Business context and reporting period
The supplied filing is NeoStem, Inc.’s Form 10-Q for the quarter ended June 30, 2012, filed August 13, 2012. This does not match the request metadata identifying Lisata Therapeutics and 2011 Q2. The summary below reflects the filing text; verify the issuer and period before relying on it.
NeoStem describes itself as a cellular-therapy company. Following its exit from regenerative medicine operations in China and its agreement to sell its 51% interest in Suzhou Erye, it reported one continuing segment: U.S. Cell Therapy, including cell-therapy development and contract development, manufacturing, processing, and storage services.
Financial performance and position
Continuing-operations results are presented separately from the China businesses classified as discontinued operations. Amounts below are in U.S. dollars.
| Metric | Three months ended June 30, 2012 | Six months ended June 30, 2012 | Comparable 2011 period |
|---|---|---|---|
| Revenue, continuing operations | $3.37 million | $7.14 million | $2.21 million; $3.66 million |
| Gross profit | $0.64 million | $1.45 million | $0.42 million; $0.20 million |
| Gross margin | 18.9% | 20.3% | 19.0%; 5.4% |
| Operating expenses | $7.45 million | $15.81 million | $10.46 million; $19.43 million |
| Operating loss | $(6.81) million | $(14.35) million | $(10.04) million; $(19.24) million |
| Loss from continuing operations | $(7.24) million | $(15.22) million | $(10.09) million; $(20.20) million |
| Consolidated net loss, including discontinued operations | $(33.42) million | $(42.63) million | $(10.54) million; $(20.24) million |
| Net loss per common share | $(0.15) | $(0.24) | $(0.13); $(0.27) |
Continuing revenue rose 53% for the quarter and 95% for the half-year. Growth came from clinical services, reimbursable clinical costs, and processing and storage services. Quarterly operating expenses fell 29%, mainly due to lower equity-based compensation in SG&A; R&D increased with the AMR-001 Phase 2 trial. The large year-over-year increase in consolidated net loss chiefly reflects discontinued operations and a $27.99 million impairment charge associated with the planned Erye sale.
For the first half, continuing operations used $9.84 million of operating cash and $0.18 million in investing cash; continuing financing provided $8.50 million, primarily from equity issuance. Including discontinued operations, consolidated operating cash use was $0.85 million, investing cash use was $2.32 million, and financing cash provided was $8.73 million. At June 30, cash and equivalents were $18.26 million consolidated, of which $16.15 million related to discontinued operations; continuing-operations cash was $2.11 million. Management reported working capital of approximately $4.2 million and NeoStem shareholders’ equity of $46.4 million.
Balance-sheet current liabilities were $48.02 million, including $38.41 million related to discontinued operations. Current mortgages and notes were reported at $3.54 million and $0.15 million, respectively; additional long-term notes were $0.06 million. The two PCT mortgages totaled approximately $3.54 million and were classified as current. PCT was out of compliance with mortgage covenants at the June 30 measurement date but had obtained lender waivers through that date. Series E preferred stock had a June 30 carrying value of $3.57 million and requires monthly redemption and 7% dividends.
Material changes, outlook, risks, and unusual items
- Portfolio changes: Regenerative Medicine–China was discontinued effective March 31, 2012. NeoStem signed a definitive agreement on June 18 to sell its Erye interest for approximately $12.3 million in cash, return of 1.04 million NeoStem shares, and cancellation of 1.17 million options and 640,000 warrants. Closing was expected by Q4 2012, subject to PRC approvals and other conditions.
- Sale progress after quarter-end: The filing reports a $1.228 million initial payment received in July and $4.912 million placed in escrow in August; the remaining $6.14 million was to be deposited by specified milestones. The transaction was not yet closed. Approval, funding, escrow release, and currency-conversion risks remain.
- Funding needs: Management expected further financing to fund operations, expand PCT, and advance cell-therapy programs. The 160-patient AMR-001 Phase 2 trial was expected to cost approximately $16 million over its first two years and up to approximately $21 million over five years, including manufacturing. Management warned that financing may not be available on acceptable terms and that failure to raise capital could force delays or reductions in programs.
- Liquidity developments: The filing states that approximately $7 million was raised after June 30 through private placements and warrant exercises. It also says $2.5 million of restricted cash connected with Series E preferred stock was expected to become available in November 2012.
- Significant risks and contingencies: Approximately RMB 17.4 million (about $2.8 million) in Erye bank deposits had been frozen in connection with litigation. Erye also faced PRC regulatory and legal uncertainties, supplier concentration, and reliance on a limited number of production lines for key antibiotic products. The company cautioned that selling Erye would leave it less diversified and dependent on a loss-making U.S. cell-therapy business.
- Controls: Management concluded disclosure controls were not effective because an unremediated material weakness at Erye involved insufficient qualified accounting staff, segregation of duties, asset records, tax expertise, and transaction audit trails. The company planned further remediation and reassessment.
- Other unusual items: First-half equity issuance materially increased shares outstanding; 137.6 million shares were outstanding at June 30, and 152.5 million were reported as of August 10. The filing also disclosed subsequent warrant inducements, additional equity placements, and a fully vested 700,000-share CEO option and 150,000-share grant in July.
Important facts for investors to verify
- Confirm that NeoStem’s June 30, 2012 10-Q—not a Lisata filing or a 2011 Q2 report—is the intended document.
- Check whether the Erye sale closed, whether all PRC approvals and purchase-price payments were completed, and how much cash was ultimately available to NeoStem.
- Reconcile continuing-operations liquidity with cash and assets classified as discontinued operations, restricted cash, and near-term obligations.
- Assess ongoing financing requirements, dilution from stock and warrant issuances, and the AMR-001 trial’s costs and progress.
- Review mortgage covenant waivers, the Erye litigation and frozen accounts, and remediation of the disclosed material weakness.