Filing identity and reporting period
The supplied filing is NeoStem, Inc.’s unaudited Form 10-Q for the quarter ended June 30, 2011, filed August 12, 2011. It does not match the request metadata, which identifies Lisata Therapeutics and 2010 Q2; confirm the intended company and period before relying on this summary.
NeoStem operated in U.S. cell therapy, China regenerative medicine, and China pharmaceutical manufacturing. The January 2011 acquisition of Progenitor Cell Therapy (PCT) expanded its U.S. cell-therapy services and development business. The company owned 51% of Erye, its China pharmaceutical manufacturer.
Financial performance and liquidity
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue, 2011; 2010 | $18.46m; $19.41m | $38.10m; $35.24m |
| Gross profit, 2011; 2010 | $4.94m; $6.50m | $10.29m; $11.48m |
| Gross margin, 2011; 2010 | 26.8%; 33.5% | 27.0%; 32.6% |
| Operating loss, 2011; 2010 | $(10.02)m; $(3.50)m | $(18.01)m; $(6.11)m |
| Net loss, 2011; 2010 | $(10.54)m; $(3.76)m | $(20.24)m; $(7.05)m |
| Net loss attributable to common shareholders, 2011; 2010 | $(10.78)m; $(5.43)m | $(21.14)m; $(10.14)m |
| Loss per share, 2011; 2010 | $(0.13); $(0.11) | $(0.27); $(0.23) |
- Revenue declined 4.9% in Q2, mainly as China pharmaceutical revenue fell 17% after management discontinued certain lower-margin intermediates. For the first half, revenue rose 8.1%, including $3.42m of PCT revenue since its acquisition.
- Six-month operating cash use was $13.27m, versus $3.46m a year earlier. Investing cash use was $6.42m; financing provided $8.85m. Cash and cash equivalents fell from $15.61m at year-end 2010 to $4.85m at June 30, 2011.
- At June 30, current assets were $43.36m and current liabilities $38.77m; reported working capital was $4.59m. Restricted cash was $4.90m, including cash pledged for Erye notes; a further $2.50m held in escrow for Series E obligations was unavailable for current needs.
- Reported current borrowings included $7.74m of bank loans, $11.06m of notes payable, and $0.19m of current mortgages. Long-term mortgages were $3.53m; $20.01m was due to Erye’s 49% shareholder, bearing 6.06% interest. Series E preferred stock was presented as mezzanine equity, with a $5.90m carrying value.
- Operating expenses rose substantially: first-half R&D was $5.28m and SG&A $23.02m, compared with $3.43m and $14.15m, respectively, in 2010. Share-based compensation and PCT-related costs were important contributors.
Material changes, outlook, and risks
- Management described a strategic shift toward cell therapies and was evaluating strategic alternatives, including possible divestiture of its Erye interest. A sale was uncertain and subject to, among other matters, EET’s right of first refusal and Chinese regulatory and tax issues.
- Management anticipated needing additional capital to fund operations, cell-therapy development, and expansion. Subsequent to quarter-end, NeoStem reported a July offering generating $16.5m gross and $14.67m net proceeds, plus a $0.73m private placement. These proceeds post-date the June 30 balance sheet.
- A July 14, 2011 agreement to acquire Amorcyte was subject to shareholder approvals and other closing conditions. Consideration included shares and warrants, potential milestone shares, and a possible revenue-based earn-out. AMR-001 was described as ready to begin a Phase II study; this was not a reported completed transaction.
- Management cited price pressure on Erye drugs and possible Chinese rules restricting antibiotic use. Certain government price cuts could reduce prices for named products by as much as 50% or 75%; actual reductions reported by June 30 were under 20%. About 93% of Erye revenue came from products using penicillin or cephalosporin as key ingredients, creating production concentration risk.
- In a Chinese patent dispute, Erye had accrued approximately $0.76m in damages and costs and had appealed. A related July 2011 copyright action led to a court order allowing up to RMB 50m of property to be frozen or seized; approximately $0.62m of cash was frozen as of August 10, 2011.
- Management disclosed deficiencies in Chinese approvals and registrations relating to the legal holding structure for Erye. Remediation was expected to involve tax liabilities and penalties; management did not expect those amounts to be material, but gave no assurance that the issues would not affect liquidity or a potential divestiture.
- NeoStem said it had incurred significant operating losses and cash outflows and warned that financing might not be available on acceptable terms. Further equity funding could dilute shareholders; failure to obtain capital could delay or curtail development and expansion. No formal earnings or revenue guidance was provided.
- PCT was not in compliance with certain mortgage covenants at June 30, 2011; it obtained a lender waiver for periods through that date. The next covenant measurement was scheduled for December 31, 2011.
Most important facts for investors to verify
- Confirm that NeoStem’s 2011 Q2 filing, rather than Lisata’s 2010 Q2 filing, is the intended document.
- Assess cash runway using the post-quarter-end offering proceeds, ongoing operating cash burn, restricted cash, and upcoming debt and Series E payments.
- Track Erye’s sales, product pricing and antibiotic regulation exposure, as well as the status and potential proceeds of any divestiture.
- Verify the resolution and financial consequences of Erye’s litigation, frozen cash, Chinese ownership-registration issues, and related tax exposure.
- Monitor the Amorcyte merger approvals, financing needs, milestone consideration, and clinical-development progress.
- Review dilution and compensation costs: common shares outstanding were 82.25m at June 30, 2011, with substantial outstanding options and warrants; the filing reported 98.05m common shares outstanding as of August 10.