NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – The Business
Overview
NeoStem, Inc. (“we,” “NeoStem” or the “Company”) is a leader in the emerging cellular therapy industry. We are pursuing the preservation and enhancement of human health globally through the development of cell based therapeutics that prevent, treat or cure disease. We have multiple cell therapy platforms that work to address the pathology of disease using a person's own cells to amplify the body's natural repair mechanisms including enhancing the destruction of cancer initiating cells, repairing and replacing damaged or aged tissue, cells and organs and restoring their normal function. We believe that cell therapy will play a large role in changing the natural history of diseases as more breakthrough therapies are developed, ultimately lessening the overall burden of disease on patients and their families as well as the economic burden that these diseases impose upon modern society.
Our business includes the development of novel proprietary cell therapy products, as well as a revenue-generating contract development and manufacturing service business that we leverage for the development of our therapeutics while providing service to other companies in the cell therapy industry. The combination of our own therapeutic development business and a revenue-generating service provider business provides the Company with unique capabilities for cost effective in-house product development and immediate revenue and future cash flow to help underwrite our internal development programs. This business model enables the Company to be opportunistic in growing its pipeline as evidenced by the Company's acquisition in May 2014 of California Stem Cell, Inc. ("CSC"), a cell biotechnology corporation that is developing cellular immunotherapies for cancer, an area we view to be one of the most promising sub-sectors in biotechnology. The lead product candidate in its immunotherapy pipeline is NBS20, also referred to as DC/TC (dendritic cell/tumor cell), and is targeting malignant melanoma initiating cells. This immunotherapy designed to treat Stage IV or recurrent Stage III metastatic melanoma, which has been granted fast track and orphan designation by the Food and Drug Administration ("FDA"), also has a Phase 3 protocol that is the subject of a Special Protocol Assessment ("SPA"). The SPA, indicates that the FDA is in agreement with the design, clinical endpoints, and planned clinical analyses of the Phase 3 trial that would serve as the basis for a Biologics License Application ("BLA") that would be filed with the FDA requesting marketing approval of this therapeutic candidate. This protocol calls for enrolling 250 evaluable patients and is expected to be initiated later in 2014. We are evaluating other clinical indications into which we may advance this program, including liver, ovarian and lung cancers.
We are also currently developing therapies to address ischemia through utilizing CD34 cells. Ischemia occurs when the supply of oxygenated blood in the body is restricted. We seek to reverse this restriction through the development and formation of new blood vessels. NBS10, also referred to as AMR-001, is our most clinically advanced product candidate in our ischemic repair program and is being developed to treat damaged heart muscle following an acute myocardial infarction (heart attack) ("AMI"). In December 2013, the Company completed enrollment in its PreSERVE AMI study. PreSERVE AMI is a randomized, double-blinded, placebo-controlled Phase 2 clinical trial testing NBS10, an autologous (donor and recipient are the same) adult stem cell product for the treatment of patients with left ventricular dysfunction following acute ST segment elevation myocardial infarction (STEMI). The last patient in the trial was infused in December 2013 and the last patient six-month follow-up occurred in June 2014. Once the primary end point six-month data is collected, the data set will be locked and analysis will begin. An abstract for the PreSERVE AMI study has been accepted for presentation at the American Heart Association's Scientific Sessions being held November 15-19, 2014 although we anticipate results of the study will be released earlier. If approved by the FDA and/or other worldwide regulatory agencies following successful completion of further trials, NBS10 would address a significant medical need for which there is currently no effective treatment, potentially improving longevity and quality of life for those suffering a STEMI, and positioning the Company to capture a meaningful share of this worldwide market. We are evaluating other clinical indications into which we may advance this program, including traumatic brain injury ("TBI"), congestive heart failure ("CHF"), and critical limb ischemia ("CLI").
Another platform technology we are developing utilizes T Regulatory Cells ("Tregs") to treat diseases caused by imbalances in an individual's immune system. Collaborating with the University of California, San Francisco, we are utilizing the technology platform of our majority-owned subsidiary, Athelos Corporation ("Athelos"), to restore immune balance by enhancing Treg cell number and function. Tregs are a natural part of the human immune system and regulate the activity of T effector cells, the cells that are responsible for protecting the body from viruses and other foreign antigens. When Tregs function properly, only harmful foreign materials are attacked by T effector cells. In autoimmune disease it is thought that deficient Treg activity permits the T effector cells to attack the body's own tissues, while in allergic diseases, like asthma, it is though that the immune system overreacts to harmless foreign substances. We plan to initiate in 2014, subject to review and approval of the protocols by the appropriate regulatory authorities, a Phase 2 study of NBS03D, a Treg based therapeutic, in the treatment of type
1 diabetes, and a Phase 1 study in Canada of NBS03A, a Treg based therapeutic, in support of our steroid resistant asthma development program.
Pre-clinical assets include our VSEL
TM
(Very Small Embryonic Like) Technology regenerative medicine platform. Regenerative medicine holds the promise of improving clinical outcomes and reducing overall healthcare costs. We are working on a Department of Defense funded study of VSELs
TM
for the treatment of chronic wounds. Other preclinical work with VSELs
TM
includes exploring macular degeneration as a target indication.
Progenitor Cell Therapy, LLC ("PCT") is a contract manufacturer in the cellular therapy industry that generates revenue. This wholly owned subsidiary, which we acquired in 2011, is an industry leader in providing high quality manufacturing capabilities and support to developers of cell-based therapies to enable them to improve efficiencies and profitability and reduce the capital investment required for their own development activities. Since its inception more than 15 years ago, PCT has provided pre-clinical and clinical current Good Manufacturing Practice (“cGMP”) development and manufacturing services to more than 100 clients. PCT has experience advancing regenerative medicine product candidates from product inception through rigorous quality standards all the way through to human testing, BLA filing and FDA product approval. PCT's core competencies in the cellular therapy industry include manufacturing of cell therapy-based products, engineering and innovation services, product and process development, cell and tissue processing, regulatory support, storage, distribution and delivery and consulting services. PCT has two cGMP, state-of-the art cell therapy research, development, and manufacturing facilities in New Jersey and California, serving the cell therapy community with integrated and regulatory compliant distribution capabilities. The Company is pursuing commercial expansion of our manufacturing operations both in the U.S. and internationally. Additionally, with our acquisition of CSC in Irvine, California, we are now in a position to leverage NeoStem Oncology's expertise in immunotherapy and advance our platform technology, as well as the technologies of PCT's client base.
Strategic acquisitions have been the cornerstone of NeoStem’s growth and have been selected in order to provide value to stockholders by taking advantage of the infrastructure we have created which includes strong development, regulatory and manufacturing expertise. By adding NBS20, our DC/TC product candidate and a late stage novel proprietary cancer cell therapy into our pipeline, we look to further advance towards our goal of delivering transformative cell based therapies to the market to help patients suffering from life-threatening medical conditions. Coupled with our strong manufacturing capability, we believe the stage is set for us to realize meaningful clinical development and manufacturing efficiencies, further positioning NeoStem to lead the cell therapy industry.
Basis of Presentation
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying Consolidated Financial Statements of the Company and its subsidiaries, which are unaudited, include all normal and recurring adjustments considered necessary to present fairly the Company’s financial position as of
June 30, 2014
and the results of its operations and its cash flows for the periods presented. The unaudited consolidated financial statements herein should be read together with the historical consolidated financial statements of the Company for the years ended
December 31, 2013
and
2012
included in our Annual Report on Form 10-K for the year ended
December 31, 2013
. Operating results for the
six months ended
June 30, 2014
are not necessarily indicative of the results that may be expected for the year ending December 31, 2014.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the Consolidated Financial Statements and Notes to the Consolidated Financial Statements for the
three and six months ended
June 30, 2013
to conform to the presentation for the
three and six months ended
June 30, 2014
.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of NeoStem, Inc. and its wholly owned and partially owned subsidiaries and affiliates as listed below.
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Entity
|
|
Percentage of Ownership
|
|
Location
|
NeoStem, Inc.
|
|
Parent Company
|
|
United States of America
|
NeoStem Therapies, Inc.
|
|
100%
|
|
United States of America
|
Stem Cell Technologies, Inc.
|
|
100%
|
|
United States of America
|
Amorcyte, LLC
|
|
100%
|
|
United States of America
|
Progenitor Cell Therapy, LLC (PCT)
|
|
100%
|
|
United States of America
|
NeoStem Family Storage, LLC
|
|
100%
|
|
United States of America
|
Athelos Corporation (1)
|
|
90%
|
|
United States of America
|
PCT Allendale, LLC
|
|
100%
|
|
United States of America
|
NeoStem Oncology, LLC (2)
|
|
100%
|
|
United States of America
|
(1) Pursuant to the Stock Purchase Agreement signed in March 2011, our initial ownership in Athelos was 80.1%, and Becton Dickinson's ("BD") initial minority ownership was 19.9%. Per the Agreement, BD will be diluted based on new investment in Athelos by us (subject to certain anti-dilution provisions). As of
June 30, 2014
, BD's ownership interest in Athelos was decreased to 10.0%, and our ownership increased to 90.0%. As a result in the change in ownership, approximately
$0.1 million
was transferred from additional paid in capital to non-controlling interests.
(2) On
May 8, 2014
, NeoStem acquired CSC, now known as NeoStem Oncology, LLC (see Note 3, Acquisition). Accordingly, the operating results of NeoStem Oncology, LLC prior to
May 8, 2014
are not included in the Company's consolidated operations and cash flows.
Note 2 – Summary of Significant Accounting Policies
In addition to the policies below, our significant accounting policies are described in Note 2 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2013. There were no changes during the
six months ended
June 30, 2014
.
Cash and Cash Equivalents
Cash and cash equivalents include short-term, highly liquid, investments with maturities of ninety days or less when purchased.
Marketable Securities
The Company determines the appropriate classification of our marketable securities at the time of purchase and reevaluate such designation at each balance sheet date. All of our marketable securities are considered as available-for-sale and carried at estimated fair values and reported in either cash equivalents or marketable securities. Unrealized gains and losses on available-for-sale securities are excluded from net income and reported in accumulated other comprehensive income (loss) as a separate component of stockholders' equity. Other income (expense), net, includes interest, dividends, amortization of purchase premiums and discounts, realized gains and losses on sales of securities and other-than-temporary declines in the fair value of securities, if any. The cost of securities sold is based on the specific identification method. We regularly review all of our investments for other-than-temporary declines in fair value. Our review includes the consideration of the cause of the impairment, including the creditworthiness of the security issuers, the number of securities in an unrealized loss position, the severity and duration of the unrealized losses, whether we have the intent to sell the securities and whether it is more likely than not that we will be required to sell the securities before the recovery of their amortized cost basis. When we determine that the decline in fair value of an investment is below our accounting basis and this decline is other-than-temporary, we reduce the carrying value of the security we hold and record a loss for the amount of such decline.
Accounts Receivable
Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts. The Company applies judgment in connection with establishing the allowance for doubtful accounts. Specifically, the Company analyzes the aging of accounts receivable 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 allowances may be required. Management regularly reviews the aging of receivables and changes in payment trends by its customers, and records a reserve when it believes collection of amounts due are at risk.
Inventories
The Company, through its PCT subsidiary, regularly enters into contracts with clients for services that have multiple stages and are dependent on one another to complete the contract and recognize revenue. The Company's inventory primarily represents work in process for costs incurred on such projects at PCT that have not been completed. The Company reviews these projects periodically to determine that the value of each project is stated at the lower of cost or market.
Goodwill and Other Intangible Assets
Goodwill is the excess of purchase price over the fair value of identified net assets of businesses acquired. The Company’s intangible assets with an indefinite life are related to in process research and development ("IPR&D") programs acquired in the Amorcyte and CSC acquisitions, as the Company expects future research and development on these programs to provide the Company with substantial benefit for a period that extends beyond the foreseeable horizon. Intangible assets with indefinite useful lives are measured at their respective fair values as of the acquisition date. The Company does not amortize goodwill and intangible assets with indefinite useful lives. Intangible assets related to IPR&D projects are considered to be indefinite-lived until the completion or abandonment of the associated R&D efforts. If and when development is complete, which generally occurs if and when regulatory approval to market a product is obtained, the associated assets would be deemed finite-lived and would then be amortized based on their respective estimated useful lives at that point in time.
The Company reviews goodwill and indefinite-lived intangible assets at least annually for possible impairment. Goodwill and indefinite-lived intangible assets are reviewed for possible impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. The Company tests its goodwill and indefinite-lived intangible assets each year on December 31. The Company reviews the carrying value of goodwill and indefinite-lived intangible assets utilizing a discounted cash flow model, and, where appropriate, a market value approach is also utilized to supplement the discounted cash flow model. The Company makes assumptions regarding estimated future cash flows, discount rates, long-term growth rates and market values to determine each reporting unit’s estimated fair value.
Amortized intangible assets consist of customer lists, manufacturing technology, tradenames, patents and rights. These intangible assets are amortized on a straight line basis over their respective useful lives.
Revenue Recognition
Clinical Services:
The Company recognizes revenue for its (i) process development and (ii) clinical manufacturing services based on the terms of individual contracts.
Revenues associated with process development services generally contain multiple stages that do not have stand-alone values and are dependent upon one another, and are recognized as revenue on a completed contract basis. We recognize revenues when all of the following conditions are met:
|
|
•
|
persuasive evidence of an arrangement exists;
|
|
|
•
|
delivery has occurred or the services have been rendered;
|
|
|
•
|
the fee is fixed or determinable; and
|
|
|
•
|
collectability is probable.
|
The Company considers signed contracts as evidence of an arrangement. The Company assesses whether the fee is fixed or determinable based on the payment terms associated with the transaction and whether the payment terms are subject to refund or adjustment. The Company assesses cash collectability based on a number of factors, including past collection history with the client and the client's creditworthiness. If the Company determines that collectability is not reasonably assured, it defers revenue recognition until collectability becomes reasonably assured, which is generally upon receipt of the cash. The Company's
arrangements are generally non-cancellable, though clients typically have the right to terminate their agreement for cause if the Company materially fails to perform.
Clinical manufacturing services are generally distinct arrangements whereby the Company is paid for time and materials or for fixed monthly amounts. Revenue is recognized when efforts are expended or contractual terms have been met.
Some client agreements include multiple elements, comprised of process development and clinical manufacturing services. The Company believes that process development and clinical manufacturing services each have stand-alone value because these services can be provided separately by other companies. In accordance with ASC Update No. 2009-13, “Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements,” the Company (1) separates deliverables into separate units of accounting when deliverables are sold in a bundled arrangement and (2) allocates the arrangement's consideration to each unit in the arrangement based on its relative selling price.
Clinical Services Reimbursements:
The Company separately charges the customers for the expenses associated with certain consumable resources (reimbursable expenses) that are specified in each clinical services contract. On a monthly basis, the Company bills customers for reimbursable expenses and immediately recognizes these billings as revenue, as the revenue is deemed earned as reimbursable expenses are incurred. For the
three months ended
June 30, 2014
and
2013
, clinical services reimbursements were $
1.1 million
and $
0.4 million
, respectively. For the
six months ended
June 30, 2014
and
2013
, clinical services reimbursements were $
1.8 million
and $
0.8 million
, respectively.
Processing and Storage Services:
The Company recognizes revenue related to the collection and cryopreservation of cord blood and autologous adult stem cells when the cryopreservation process is completed which is approximately 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 advance payments.
New Accounting Pronouncement
In May 2014, the FASB issued ASU 2014-09, "
Revenue from Contracts with Customers (Topic 606).
" The new revenue recognition standard provides a five-step analysis to determine when and how revenue is recognized. The standard requires that a company recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. This ASU is effective for annual periods beginning after December 15, 2016 and will be applied retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on its consolidated financial statements.
Note 3 – Acquisition
On
May 8, 2014
(the “Closing”), NeoStem closed its acquisition of CSC (the “CSC Acquisition”), pursuant to the terms of the Agreement and Plan of Merger, dated as of April 11, 2014 (the “Merger Agreement”), by and among NeoStem, CSC, NBS Acquisition Sub I, Inc., a Delaware corporation and a wholly-owned subsidiary of NeoStem (“Subco”), NBS Acquisition Sub II, LLC, a Delaware limited liability company and a wholly-owned subsidiary of NeoStem (“Subco II”), and Jason Livingston, solely in his capacity as CSC stockholder representative (together with his permitted successors, the “CSC Representative”). At Closing, Fortis Advisors LLC succeeded to the duties of the CSC Representative pursuant to the Merger Agreement.
Pursuant to the Merger Agreement, on the Closing Date, (1) Subco was merged with and into CSC (the “First Merger”) and (2) CSC was then merged with and into Subco II (the “Second Merger”, and collectively with the First Merger, the “Mergers”), with Subco II surviving the Mergers as a wholly-owned subsidiary of NeoStem. At Closing, Subco II changed its legal name to NeoStem Oncology, LLC.
CSC is a biopharmaceutical company with deep expertise in stem cell biology that is engaged in the development of therapies using a patient’s own, i.e., autologous, cells. Its development efforts are primarily directed at immunotherapies for cancer. Its most advanced program is an immunotherapy, NBS20, also referred to as DC/TC (dendritic cell/tumor cell), which uses patients’ own tumor cells to maximize the ability of their immune system to identify and eliminate the cancer initiating cells that are capable of reconstituting or developing new tumors (i.e., “cancer stem cells” or “replicating cells”). The current focus of that program is the treatment of metastatic melanoma. As a result of encouraging Phase 2 data, the Company expects to initiate a Phase 3 clinical trial later in 2014, for which it has received Special Protocol Assessment (“SPA”) and Fast Track designation, as well as Orphan Drug designation.
Aggregate Merger Consideration
Pursuant to the terms of the Merger Agreement, all shares of CSC common stock (“CSC Common Stock”) and CSC preferred stock (“CSC Preferred Stock”, and collectively with the CSC Common Stock, the “CSC Capital Stock”) outstanding immediately prior to the Closing, and all outstanding unexercised options to purchase CSC Common Stock (“CSC Options”) (treated as if a net exercise had occurred), were canceled and converted into the right to receive, in the aggregate (and giving effect to the liquidation preferences accorded to the CSC Preferred Stock):
(1)
An aggregate of
5,329,593
shares of NeoStem common stock (subject to payment of nominal cash in lieu of fractional shares) (the “Closing Merger Consideration”).
(2)
if payable after the Closing, certain payments in an amount of up to
$90.0 million
in the aggregate, payable in shares of NeoStem Common Stock or cash, in NeoStem’s sole discretion, in the event of the successful completion of certain milestone events in connection with the CSC business being acquired by NeoStem (the “Milestone Payments”, and together with the Closing Merger Consideration, the “Merger Consideration”).
The fair value of the net assets acquired in the CSC Acquisition was
$20.3 million
. The fair value of the consideration paid by NeoStem was valued at
$35.3 million
, resulting in the recognition of goodwill in the amount of
$15.0 million
. The consideration paid was comprised of equity issued and milestone payments. The fair value of the equity issued by NeoStem was valued at
$24.5 million
. The fair value of the milestone payments was valued at
$10.8 million
, and is contingent on the achievement of certain milestones associated with the future development of the acquired programs. Such contingent consideration has been classified as a liability and will be subject to remeasurement.
The preliminary fair value of assets acquired and liabilities assumed on
May 8, 2014
is as follows (in thousands):
|
|
|
|
|
Cash and cash equivalents
|
$
|
51.2
|
|
Accounts receivable trade, net
|
45.1
|
|
Prepaids and other current assets
|
19.2
|
|
Property, plant and equipment, net
|
1,040.9
|
|
Other assets
|
201.0
|
|
Goodwill
|
14,961.9
|
|
In-Process R&D
|
35,790.0
|
|
Accounts payable
|
(333.1
|
)
|
Accrued liabilities
|
(2,014.1
|
)
|
Deferred tax liability
|
(14,509.3
|
)
|
|
$
|
35,252.8
|
|
The total cost of the acquisition, which is still preliminary, has been allocated to the assets acquired and the liabilities assumed based upon their estimated fair values at the date of the acquisition. The final allocation is pending the receipt of a third-party valuation and the completion of the Company’s internal review, which is expected during fiscal 2014.
For the period since the acquisition (May 9, 2014 to
June 30, 2014
), NeoStem recorded
$0.01 million
in revenues and a net loss of approximately
$2.3 million
or
$0.07
basic and diluted loss per share attributable to CSC.
Pro Forma Financial Information
The following supplemental table presents unaudited consolidated pro forma financial information as if the closing of the acquisition of CSC had occurred on January 1, 2013 (in thousands, except per share amounts):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2014
|
|
Six Months Ended June 30, 2014
|
|
(As Reported)
|
|
(Proforma)
|
|
(As Reported)
|
|
(Proforma)
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
4,489
|
|
|
$
|
4,982
|
|
|
$
|
8,545
|
|
|
$
|
9,255
|
|
Net loss
|
$
|
(12,770
|
)
|
|
$
|
(13,574
|
)
|
|
$
|
(26,600
|
)
|
|
$
|
(29,097
|
)
|
Net loss attributable to NBS
|
$
|
(12,605
|
)
|
|
$
|
(13,409
|
)
|
|
$
|
(26,287
|
)
|
|
$
|
(28,784
|
)
|
Net loss per share attributable to NBS
|
$
|
(0.40
|
)
|
|
$
|
(0.36
|
)
|
|
$
|
(0.88
|
)
|
|
$
|
(0.82
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2013
|
|
Six Months Ended June 30, 2013
|
|
(As Reported)
|
|
(Proforma)
|
|
(As Reported)
|
|
(Proforma)
|
|
|
|
|
|
|
|
|
Revenues
|
$
|
4,359
|
|
|
$
|
4,596
|
|
|
$
|
6,883
|
|
|
$
|
7,282
|
|
Net loss
|
$
|
(8,626
|
)
|
|
$
|
(9,830
|
)
|
|
$
|
(17,490
|
)
|
|
$
|
(19,963
|
)
|
Net loss attributable to NBS
|
$
|
(8,575
|
)
|
|
$
|
(9,780
|
)
|
|
$
|
(17,376
|
)
|
|
$
|
(19,849
|
)
|
Net loss per share attributable to NBS
|
$
|
(0.46
|
)
|
|
$
|
(0.41
|
)
|
|
$
|
(0.99
|
)
|
|
$
|
(0.87
|
)
|
The unaudited supplemental pro forma financial information should not be considered indicative of the results that would have occurred if the acquisition of CSC had been consummated on January 1, 2013, nor are they indicative of future results.
Note 4 – Available-for-Sale-Securities
The following table is a summary of available-for-sale securities recorded in cash and cash equivalents or marketable securities in our Consolidated Balance Sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
|
|
Estimated Fair Value
|
Certificate of deposits
|
$
|
744.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
744.0
|
|
Money market funds
|
21,051.0
|
|
|
—
|
|
|
—
|
|
|
21,051.0
|
|
Municipal debt securities
|
6,581.3
|
|
|
1.1
|
|
|
(0.1
|
)
|
|
6,582.3
|
|
Total
|
$
|
28,376.3
|
|
|
$
|
1.1
|
|
|
$
|
(0.1
|
)
|
|
$
|
28,377.3
|
|
Estimated fair values of available-for-sale securities are generally based on prices obtained from commercial pricing services. The following table summarizes the classification of the available-for-sale debt securities on our Consolidated Balance Sheets (in thousands):
|
|
|
|
|
|
June 30, 2014
|
Cash and cash equivalents
|
$
|
27,456.5
|
|
Marketable securities
|
920.8
|
|
Total
|
$
|
28,377.3
|
|
The following table summarizes our portfolio of available-for-sale debt securities by contractual maturity (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
Amortized Cost
|
|
Estimated Fair Value
|
Less than one year
|
$
|
28,376.3
|
|
|
$
|
28,377.3
|
|
Greater than one year
|
—
|
|
|
—
|
|
Total
|
$
|
28,376.3
|
|
|
$
|
28,377.3
|
|
Note 5 – Inventories
Inventories, primarily representing work in process for costs incurred on projects at PCT that have not been completed, were $
2.0 million
and $
1.3 million
as of
June 30, 2014
and
December 31, 2013
, respectively. The Company also has deferred revenue of approximately $
2.4 million
and $
1.5 million
of advance billings received as of
June 30, 2014
and
December 31, 2013
, respectively, related to these contracts.
Note 6 – Loss Per Share
For the
six months ended
June 30, 2014
and
2013
, the Company incurred net losses and therefore no common stock equivalents were utilized in the calculation of loss per share. At
June 30, 2014
and
2013
, the Company excluded the following potentially dilutive securities:
|
|
|
|
|
|
|
|
June 30,
|
|
2014
|
|
2013
|
Stock Options
|
4,204,270
|
|
|
2,647,437
|
|
Warrants
|
3,623,956
|
|
|
5,430,137
|
|
Restricted Shares
|
205,231
|
|
|
73,500
|
|
Note 7 – Fair Value Measurements
Fair value of financial assets and liabilities that are being measured and reported are defined as the exchange 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). The Company is required to classify fair value measurements in one of the following categories:
Level 1 inputs 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 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. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
The Company classifies the fair value of the warrant derivative liabilities as level 3 inputs. These inputs require material subjectivity because value is derived through the use of a lattice model that values the derivatives based on probability weighted discounted cash flows. In May 2014, the warrants expired and the value of the warrant derivative liabilities were written off and recorded in other expenses in our consolidated statement of operations.
The Company classifies the fair value of contingent consideration obligations as level 3 inputs. The Company has recognized contingent consideration obligations related to the following:
|
|
•
|
In October 2011, in connection with the Company's acquisition of Amorcyte, contingent consideration obligations were recognized relating to earn out payments equal to
10%
of the net sales of the lead product candidate NBS10 (in the event of and following the date of first commercial sale of NBS10), provided that in the event NeoStem sublicenses NBS10,
|
the applicable earn out payment will be equal to
30%
of any sublicensing fees, and provided further that NeoStem will be entitled to recover direct out-of-pocket clinical development costs not previously paid or reimbursed and any costs, expenses, liabilities and settlement amounts arising out of claims of patent infringement or otherwise challenging Amorcyte’s right to use intellectual property, by reducing any earn out payments due by 50% until such costs have been recouped in full (the “Earn Out Payments”). The contingent consideration fair value increased from
$9.5 million
as of
December 31, 2013
to
$9.9 million
as of
June 30, 2014
. The change in estimated fair value is based or the impact of the time progression through the Phase 2 clinical trial from
December 31, 2013
to
June 30, 2014
, and has been recorded in other expenses in our consolidated statement of operations.
|
|
•
|
In May 2014, in connection with the Company's acquisition of CSC, contingent consideration obligations were recognized relating to milestone payments of up to
$90.0 million
, based on the achievement of certain milestones associated with the future development of the acquired programs. The contingent consideration fair value recognized in the acquisition in May 2014 was
$10.8 million
. There was no change in estimated fair value as of
June 30, 2014
.
|
The fair value of contingent consideration obligations is based on discounted cash flow models using a probability-weighted income approach. The measurements are based upon unobservable inputs supported by little or no market activity based on our own assumptions and experience. The Company bases the timing to complete the development and approval programs on the current development stage of the product and the inherent difficulties and uncertainties in developing a product candidate, such as obtaining U.S. Food and Drug Administration (FDA) and other regulatory approvals. In determining the probability of regulatory approval and commercial success, we utilize data regarding similar milestone events from several sources, including industry studies and our own experience. These fair value measurements represent Level 3 measurements as they are based on significant inputs not observable in the market. Significant judgment is employed in determining the appropriateness of these assumptions as of the acquisition date and for each subsequent period. Accordingly, changes in assumptions could have a material impact on the amount of contingent consideration expense we record in any given period.
The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of
June 30, 2014
, and
December 31, 2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities - available for sale
|
|
$
|
—
|
|
|
$
|
920.8
|
|
|
$
|
—
|
|
|
$
|
920.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
$
|
—
|
|
|
$
|
920.8
|
|
|
$
|
—
|
|
|
$
|
920.8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
23.2
|
|
|
$
|
23.2
|
|
Contingent consideration
|
|
—
|
|
|
—
|
|
|
20,640.0
|
|
|
20,640.0
|
|
|
—
|
|
|
—
|
|
|
9,450.0
|
|
|
9,450.0
|
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
20,640.0
|
|
|
$
|
20,640.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9,473.2
|
|
|
$
|
9,473.2
|
|
For those financial instruments with significant Level 3 inputs, the following table summarizes the activity for the
six months ended
June 30, 2014
by type of instrument (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 30, 2014
|
|
|
Warrants
|
|
Contingent Consideration
|
|
Total
|
Beginning liability balance
|
|
$
|
23.2
|
|
|
$
|
9,450.0
|
|
|
$
|
9,473.2
|
|
|
|
|
|
|
|
|
Amount issued in acquisition
|
|
—
|
|
|
10,790.0
|
|
|
10,790.0
|
|
Change in fair value recorded in earnings
|
|
—
|
|
|
400.0
|
|
|
400.0
|
|
Expiration
|
|
(23.2
|
)
|
|
—
|
|
|
(23.2
|
)
|
|
|
|
|
|
|
|
Ending liability balance
|
|
$
|
—
|
|
|
$
|
20,640.0
|
|
|
$
|
20,640.0
|
|
Some of the Company’s financial instruments are not measured at fair value on a recurring basis, but are recorded at amounts that approximate fair value due to their liquid or short-term nature, such as cash and cash equivalents, accounts receivable, accounts payable. Our long-term debt and notes payable are carried at cost and approximate fair value due to their variable or fixed interest rates, which are consistent with the interest rates in the market.
Note 8 – Goodwill and Other Intangible Assets
The following table summarizes the changes in the carrying amount of goodwill (in thousands):
|
|
|
|
|
|
Total
|
Balance as of December 31, 2013
|
$
|
11,117.7
|
|
Goodwill resulting from the acquisition of CSC
|
14,961.8
|
|
Balance as of June 30, 2014
|
$
|
26,079.5
|
|
The Company's intangible assets and related accumulated amortization as of
June 30, 2014
and
December 31, 2013
consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
|
Useful Life
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
|
Gross
|
|
Accumulated Amortization
|
|
Net
|
Customer list
|
10 years
|
|
$
|
1,000.0
|
|
|
$
|
(345.1
|
)
|
|
$
|
654.9
|
|
|
$
|
1,000.0
|
|
|
$
|
(295.1
|
)
|
|
$
|
704.9
|
|
Manufacturing technology
|
10 years
|
|
3,900.0
|
|
|
(1,345.9
|
)
|
|
2,554.1
|
|
|
3,900.0
|
|
|
(1,150.9
|
)
|
|
2,749.1
|
|
Tradename
|
10 years
|
|
800.0
|
|
|
(276.1
|
)
|
|
523.9
|
|
|
800.0
|
|
|
(236.1
|
)
|
|
563.9
|
|
In process R&D
|
Indefinite
|
|
45,190.0
|
|
|
—
|
|
|
45,190.0
|
|
|
9,400.0
|
|
|
—
|
|
|
9,400.0
|
|
Patent rights
|
19 years
|
|
669.0
|
|
|
(228.9
|
)
|
|
440.1
|
|
|
669.0
|
|
|
(211.3
|
)
|
|
457.7
|
|
Total Intangible Assets
|
|
|
$
|
51,559.0
|
|
|
$
|
(2,196.0
|
)
|
|
$
|
49,363.0
|
|
|
$
|
15,769.0
|
|
|
$
|
(1,893.4
|
)
|
|
$
|
13,875.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible amortization expense was classified in the operating expense categories for the periods included below as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
|
2014
|
|
2013
|
Cost of revenue
|
|
$
|
158.4
|
|
|
$
|
195.0
|
|
Research and development
|
|
54.2
|
|
|
17.6
|
|
Selling, general and administrative
|
|
90.0
|
|
|
90.0
|
|
Total
|
|
$
|
302.6
|
|
|
$
|
302.6
|
|
Estimated intangible amortization expense on an annual basis for the succeeding five years is as follow (in thousands):
|
|
|
|
|
2014
|
$
|
302.6
|
|
2015
|
605.2
|
|
2016
|
605.2
|
|
2017
|
605.2
|
|
2018
|
605.2
|
|
Thereafter
|
46,639.6
|
|
|
$
|
49,363.0
|
|
Note 9 – Accrued Liabilities
Accrued liabilities as of
June 30, 2014
and
December 31, 2013
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
June 30, 2014
|
|
December 31, 2013
|
Salaries, employee benefits and related taxes
|
$
|
1,443.2
|
|
|
$
|
2,325.8
|
|
Professional fees
|
651.7
|
|
|
544.8
|
|
License fees
|
100.0
|
|
|
500.0
|
|
Other
|
392.4
|
|
|
647.4
|
|
|
$
|
2,587.3
|
|
|
$
|
4,018.0
|
|
Note 10 – Debt
Notes Payable
As of
June 30, 2014
and
December 31, 2013
, the Company had notes payable of approximately
$1.8 million
and
$0.9 million
, respectively. The notes relate to certain insurance policies and equipment financings, require monthly payments, and mature within one to three years.
Mortgages Payable
In October 2007, PCT issued a note to borrow
$3.1
million (the “First Mortgage”) in connection with its
$3.8
million purchase of condominium units in an existing building in Allendale, New Jersey (the “Property”). The First Mortgage is payable in 239 consecutive
monthly payments
of principal and interest, based on a 20 year amortization schedule; and one final payment of all outstanding principal plus accrued interest then due. The current monthly installment is
$20,766
, which includes interest at an initial rate of
5.00%
; the interest rate and monthly installments payments are subject to adjustment on October 1, 2017. On that date, upon prior written notice, the lender has the option to declare the entire outstanding principal balance, together with all outstanding interest, due and payable in full. The First Mortgage is secured by substantially all of the assets of PCT, including a first mortgage on the Property and assignment of an amount approximately equal to eighteen months debt service held in escrow. The Note matures on October 1, 2027 if not called by the lender on October 1, 2017. The First Mortgage had previously been subject to certain debt service coverage and total debt to tangible net worth financial covenant ratios measured semi-annually. The outstanding balance was approximately $
2.4 million
and
$2.5 million
at
June 30, 2014
and
December 31, 2013
, respectively, of which $
130,000
is payable within twelve months as of
June 30, 2014
.
In December 2010 PCT Allendale, a wholly-owned subsidiary of PCT, entered into a note for a second mortgage in the amount of
$1.0
million (the "Second Mortgage") on the Allendale Property with TD Bank, N.A. The initial guarantors of the Second Mortgage were PCT, DomaniCell (a wholly-owned subsidiary of PCT, now known as NeoStem Family Storage, LLC), Regional Cancer Care Associates LLC and certain of its partners. The Second Mortgage had been subject to an annual financial covenant starting December 31, 2011. The Second Mortgage is for
124
months at a fixed rate of
6%
for the first
64
months. The loan is callable for a certain period prior to the interest reset date. The outstanding balance was approximately
$0.7 million
and
$0.8 million
at
June 30, 2014
and
December 31, 2013
, respectively, of which $
89,000
is payable within twelve months as of
June 30, 2014
.
In December 2013, the Company modified both the First Mortgage and Second Mortgage with TD Bank, N.A., whereby (i) prior debt service coverage and total debt to tangible net worth financial covenant ratios were replaced with a minimum unencumbered liquidity covenant, and (ii) prior guarantors were released (see Note 14) and replaced with NeoStem, PCT, and NeoStem Family Storage. The Company is in compliance with the new minimum unencumbered liquidity covenant.
Note 11 – Shareholders' Equity
Reverse Stock Split
On June 28, 2013, pursuant to prior shareholder authorization, the Company’s board of directors unanimously approved a 1-for-10 reverse stock split of the Company’s common stock, which the Company effected on July 16, 2013. All share and per share amounts of common stock, options and warrants in the accompanying financial statements have been restated for all periods to give retroactive effect to the reverse stock split. The shares of common stock retained a par value of
$0.001
per share. Accordingly, the stockholders’ deficit reflects the reverse stock split by reclassifying from “common stock” to “additional paid-in capital” an amount equal to the par value of the decreased shares resulting from the reverse stock split.
Equity Issuances
In September 2011, the Company entered into a common stock purchase agreement (the “Initial Purchase Agreement”) with Aspire Capital Fund, LLC, an Illinois limited liability company (“Aspire Capital”), which provided that Aspire Capital was committed to purchase up to an aggregate of
$20.0 million
worth of shares of the Company’s common stock over the
24
-month term. In August, 2012, the Initial Purchase Agreement was extended for an additional 24-month term through September 2015. During the three months ended March 31, 2014, the Company issued
0.8 million
shares of Common Stock under the provisions the Initial Purchase Agreement with Aspire for gross proceeds of approximately
$5.6 million
. As of March 31, 2014, the full
$20.0 million
worth of shares of the Company's stock had been issued under the Initial Purchase Agreement.
In March 2014, the Company entered into a new common stock purchase agreement (the “Purchase Agreement”) with Aspire Capital, which provides that, subject to certain terms and conditions, Aspire Capital is committed to purchase up to an aggregate of
$30.0 million
worth of shares of the Company’s common stock over the
24
-month term. At the Company’s discretion, it may present Aspire Capital with purchase notices from time to time to purchase the Company’s common stock, provided certain price and other requirements are met. The purchase price for the shares of stock was based upon one of two formulas set forth in the Purchase Agreement depending on the type of purchase notice the Company submits to Aspire Capital, and is based on market prices of the Company’s common stock (in the case of regular purchases) or a discount of
5%
applied to volume weighted average prices (in the case of VWAP purchases), in each case as determined by parameters defined in the Purchase Agreement. As consideration for entering into the Purchase Agreement, we issued
150,000
shares of our common stock to Aspire Capital. During the
six months ended
June 30, 2014
, the Company issued
0.7 million
shares of Common Stock under the provisions the Purchase Agreement with Aspire for gross proceeds of approximately
$4.4 million
.
Option Exercises
During the
six months ended
ended
June 30, 2014
, option holders exercised an aggregate of
41,136
options at exercise prices between of
$5.20
and
$6.20
per share for gross proceeds of approximately
$0.2 million
.
Warrant Exercises
During the
six months ended
ended
June 30, 2014
, warrant holders exercised an aggregate of
265,250
warrants at exercise price between
$5.10
and
$14.50
per share for gross proceeds of approximately
$1.4 million
.
Stock Options and Warrants
The following table summarizes the activity for stock options and warrants for the
six months ended
June 30, 2014
: