Business Context and Reporting Period
Company: NeoStem, Inc. (formerly Phase III Medical, Inc.)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: NeoStem operates a platform for the collection, processing, and long-term storage of autologous adult stem cells. The company manages a network of collection centers in major U.S. metropolitan areas. Additionally, NeoStem has entered the R&D sector via an exclusive license for VSEL (very small embryonic-like) stem cell technology. The company is actively pursuing expansion into China through a proposed merger with China Biopharmaceuticals Holdings, Inc. (CBH) and a share exchange with China StemCell Medical Holding Limited.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Total Revenues | $83,541 | $231,664 |
| Gross Profit | $51,562 | $206,817 |
| Operating Loss | $(9,233,453) | $(10,438,836) |
| Net Loss | $(9,242,071) | $(10,445,473) |
| Cash and Cash Equivalents (Year End) | $430,786 | $2,304,227 |
| Working Capital (Deficiency) | $(430,717) | $1,930,851 |
| Total Stockholders' Equity | $863,176 | $3,316,194 |
| Net Cash Used in Operating Activities | $(4,732,165) | $(6,132,424) |
| Net Cash Provided by Financing Activities | $2,868,509 | $7,846,885 |
Note: Revenue in 2008 consisted of $52,500 from stem cell collection/storage and $31,000 in startup fees. The 2007 revenue included $189,000 in startup fees and $1,700 from the run-off of former warranty business.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by approximately 64% from 2007 to 2008, primarily due to a reduction in startup fees from collection centers as the company shifted focus to recruiting clients in existing networks and waiving fees to support new center launches.
- Liquidity Deterioration: Cash balance dropped from $2.3 million in 2007 to $431,000 in 2008. The company moved from positive working capital of $1.9 million to a negative working capital of approximately $431,000.
- Expense Reduction: Selling, General, and Administrative (SG&A) expenses decreased by $1.36 million (13%) to $9.29 million, driven by staff reductions and a decrease in the fair value of equity instruments issued for services.
- Financing Activity: The company raised approximately $2.9 million in gross proceeds through four private placements in 2008 (May, September, October, November), compared to $7.9 million in 2007.
Guidance, Outlook, Risks, and Contingencies
Outlook and Capital Needs: Management states that the company will require substantial additional capital to fund operations, R&D, and marketing. The company intends to meet near-term cash requirements through an equity offering anticipated in the second quarter of 2009, targeting no less than $10 million. In the interim, the company issued $1.15 million in promissory notes (RimAsia Notes) in early 2009.
Strategic Transactions (Merger & Share Exchange): In November 2008, NeoStem entered into agreements to acquire a 51% interest in Suzhou Erye Pharmaceuticals Company Ltd. (via merger with CBH) and to obtain benefits from Shandong New Medicine Research Institute (via share exchange). These transactions are subject to shareholder approval and regulatory approvals, with closings anticipated in Q2 2009. The company notes that these acquisitions are not expected to generate sufficient excess cash flow to support the platform business in the near term.
Key Risks:
- Liquidity: History of operating losses and negative working capital may hinder the ability to raise capital on favorable terms.
- Delisting: The company received notice from the NYSE Amex regarding non-compliance with shareholder meeting requirements and is nearing financial thresholds for continued listing.
- China Expansion: Significant risks associated with doing business in China, including regulatory uncertainty, political instability, and the use of Variable Interest Entity (VIE) structures.
- SEC Inquiry: The company received an informal request from the SEC for documents regarding securities issuances from 2007 to present, related to an investigation of a third-party underwriter. The company is cooperating, and there is no indication it is the target of an investigation.
- Technology Commercialization: No assurance that VSEL technology or adult stem cell therapies will be successfully commercialized or gain regulatory approval.
Important Facts for Investor Verification
- Cash Runway: Verify the company's ability to raise the anticipated $10 million equity offering in Q2 2009 given the current cash balance of ~$431,000 and negative working capital.
- Transaction Closing: Confirm the status of the proposed Merger with CBH and Share Exchange with Shandong, including shareholder approval and PRC regulatory clearance, as these are critical to the company's growth strategy.
- Listing Status: Monitor the company's compliance plan with the NYSE Amex to avoid delisting, which would severely impact liquidity.
- Revenue Sustainability: Assess the viability of the stem cell collection business model, given the minimal number of collections (nine in 2008) and the reliance on startup fees which are being reduced.
- Related Party Transactions: Review the terms of the $1.15 million promissory notes issued to RimAsia Capital Partners, a principal stockholder, and the potential dilution from the proposed China transactions.