LSTA

Business Context and Reporting Period

Company: NeoStem, Inc. (formerly Phase III Medical, Inc.)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2008
Business Overview: NeoStem operates a commercial autologous adult stem cell bank, managing a network of collection centers in the U.S. The company also holds an exclusive worldwide license for VSEL (very small embryonic-like) stem cell technology. Historically, the company ran off extended warranty contracts, a segment completed as of March 31, 2007.

Key Financial Metrics

Liquidity and Balance Sheet Highlights (as of Sep 30, 2008)

• Cash and Cash Equivalents: $794,367 (down from $2,304,227 at Dec 31, 2007).
• Working Capital: $461,325 (Current Assets: $919,427; Current Liabilities: $458,102).
• Total Liabilities: $458,102.
• Stockholders' Equity: $1,829,763.
• Accumulated Deficit: $(37,562,914).

Cash Flow Summary (Nine Months Ended Sep 30, 2008)

• Net Cash Used in Operating Activities: $(3,618,250).
• Net Cash Used in Investing Activities: $(27,296).
• Net Cash Provided by Financing Activities: $2,135,686 (primarily from private placements).
• Net Decrease in Cash: $(1,509,860).

Material Changes vs. Prior Period

• Revenue Decline: Nine-month revenues decreased 32% to $49,469 from $74,471 in the prior year, primarily due to reduced startup fees from physician network recruitment.
• Expense Reduction: Selling, general, and administrative (SG&A) expenses decreased 16% to $6.84 million for the nine months ended Sep 30, 2008, compared to $8.16 million in 2007. This was driven by a significant reduction in equity-based compensation (stock and warrants) used to pay for services.
• Improved Loss Profile: Net loss for the nine months decreased by approximately $1.29 million compared to the prior year period, largely due to the reduction in non-cash equity compensation expenses.
• Capitalization: The company raised $2.15 million in gross proceeds through private placements in May and September 2008 to fund operations.

Outlook, Risks, and Unusual Items

Strategic Transactions (Subsequent Events)

• Merger Agreement (Nov 2, 2008): Entered into an agreement to acquire a 51% interest in Suzhou Erye Pharmaceuticals Company Ltd. (Erye), a Chinese pharmaceutical manufacturer, via a merger with China Biopharmaceuticals Holdings, Inc. (CBH). Expected closing in Q1 2009.
• Share Exchange (Nov 2, 2008): Entered into an agreement to acquire control of Shandong New Medicine Research Institute (Shandong), a regenerative medicine entity in China, via a share exchange. Expected closing in Q1 2009.
• October 2008 Financing: Raised an additional $250,000 via private placement on October 23, 2008.

Risks and Contingencies

• Liquidity Risk: The company has a history of losses and relies on continued financing to fund operations. If financing is not successful, operations may need to be curtailed.
• Regulatory Risk (China): The proposed acquisitions involve significant exposure to the People's Republic of China (PRC). Risks include obtaining necessary PRC governmental approvals, currency exchange restrictions, and the uncertainty of enforcing contractual arrangements (VIE structure) for the Shandong acquisition.
• Integration Risk: Success depends on integrating the Chinese entities and managing operations in a foreign market where the company has limited experience.
• VSEL Technology: Research obligations under the University of Louisville license require future funding ($375,000 committed) and regulatory approvals (IRB) which have not yet commenced.

Investor Verification Checklist

• Cash Runway: Verify the sufficiency of the $794,367 cash balance against the burn rate of ~$3.6M over nine months, considering the need to fund operations until the Q1 2009 closings of the Chinese acquisitions.
• Acquisition Approvals: Monitor the status of PRC governmental approvals required for the Erye joint venture and the Shandong VIE structure, as failure to obtain these will terminate the transactions.
• Dilution Impact: Assess the dilution from the proposed issuance of 7.5 million shares for the CBH merger and up to 5 million shares for the Shandong exchange, alongside existing warrant overhang (approx. 4.77 million shares).
• Revenue Realization: Confirm the operational status and revenue generation of the new collection centers in New York, Santa Monica, and Coral Gables, as historical revenues have been minimal.
• Debt Obligations: Review the terms of the $131,617 in notes payable related to insurance policies and the potential for additional funding requirements for the Erye facility relocation.