||
|
(t)
|
Amendment
No. 1 to Exclusive License Agreement between Stem Cell Technologies, Inc.
and the University of Louisville Research Foundation, Inc.(22)
|
10.2
|
||
|
(u)
|
Sponsored
Research Agreement between NeoStem, Inc. and the University of Louisville
Research Foundation, Inc.(21)
|
10.3
|
||
|
(v)
|
Amendment
No. 1 to Sponsored Research Agreement between NeoStem, Inc. and the
University of Louisville Research Foundation, Inc.(22)
|
10.1
|
||
|
(w)
|
Stem
Cell Collection Services Agreement dated December 15, 2006 between NeoStem
and HemaCare Corporation(23)
|
10.1
|
||
|
(x)
|
Advisory
Agreement dated May 2006 between Phase III Medical, Inc. and Duncan
Capital Group LLC(24)
|
10(ee)
|
|
(y)
|
Amendment
dated February 1, 2007 to Advisory Agreement dated May 2006 between Phase
III Medical, Inc. and Duncan Capital Group LLC(23)
|
10.2
|
||
|
(z)
|
Employment
Agreement between Phase III Medical, Inc. and Dr. Robin L. Smith, dated
May 26, 2006+(6)
|
10.4
|
||
|
(aa)
|
January
26, 2007 Amendment to Employment Agreement of Robin Smith+(25)
|
10.1
|
||
|
(bb)
|
September
27, 2007 Amendment to Employment Agreement of Robin L. Smith+(26)
|
10.1
|
||
|
(cc)
|
Letter
agreement dated January 9, 2008 with Dr. Robin Smith+(27)
|
10.1
|
||
|
(dd)
|
Employment
Agreement dated as of February 6, 2003 by and between Corniche Group
Incorporated and Mark Weinreb+(16)
|
99.2
|
||
|
(ee)
|
Amendment
dated July 20, 2005 to Employment Agreement with Mark Weinreb dated
February 6, 2003+(15)
|
10.2
|
||
|
(ff)
|
Letter
Agreement between Phase III Medical, Inc. and Mark Weinreb effective as of
June 2, 2006+(6)
|
10.5
|
||
|
(gg)
|
January
26, 2007 Amendment to Employment Agreement of Mark Weinreb+(25)
|
10.2
|
||
|
(hh)
|
September
28, 2007 Amendment to Employment Agreement of Mark Weinreb+(26)
|
10.2
|
||
|
(ii)
|
Employment
Agreement between the Company and Larry A. May dated January 19,
2006+(28)
|
10.1
|
||
|
(jj)
|
Letter
Agreement between Phase III Medical, Inc. and Larry A. May effective as of
June 2, 2006+(6)
|
10.7
|
||
|
(kk)
|
January
26, 2007 Amendment to Employment Agreement of Larry A. May+(25)
|
10.3
|
||
|
(ll)
|
Letter
Agreement, dated April 20, 2005, between Phase III Medical, Inc. and
Catherine M. Vaczy+(18)
|
10.3
|
- 64
- -
|
(mm)
|
Letter
Agreement dated August 12, 2005 with Catherine M. Vaczy(15)
|
10.7
|
||
|
(nn)
|
Letter
Agreement dated December 22, 2005 between Phase III Medical, Inc. and
Catherine M. Vaczy+(29)
|
10(y)
|
||
|
(oo)
|
Letter
Agreement dated January 30, 2006 between Phase III Medical, Inc. and
Catherine M. Vaczy+(29)
|
10(cc)
|
||
|
(pp)
|
Letter
Agreement between Phase III Medical, Inc. and Catherine M. Vaczy effective
as of June 2, 2006+(6)
|
10.6
|
||
|
(qq)
|
January
26, 2007 Employment Agreement with Catherine M. Vaczy+(25)
|
10.4
|
||
|
(rr)
|
Letter
agreement dated January 9, 2008 with Catherine M. Vaczy+(27)
|
10.2
|
||
|
(ss)
|
Letter
Agreement dated as of August 12, 2004 by and between Phase III Medical,
Inc. and Dr. Wayne A. Marasco(30)
|
10.6
|
||
|
(tt)
|
Amendment
dated July 20, 2005 to Employment Agreement with Wayne A. Marasco dated
August 12, 2004(15)
|
10.3
|
||
|
(uu)
|
Letter
Agreement between Phase III Medical, Inc. and Wayne A. Marasco effective
as of June 2, 2006(6)
|
10.8
|
||
|
(vv)
|
Employment
Agreement between the Company and Denis O. Rodgerson dated January 19,
2006(28)
|
10.2
|
||
|
(ww)
|
Employment
Agreement between NeoStem, Inc. and Renee F. Cohen dated August 15,
2007+(31)
|
10.1
|
||
|
(xx)
|
Board
of Directors Agreement by and between Phase III Medical, Inc. and Joseph
Zuckerman dated January 20, 2004+(30)
|
10.8
|
||
|
(yy)
|
Form
of Lock Up and Voting Agreement (NeoStem) dated November 2, 2008 by and
between NeoStem, Inc., China BioPharmaceutical Holdings, Inc. and the
individuals listed therein(11)
|
10.3
|
|
(zz)
|
Form
of Lock Up and Voting Agreement (China BioPharmaceutical Holdings, Inc.)
dated November 2, 2008 by and between NeoStem, Inc., China
BioPharmaceutical Holdings, Inc. and the individuals listed therein(11)
|
10.4
|
||
|
(aaa)
|
Lease
Modification Agreement dated April 13, 2009 between NeoStem, Inc. and SLG
Graybar Sublease LLC and Original Agreement of Lease dated as of June 14,
2006, with related Consent and Assignment and Assumption Documents(35)
|
10.1
|
||
|
(bbb)
|
Consigned
Management and Technology Service Agreement dated June 1, 2009 among
Qingdao Niao Bio-Technology Ltd., NeoStem (China), Inc. and The
Shareholder of Qingdao Niao Bio-Technology Ltd.(38)
|
10.1
|
||
|
(ccc)
|
Equity
Pledge Agreement dated June 1, 2009 among Qingdao Niao Bio-Technology
Ltd., NeoStem (China), Inc. and The Shareholder of Qingdao Niao
Bio-Technology Ltd.(38)
|
10.2
|
||
|
(ddd)
|
Exclusive
Purchase Option Agreement dated June 1, 2009 among Qingdao Niao
Bio-Technology Ltd., NeoStem (China), Inc. and The Shareholder of Qingdao
Niao Bio-Technology Ltd.(38)
|
10.3
|
||
|
(eee)
|
Loan
Agreement dated June 1, 2009 between NeoStem (China), Inc. and The
Shareholder of Qingdao Niao Bio-Technology Ltd.(38)
|
10.4
|
||
|
(fff)
|
Consigned
Management and Technology Service Agreement dated June 1, 2009 among
Beijing Ruijieao Bio-Technology Ltd., NeoStem (China), Inc. and The
Shareholder of Beijing Ruijieao Bio-Technology Ltd.(38)
|
10.5
|
||
|
(ggg)
|
Equity
Pledge Agreement dated June 1, 2009 among Beijing Ruijieao Bio-Technology
Ltd., NeoStem (China), Inc. and The Shareholder of Beijing Ruijieao
Bio-Technology Ltd.(38)
|
10.6
|
||
|
(hhh)
|
Exclusive
Purchase Option Agreement dated June 1, 2009 among Beijing Ruijieao
Bio-Technology Ltd., NeoStem (China), Inc. and The Shareholder of Beijing
Ruijieao Bio-Technology Ltd.(38)
|
10.7
|
- 65
- -
|
(iii)
|
Loan
Agreement dated June 1, 2009 between NeoStem (China), Inc. and The
Shareholder of Beijing Ruijieao Bio-Technology Ltd.(38)
|
10.8
|
||
|
(jjj)
|
Network
Agreement, dated June 15, 2009, between NeoStem, Inc. and Enhance
BioMedical Holdings Limited(35)
|
10.2
|
||
|
(kkk)
|
Funding
Agreement made as of July 1, 2009 by and between NeoStem, Inc., China
Biopharmaceuticals Holdings, Inc., China Biopharmaceuticals Corp., and
RimAsia Capital Partners L.P.(33)
|
10.2
|
||
|
(lll)
|
Amendment
No. 1 dated June 29, 2009 to Lock Up and Voting Agreement (NeoStem) dated
November 2, 2008 by and between NeoStem, Inc., China BioPharmaceutical
Holdings, Inc. and the individuals listed therein.(35)
|
10.3
|
||
|
(mmm)
|
Joinders
dated June 29, 2009 to Lock Up and Voting Agreement (NeoStem) dated
November 2, 2008 by and between NeoStem, Inc., China BioPharmaceutical
Holdings, Inc. and the individuals listed therein.(35)
|
10.4
|
||
|
(nnn)
|
Employment
Agreement dated July 6, 2009 between NeoStem, Inc. and Alan Harris, M.D.,
Ph.D.+(34)
|
10.1
|
||
|
(ooo)
|
Letter
Agreement dated July 8, 2009 between NeoStem, Inc. and Catherine M. Vaczy,
Esq.+(34)
|
10.2
|
||
|
(ppp)
|
Amendment
dated July 29, 2009 to Employment Agreement dated May 26, 2006 between
NeoStem, Inc. and Robin Smith.+(37)
|
10.1
|
||
|
(qqq)
|
Employment
Agreement dated August 17, 2009 between NeoStem, Inc. and Anthony
Salerno(incorporated by reference to the Registration Statement on Form
S-4/A filed by registrant on October 6, 2009 and effective October 7,
2009)+
|
10(vvv)
|
|
(rrr)
|
Commercial
Lease dated as of September 1, 2009 between NeoStem, Inc. and Rivertech
Associates II, LLC, c/o The Abbey Group (incorporated by reference to
Pre-Effective Amendment No. 3 to Registration Statement on Form S-4/A,
File No. 333-160578, filed with the SEC by registrant on September 23,
2009)
|
10(www)
|
||
|
(sss)
|
Separation
Agreement and General Release made as of September 29, 2009, by and
between Mark Weinreb and NeoStem, Inc.+(42)
|
10(xxx)
|
||
|
(ttt)
|
Form
of Indemnification Agreement for directors, officers and certain other
employees(42)
|
10.2
|
||
|
(uuu)
|
Agreement
among Progenitor Cell Therapy, LLC, NeoStem, Inc. and NeoStem (China),
Inc. dated December 31, 2009(44)
|
10.1
|
||
|
(vvv)
|
Underwriting
Agreement, dated as of February 11, 2010, between NeoStem, Inc. and Roth
Capital Partners, LLC(46)
|
1.1
|
||
|
(www)
|
October
2009 English translation of Joint Venture Contract of Suzhou Erye
Pharmeutical Co.,Ltd. †
|
|||
|
(xxx)
|
Employment
Agreement dated as of November 19, 2009 between NeoStem, Inc. and
Christopher Duignan†
|
|||
|
14(a)
|
Code
of Ethics for Senior Financial Officers(12)
|
14.1
|
||
|
21(a)
|
Subsidiaries
of NeoStem, Inc.(45)
|
21
(a)
|
||
|
23(a)
|
Consent
of Holtz Rubenstein Reminick LLP†
|
23.1
|
||
|
31(a)
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002†
|
31.1
|
||
|
(b)
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002†
|
31.2
|
||
|
32(a)
|
Certification
of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002†
|
32.1
|
||
|
(b)
|
Certification
of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002†
|
32.2
|
- 66
- -
|
†
|
Filed
herewith.
|
|
*
|
Filed
with the Securities and Exchange Commission (the “SEC”) as an exhibit,
numbered as indicated above, to our current report on Form 8-K, dated
August 1, 2006, which exhibit is incorporated here by
reference.
|
|
+
|
Management
contract or compensatory plan or arrangement required to be filed as an
exhibit to this Form 10-K pursuant to Item 15(b) of Form
10-K.
|
|
|
(1)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our quarterly
report on Form 10-QSB for the quarter ended September 30, 2007, which
exhibit is incorporated here by
reference.
|
|
(2)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our quarterly
report on Form 10-Q for the quarter ended September 30, 2008, which
exhibit is incorporated here by
reference.
|
|
(3)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to Pre-Effective
Amendment No. 3 to our Registration Statement on Form SB-2/A, File No.
333-142923, which exhibit is incorporated here by
reference.
|
|
(4)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our current
report on Form 8-K, dated December 31, 2005, which exhibit is incorporated
here by reference.
|
|
(5)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our annual
report on Form 10-K for the year ended December 31, 2003, which exhibit is
incorporated here by reference.
|
|
(6)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our current
report on Form 8-K, dated June 2, 2006, which exhibit is incorporated here
by reference.
|
|
(7)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our
Registration Statement on Form S-1, File No. 333-137045, which exhibit is
incorporated here by reference.
|
|
(8)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our current
report on Form 8-K, dated January 26, 2007, which exhibit is incorporated
here by reference.
|
|
(9)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our current
report on Form 8-K, dated May 20, 2008, which exhibit is incorporated here
by reference.
|
|
(10)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our current
report on Form 8-K, dated August 28, 2008, which exhibit is incorporated
here by reference.
|
|
(11)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our annual
report on Form 10-K for the year ended December 31, 2008, which exhibit is
incorporated here by reference.
|
|
(12)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our
Registration Statement on Form S-3, File No. 333-145988, which exhibit is
incorporated here by reference.
|
|
(13)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our current
report on Form 8-K, dated April 13, 2009, which exhibit is incorporated
here by reference.
|
|
(14)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to Pre-Effective
Amendment No. 1 to our Registration Statement on Form S-1, File No.
333-137045, which exhibit is incorporated here by
reference.
|
- 67
- -
|
(15)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our quarterly
report on Form 10-Q for the quarter ended June 30, 2005, which exhibit is
incorporated here by reference.
|
|
(16)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our current
report on Form 8-K, dated February 6, 2003, which exhibit is incorporated
here by reference.
|
|
(17)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our quarterly
report on Form 10-Q for the quarter ended September 30, 2005, which
exhibit is incorporated here by
reference.
|
|
(18)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our current
report on Form 8-K, dated April 20, 2005, which exhibit is incorporated
here by reference.
|
|
(19)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our
Registration Statement on Form S-1, File No. 333-137045, which exhibit is
incorporated here by reference.
|
|
(20)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our current
report on Form 8-K, dated December 6, 2005, which exhibit is incorporated
here by reference.
|
|
(21)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our current
report on Form 8-K, dated November 13, 2007, which exhibit is incorporated
here by reference. Certain portions of Exhibits 10(w) (10.2) and 10(x)
(10.3) were omitted based upon a request for confidential treatment, and
the omitted portions were filed separately with the SEC on a confidential
basis.
|
|
(22)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our quarterly
report on Form 10-Q for the quarter ended March 31, 2009, which exhibit is
incorporated here by reference.
|
|
(23)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our annual
report on Form 10-K for the year ended December 31, 2006, which exhibit is
incorporated here by reference.
|
|
(24)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our quarterly
report on Form 10-Q for the quarter ended March 31, 2006, which exhibit is
incorporated herein by reference.
|
|
(25)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our second
current report on Form 8-K, dated January 26, 2007, which exhibit is
incorporated here by reference.
|
|
(26)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our current
report on Form 8-K, dated September 27, 2007, which exhibit is
incorporated here by reference.
|
|
(27)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our current
report on Form 8-K, dated January 9, 2008, which exhibit is incorporated
here by reference.
|
|
(28)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our current
report on Form 8-K, dated January 19, 2006, which exhibit is incorporated
here by reference.
|
|
(29)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our annual
report on Form 10-K for the year ended December 31, 2005, which exhibit is
incorporated here by reference.
|
|
(30)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our annual
report on Form 10-K for the year ended December 31, 2004, which exhibit is
incorporated here by reference.
|
|
(31)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our current
report on Form 8-K, dated August 15, 2007, which exhibit is incorporated
here by reference.
|
- 68
- -
|
(32)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our current
report on Form 8-K, dated July 2, 2009, which exhibit is incorporated here
by reference.
|
|
(33)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our current
report on Form 8-K, dated July 1, 2009, which exhibit is incorporated here
by reference.
|
|
(34)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our current
report on Form 8-K, dated July 6, 2009, which exhibit is incorporated here
by reference.
|
|
(35)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our
Pre-Effective Amendment No. 4 to Registration Statement Form S-4/A, File
No. 333-160578, which exhibit is incorporated by
reference.
|
|
(36)
|
Omitted.
|
|
(37)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our current
report on Form 8-K dated July 29, 2009, which exhibit is incorporated here
by reference.
|
|
(38)
|
Filed
as an exhibit, numbered as indicated above, to our current report on Form
8-K, dated July 2, 2009, which exhibit is incorporated here by
reference.
|
|
(39)
|
Omitted.
|
|
(40)
|
Filed
with the SEC on August 28, 2009 as an exhibit, numbered as indicated
above, to our Pre-Effective Amendment No. 2 to Registration Statement on
Form S-4/A, File No. 333-160578, which exhibit is incorporated here by
reference.
|
|
(41)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our
Registration Statement on Form S-8, File No. 333-162733, which exhibit is
incorporated here by reference.
|
|
(42)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our
Pre-Effective Amendment No. 4 to Registration Statement on Form S-4/A,
File No. 333-160578, which exhibit is incorporated here by
reference.
|
|
(43)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our
Pre-Effective Amendment No. 4 to Registration Statement on Form S-4/A,
File No. 333-160578, which exhibit is incorporated here by
reference.
|
|
(44)
|
Filed
with the SEC on January 7, 2010, as an exhibit, numbered as indicated
above, to our current report on Form 8-K dated December 31, 2009 (subject
to confidential treatment as indicated
therein).
|
|
(45)
|
Filed
with the SEC as an exhibit, numbered as indicated above, to our
Pre-Effective Amendment No. 3 to Registration Statement on Form S-1, File
No. 333-163741, which exhibit is incorporated here by
reference.
|
|
(46)
|
Filed
with the SEC on February 12, 2010, as an exhibit, numbered as indicated
above, to our current report on Form 8-K dated February 11, 2010, which
exhibit is incorporated here by
reference.
|
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City of New York, State of
New York, on March 31, 2010.
|
NEOSTEM,
INC.
|
|||
|
By
|
/s/
Robin L. Smith
|
||
|
Name:
Robin L. Smith
|
|||
|
Title:
Chief Executive Officer
|
|||
- 69
- -
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/Robin
L. Smith
|
Director,
Chief Executive Officer and Chairman of
|
March
31, 2010
|
||
|
Robin
L. Smith, M.D.
|
the
Board (Principal Executive Officer)
|
|||
|
/s/Larry
A. May
|
Chief
Financial Officer (Principal Financial
|
March
31, 2010
|
||
|
Larry
A. May
|
Officer
|
|||
|
/s/Christopher
C. Duignan
|
Vice
President, Finance (Principal Accounting
|
March
31, 2010
|
||
|
Christopher
C. Duignan
|
Officer)
|
|||
|
/s/Richard
Berman
|
Director
|
March
31, 2010
|
||
|
Richard
Berman
|
||||
|
/s/Steven
S. Myers
|
Director
|
March
31, 2010
|
||
|
Steven
S. Myers
|
||||
|
/s/Drew
Bernstein
|
Director
|
March
31, 2010
|
||
|
Drew
Bernstein
|
||||
|
/s/Eric
Wei
|
Director
|
March
31, 2010
|
||
|
Eric
Wei
|
||||
|
/s/Edward
C. Geehr
|
Director
|
March
31, 2010
|
||
|
Edward
C. Geehr, M.D.
|
||||
|
/s/Shi
Mingsheng
|
Director
|
March
31, 2010
|
||
|
Shi
Mingsheng
|
||||
- 70
- -
Joint
Venture Contract
OF
SUZHOU
ERYE PHARMACEUTICAL CO., LTD.
Superseding
the Version Executed on June 16, 2005
Amended
and Restated on October 21, 2009
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CHAPTER
I GENERAL
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2
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CHAPTER
II PURPOSE, BUSINESS SCOPE AND SCALE OF THE JV COMPANY
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2
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CHAPTER
III TOTAL INVESTMENT AND REGISTERED CAPITAL
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3
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CHAPTER
IV LIABILITIES OF THE PARTIES
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4
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CHAPTER
V BUSINESS OPERATION
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6
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CHAPTER
VI BOARD OF DIRECTORS
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7
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CHAPTER
VII OPERATION AND MANAGEMENT ORGANIZATION
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8
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CHAPTER
VIII YARD AND PLANT
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9
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CHAPTER
IX EMPLOYMENT MANAGEMENT
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9
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CHAPTER
X FINANCE, ACCOUNTING AND AUDITING
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9
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CHAPTER
XI DISTRIBUTION OF PROFITS
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10
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CHAPTER
XII NEW PLANT CONSTRUCTION
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10
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CHAPTER
XIII COOPERATION TERM AND ASSET DISPOSAL AFTER TERMINATION
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12
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CHAPTER
XIV AMENDMENT, CHANGE AND CANCELLATION OF CONTRACT
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12
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CHAPTER
XV LIABILITIES FOR DEFAULT
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13
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CHAPTER
XVI DISPUTE RESOLUTION
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13
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CHAPTER
XVII EFFECTIVENESS AND OTHERS
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14
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This
Joint Venture Contract (this “Contract”)
is entered into by and between:
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Party A:
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Suzhou Erye Economy & Trade
Co., Ltd.
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| Registered Address: | Tainan Road, Canglang District, Suzhou |
| Legal Representative: | Shi Mingsheng Title: Chairman Nationality: Chinese |
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Party B
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China Biopharmaceuticals
Holdings Inc.
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| Legal Address: |
101
East 52nd
Street, New York, New York
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| Legal Representative: | Peng Mao Title: CEO Nationality: Canadian |
WHEREAS,
(1) Party
A is a limited liability company duly registered and established and validly
existing under the laws of the People’s Republic of China (the “PRC”), and
Party B is a limited liability company duly established and validly existing
under the laws of the State of Delaware of the United States of America (the
“U.S.”).
(2) NeoStem,
Inc. (“NeoStem”)
is a corporation duly established and validly existing under the laws of the
State of Delaware of the U.S., and Party B is a wholly-owned subsidiary of
NeoStem.
(3) Suzhou
Erye Pharmaceutical Co., Ltd. (the “JV
Company” or the “Subsisting
Company”) is a limited liability company duly registered and established
and validly existing under the laws of the PRC.
(5) To
further specify the rights and obligations of Party A and Party B, Party A and
Party B agree to enter into this Contract to supersede the original JV legal
documents by amending and restating all thereof so that the original JV legal
documents will have no further effect when this Contract becomes
effective.
DEFINITIONS:
(1) “Subsistence-after-Split-off”
shall mean the status of the JV Company where it is split off on September [ ],
2009 according to a resolution of the Board of Directors of the JV
Company. Specifically, the JV Company (the Subsisting Company) will
maintain business after the split-off and will carry on partial assets and all
liabilities (other than the liabilities related to the assets that are split
off), and, in the meanwhile, a new company (the “New
Company”) will be set up to carry on partial assets. The
Subsisting Company has executed a Split-off Agreement with the New Company which
will become effective upon the change registration with the competent
administration of industry and commerce.
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(2) “Split-off
Date” shall mean the date of the change registration for the aforesaid
split-off, as approved by the PRC government, with the competent administration
of industry and commerce, being the first day as from which the Split-off
Agreement becomes effective pursuant to the PRC laws.
(3) “Relocation of the
JV Company” shall mean the construction plan for a new operation premises
already carried out by the JV Company, pursuant to which the JV Company will
purchase land and new equipment on the new yard (located at Huangdai Town,
Xiangcheng District, Suzhou) and build plants thereon, and remove its operating
activities from the old yard (859 Panxu Road, Suzhou) to the new yard after
obtaining the production permit from the government authority.
(4) “Control”
shall mean the activities of a party to influence the operation and decisions of
the other party, through holding more than fifty percent (50%) of the equity
interest, or being entitled to appoint or recommend more than fifty percent
(50%) of directors of the Board, or agreement or acceptance of authorization or
otherwise. “Controlling
Person” or “Parent
Company” shall mean such controlling party. The Control of a
third company by a Controlling Person through the controlled company shall be
deemed as a direct Control of such third company by the Controlling
Person.
(5) “Affiliate”
shall include the Parent Company controlling a party, any subsidiary under
control by such party or any company under the common control with such
party.
GENERAL
Article
1 Subject
to the Law of the People’s
Republic of China on Sino-Foreign Equity Joint Venter Enterprises and
other applicable laws and regulations of the PRC, Party A and Party B agree to
carry on the operation of Suzhou Erye Pharmaceutical Co., Ltd. as a joint
venture (the “JV
Company”). The name of the JV Company is “Suzhou Erye
Pharmaceutical Co., Ltd.” in English and “苏州二叶制药有限公司” in
Chinese.
Article
2 The
legal address of the JV Company is at 859 Panxu Road, Canglang District, Suzhou,
Jiangsu Province.
Article
3 Any
and all of the activities of the JV Company shall be in compliance with the laws
and regulations of the PRC and subject to the jurisdiction and protection of the
PRC law.
PURPOSE,
BUSINESS SCOPE AND SCALE OF THE JV COMPANY
Article
4 The
purpose of the JV Company is to develop an internationally leading company by
mutual efforts based on the desire of strengthening economic cooperation and
technical communications. Both Party A and Party B will try to
achieve the satisfactory economic benefits through scientific operation and
management, and explore and develop the business of the JV Company in the spirit
of mutual understanding and mutual cooperation.
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Article
5 The
business scope of the JV Company covers the production and sale
of sterile injection powder (penicillin and cefa-), hard capsule,
crude drug (including penicillin) and aluminum cover of injection bottle, the
operation of export of antibiotic active compound and antibiotic series sterile
injection powder and capsule manufactured by the JV Company and of technologies
related thereto, the operation of export of raw and auxiliary materials,
machinery equipment, instrumentations, fittings and components, and technologies
necessary for the production and scientific research of the JV Company
(excluding products and technologies the operation of which is restricted or the
import/export of which is prohibited by the State), and the operation of the
business of processing with imported materials and the business of processing
according to samples, assembling parts conducting supplied by investor or
clients and/or conducting compensation trade.
Article
6 The
scale of the JV Company’s production shall range from RMB200,000,000 to
300,000,000 as to its annual sales revenue, and the scale will be expanded or
adjusted gradually based on the market status.
TOTAL
INVESTMENT AND REGISTERED CAPITAL
Article
7 The
amount of the total investment of the JV Company, as a subsisting company upon
the Subsistence-after-Split-off, shall be changed to Renminbi Thirty Two Million
Two Hundred and Forty Thousand yuan (RMB32,240,000) from the
original Renminbi Forty Million Eight Hundred and Sixteen Thousand Four Hundred
yuan
(RMB40,816,400).
Article
8 The
amount of the registered capital of the JV Company, upon the
Subsistence-after-Split-off, shall be Renminbi Sixteen Million One Hundred and
Twenty Thousand yuan
(RMB16,120,000) and its paid-in capital then shall be Renminbi Sixteen Million
One Hundred and Twenty Thousand yuan
(RMB16,120,000).
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1.
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The
amount of the registered capital of the JV Company before the aforesaid
split-off, being Renminbi Twenty Million Four Hundred Thousand yuan (RMB20,400,000),
has been fully paid up, among
which,
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A. an
amount of Renminbi Ten Million yuan (RMB10,000,000) was
subscribed by the original 38 Chinese individual shareholders upon the
establishment of the JV Company on June 6, 2003 as a PRC domestic
company. Party A became a shareholder of the JV Company by purchasing
such amount from those original 38 Chinese individual shareholders on May 19,
2008.
B. an
amount of Renminbi Ten Million Four Hundred Thousand yuan (RMB10,400,000) was
injected by CBH in two installments to increase the investment, respectively, in
February of 2006 and April of 2006, totaling Two Million Two Hundred Thousand US
dollars (US$2,200,000), equal to Renminbi Eighteen Million Two
Hundred and Eight Thousand Three Hundred yuan (RMB18,208,300) as
converted at the then exchange rate, in which the amount of Renminbi Ten Million
Four Hundred Thousand yuan (RMB10,400,000) has been
confirmed as the registered capital of the JV Company and the residual of which
is accounted as capital surplus under its capital reserve.
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2.
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Since
the JV Company has been split off, the JV Company, as a subsisting
company, sees a reduction in the amount of its registered capital from
Renminbi Twenty Million Four Hundred Thousand yuan (RMB20,400,000)
down to Renminbi Sixteen Million One Hundred and Twenty Thousand yuan (RMB16,120,000),
among which Party A is holding its registered capital of Renminbi Seven
Million Eight Hundred and Ninety Eight Thousand Eight Thousand yuan (RMB7,898,800) and
Party B is holding its registered capital of Renminbi Eight Million Two
Hundred and Twenty One Thousand Two Hundred yuan
(RMB8,221,200). Party A and Party B have paid up their
subscribed amounts of registered capital
respectively.
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Article
9 When
this Contract becomes effective, Party A holds 49% of the total registered
capital of the JV Company and Party B holds 51% of the total registered capital
of the JV Company.
Article
10 If
a party hereto (the “Transferring
Party”) intends to transfer its equity interest in the JV Company to a
third party, such Transferring Party must first offer such equity interest to
the other party hereto (the “Non-Transferring
Party”) in a writing (the “Offer”)
setting forth the terms and conditions for the interest to be
transferred. If the Non-Transferring Party refuses the Offer, or
fails to accept the Offer within 90 days (the “Consideration
Period”), or fails to close on the Offer within 45 days (the “Closing
Period”) after accepting the Offer, the Transferring Party shall be free
to offer, within 90 days commencing from the earliest of such refusal, the end
of the Consideration Period or the end of the Closing Period, its equity
interest to any third party, and close the transfer within 45 days after such
offer is accepted, on such terms and conditions as can be verified by the
Non-Transferring Party to be no more favorable than those for the Offer to the
Non-Transferring Party.
The
transfer of its equity interest by either party hereto to any other third party
shall mean such circumstance that causes the change of the actual Controlling
Person of the Transferring Party, including but not limited to:
1. Either
party hereto directly transfers its equity interest in the JV Company to any
third party, or otherwise disposes of such equity interest to the effect that
such equity interest would be actually transferred; or
2. The
actual Controlling Person of either party hereto holding more than 50% of the
equity interest of such party changes unless such Controlling Person is a public
company.
LIABILITIES
OF THE PARTIES
Article
11 Either
party hereto represents and warrants to the other party hereto as
follows:
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1. It
has any and all of the civil rights and capacities necessary to the execution
and performance of this Contract which will not violate or breach any and all of
the legal documents, including but not limited to the articles of association,
contracts and agreements, binding on it.
2. It
has taken or will take any and all of the necessary actions in order to obtain
any and all of the consents, approvals, authorizations and permits required by
the execution and performance of this Contract.
3. It
will make its best efforts to cooperate closely with the other party hereto on
reliance of the doctrines of good faith, pragmatism and responsibility so as to
cause this Contract to be performed in a sound and smooth manner, and strictly
comply with any and all of the principles set out herein and commit nothing that
may impair the performance of this Contract.
4. As
of the date on which this Contract becomes effective, it has not, and undertakes
that none of its Affiliates has, individually or jointly with any third party,
engaged or participated in, or owned any interests or benefits in, any business
of chemical drugs that directly competes with the JV Company.
5. Either
party hereto confirms with the other party hereto that the equity interest of
the other party hereto in the JV Company is legitimate and valid and that it
will use its best efforts to defend the shareholder’s interests of the other
party hereto.
Article
12 Party
A represents and warrants as follows:
1. Any
and all of the materials that have been or will be furnished to Party B by it
shall be true, complete, correct and not misleading.
2. It
has obtained any requisite authority, permit, authorization, license and
consent, including but not limited to the business license issued by the
competent administration of industry and commerce, necessary to carry on its
business operation, and its operation has not exceeded the approved business
scope and provisions of its articles of association.
Article
13 Party
B represents and warrants as follows:
1. Any
and all of the information disclosed to Party A by it is true, timely and
complete.
2. It
shall not make any claim over or challenge any agreement entered into by the JV
Company as of the date hereof so long as such agreement has been disclosed
pursuant to the U.S. securities law or was entered into in the ordinary course
of business with normal commercial terms.
3. It
has informed NeoStem of the contents hereof. NeoStem irrevocably
undertakes to guarantee its obligations and liabilities hereunder, and the
undertaking letter issued by NeoStem for such purpose in the form attached
hereto shall constitute an integral part of this Contract.
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4. Prior
to the investment by it in any chemical drug manufacturing company that competes
directly with the business of the JV Company, it must obtain the consent from
the JV Company. It shall consult with the JV Company prior to
introducing any new chemical drug into the PRC with respect to whether the same
can be produced in a more cost-saving or efficient manner by the JV
Company.
BUSINESS
OPERATION
Article
14 Any
business conducted by the JV Company shall be decided and carried out by the
Board of Directors of the JV Company.
Party B
will be entitled to, with a reasonable prior notice to the JV Company,
periodically send its representatives to visit the JV Company and consult with
the senior management of the JV Company with respect to operation, financial
conditions, strategy and other similar issues.
Article
15 The
JV Company shall mainly purchase the raw and auxiliary materials necessary for
its production in the PRC domestic market, and sell most of its finished
products in the PRC domestic market, with a small amount sold
abroad.
Article
16 The
JV Company shall continue to use the existing production equipment and
technologies to conduct its business. If the purchase of any
additional equipments or technologies becomes necessary, the priority will be
given to the PRC domestic market.
Article
17 Should
NeoStem succeed in its development of stem cell medicine, Party B shall, if
permitted by the applicable PRC law, be responsible for introducing such
medicine into the PRC, in which case the JV Company shall enjoy the priority
right of production and sale of the same in the PRC, subject, however, to the
capability of the JV Company in such production and sales activities, taking
into consideration factors including the competitive costs, time-to-market,
quality, stability and other similar aspects of the same.
Article
18 Party
B or NeoStem shall from time to time study the feasibility of introducing
certain commercially potential patented medicine into the PRC under the
appropriate market conditions, based on the existing resources and general
market circumstances. In the event Party B or NeoStem fails to
support the JV Company in terms of products, Party B or NeoStem shall, subject
to the approval of their respective board of directors, provide the JV Company
with the R&D funds support based on its future demands and business
development.
Article
19 Since
the integration of the PRC domestic pharmaceutical industry provides a new
opportunity, Party A will seize any chance to seek and land some merger and/or
acquisition projects favorable for the development of the JV Company pursuant to
the guidelines and standards mutually agreed by Party A and Party B or
NeoStem. Party B undertakes that NeoStem will conduct a due diligence
investigation towards the target acquisition together with Party A, and NeoStem
or Party B will, subject to the approval of NeoStem’s board of directors,
provide capital or equity support therefor.
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BOARD
OF DIRECTORS
Article
20 The
number of the members of the Board of Directors of the JV Company shall be
reduced from seven (7) to five (5), among whom two (2) Directors shall be
appointed by Party A and three (3) Directors shall be appointed by Party
B. One of the Directors appointed by Party B shall be the director on
the board of directors of NeoStem appointed by Party A (and such Director shall
represent the interests of Party B in the discharge of his or her duties as a
Director). The tenure of each Director shall be four (4) years,
renewable upon re-appointment consecutively.
The
Chairman of the JV Company shall be the Director appointed by Party A to the
Board of Directors and shall be the legal representative of the JV
Company.
The CFO
of the JV Company shall be appointed by Party A.
Article
21 The
Board of Directors shall be the highest authority of the JV Company and shall
decide any and all of the major issues of the JV Company.
With
regard to any of the following matters, no resolution may be adopted without the
affirmative voting of more than seventy five percent (75%) of the entire members
of the Board of Directors:
1. Disposition
of any and all of the material assets of the JV Company;
2. Change
of more than 50% of equity interest;
3. Change
of more than a half of the entire Directors, in the accumulative aggregate,
within any consecutive twenty four (24) months, excluding any change due to
retirement, injury, illness, death, voluntary resignation, termination of
employment or any other similar cause;
4. Decision
on the material strategy of operation and development of the JV Company;
and
5. Any
related-party transaction between the JV Company and its shareholders and/or
Affiliates.
With
regard to any of the following matters, no resolution may be adopted without the
unanimous consensus of all the Directors present at a board
meeting:
1. Amendment
to the Articles of Association of the JV Company;
2. Termination
or dissolution of the JV Company;
3. Increase
or reduction of the registered capital of the JV Company; and
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4. Merger
or divestiture of the JV Company.
Except
the major issues set forth above, decisions with respect to all other issues
required voting of the Directors may be adopted by more than half of the entire
members of Board of Directors.
Article
22 The
Board of Directors shall meet at least one (1) time during each year, and shall
be convened and presided over by the Chairman or, if the Chairman is incapable
of doing so, by a Director authorized by the Chairman. Upon the
request of any two Directors, the Chairman shall convene an interim meeting of
the Board of Directors. Any Director may attend any Board meeting
telephonically.
Article
23 The
quorum for any meeting of the Board of Directors shall be at least four (4)
Directors.
If a
Director is unable to attend a meeting of the Board of Directors, he or she may
issue a proxy and entrust a representative to attend the meeting and vote on his
or her behalf, whose attendance shall be deemed the same as attendance by him or
her.
The
minutes of any and all of the meetings of the Board of Directors shall be signed
by all the Directors present at the meeting before kept into files.
A meeting
of the Board of Directors shall generally be held at the place of legal address
of the JV Company.
OPERATION
AND MANAGEMENT ORGANIZATION
Article
24 The
JV Company shall establish its management structure responsible for its
day-to-day corporate management. The management structure shall
consist of one (1) General Manager who shall be engaged by the Board of
Directors for a tenure of four (4) years, renewable upon re-assignment
consecutively.
Article
25 The
General Manager shall be responsible for carrying out any and all of the
resolutions of the Board of Directors and organizing and directing the
day-to-day management of the JV Company. Within the authorization by
the Board of Directors, the General Manager shall act on behalf of the JV
Company, hire or dismiss any employees under his or her level, and exercise such
other powers as granted by the Board of Directors.
Article
26 The
Chairman or any Director may concurrently serve as General Manager or other
senior officer of the JV Company upon the engagement by the Board of
Directors. In the event the General Manager or any of other senior
officers practices graft or commits a gross neglect of duty, the Board of
Directors may make a resolution at any time to dismiss and impose a necessary
punishment on him or her.
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YARD
AND PLANT
Article
27 With
respect to the old yard of the JV Company in use and located at 859 Panxu Road,
Suzhou, the land area is 45,024.2 square meters and construction area is
33,492.75 square meters. The land use right to and all the buildings
on such old yard have been split off to the New Company because of the
occurrence of the Subsistence-after-Split-off to the JV Company which will
lease, at a token price, the land and plant buildings (i.e. the old yard) from
the New Company, and maintain the original operation and businesses
unchanged.
The land
area of the new yard of the JV Company located at Huangdai Town, Xiangcheng
District, Suzhou is 107,385.6 square meters, while buildings and plants thereon
are now under construction. The land use right to and the buildings
on such new yard belong to and are possessed by the JV Company.
CHAPTER
IX
EMPLOYMENT
MANAGEMENT
Article
28 The
JV Company undertakes that it will continue to employ each and every former
employee before joint venture. Any recruitment and dismissal of the
employees of the JV Company shall be reviewed and determined by the Board
according to the PRC Labor Law, the PRC Labor Contract Law and other applicable
PRC regulations. The JV Company and the trade union thereof shall collectively
or with individual separately enter into labor contracts. The labor
contract shall, once duly executed, be filed with the competent local labor
administration authority.
Article
29 All
payments in connection with salaries, benefits and labor insurances of the
employees of the JV Company shall be made pursuant to the PRC Labor Law and
other applicable PRC regulations.
CHAPTER
X
FINANCE,
ACCOUNTING AND AUDITING
Article
30 Any
fiscal year of the JV Company shall commence on January 1st and end
on December 31st of the
same year. Any and all of the vouchers, bills, statements and books
shall be prepared in Chinese. The JV Company shall use Renminbi as
its standard bookkeeping currency.
The JV
Company shall, in most cases, make settlement of accounts monthly and final
settlement at the end of each year. All financial statements shall be
prepared according to the accounting principles of the PRC. The JV
Company shall, on the annual basis, deliver to Party B the complete audited
financial statements.
Party A
shall use its efforts to cause the JV Company to take any and all of the
necessary actions and provide any and all of the necessary information of the JV
Company to NeoStem so that NeoStem can timely fulfill its reporting obligations
under the U.S. securities law, including compliance with the accounting rules of
the Securities and Exchange Commission of the U.S. Party A shall
support NeoStem’s corporate development strategy and compliance with the U.S.
securities law.
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Article
31 A
PRC CPA shall be retained for financial auditing and shall report the results to
the Board of Directors and the General Manager.
CHAPTER
XI
DISTRIBUTION
OF PROFITS
Article
32 The
JV Company shall go through formalities in respect of reduction, exemption and
payment of income tax imposed upon its profits according to the Law of the People’s Republic of
China of Enterprise Income Taxes and regulations related
thereto. After deduction of public reserves from the profits for a
given year, the Board of Directors shall make bonus distribution plan based on
the operation of that year.
Article
33 The
dividend distributions to the shareholders shall be made in proportion to the
shareholders’ equity, unless otherwise prescribed herein.
CHAPTER
XII
NEW
PLANT CONSTRUCTION
Article
34 For
the purpose of a smooth completion of the relocation of the JV Company, Party B
agrees to continue to be responsible for costs for such relocation, which is
only limited to, and will not be responsible for any cost
exceeding:
1. Profit distribution prior to the
Split-off Date
Any and
all of the undistributed profits as of the Split-off Date (subject to the
statements audited under the PRC accounting principles) shall be used for
dividend distribution. Party A and Party B agree that such dividend
distribution shall be made by the end of March of 2010 and shall instruct the
Directors to execute a board resolution authorizing such dividend
distribution. Specifically,
1.1 49%
of such dividend distribution (after tax) shall be allocated to Party A who
shall, upon its receipt of the same, loan back to the JV Company who shall later
repay Party A gradually following the completion of the construction of the new
plant (together with interest thereon, computed at the then applicable standard
interest rate for Renminbi loans by financial institutions announced by the
People’s Bank of China). Such loan by Party A shall not be deemed as
the performance by Party B of part of its obligation to fund the relocation of
the JV Company.
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1.2 51%
of such dividend distribution (after tax) shall be allocated directly to the JV
Company as the new plant construction fund. Party A and Party B agree
to characterize such fund as the capital surplus for such 51% interest in the JV
Company as subscribed by Party B, to be recorded under the capital reserve entry
of the JV Company (subject to the auditing opinion of a PRC
accountant). If such 51% dividend distribution results in any tax
liability onto Party B, the JV Company shall allocate a sufficient dividend in
cash to Party B to cover such tax liability.
2. Profit distribution in three years
following the Split-off Date
For a
three (3) years period commencing on the first day of the first fiscal quarter
after this Contract becomes effective and ending on the third anniversary
thereof, the operating net profit of the JV company shall be distributed fully
as a dividend distributed annually within 90 days after the prior fiscal year
ends. Specifically,
2.1 49%
of the dividend distribution (after tax) shall be allocated to Party A who
shall, upon its receipt of the same, loan back to the JV Company who shall later
repay Party A gradually following the completion of the construction of the new
plant (together with interest thereon, computed at the then applicable standard
interest rate for Renminbi loans by financial institutions announced by the
People’s Bank of China). Such loan by Party A shall not be deemed as
the performance by Party B of part of its obligation to fund the relocation of
the JV Company.
2.2
45% of the dividend distribution (after tax) shall be allocated directly to the
JV Company as part of the new plant construction fund. Party A and Party B agree
to characterize such fund as the capital surplus for such 51% interest in the JV
Company as subscribed by Party B, to be recorded under the capital reserve entry
of the JV Company (subject to the auditing opinion of a PRC
accountant). If such 45% dividend distribution results in any tax
liability onto Party B, the JV Company shall allocate a sufficient dividend in
cash to Party B to cover such tax liability.
2.3 6%
of the dividend distribution (after tax withholding) shall be allocated directly
to Party B for the direct purpose of NeoStem’s operating expenses.
2.4 In
the event of the sale of all of the assets of the JV Company or liquidation of
the JV Company, Party B shall be entitled to receive the return of such capital
surplus before any distribution of the JV Company’s assets is made based upon
the shareholding percentages of the shareholders. Upon an initial
public offering of the JV Company which raises at least Renminbi Fifty Million
yuan (RMB50,000,000),
to the extent permitted by the applicable PRC law and accounting principles and
approved by the Board of Directors, Party B shall be entitled to receive the
return of such capital surplus.
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2.5 Party
A and Party B shall respectively instruct their Directors in the JV Company to
execute a board resolution authorizing such dividend distribution.
Article
35 Party
A undertakes that, after the implementation of Article 34, if the JV Company is
still in need of fund, the JV Company may finance itself through
loans. Party A shall exert its best efforts to assist the JV Company
in raising funds and shall endeavor to complete the relocation of the JV Company
within three (3) years. Further, the land, buildings, equipment
and other assets of the new plant of the JV Company shall belong to and be
possessed by the JV Company and shall be recorded into the balance sheet of the
JV Company.
Article
36 Party
B undertakes that, during the course of the relocation to the new plant, it
shall use its efforts to attempt to provide certain loan assistance to the JV
Company.
Article
37 Relocation
After the
new yard of the JV Company (located at Huangdai Town, Xiangcheng District,
Suzhou) meet such conditions precedent to its production as specified by the
competent governmental authority or authorities and any and all of the equipment
for its operation have been conveyed into the new yard and can run completely,
the Subsisting Company must use its best efforts to promptly terminate its
operating activities in the old yard, and the lease between the JV Company and
the New Company shall then terminate.
CHAPTER
XIII
COOPERATION
TERM AND ASSET DISPOSAL AFTER TERMINATION
Article
38 The
cooperation term of the JV Company shall be twenty five (25) years, and the
issuance date of the JV Company’s business license shall be deemed as its
establishment date.
Article
39 The
JV Company shall enter into liquidation according to law after the expiration or
upon any prior termination of cooperation term. After the
verification of the liquidated finance by accounting firm, the remaining assets
shall be allocated or assumed by Party A and Party B pro rata in proportion to
their equity interests in the JV Company.
CHAPTER
XIV
AMENDMENT,
CHANGE AND CANCELLATION OF CONTRACT
Article
40 Any
amendment to this Contract and/or the exhibits hereto shall not become effective
unless and until Party A and Party B have executed a supplementary contract with
respect thereof.
Article
41 Upon
the proposal initiated by either Party and the unanimous consensus adopted at a
meeting of the Board of Directors, the cooperation term may be extended by
filing to the competent foreign economic and trade cooperation bureau or its
entrusted approval agency six (6) months prior to the expiration
thereof.
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Article
42 This
Contract can, after Party A and Party B have reached an agreement to the
aftermath matters, be early terminated for any of the following
reasons:
1. Either
party hereto proposes to terminate this Contract and such proposal has been
agreed by the two parties;
2. The
performance of this Contract become impossible because of such a force majeure
event as earthquake, typhoon, flood, fire or warfare which is unforeseeable and
the consequence of which cannot be prevented or is unavoidable;
3. The
JV Company has been suffering losses for consecutive years and is incapable of
continuing its operation; and
4. The
JV Company is unable to meet the sales scale set forth herein due to failure by
either party hereto to perform its obligations under, or its violation of, this
Contract or the Articles of Association.
CHAPTER
XV
LIABILITIES
FOR DEFAULT
Article
43 If
the JV Company has suffered any damages due to any fault of either party hereto,
such defaulting party shall indemnify the JV Company for the losses as a result
thereof.
Article
44 If
this Contract and/or the exhibits hereto shall become non-performable or cannot
be performed to its full extent due to any fault of either party hereto, such
defaulting party shall assume such liabilities for default and indemnify
relevant losses thereof. If both Party A and Party B have been in
default, Party A and Party B shall assume their respective and separate
liabilities and indemnify relevant losses in light of the actual
circumstances.
CHAPTER
XVI
DISPUTE
RESOLUTION
Article
45 If
there is any dispute arising out of or in connection with this Contract, Party A
and Party B shall resolve such dispute through amicable negotiations, failing
which the dispute shall be submitted to China International Economic and Trade
Arbitration Commission for arbitration in Beijing in accordance with its
arbitration procedure and relevant rules. Such arbitral award is
final and binding upon Party A and Party B. The arbitration fees
shall be borne by the party hereto who loses the arbitration.
Article
46 During
the course of arbitration, except for the provisions hereof that are in dispute
and under arbitration, this Contract shall continue to be performed to the
effect that such disputed provisions shall not affect the normal operation of
the JV Company.
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CHAPTER
XVII
EFFECTIVENESS
AND OTHERS
Article
47 This
Contract shall be approved by the Ministry of Commerce of the PRC or its branch
offices and shall not become effective unless and until the date on which such
approval certificate has been obtained.
Article
48 The
ancillary agreements entered into in accordance with the principles set forth in
this Contract shall constitute an integral part of this
Contract. Party A and Party B shall cooperate with each other to
amend the Articles of Association of the JV Company to reflect the terms of this
Contract as hereby amended.
Article
49 The
execution, validity, interpretation, performance and the dispute resolution of
this Contract shall be governed by the laws of the PRC.
Article
50 Such
legal addresses of Party A and Party B as set forth in this Contract shall be
their respective communication addresses to which the written documents to each
party hereto shall be addressed and shall be deemed delivered if so
addressed.
Article
51 This
Contract is made in Chinese into ten (10) originals, with Party A and Party B
each holding two (2) of them. This Contract can be made into several
counterparts to be used for filing with the competent governmental
authorities.
Article
52 This
Contract is duly executed by the legal or authorized representatives of Party A
and Party B respectively on October [ ],
2009.
[THE
REMAINING OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
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(Execution Page of the Joint Venture
Contract of Suzhou Erye Pharmaceutical Co., Ltd.)
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For
and on behalf of
Party
A: Suzhou Erye Economy
& Trade Co., Ltd.
By: _________________________
Shi
Mingsheng, Chairman
For
and on behalf of
Party
B: China
Biopharmaceuticals Holdings Inc.
By:___________________________
Peng
Mao, President
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Undertaking
NeoStem,
Inc. (“NeoStem”)
is a corporation duly established and validly existing under the laws of the
State of Delaware of the U.S.
WHEREAS,
NeoStem’s
wholly owned subsidiary China Biopharmaceuticals Holdings Inc. (“CBH”) and
Suzhou Erye Economic and Trade Co., Ltd. (“EET”) have
entered into a Joint Venture Contract of Suzhou Erye Pharmaceutical Co., Ltd.
(the “JV
Contract”) on October [ ],
2009.
NOW,
THEREFORE NeoStem hereby undertakes:
1. THAT
NeoStem fully understands and absolutely agrees to the whole content of the JV
Contract;
2. THAT
CBH has obtained NeoStem’s necessary authorization to execute the JV
Contract;
3. THAT
CBH’s obligations and liabilities under the JV Contract shall be deemed the
obligations and liabilities of NeoStem who shall undertake to provide an
irrevocable guarantee for such joint liability;
4. THAT,
in accordance with the PRC law, the obligations and liabilities assumed by CBH
as a shareholder of Suzhou Erye Pharmaceutical Co., Ltd. shall be deemed to be
NeoStem’s obligations and liabilities for which NeoStem shall undertake to
provide an irrevocable guarantee;
5. THAT
NeoStem’s performance of its undertakings contained herein shall constitute the
consideration of EET’s performance of its obligations under the JV Contract, and
shall remain effective and irrevocable throughout the validity ofthe JV
Contract, and, if the JV Contract becomes invalid or terminates, this
Undertaking shall be canceled in accordance with any supplementary covenant by
and between NeoStem and EET;
6. THAT
NeoStem shall be entitled to the rights and benefits to which CBH is entitled to
under the JV Contract or should be entitled to under any other document relating
to the JV Company to which CBH is a party, provided that such rights and
benefits may not be enjoyed by CBH in a duplicative manner; and
7. THAT
this Undertaking, as part of the JV Contract, shall be governed by the PRC
law.
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For
and on behalf of
NeoStem,
Inc.
By: ___________________
Date:
October [ ],
2009
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EMPLOYMENT
AGREEMENT
EMPLOYMENT AGREEMENT, dated as of
November 19, 2009 by and between NeoStem, Inc. (the “Company”) and Christopher
Duignan (the “Employee”).
W I T N E S S E T
H:
WHEREAS, the Company wishes for
Employee to serve as its Vice President, Finance and Employee agrees to so serve
on the terms hereinafter set forth.
NOW THEREFORE, in consideration of the
mutual covenants herein contained, the parties hereto hereby agree as
follows:
Section 1. Employment. The Company
agrees to employ the Employee, and the Employee agrees to be employed by the
Company, upon the terms and conditions hereinafter provided, for a period
commencing on November 30, 2009 (the “Commencement Date”) and, subject to
earlier termination pursuant to Section 5 hereof, continuing until the second
(2nd) anniversary of the Commencement Date (the “Term”). The Employee
hereby represents and warrants that he has the legal capacity to execute and
perform this Agreement, and that its execution and performance by him will not
violate the terms of any existing agreement or understanding to which the
Employee is a party.
Section 2. Responsibilities. During the Term, the
Employee agrees to serve as Vice President, Finance. It is agreed
that commencing as of February 15, 2009, Employee shall commence serving as
Employer’s Principal Accounting Officer, subject to the prior
approval of the Company’s Board of Directors. Such position shall have such
duties as assigned to Employee from time to time by the Chief Executive Officer
of the Company, and which she considers to be appropriate for such
position.
During
the Term, and except for reasonable vacation periods pursuant to the Company’s
policies, the Employee shall devote substantially all of his business time,
attention, skill and efforts exclusively to the business and affairs of the
Company and its subsidiaries and affiliates. Employee shall be based
in or around New York, NY; however, it is understood that reasonable travel
shall be required from time to time.
Section 3. Compensation. For all services
rendered by the Employee in any capacity required hereunder during the Term, the
Employee shall be compensated as follows:
(a) The
Company shall pay the Employee a fixed annual salary equal to $168,000 (the
“Base Salary”) in accordance with the Company’s payroll practices, including the
withholding of appropriate payroll taxes.
.
(b) The
Employee shall be entitled to participate in all compensation and employee
benefit plans or programs, and to receive all benefits and perquisites, which
are approved by the Board of Directors of the Company and are generally made
available by the Company to all salaried employees of the Company and to the
extent permissible under the general terms and provisions of such plans or
programs and in accordance with the provisions
thereof. Notwithstanding any of the foregoing, nothing in this
Agreement shall require the Company nor any subsidiary of the Company to
establish, maintain or continue any particular plan or program nor preclude the
amendment, rescission or termination of any such plan or program that may be
established from time to time. You will be entitled to participate in
any medical, health and insurance plans of the Company commencing 90 days after
the Commencement Date.
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(c
) The Employee
shall be entitled to a monthly car allowance equal to $1,000 payable monthly and
to a quarterly bonus equal to $6,000 payable on the last day of each fiscal
quarter; provided that the first such quarterly payment shall be prorated based
on the time between the Commencement Date and Decembber 31, 2009 and shall be
payable on December 31, 2009.
(c) On
the Commencement Date Employee shall be granted an option (the “Option”) to
purchase 250,000 shares of Company common stock, $.001 par value (the “Common
Stock”) under and subject to all the terms of the Company’s 2009 Equity
Compensation Plan (“2009 ECP”) at a per share exercise price equal to the
closing price of the Common Stock on the date of grant which shall become vested
and exercisable (i) as to 25,000 shares on the Commencement Date; (ii) as to
25,000 shares on the date of the Company’s filing of its Annual Report on Form
10-K for the year ended December 31, 2009; (iii) as to 100,000 shares on the one
year anniversary of the Commencement Date; and (iv) as to 100,000 shares
on the two year anniversaryof the Commencement Date
Section 4. Business
Expenses. The Company shall
pay or reimburse the Employee for all reasonable travel (it being understood
that travel shall be arranged by the Company) and other reasonable expenses
incurred by the Employee in connection with the performance of his duties and
obligations under this Agreement, subject to the Employee’s presentation of
appropriate vouchers in accordance with such expense account policies and
approval procedures as the Company may from time to time establish for employees
(including but not limited to prior approval of extraordinary expenses) and to
preserve any deductions for Federal income taxation purposes to which the
Company may be entitled.
Section 5. Termination of
Employment.
(a) The
Company may terminate Employee’s employment prior to the end of the Term
immediately upon written notice to Employee and will pay the employee for 30
days post termination date. Employee may terminate Employee’s
employment upon thirty days’ prior written notice to the Company. In
the event that the Employee’s employment terminates prior to expiration of the
Term due to any reason, earned but unpaid Base Salary as of the date of
termination of employment shall be payable in
full. However, no other payments shall be made, or
benefits provided, by the Company under this Agreement except as otherwise
required by law.
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Section 6. Confidentiality;
Covenant Against Competition; Proprietary Information;
Lock-up.
(a) The
Employee shall execute the Confidentiality, Non-Compete and Inventions
Assignment Agreement attached hereto as Attachment A concurrently with the
execution of this Agreement.
(b) Without
the prior written consent of the Company, Employee will not, directly or
indirectly, offer, sell, pledge, contract to sell (including any short sale),
grant any option to purchase or otherwise dispose of any shares of Common Stock
or other Company securities (including, without limitation, shares of Common
Stock of the Company which may be deemed to be beneficially owned by the
undersigned on the date hereof in accordance with the rules and regulations of
the Securities and Exchange Commission, shares of Common Stock which may be
issued upon exercise of a stock option or warrant and any other security
convertible into or exchangeable for Common Stock) (each of the foregoing
referred to as a “Disposition”) from the date hereof until April 29,
2009
Section 7. Withholding
Taxes. The Company may
directly or indirectly withhold from any payments made under this Agreement all
Federal, state, city or other taxes and all other deductions as shall be
required pursuant to any law or governmental regulation or ruling or pursuant to
any contributory benefit plan maintained by the Company in which the Employee
may participate.
Section 8. Notices. All notices,
requests, demands and other communications required or permitted hereunder shall
be given in writing and shall be deemed to have been duly given if delivered or
mailed, postage prepaid, by certified or registered mail or by use of an
independent third party commercial delivery service for same day or next day
delivery and providing a signed receipt as follows:
(a) To
the Company:
NeoStem, Inc.
420 Lexington Avenue
Suite 450
New York, New
York 10170
Attention: General
Counsel
(b) To
the Employee:
Christopher Duignan
or to
such other address as either party shall have previously specified in writing to
the other. Notice by mail shall be deemed effective on the second
business day after its deposit with the United States Postal Service, notice by
same day courier service shall be deemed effective on the day of deposit with
the delivery service and notice by next day delivery service shall be deemed
effective on the day following the deposit with the delivery
service.
Section 9. No
Attachment. Except as
required by law, no right to receive payments under this Agreement shall be
subject to anticipation, commutation, alienation, sale, assignment, encumbrance,
charge, pledge, or hypothecation or to execution, attachment, levy, or similar
process or assignment by operation of law, and any attempt, voluntary or
involuntary, to effect any such action shall be null, void and of no effect;
provided, however, that
nothing in this Section 9 shall preclude the assumption of such rights by
executors, administrators or other legal representatives of the Employee or her
estate and their conveying any rights hereunder to the person or persons
entitled thereto.
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Section 10. Source of
Payment. All payments
provided for under this Agreement shall be paid in cash from the general funds
of the Company. The Company shall not be required to establish a
special or separate fund or other segregation of assets to assure such payments,
and, if the Company shall make any investments to aid it in meeting its
obligations hereunder, the Employee shall have no right, title or interest
whatever in or to any such investments except as may otherwise be expressly
provided in a separate written instrument relating to such
investments. Nothing contained in this Agreement, and no action taken
pursuant to its provisions, shall create or be construed to create a trust of
any kind, or a fiduciary relationship, between the Company and the Employee or
any other person. To the extent that any person acquires a right to
receive payments from the Company hereunder, such right, without prejudice to
rights which employees may have, shall be no greater than the right of an
unsecured creditor of the Company.
Section 11. Binding
Agreement; No Assignment. This Agreement
shall be binding upon, and shall inure to the benefit of, the Employee and the
Company and their respective permitted successors, assigns, heirs, beneficiaries
and representatives. This Agreement is personal to the Employee and
may not be assigned by her. This Agreement may not be assigned by the
Company except (a) in connection with a sale of all or substantially all of its
assets or a merger or consolidation of the Company, or (b) to an entity that is
a subsidiary or affiliate of the Company. Any attempted assignment in
violation of this Section 11 shall be null and void.
Section 12. Governing Law;
Consent to Jurisdiction. The validity,
interpretation, performance, and enforcement of this Agreement shall be governed
by the laws of the State of New York. In addition, the Employee and
the Company irrevocably submit to the jurisdiction of the courts of the State of
New York and the United States District Court sitting in New York County for the
purpose of any suit, action, proceeding or judgment relating to or arising out
of this Agreement and the transactions contemplated hereby. Service
of process in connection with any such suit, action or proceeding may be served
on the Employee or the Company anywhere in the world by the same methods as are
specified for the giving of notices under this Agreement. The
Employee and the Company irrevocably consent to the jurisdiction of any such
court in any such suit, action or proceeding and to the laying of venue in such
court.
Section 13. Amendments. This Agreement
may only be amended or otherwise modified by a writing executed by all of the
parties hereto.
Section 14. Counterparts. This Agreement may be
executed in any number of counterparts, each of which when executed shall be
deemed to be an original and all of which together shall be deemed to be one and
the same instrument.
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IN WITNESS WHEREOF, the Company has
caused this Agreement to be executed by its duly authorized officer and the
Employee has signed this Agreement, all as of the
first
date above written.
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NEOSTEM,
INC.
By:
/s/ Robin L. Smith
Name: Robin L.
Smith
Title: Chairman
and CEO
/s/ Christopher
Duignan
Christopher
Duignan
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Attachment
A
NEOSTEM,
INC.
Confidentiality, Proprietary
Information
and Inventions
Agreement
I
recognize that NeoStem, Inc., a Delaware corporation (the “Company”), is engaged
in the business of operating a commercial autologous adult stem cell bank and
the pre-disease collection, processing and long-term storage of adult stem cells
and the research on very small embryonic like (VSEL) stem cells and other adult
stem cell initiatives both within the U.S. and China (the
“Business”). Any company with which the Company enters into, or seeks
or considers entering into, a business relationship in furtherance of the
Business is referred to as a “Business Partner”.
I
understand that as part of my performance of duties as an employee of the
Company, I will have access to confidential or proprietary information of the
Company and the Business Partners, and I may make new contributions and
inventions of value to the Company. I further understand that because
of my relationship to the Company I have created in me a duty of trust and
confidentiality to the Company with respect to any information: (1) related,
applicable or useful to the business of the Company, including the Company’s
anticipated research and development or such activities of its Business
Partners; (2) resulting from tasks performed by me for the Company; (3)
resulting from the use of equipment, supplies or facilities owned, leased or
contracted for by the Company; or (4) related, applicable or useful to the
business of any partner, client or customer of the Company, which may be made
known to me or learned by me during the period of my employment.
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For
purposes of this Agreement, the following definitions apply:
“Proprietary
Information” shall mean information relating to the Business or the business of
any Business Partner and generally unavailable to the public that has been
created, discovered, developed or otherwise has become known to the Company or
in which property rights have been assigned or otherwise conveyed to the Company
or a Business Partner, which information has economic value or potential
economic value to the business in which the Company is or will be
engaged. Proprietary Information shall include, but not be limited
to, trade secrets, processes, formulas, writings, data, know-how, negative
know-how, improvements, discoveries, developments, designs, inventions,
techniques, technical data, patent applications, customer and supplier lists,
financial information, business plans or projections and any modifications or
enhancements to any of the above.
“Inventions”
shall mean all Business-related discoveries, developments, designs,
improvements, inventions, formulas, software programs, processes, techniques,
know-how, negative know-how, writings, graphics and other data, whether or not
patentable or registrable under patent, copyright or similar statutes, that are
related to or useful in the business or future business of the Company or its
Business Partners or result from use of premises or other property owned, leased
or contracted for by the Company. Without limiting the generality of
the foregoing, Inventions shall also include anything related to the Business
that derives actual or potential economic value from not being generally known
to the public or to other persons who can obtain economic value from its
disclosure or use.
As part
of the consideration for my employment or continued employment, as the case may
be, and the compensation received by me from the Company from time to time, I
hereby agree as follows:
1. Proprietary Information and
Inventions.
(a) All
Proprietary Information and Inventions related to the Business shall be the sole
property of the Company and its assigns, and the Company or its Business
Partners, as the case may be, and their assigns shall be the sole owner of all
patents, trademarks, service marks, copyrights and other rights (collectively
referred to herein as “Rights”) pertaining to Proprietary Information and
Inventions. I hereby assign to the Company any rights I may have or
acquire in Proprietary Information or Inventions or Rights pertaining to the
Proprietary Information or Inventions which Rights arise in the course of my
Employment. I further agree as to all Proprietary Information or
Inventions to which Rights arise in the course of my Employment to assist the
Company or any person designated by it in every proper way (but at the Company’s
expense) to obtain and from time to time enforce Rights relating to said
Proprietary Information or Inventions in any and all countries. I
will execute all documents for use in applying for, obtaining and enforcing such
Rights in such Proprietary Information or Inventions as the Company may desire,
together with any assignments thereof to the Company or persons designated by
it. My obligation to assist the Company or any person designated by
it in obtaining and enforcing Rights relating to Proprietary Information or
Inventions shall continue beyond the cessation of my employment. In
the event the Company is unable, after reasonable effort, to secure my signature
on any document or documents needed to apply for or enforce any Right relating
to Proprietary Information or to an Invention, whether because of my physical or
mental incapacity or for any other reason whatsoever, I hereby irrevocably
designate and appoint the Company and its duly authorized officers and agents as
my agents and attorneys-in-fact to act for and in my behalf and stead in the
execution and filing of any such application and in furthering the application
for and enforcement of Rights with the same legal force and effect as if such
acts were performed by me. I hereby acknowledge that all original
works of authorship that are made by me (solely or jointly with others) within
the scope of my employment and which are protectable by copyright are “works for
hire” as that term is defined in the United States Copyright Act (17 USCA,
Section 101).
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2. Confidentiality. At
all times, both during my employment and after the cessation of my employment,
whether the cessation is voluntary or involuntary, for any reason or no reason,
or by disability, I will keep in strictest confidence and trust all Proprietary
Information, and I will not disclose or use or permit the use or disclosure of
any Proprietary Information or Rights pertaining to Proprietary Information, or
anything related thereto, without the prior written consent of the Company,
except as may be necessary in the ordinary course of performing my duties for
the Company. I recognize that the Company has received and in the
future will receive from third parties (including Business Partners) their
confidential or proprietary information subject to a duty on the Company’s part
to maintain the confidentiality of such information and to use it only for
certain limited purposes. I agree that I owe the Company and such
third parties (including Business Partners), during my employment and
thereafter, a duty to hold all such confidential or proprietary information in
the strictest confidence, and I will not disclose or use or permit the use or
disclosure of any such confidential or proprietary information without the prior
written consent of the Company, except as may be necessary in the ordinary
course of performing my duties for the Company consistent with the Company’s
agreement with such third party.
3. Noncompetition and
Nonsolicitation. During my employment, and for a period of two
(2) years after the Cessation of my employment, I will not directly or
indirectly, whether alone or in concert with others or as a partner, officer,
director, consultant, agent, employee or stockholder of any company or
commercial enterprise, directly or indirectly, engage in any activity in the
United States, Canada or China that the Company shall determine in good faith is
in competition with the Company concerning its work in the
Business. During my employment and for a period of two (2) years
after the cessation of my employment, I will not, either directly or indirectly,
either alone or in concert with others, solicit or encourage any employee of or
consultant to the Company to leave the Company or engage directly or indirectly
in competition with the Company in the Business. During my employment
and for a period of two (2) years after the cessation of my employment, I agree
not to plan or otherwise take any preliminary steps, either alone or in concert
with others, to set up or engage in any business enterprise that would be in
competition with the Company in the Business. The following shall not
be deemed to be competitive with the Company: (i) my ownership of stock,
partnership interests or other securities of any entity not in excess of two
percent (2%) of any class of such interests or securities which is publicly
traded. It is understood and agreed that the restrictions contained
in this Section 3 shall immediately cease to be of force and effect in the event
the Company ceases to be engaged in the Business.
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4. Delivery of Company Property and Work
Product. In the event of the cessation of my employment, I
will deliver to the Company all biological materials, devices, records,
sketches, reports, memoranda, notes, proposals, lists, correspondence,
equipment, documents, photographs, photostats, negatives, undeveloped film,
drawings, specifications, tape recordings or other electronic recordings,
programs, data, marketing material and other materials or property of any nature
belonging to the Company or its clients or customers, and I will not take with
me, or allow a third party to take, any of the foregoing or any reproduction of
any of the foregoing.
5. No Conflict. I
represent, warrant and covenant that my performance of all the terms of this
Agreement and the performance of my duties for the Company does not and will not
breach any agreement to keep in confidence proprietary information acquired by
me in confidence or in trust prior to my employment. I have not
entered into, and I agree that I will not enter into, any agreement, either
written or oral, in conflict herewith.
6. No Use of Confidential
Information. I represent, warrant and covenant that I have not
brought and will not bring with me to the Company or use in my employment any
materials or documents of a former employer, or any person or entity for which I
have acted as an independent contractor or consultant, that are not generally
available to the public, unless I have obtained written authorization from any
such former employer, person or firm for their possession and use. I
understand and agree that, in my service to the Company, I am not to breach any
obligation of confidentiality that I have to former employers or other
persons.
7. Equitable Relief. I
acknowledge that irreparable injury may result to the Company from my violation
or continued violation of the terms of this Agreement and, in such event, I
expressly agree that the Company shall be entitled, in addition to damages and
any other remedies provided by law, to an injunction or other equitable remedy
respecting such violation or continued violation by me.
8. Severability. If
any provision of this Agreement shall be determined by any court of competent
jurisdiction to be unenforceable or otherwise invalid as written, the same shall
be enforced and validated to the extent permitted by law. All
provisions of this Agreement are severable, and the unenforceability or
invalidity of any single provision hereof shall not affect the remaining
provisions.
9. Miscellaneous. This
Agreement shall be governed by and construed under the laws of the State of New
York applied to contracts made and performed wholly within such
state. No implied waiver of any provision within this Agreement shall
arise in the absence of a waiver in writing, and no waiver with respect to a
specific circumstance, event or occasion shall be construed as a continuing
waiver as to similar circumstances, events or occasions. This
Agreement, together with the Consulting Agreement dated this date, contains the
sole and entire agreement and understanding between the Company and myself with
respect to the subject matter hereof and supersedes and replaces any prior
agreements to the extent any such agreement is inconsistent
herewith. This Agreement can be amended, modified, released or
changed in whole or in part only by a written agreement executed by the Company
and myself. This Agreement shall be binding upon me, my heirs,
executors, assigns and administrators, and it shall inure to the benefit of the
Company and each of its successors or assigns. This Agreement shall
be effective as of the first day of my being retained to render services to the
Company, even if such date precedes the date I sign this Agreement.
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10. Thorough Understanding of
Agreement. I have read all of this Agreement and understand it
completely, and by my signature below I represent that this Agreement is the
only statement made by or on behalf of the Company upon which I have relied in
signing this Agreement.
IN WITNESS WHEREOF, I have caused this
Agreement to be signed on the date written below.
DATED: November
19, 2009
Employee:
/s/
Christopher Duignan
Christopher
Duignan
- 9
- -
EXHIBIT
23.1
CONSENT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby
consent to the incorporation by reference into the Registration Statements on
Form S-8 (Registration No. 333-107438, Registration No. 333-144265, Registration
No. 333-162733, and Registration No. 333-159282 ) and Registration Statement on
Form S-3 (Registration No. 333-145988) of NeoStem, Inc. of our report dated
March 31, 2010 with respect to the consolidated financial statements of NeoStem,
Inc. and Subsidiaries appearing in this Annual Report on Form 10-K of NeoStem,
Inc. for the year ended December 31, 2009.
|
/s/
Holtz Rubenstein Reminick LLP
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||||
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Holtz
Rubenstein Reminick LLP
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||||
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Melville,
New York
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March
31, 2010
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||||
I, Robin
L. Smith, certify that:
1. I have
reviewed this Annual Report on Form 10-K of NeoStem, Inc.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The
registrant's other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal control over financial
reporting.
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Date:
March 31, 2010
|
/s/
Robin L. Smith M.D.
|
||
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Name:
Robin L. Smith M.D.
|
|||
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Title: Chief
Executive Officer
(Principal
Executive Officer)
|
|||
A signed
original of this written statement required by Section 302 has been provided to
the Corporation and will be retained by the Corporation and furnished to the
Securities and Exchange Commission or its staff upon request.
I, Larry
A. May, certify that:
1. I have
reviewed this Annual Report on Form 10-K of NeoStem, Inc.;
2. Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;
4. The
registrant's other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant
and have:
(a)
Designed such disclosure controls and procedures, or caused such disclosure
controls and procedures to be designed under our supervision, to ensure that
material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly
during the period in which this report is being prepared;
(b)
Designed such internal control over financial reporting, or caused such internal
control over financial reporting to be designed under our supervision, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
(c)
Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
(d)
Disclosed in this report any change in the registrant's internal control over
financial reporting that occurred during the registrant's most recent fiscal
quarter (the registrant's fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting; and
5. The
registrant's other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
(a) All
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process, summarize and
report financial information; and
(b) Any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant's internal control over financial
reporting.
|
Date:
March 31, 2010
|
/s/
Larry A. May
|
||
|
Name:
Larry A. May
|
|||
|
Title: Chief
Financial Officer
(Principal
Financial Officer)
|
|||
A signed
original of this written statement required by Section 302 has been provided to
the Corporation and will be retained by the Corporation and furnished to the
Securities and Exchange Commission or its staff upon request.
CERTIFICATION
PURSUANT TO
18
U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Annual Report on Form 10-K (the "Report") of NeoStem, Inc.
(the "Corporation") for the year ended December 31, 2009, as filed with the
Securities and Exchange Commission on the date hereof, I, Robin L. Smith, Chief
Executive Officer of the Corporation, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to
my knowledge, that:
(1) The
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the
Corporation.
|
Dated: March
31, 2010
|
/s/
Robin L. Smith M.D.
|
||
|
Robin
L. Smith M.D.
Chief
Executive Officer
|
|||
The
foregoing certification is being furnished solely pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63
of Title 18, United States Code) and is not being filed as part of the Report or
as a separate disclosure document.
A signed
original of this written statement required by Section 906, or other document
authenticating, acknowledging, or otherwise adopting the signature that appears
in typed form within the electronic version of this written statement required
by Section 906, has been provided to the Corporation and will be retained by the
Corporation and furnished to the Securities and Exchange Commission or its staff
upon request.
18
U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In
connection with the Annual Report on Form 10-K (the "Report") of NeoStem, Inc.
(the "Corporation") for the year ended December 31, 2009, as filed with the
Securities and Exchange Commission on the date hereof, I, Larry A. May, Chief
Financial Officer of the Corporation, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to
my knowledge, that:
(1) The
Report fully complies with the requirements of Section 13(a) or 15(d) of the
Securities Exchange Act of 1934; and
(2) The
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the
Corporation.
|
Dated: March
31, 2010
|
/s/
Larry A. May
|
||
|
Larry
A. May
Chief
Financial Officer
|
|||
The
foregoing certification is being furnished solely pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of Section 1350, Chapter 63
of Title 18, United States Code) and is not being filed as part of the Report or
as a separate disclosure document.
A signed
original of this written statement required by Section 906, or other document
authenticating, acknowledging, or otherwise adopting the signature that appears
in typed form within the electronic version of this written statement required
by Section 906, has been provided to the Corporation and will be retained by the
Corporation and furnished to the Securities and Exchange Commission or its staff
upon request.