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NBS > SEC Filings for NBS > Form 10-Q on 8-May-2014All Recent SEC Filings

Show all filings for NEOSTEM, INC.

Form 10-Q for NEOSTEM, INC.


8-May-2014

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, 2013. 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, 2013.

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 developing products. 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 through the issuance of equity 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. CSC, now known as NeoStem Oncology, LLC, is driving the Company's Targeted Immunotherapy Program for cancer through the development of its lead product candidate, Melapuldencel-T, to treat Stage IV or recurrent melanoma. The Phase 3 protocol is the subject of a Special Protocol Assessment (SPA), indicating that the Food and Drug Administration ("FDA") is in agreement with the design, clinical endpoints, and planned clinical analyses of the Phase 3 trial that will serve as the basis for a Biologics License Application ("BLA"). This protocol calls for enrolling 250 patients and is expected to be initiated in 2014.

We are currently developing therapies to address ischemia through our CD34 Cell Program. 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. AMR-001 is our most clinically advanced product candidate in our CD34 Cell 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 AMR-001, 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). With the last patient of the planned 160 patient trial infused in late December 2013, we expect the last patient six-month follow-up to occur in June 2014. Once the primary end point six-month data is collected, the data set will be locked and analysis will begin with a submission for a possible presentation of the study at the American Heart Association's Scientific Sessions to be held November 15-19, 2014. If approved by Food and Drug Administration (the "FDA ") and/or other worldwide regulatory agencies following successful completion of further trials, AMR-001 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 also expect to advance the technology into other clinical indications such as chronic heart failure ("CHF"), traumatic brain injury ("TBI"), and/or 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. In collaborating with Becton-Dickinson and the University of California, San Francisco, we are utilizing this 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 antigen exposure. 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, and in allergic diseases, like asthma, the immune system overreacts to harmless foreign substances. We plan to initiate a Phase 2 study of Treg based therapeutics to treat


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type 1 diabetes in 2014. We also plan to initiate a Phase 1 study in Canada of Treg based therapeutics in support of a steroid resistant asthma indication in 2014.

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 VSELsTM for the treatment of chronic wounds. Other preclinical work with VSELsTM includes exploring macular degeneration as a target indication.

Progenitor Cell Therapy, LLC ("PCT") is a contract manufacturer 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 capital investment 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 the acquisition of CSC, PCT can leverage CSC's additional manufacturing capacity in Irvine, California as well as the personnel experience and expertise in immunotherapy to provide additional manufacturing and /or development work to advance NeoStem's platform technology as well as 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 Melapuldencel-T, 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 best in class manufacturing capability, the stage is set for us to realize meaningful clinical development and manufacturing efficiencies, further positioning NeoStem to lead the cell therapy industry.

Results of Operations

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

Net loss for the three months ended March 31, 2014 was approximately $13.8 million compared to $8.9 million for the three months ended March 31, 2013.

Revenues

For the three months ended March 31, 2014, total revenues were approximately
$4.1 million compared to $2.5 million for the three months ended March 31, 2013,
representing an increase of $1.5 million, or 61%. Revenues were comprised of the
following (in thousands):
                                      Three Months Ended March 31,
                                           2014                  2013
Clinical Services               $       2,567.0               $ 1,365.7
Clinical Services Reimbursables           748.0                   362.8
Processing and Storage Services           740.6                   795.5
                                $       4,055.6               $ 2,523.9

Clinical Services, representing process development and clinical manufacturing services provided by PCT to its various clients, were approximately $2.6 million for the three months ended March 31, 2014 compared to $1.4 million for the three months ended March 31, 2013, representing an increase of approximately $1.2 million or 88%. The increase was primarily due to $0.7 million of higher process development revenue, such revenue being recognized on a "completed contract" basis, and $0.5 million of higher clinical manufacturing revenue (which is recognized as services are rendered).


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Overall, there were approximately 50% more Clinical Services active clients as of March 31, 2014 compared to March 31, 2013, including five new clinical service contracts initiated during the current quarter.

           Process Development Revenue - Process development revenues were
            approximately $0.8 million for the three months ended March 31, 2014
            compared to $0.1 million for the three months ended March 31, 2013.
            In accordance with our revenue recognition policy, process
            development revenue is recognized upon contract completion (i.e.,
            when the services under a particular contract are completed). The
            revenue for the three months ended March 31, 2014 primarily related
            to the completion of a large process development contract during the
            quarter. In the prior year period, only minor process development
            contracts had been completed, resulting in lower revenue recognition.
            In addition, numerous process development contracts were still in
            process, including five new contracts initiated during the quarter,
            resulting in approximately $1.5 million of deferred process
            development revenue as of March 31, 2014. This revenue will be
            recognized in future periods upon completion of those contracts.
            Process development revenue will continue to fluctuate from period to
            period as a result of our process development revenue recognition
            policy.



           Clinical Manufacturing Revenue - Clinical manufacturing revenues were
            approximately $1.8 million for the three months ended March 31, 2014,
            compared to $1.2 million for the three months ended March 31, 2013.
            The increase is primarily due to an increase in the number of
            patients our customers have enrolled and treated in clinical trials.

Clinical Services Reimbursables, representing reimbursement of expenses for certain consumables incurred on behalf of our clinical service revenue clients, were approximately $0.7 million for the three months ended March 31, 2014 compared to $0.4 million for the three months ended March 31, 2013, representing an increase of approximately $0.4 million or 106%. Generally, clinical services reimbursables correlate with clinical services revenues. In addition, our terms for billing reimbursable expenses do not include a significant mark up in the acquisition cost of such consumables, and as a result, changes in this revenue category have little impact on our gross profit and net loss.

Processing and Storage Services, representing revenues from our oncology stem cell processing, cord blood, and adult stem cell processing and banking activities, were approximately $0.7 million for the three months ended March 31, 2014 compared to $0.8 million for the three months ended March 31, 2013, representing a decrease of approximately $0.1 million or 7%. The decrease is primarily attributable to decreased revenue from our oncology stem cell processing services.

Operating Costs and Expenses of Revenues

For the three months ended March 31, 2014, operating expenses totaled $17.6 million compared to $11.4 million for the three months ended March 31, 2013, representing an increase of $6.2 million or 55%. Operating expenses were comprised of the following:

Cost of revenues were approximately $3.8 million the three months ended March 31, 2014 compared to $2.4 million for the three months ended March 31, 2013, representing an increase of $1.4 million or 60%. The increase was primarily due to greater Clinical Service revenues during the current quarter. Overall, gross profit for the three months ended March 31, 2014 was $0.2 million or 6%, compared to gross profit for the three months ended March 31, 2013 of $0.1 million or 5%. Gross profit percentages generally will increase as Clinical Service revenue increases. However, gross profit percentages will also fluctuate from period to period due to the mix of service and reimbursable revenues and costs, as well as the timing of our revenue recognition under our revenue recognition policy.

Research and development expenses were approximately $4.8 million for the three months ended March 31, 2014 compared to $3.2 million for the three months ended March 31, 2013, representing an increase of approximately $1.6 million, or 50%. Research and development expenses related to AMR-001, including expenses associated with our Phase 2 clinical trial, increased by approximately $0.2 million for the three months ended March 31, 2014 compared to the prior year period. The Phase 2 clinical trial completed enrollment in the fourth quarter of 2013. Research and development expenses associated with our Regulatory T cell ("Treg") platform increased by approximately $1.0 million, and was primarily due to our efforts to develop Tregs for the treatment of type 1 diabetes, steroid resistant asthma, and organ transplant rejection. We continue to focus efforts on initiating a Phase 2 in type 1 diabetes in 2014 within the Treg platform. Research and development associated with engineering and innovation initiatives at PCT to improve scale up, automation, and integration capabilities also increased during the current quarter compared to the prior year quarter. Equity-based compensation included in research and development expenses for the three months ended March 31, 2014 and March 31, 2013 were approximately $0.5 million and $0.2 million, respectively.


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Selling, general and administrative expenses were approximately $9.0 million for the three months ended March 31, 2014 compared to $5.8 million for the three months ended March 31, 2013, representing an increase of approximately $3.2 million, or 55%. Equity-based compensation included in selling, general and administrative expenses for the three months ended March 31, 2014 was approximately $3.3 million, compared to approximately $1.9 million for the three months ended March 31, 2013, representing an increase of $1.4 million. The increase in equity-based compensation is due to the broader use of equity-based compensation during the current quarter, as well as changes in option vesting provisions initiated in 2013, impacting the timing of equity-based compensation expense recognition. Equity-based compensation expense is expected to be lower in future quarters. Non-equity-based general and administrative expenses for the three months ended March 31, 2014 were approximately $5.7 million, compared to approximately $3.8 million for the three months ended March 31, 2013, representing an increase of $1.9 million. The increase was related to higher strategic and corporate development activities, including efforts associated with the acquisition of California Stem Cell, Inc. in the second quarter of 2014, as well as increased corporate infrastructure to support our expanded research and development operations.

Historically, to minimize our use of cash, we have used a variety of equity and equity-linked instruments to compensate employees, consultants and other service providers. The use of these instruments has resulted in charges to the results of operations, which has been significant in the past. 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.

Other Income (Expense)

Other expense, net for the three months ended March 31, 2014 was approximately $190,000, and other income, net, for the three months ended March 31, 2013 was $11,000. Other income (expense), net for the three months ended March 31, 2014 primarily relates to the increase in the estimated fair value of our contingent consideration liability associated with potential earn out payments on the net sales of our product candidate AMR-001 (in the event of and following the date of first commercial sale of AMR-001).

For the three months ended March 31, 2014 interest expense was $94,000 compared with $44,000 for the three months ended March 31, 2013.

Provision for Income Taxes

The provision for income taxes for the three months ended March 31, 2014 relate to the taxable temporary differences on the goodwill recognized in the PCT acquisition in 2011, which is being amortized over 15 years for tax purposes. A tax provision will continue to be recognized each period over the amortization period, and will only reverse when the goodwill is eliminated through a sale, impairment, or reclassification from an indefinite-lived asset to a finite-lived asset.

Noncontrolling Interests

In March 2011, we acquired rights to use patents under licenses from Becton, Dickinson and Company ("BD") in exchange for a 19.9% interest in our Athelos subsidiary. Pursuant to the Stock Purchase Agreement signed in March 2011, BD's ownership will be diluted based on new investment in Athelos (subject to certain anti-dilution provisions). As of March 31, 2014, BD's ownership interest in Athelos was decreased to 10.0%, and our ownership increased to 90.0%. For the three months ended March 31, 2014 and 2013, BD's share of Athelos' net loss totaled approximately $0.1 million and $0.1 million, respectively.

Analysis of Liquidity and Capital Resources

At March 31, 2014 we had a cash balance of approximately $41.4 million, working capital of approximately $37.8 million, and stockholders' equity of approximately $59.6 million.

During the three months ended March 31, 2014, we met our immediate cash requirements through revenue generated from our PCT operations, existing cash balances, the issuance of common stock under our purchase agreement with Aspire, and warrant exercises. Additionally, we used equity and equity-linked instruments to pay for services and compensation.


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Net cash provided by or used in operating, investing and financing activities from continuing operations were as follows (in thousands):

                                             Three Months Ended March 31,
                                                 2014               2013
Net cash used in operating activities     $     (11,253.5 )     $ (7,135.7 )
Net cash used in investing activities            (1,239.6 )          (53.6 )
Net cash provided by financing activities         7,719.0          2,705.4

Operating Activities

Our cash used in operating activities in the three months ended March 31, 2014 totaled approximately $11.3 million, which is the sum of (i) our net loss of $13.8 million, and adjusted for non-cash expenses totaling $4.6 million (which includes adjustments for equity-based compensation and depreciation and amortization), and (ii) changes in operating assets and liabilities providing approximately $2.0 million.

Our cash used in operating activities in the three months ended March 31, 2013 totaled approximately $7.1 million, which is the sum of (i) our net loss of $8.9 million, and adjusted for non-cash expenses totaling $2.8 million (which includes adjustments for equity-based compensation and depreciation and amortization), and (ii) changes in operating assets and liabilities providing approximately $1.0 million.

Investing Activities

During the three months ended March 31, 2014, we spent approximately $1.2 million for property and equipment. During the three months ended March 31, 2013, we spent approximately $0.1 million for property and equipment.

Financing Activities

During the three months ended March 31, 2014, our financing activities consisted of the following:
We raised gross proceeds of approximately $5.6 million through the issuance of approximately 0.8 million shares of Common Stock under the provisions of our equity line of credit with Aspire.

We raised approximately $0.1 million from the exercise of 12,800 options.

We raised approximately $1.3 million from the exercise of 250,000 warrants.

During the three months ended March 31, 2013, our financing activities consisted of the following:
We raised gross proceeds of approximately $2.8 million through the issuance of 454,300 shares of Common Stock under the provisions of our equity line of credit with Aspire.

We raised approximately $0.1 million from the exercise of approximately 20,800 warrants. To induce the exercise of certain of these warrants, we provided consideration to the warrant holders in the form of cash.

Liquidity and Capital Requirements Outlook

We anticipate requiring additional capital for strategic transactions and otherwise in order to fund the development of cell therapy product candidates, particularly in our Targeted Immunotherapy Program, CD34 Cell Program and T Regulatory Cell Program. The most significant funding needs are anticipated to be in connection with the conduct of our Phase 3 clinical trial of Melapuldencel-T for stage IV and recurrent stage III melanoma which is expected to be initiated in 2014 and cost approximately $25 million, and other costs related to the operation of CSC (now known as NeoStem Oncology, LLC), which we acquired in May 2014. The recent acquisition of the CSC operations could result in our re-prioritizing the timing of the initiation of certain of our other earlier stage clinical trials. We also anticipate requiring additional capital to grow the PCT business, including implementing additional automation capabilities and pursuing plans to establish commercial capacity and expand internationally. Additionally, we recently completed expansion in the Allendale, New Jersey facility adding laboratory, clean room suites and support facil


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ities and we commenced construction at the Mountain View facility and expanded its manufacturing capacity with additional clean rooms, laboratory space and support facilities and the build-out is expected to be completed in May 2014.

To meet our short and long term liquidity needs, we currently expect to use existing cash balances, our revenue generating activities, and a variety of other means. Those other means include the continued use of a common stock purchase agreement with Aspire (the "Aspire Agreement"). We entered into a new $30 million common stock purchase agreement with Aspire in March 2014. Other sources of liquidity could include potential issuances of debt or equity securities in public or private financings, additional warrant exercises, option exercises, and/or sale of assets. In addition, we will continue to seek as appropriate grants for scientific and clinical studies from the National Institutes of Health, Department of Defense, and other governmental agencies and foundations, but there can be no assurance that we will be successful in qualifying for or obtaining such grants. Our history of operating losses and liquidity challenges, 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. During times of extreme market volatility, capital may not be available on favorable terms, if at all. Our inability to obtain such additional capital could materially and adversely affect our business operations. We believe that our current cash balances and revenue generating activities, along with access to the Aspire Agreement, will be sufficient to fund the business, as now operated, into 2015.

While we continue to seek capital through a number of means, there can be no assurance that additional financing will be available or on acceptable terms, if at all, and our negotiating position in capital generating efforts may worsen as existing resources are used. Additional equity financing may be dilutive to our stockholders; debt financing, if available, may involve significant cash payment obligations and covenants that restrict our ability to operate as a business, our stock price may not reach levels necessary to induce option or warrant exercises, and asset sales may not be possible on terms we consider acceptable. If we are unable to raise the funds necessary to meet our long-term liquidity needs, we may have to delay or discontinue the acquisition and development of cell therapies, and/or the expansion of our business or raise funds on terms that we currently consider unfavorable.

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