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NBS > SEC Filings for NBS > Form 10-Q on 13-Nov-2012All Recent SEC Filings

Show all filings for NEOSTEM, INC.

Form 10-Q for NEOSTEM, INC.


13-Nov-2012

Quarterly Report


ITEM 2. 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" herein and under "Risk Factors" in our annual report on Form 10-K for the year ended December 31, 2011. The following discussion should be read in conjunction with our consolidated financial statements and related notes thereto included elsewhere in this quarterly report and in our annual report on Form 10-K for the year ended December 31, 2011, as recast in our current report on Form 8-K filed on August 15, 2012 to reflect our Pharmaceutical Manufacturing - China and Regenerative Medicine - China segments as discontinued operations.

Overview

We are emerging as a technology and market leading company in the fast developing cell therapy industry. Our multifaceted business strategy combines a state-of-the-art contract development and manufacturing organization (CDMO) with a medically important cell therapy product development program enabling short-term and long-term revenue growth opportunities. Our service business and pipeline of proprietary cell therapy products work in concert, giving us a competitive advantage that we believe is unique to the biotechnology and pharmaceutical industries. Supported by an experienced scientific and business management team and a strategic and growing patent and patent pending (IP) portfolio, we are well positioned to succeed.

As a leading cell therapy Company, we have a pipeline of proprietary products, including stem cell therapies for cardiovascular disease and regenerative medicine as well as a T cell therapy for autoimmune disorders. Through our GMP facilities, we further support the cell therapy community's efforts to discover solutions for chronic disease by providing contract development and manufacturing expertise. In addition, we offer 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.

In 2011, we operated our business in three reportable segments: (i) Cell Therapy - United States; (ii) Regenerative Medicine - China; and (iii) Pharmaceutical Manufacturing - China. In 2012, we began to exit our operations in China. Effective March 31, 2012, we no longer operated in the Regenerative Medicine - China reportable segment, which is now reported in discontinued operations (see Note 13). The Erye divestiture closed on November 13, 2012 (see Note 16). On June 18, 2012, we signed a definitive agreement to sell our 51% interest in Suzhou Erye, which represented the operations in our Pharmaceutical Manufacturing - China segment, and is also reported in discontinued operations (see Note 13). As a result, we currently operate in a single reporting segment - Cell Therapy, which will focus on CDMO and cell therapy development programs.

We strengthened our expertise in cellular therapies with our January 19, 2011 acquisition of Progenitor Cell Therapy, LLC, a Delaware limited liability company ("PCT"). PCT is engaged in a wide range of services in the cell therapy market for the treatment of human disease, including, but not limited to contract manufacturing, product and process development, regulatory consulting, product characterization and comparability, and storage, distribution, manufacturing and transportation of cell therapy products. PCT's legacy business relationships also afford NeoStem introductions to innovative therapeutic programs.

In March 2011 PCT's wholly owned subsidiary, Athelos, Inc. ("Athelos"), acquired rights and technology for a T-cell based immunomodulatory therapeutic in exchange for an approximate 20% interest in Athelos.

We further strengthened our breadth in cellular therapies through its October 17, 2011 acquisition of Amorcyte, LLC. Amorcyte is a development stage cell therapy company focusing on novel treatments for cardiovascular disease. Amorcyte's lead product candidate is AMR-001. In January 2012, Amorcyte commenced patient enrollment for its PreSERVE Phase 2 trial to investigate AMR-001's ability to preserve heart function after a heart attack.

We view the PCT and Amorcyte acquisitions as fundamental to building a foundation in achieving our strategic mission of capturing the paradigm shift to cell therapy.

We acquired our Pharmaceutical Manufacturing - China segment when on October 30, 2009, China Biopharmaceuticals Holdings, Inc. ("CBH") merged with a wholly-owned subsidiary of NeoStem (the "Erye Merger"). As a result of the Erye Merger, NeoStem acquired CBH's 51% ownership interest in Erye, a Sino-foreign joint venture with limited liability organized under the laws of the PRC. 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. In 2010, Erye began transferring its operations to its newly constructed manufacturing facility, as to which construction is now substantially completed. The relocation and the new production lines have been completed and received cGMP certification. As


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part of our plan to focus its business on capturing the paradigm shift to cell therapies following the January 2011 acquisition of PCT, on June 18, 2012, we entered into a definitive agreement to sell its interest in Erye for approximately $12.3 million in cash plus the return to the Company of 1,040,000 shares of NeoStem common stock and the cancellation of 1,170,000 options and 640,000 warrants. The Erye divestiture closed on November 13, 2012.

Results of Operations

Three and Nine Months Ended September 30, 2012 Compared to Three and Nine Months Ended September 30, 2011

Net loss for the three months ended September 30, 2012 was approximately $8.4 million compared to $7.3 million for the three months ended September 30, 2011. Our net loss from continuing operations for the three months ended September 30, 2012 and 2011 was approximately $8.5 million and $6.6 million, respectively. The loss from discontinued operations - net, reflects the operations of our Regenerative Medicine - China segment which was deconsolidated in the first quarter of 2012, and the operations of our Pharmaceutical Manufacturing - China segment, effective with our agreement to sell our 51% interest in Suzhou Erye in the second quarter of 2012. The income from discontinued operations - net for the three months ended September 30, 2012 was approximately $0.2 million and loss from discontinued operations - net for the three months ended September 30, 2011 $0.8 million.

Net loss for the nine months ended September 30, 2012 was approximately $51.0 million compared to $27.7 million for the nine months ended September 30, 2011. Our net loss from continuing operations for the nine months ended September 30, 2012 and 2011 was approximately $23.8 million and $26.9 million, respectively. The loss from discontinued operations - net for the nine months ended ended September 30, 2012 and 2011 was approximately $27.3 million and $0.8 million, respectively.

Revenues

For the three months ended September 30, 2012, total revenues were approximately
$4.4 million compared to $2.2 million for the three months ended September 30,
2011, representing an increase of $2.3 million or 104%. Revenues for period were
comprised of the following (in thousands):
                                       Three Months Ended September 30,
                                              2012                     2011
Clinical Services               $         2,921.8                   $ 1,014.3
Clinical Services Reimbursables             928.0                       714.0
Processing and Storage Services             577.9                       448.7
Other                                         6.3                           -
                                $         4,434.0                   $ 2,177.0

Clinical Services, representing process development and clinical manufacturing services provided at PCT to its various clients, were approximately $2.9 million for the three months ended September 30, 2012 compared to $1.0 million for the three months ended September 30, 2011, representing an increase of approximately $1.9 million or 188%. The increase in clinical services revenue is due to an increased overall visibility of PCT and penetration into the cell therapy marketplace along with a general increase in the development of autologous cell therapies in the United States due to enhanced investment and expanded marketing programs in 2011 and 2012. The revenue increase was also as a result of fewer clinical service contracts subject to contract completion for revenue recognition in the three months ended September 30, 2012 compared to the three months ended September 30, 2011. In accordance with our revenue recognition policy, revenue is recognized upon contract completion when the contract contains certain multiple stages that do not have stand alone values and are dependent on one another.

Clinical Services Reimbursables, representing reimbursement of expenses for certain consumables incurred on behalf of our clinical service revenue clients, were approximately $0.9 million for the three months ended September 30, 2012 compared to $0.7 million for the three months ended September 30, 2011, representing an increase of approximately $0.2 million or 30%. Our reimbursable revenue increased as a result of increased manufacturing and process development activity.

Processing and Storage Services, representing revenues from our oncology, cord blood, and adult stem cell banking activities, were approximately $0.6 million for the three months ended September 30, 2012 compared to $0.4 million for the three months ended September 30, 2011, representing an increase of approximately $0.1 million or 29%. The increase


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is primarily attributable to increased revenue from our oncology stem cell processing service. Additionally, we added hospital clients during 2012 as more hospitals have begun to outsource their oncology stem cell processing. We expect to continue to see this level of revenue during the remainder of 2012.

For the three months ended September 30, 2012, total cost of revenues were approximately $3.7 million compared to $1.9 million for the three months ended September 30, 2011, representing an increase of $1.9 million or 98%. Overall, gross profit for the three months ended September 30, 2012 was $0.7 million compared to $0.3 million for the three months ended September 30, 2011, representing an increase of approximately $0.4 million or 140% .

For the nine months ended September 30, 2012, total revenues were approximately $11.6 million compared to $5.8 million for the nine months ended September 30, 2011, representing an increase of $5.7 million or 98%. Revenues for period were comprised of the following (in thousands):

                                      Nine Months Ended September 30,
                                             2012                    2011
Clinical Services               $         6,701.2                 $ 2,620.3
Clinical Services Reimbursables           2,881.8                   1,789.6
Processing and Storage Services           1,976.8                   1,218.1
Other                                        19.0                     209.0
                                $        11,578.8                 $ 5,837.0

Clinical Services were approximately $6.7 million for the nine months ended September 30, 2012 compared to $2.6 million for the nine months ended September 30, 2011, representing an increase of approximately $4.1 million or 156%. The increase in clinical services revenue is due to an increased overall visibility of PCT and penetration into the cell therapy marketplace along with a general increase in the development of autologous cell therapies in the United States due to enhanced investment and expanded marketing programs in 2011 and 2012. The revenue increase was also as a result of fewer clinical service contracts subject to contract completion for revenue recognition in the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011. In accordance with our revenue recognition policy, revenue is recognized upon contract completion for certain clinical service contracts.

Clinical Services Reimbursables were approximately $2.9 million for the nine months ended September 30, 2012 compared to $1.8 million for the nine months ended September 30, 2011, representing an increase of approximately $1.1 million or 61%. Our reimbursable revenue increased as a result of increased manufacturing and process development activity.

Processing and Storage Services were approximately $2.0 million for the nine months ended September 30, 2012 compared to $1.2 million for the nine months ended September 30, 2011, representing an increase of approximately $0.8 million or 62%. The increase is primarily attributable to increased revenue from our oncology stem cell processing service. Additionally, we added hospital clients during 2012 as more hospitals have begun to outsource their oncology stem cell processing.

Other Revenue were approximately $19.0 thousand for the nine months ended September 30, 2012 compared to $0.2 million for the nine months ended September 30, 2011. In the second quarter of 2011, we received a $200,000 license fee related to our adult stem cell technology.

For the nine months ended September 30, 2012, total cost of revenues were approximately $9.4 million compared to $5.3 million for the nine months ended September 30, 2011, representing an increase of $4.1 million or 77%. Overall, gross profit for the nine months ended September 30, 2012 was $2.1 million compared to $0.5 million, representing an increase of approximately $1.6 million or 327% .

Operating Expenses

Historically, to minimize our use of cash, we have used a variety of equity and equity-linked instruments to compensate


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employees, consultants and other service providers. The use of these instruments has resulted in charges to the results of operations, which has from time to time in the past been significant. 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 three months ended September 30, 2012 operating expenses totaled $8.8 million compared to $7.5 million for the three months ended September 30, 2011, representing an increase of $1.3 million or 17%. Operating expenses for period were comprised of the following:

Selling, general and administrative expenses of approximately $5.9 million for the three months ended September 30, 2012 compared to $6.0 million for the three months ended September 30, 2011, representing a minor decrease of approximately $0.1 million. Equity-based compensation included in selling, general and administrative expenses for the three months ended September 30, 2012 was approximately $1.8 million, compared to approximately $1.6 million for the three months ended September 30, 2011, representing an increase of $0.2 million. In addition, other, cash based, general and administrative expenses increased approximately $0.2 million, and other, cash based, selling expenses decreased $0.4 million compared to the prior year period.

Research and development expenses of approximately $2.8 million for the three months ended September 30, 2012 compared to $1.5 million for the three months ended September 30, 2011, representing an increase of approximately $1.3 million or 84%. Overall, the increase was primarily due to expenses of approximately $2.5 million associated with our Phase 2 clinical trial for AMR-001, which was initiated in January 2012. The increase was partially offset by reduced costs associated with internal research activities relating to our VSEL Technology. Equity-based compensation included in research and development expenses for the three months ended September 30, 2012 was approximately $0.1 million, compared to approximately $0.1 million of equity-based compensation reversals that were due to forfeitures for the three months ended September 30, 2011, representing an increase of $0.2 million.

For the nine months ended September 30, 2012 operating expenses totaled $24.6 million compared to $27.0 million for the nine months ended September 30, 2011, representing a decrease of $2.4 million or 9%. Operating expenses for period were comprised of the following:

Selling, general and administrative expenses of approximately $17.1 million for the nine months ended September 30, 2012 compared to $21.3 million for the nine months ended September 30, 2011, representing a decrease of approximately $4.2 million or 20%. Equity-based compensation included in selling, general and administrative expenses for the nine months ended September 30, 2012 was approximately $5.0 million, compared to approximately $7.5 million for the nine months ended September 30, 2011, representing a decrease of $2.5 million. General and administrative expenses decreased approximately $1.1 million, in part due to a one-time contribution of $0.6 million paid in equity to the Stem for Life Foundation during the nine months ended September 30, 2011. Selling expenses also decreased $0.6 million compared to the prior year period.

Research and development expenses of approximately $7.5 million for the nine months ended September 30, 2012 compared to $5.7 million for the nine months ended September 30, 2011, representing an increase of approximately $1.8 million or 32%. Overall, the increase was primarily due to expenses of approximately $5.2 million associated with our Phase 2 clinical trial for AMR-001, which was initiated in January 2012. The increase was partially offset by a prior year period $1.2 million in-process research and development charge incurred, and reduced internal research activities relating to our VSEL Technology. Equity-based compensation included in research and development expenses for the nine months ended September 30, 2012 was approximately $0.4 million, compared to approximately $0.5 million for the nine months ended September 30, 2011, representing a decrease of $0.1 million.

Other Income and Expense

For the three months ended September 30, 2012 interest expense was $0.4 million compared with $0.6 million for the three months ended September 30, 2011. For the nine months ended September 30, 2012 interest expense was $1.4 million compared with $2.1 million for the nine months ended September 30, 2011. Interest expense in each period was primarily due to the amortization of debt discount related to the Series E Preferred Stock.

Other expense for the three months ended September 30, 2012 totaled approximately $0.1 million, compared with other income of $1.3 million for the three months ended September 30, 2011. Other income for the nine months ended September 30, 2012 totaled approximately $36.9 thousand, compared with other income of $1.6 million for the nine months ended September 30, 2011, and primarily relates to the revaluation of derivative liabilities that have been established in connection with the Convertible


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Redeemable Series E Preferred Stock.

Discontinued Operations

Regenerative Medicine - China segment

In 2009, the Company began its Regenerative Medicine-China business in the People's Republic of China ("China" or "PRC") through its subsidiary, a wholly foreign owned entity ("WFOE") and entered into contractual arrangements with certain variable interest entities ("VIEs"). Foreign companies have commonly used VIE structures to operate in the PRC, and while such structures are not uncommon, recently they have drawn greater scrutiny from the local Chinese business community in the PRC who have urged the PRC State Council to restrict the use of these structures. In addition, in December 2011, China's Ministry of Health announced its intention to more tightly regulate stem cell clinical trials and stem cell therapeutic treatments in the PRC, which has created uncertainty regarding the ultimate regulatory environment in the PRC. Accordingly, the Company took steps to restrict, and ultimately eliminate its regenerative medicine business in the PRC. As a result of these steps, the Company has discontinued its operations in its Regenerative Medicine-China business. The Company has determined that any liability arising from the activities of the WFOE and the VIEs will likely be limited to the net assets currently held by each entity. As of March 31, 2012, the Company recognized the following loss on exit of the Regenerative Medicine-China business (in thousands):

Cash                                      $   195.1
Prepaid expenses and other current assets      14.9
Property, plant and equipment, net          1,023.7
Other Assets                                  330.5
Accounts payable                             (177.1 )
Accrued liabilities                           (79.2 )
Accumulated comprehensive income             (169.9 )
Loss on exit of segment                   $ 1,138.0

The operations and cash flows of the Regenerative Medicine - China business were eliminated from ongoing operations as a result of our exit decision, and the Company will not have continuing involvement in this business going forward. The operating results of the Regenerative Medicine - China business for the three and nine months ended September 30, 2012 and 2011, which are included in discontinued operations, were as follows (in thousands):

                                     Three Months Ended September
                                                  30,                    Nine Months Ended September 30,
                                          2012            2011              2012                 2011
Revenue                              $          -     $     98.8     $          52.3       $         148.9
Cost of revenues                                -          (31.3 )             (30.6 )               (49.4 )
Research and development                        -           93.6              (103.3 )               (64.5 )
Selling, general, and administrative            -         (782.3 )            (497.3 )            (1,572.3 )
Other income (expense)                          -            1.4                (6.8 )               (11.3 )
Loss on exit of segment                         -              -            (1,138.0 )                   -
Loss from discontinued operations    $          -     $   (619.8 )   $      (1,723.7 )     $      (1,548.6 )

The summary of the assets and liabilities related to Regenerative Medicine-China discontinued operations as of December 31, 2011 was as follows (in thousands):


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                                           December 31, 2011
Assets
Cash and cash equivalents                 $             103.3
Prepaid expenses and other current assets               284.4
Property, plant and equipment, net                    1,256.8
Other Assets                                            149.0
                                          $           1,793.5
Liabilities
Accounts payable                          $             177.8
Accrued liabilities                                      31.0
                                          $             208.8

Pharmaceutical Manufacturing - China segment

On June 18, 2012, the Company announced that it had entered into a definitive agreement to sell its 51% interest in Erye for approximately $12.3 million in cash and the return to the Company of (i) 1,040,000 shares of the Company's Common Stock and (ii) the cancellation of 1,170,000 options and 640,000 Common Stock warrants. The closing of the transaction is subject to the satisfaction of certain conditions. The Erye divestiture closed on November 13, 2012. The operations and cash flows of the Pharmaceutical Manufacturing - China business will be eliminated from ongoing operations with the sale of the Company's 51% interest in Erye. The operating results of the Pharmaceutical Manufacturing - China business for the three and nine months ended September 30, 2012 and 2011, including the estimated asset impairments based on the definitive agreement purchase price, were as follows (in thousands):

                                               Three Months Ended September 30,             Nine Months Ended September 30,
                                                  2012                   2011                  2012                  2011
Revenue                                    $       20,036.4       $       15,513.0      $       57,254.7       $      49,806.0
Cost of revenues                                  (11,551.5 )            (11,905.1 )           (37,131.5 )           (36,207.1 )
Research and development                             (611.8 )               (782.5 )            (2,231.5 )            (1,885.3 )
Selling, general, and administrative               (3,514.7 )             (2,107.4 )            (9,714.8 )            (8,233.5 )
Other income (expense)                                 (0.9 )               (583.2 )            (1,008.3 )              (949.3 )
Provision for income taxes                         (1,029.9 )                (26.2 )            (1,535.4 )              (907.6 )
Asset impairments                                  (3,175.5 )                    -             (31,170.1 )                   -
(Loss) income from discontinued operations $          152.1       $          108.6      $      (25,536.9 )     $       1,623.2

The summary of the assets and liabilities related to Pharmaceutical Manufacturing- China discontinued operations as of September 30, 2012 and December 31, 2011, respectively, were as follows (in thousands):


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                                           September 30, 2012     December 31, 2011
Cash and cash equivalents                 $          10,789.5    $           8,707.0
Restricted cash                                       2,892.4                      -
Accounts receivable, net                              7,105.3                5,525.7
Inventory                                            15,141.9               16,505.7
Deferred income taxes                                   344.2                  463.7
Prepaid expenses and other current assets               750.9                  777.5
Property, plant and equipment, net                   37,327.3               36,490.4
Land use rights, net                                  3,021.5                4,872.4
Goodwill                                                    -                8,495.7
Intangible assets, net                                      -               21,846.4
Other assets                                          2,821.1                2,459.9
Total assets                              $          80,194.1    $         106,144.4
. . .
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