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Acquisitions | 9 Months Ended
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Sep. 30, 2011
Acquisitions | Note 4 – Acquisitions On January 19, 2011 (the “Closing Date”), NBS Acquisition Company LLC (“Subco”), a newly formed wholly-owned subsidiary of NeoStem, merged (the “PCT Merger”) with and into Progenitor Cell Therapy, LLC, a Delaware limited liability company (“PCT”), with PCT as the surviving entity, in accordance with the terms of the Agreement and Plan of Merger, dated September 23, 2010 (the “PCT Merger Agreement”), among NeoStem, PCT and Subco. As a result of the consummation of the PCT Merger, NeoStem acquired all of the membership interests of PCT, and PCT is now a wholly-owned subsidiary of NeoStem. Founded by Dr. Andrew L. Pecora and Robert A. Preti, Ph.D., PCT became an internationally recognized cell therapy services and development company. They sought to create a business for “as needed” development and manufacturing services for the emerging cell therapy industry and to prepare for eventual commercialization. With its cell therapy manufacturing facilities and team of professionals, PCT offers a platform that can facilitate the preclinical and clinical development and commercialization of cellular therapies for clients throughout the world. PCT offers current Good Manufacturing Practices (cGMP)-compliant cell transportation, manufacturing, storage, and distribution services and supporting clinical trial design, product process development, logistics, regulatory and quality systems development services. In addition, through its network of contacts throughout the cell therapy industry, PCT is able to identify early stage development opportunities in the cell therapy field and opportunistically develop these cell therapies through proof of concept where they can be further developed and ultimately commercialized through NeoStem’s developing commercial structure. Dr. Preti now serves as PCT's President and Chief Scientific Officer and Dr. Pecora as Chief Medical Officer of NeoStem and PCT. PCT is engaged in a broad range of services in the cell therapy market for the treatment of human disease, including but not limited to contract manufacturing, product and process development, product and regulatory consulting, and product characterization and comparability. PCT’s expertise in the cell therapy space, which includes therapeutic vaccines (oncology), various related cell therapeutics, cell diagnostics, and regenerative medicine, creates a platform upon which NeoStem intends to build a therapeutics strategy. NeoStem’s goal is to develop internally, or through partnerships, allogeneic (cells from a third-party donor) or autologous (cells from oneself) cell therapeutics technologies that, in the aggregate, comprise the Cell Therapy – United States reportable segment. In addition, PCT has assumed NeoStem’s adult stem cell business based on PCT’s strategic advantages in meeting cGMP regulatory requirements in an industry that is widely dispersed with a range of quality issues. NeoStem believes that PCT, as a quality leader, is ideally positioned to become a leader in cell collection, processing and storage (cell banking) which is synergistic with NeoStem’s roots in this business. In addition, PCT’s leadership in the transportation and distribution of cell therapy products is complementary to NeoStem’s strategic vision of working with the industry leader as the partner of choice. These efforts are being bundled together into a new service with PCT’s cord blood banking business into a multigenerational stem cell collection and storage plan that the Company calls the “Family Plan”. Pursuant to the terms of the PCT Merger Agreement, all of the membership interests of PCT outstanding immediately prior to the effective time of the PCT Merger were converted into the right to receive, in the aggregate, (i) 10,600,000 shares of the common stock, par value $0.001 per share, of NeoStem (the “NeoStem Common Stock”) (reflecting certain final price adjustments agreed to at the closing) and (ii) warrants to purchase an aggregate 3,000,000 shares of NeoStem Common Stock as follows:
| (i) | common stock purchase warrants to purchase one million (1,000,000) shares of NeoStem Common Stock, exercisable over a seven year period at an exercise price of $7.00 per share (the “$7.00 Warrants”), and which will vest only if a specified business milestone (described in the PCT Merger Agreement) is accomplished within three (3) years of the Closing Date of the PCT Merger; and
| (ii) | common stock purchase warrants to purchase one million (1,000,000) shares of NeoStem Common Stock exercisable over a seven year term at an exercise price of $3.00 per share (the “$3.00 Warrants”); and
| (iii) | common stock purchase warrants to purchase one million (1,000,000) shares of NeoStem Common Stock exercisable over a seven year period at an exercise price of $5.00 per share (the “$5.00 Warrants” and, collectively with the $7.00 Warrants and the $3.00 Warrants, the “Warrants”).
The Warrants are redeemable in certain circumstances. Transfer of the shares issuable upon exercise of the Warrants is restricted until the one year anniversary of the Closing Date. In accordance with the PCT Merger Agreement, NeoStem has deposited into an escrow account with the escrow agent (who is initially NeoStem’s transfer agent), 10,600,000 shares of NeoStem Common Stock for eventual distribution to the former members of PCT (subject to downward adjustment to satisfy any indemnification claims of NeoStem, all as described in the PCT Merger Agreement). As of September 30, 2011, approximately 974,000 shares have been distributed to the former members of PCT. The issuance of NeoStem securities in the PCT Merger was approved at a special meeting of shareholders of NeoStem held on January 18, 2011 (the “NeoStem Special Meeting”), on which date the PCT Merger was also approved at a special meeting of members of PCT. The fair value of the net assets acquired in the PCT Merger was $12,416,200. The fair value of the equity issued as consideration by NeoStem was valued at $17,200,000 resulting in the recognition of goodwill in the amount of $4,783,600. The fair value of the equities issued by NeoStem included 10,600,000 shares of NeoStem Common stock valued at $15,900,000 and NeoStem warrants to purchase up to 3,000,000 shares valued at $1,966,200. A portion of the consideration paid is contingent upon the accomplishment of a certain milestone for the $7.00 Warrants. Such contingent consideration has been classified as equity and will not be subject to remeasurement. The goodwill that has been created by this acquisition is reflective of values and opportunities of utilizing PCT’s cell collection, processing and storage (cell banking) resources and production capacities, as mentioned above. The preliminary fair value of assets acquired and liabilities assumed on January 19, 2011 is as follows:
Cash |  | $ | 227,900 |
Accounts Receivable |  |  | 442,400 |
Other Current Assets |  |  | 166,200 |
Property, Plant & Equipment |  |  | 11,769,000 |
Intangibles |  |  | 8,100,000 |
Goodwill |  |  | 4,783,600 |
Other Assets |  |  | 654,100 |
Accounts Payable |  |  | 1,370,900 |
Other Liabilities |  |  | 540,500 |
Deferred Revenues |  |  | 247,400 |
Amount Due Related Party |  |  | 3,000,000 |
Mortgages Payable |  |  | 3,784,600 |
The total cost of the acquisition, which is still preliminary, has been allocated to the assets acquired and the liabilities assumed based upon their estimated fair values at the date of the acquisition. It is expected the goodwill will be deductible for income tax purposes. As of September 30, 2011, the preliminary fair values of the deferred tax liabilities were reduced to zero, from an initial estimate of $4.3 million, due to the finalization of the tax treatment of the transaction. As a result, the tax provision for the nine months ended September 30, 2011 reflects a $178,000 adjustment related to the portion of deferred tax liability recognized in the first and second quarters of fiscal 2011. In addition, the fair value of the equity issued as consideration by NeoStem was reduced by $666,200. The net effect of the updated values reduced the preliminary goodwill by $4.9 million. This estimated purchase price allocation continues to be subject to revision based on additional valuation work that is being conducted. The final allocation is pending the receipt of this valuation work and the completion of the Company’s internal review, which is expected during fiscal 2011. For the period since the acquisition (January 19-September 30, 2011), NeoStem recorded $5,571,500 in revenues and a net loss of approximately $4,043,300 or $0.05 basic and diluted loss per share attributable to PCT. The following supplemental table presents unaudited consolidated pro forma financial information as if the closing of the acquisition of PCT had occurred on January 1, 2010 (in thousands, except per share amounts):
|  | Nine Months Ended September 30, |  |  | Three Months Ended September 30, |  |  | Nine Months Ended September 30, |
|  | 2011 |  |  | 2011 |  |  | 2010 |  |  | 2010 |  |  | 2010 |  |  | 2010 |
|  | (As Reported) |  |  | (Proforma) |  |  | (As Reported) |  |  | (Proforma) |  |  | (As Reported) |  |  | (Proforma) |
Revenues |  | $ | 55,858 |  |  | $ | 56,240 |  |  | $ | 16,476 |  |  | $ | 18,883 |  |  | $ | 51,716 |  |  | $ | 57,575 |
Cost of revenues |  |  | 41,637 |  |  |  | 41,961 |  |  |  | 11,233 |  |  |  | 12,996 |  |  |  | 35,016 |  |  |  | 39,561 |
Gross profit |  |  | 14,221 |  |  |  | 14,279 |  |  |  | 5,243 |  |  |  | 5,887 |  |  |  | 16,701 |  |  |  | 18,014 |
Research and development |  |  | 7,767 |  |  |  | 7,767 |  |  |  | 1,680 |  |  |  | 1,679 |  |  |  | 5,114 |  |  |  | 5,111 |
Selling, general, and administrative |  |  | 31,829 |  |  |  | 32,218 |  |  |  | 9,307 |  |  |  | 10,905 |  |  |  | 23,442 |  |  |  | 28,120 |
Operating loss |  |  | (25,375 | ) |  |  | (25,706 | ) |  |  | (5,744 | ) |  |  | (6,696 | ) |  |  | (11,855 | ) |  |  | (15,217 | )
Other income (expense), net |  |  | (1,447 | ) |  |  | (1,482 | ) |  |  | 35 |  |  |  | (47 | ) |  |  | 6 |  |  |  | (208 | )
Loss from operations before provision for income taxes and |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
noncontrolling interests |  |  | (26,821 | ) |  |  | (27,187 | ) |  |  | (5,709 | ) |  |  | (6,743 | ) |  |  | (11,849 | ) |  |  | (15,425 | )
Provision for income taxes |  |  | 908 |  |  |  | 908 |  |  |  | 286 |  |  |  | 286 |  |  |  | 1,191 |  |  |  | 1,191 |
Net loss |  |  | (27,729 | ) |  |  | (28,905 | ) |  |  | (5,995 | ) |  |  | (7,029 | ) |  |  | (13,040 | ) |  |  | (16,616 | )
Less – net income attributable to noncontrolling interests |  |  | 559 |  |  |  | 559 |  |  |  | 1,146 |  |  |  | 1,146 |  |  |  | 4,086 |  |  |  | 4,086 |
Preferred dividends |  |  | 508 |  |  |  | 508 |  |  |  | - |  |  |  | - |  |  |  | 154 |  |  |  | 154 |
Net loss attributable to NeoStem, Inc. common shareholders |  | $ | (28,796 | ) |  | $ | (29,162 | ) |  | $ | (7,140 | ) |  | $ | (8,175 | ) |  | $ | (17,280 | ) |  | $ | (20,855 | )
Basic and diluted loss per share |  | $ | (0.35 | ) |  | $ | (0.35 | ) |  | $ | (0.13 | ) |  | $ | (0.12 | ) |  | $ | (0.36 | ) |  | $ | (0.35 | )
Weighted average common shares outstanding |  |  | 82,775 |  |  |  | 83,513 |  |  |  | 56,777 |  |  |  | 67,377 |  |  |  | 48,599 |  |  |  | 59,199 |
The unaudited supplemental pro forma financial information should not be considered indicative of the results that would have occurred if the PCT Merger had been consummated on January 1, 2010, nor are they indicative of future results. Athelos Corporation (“Athelos”) is a subsidiary of PCT pursuing the development of T regulatory cells (TRegs) as a therapeutic to treat disorders of the immune system. Pursuant to a Stock Purchase and Assignment Agreement dated March 28, 2011, Athelos issued approximately 20% of its shares to Becton Dickinson and Company (“BD”) in exchange for the rights to certain intellectual property relating to TRegs that BD owned pursuant to a license agreement between the University of Pennsylvania (“Penn”) and BD dated September 28, 2005 (the “Penn License”), and a license agreement between ExCell Therapeutics, LLC and BD dated September 16, 2005, as amended August 31, 2007 (the “ExCell License”). Pursuant to a Stock Purchase and Assignment Agreement dated March 28, 2011, Athelos took assignment from BD of its rights and obligations under the Penn License and the ExCell License, including, among other things, obligations to pay royalties on net sales of licensed products, maintenance fees and milestones on initiation of clinical trial stages, license application filings and regulatory approvals. As expressly anticipated by the parties, Athelos replaced the assignment of the Penn License with two new direct licenses: The Amended and Restated Patent License Agreement between Penn and Athelos dated September 12, 2011, and the Patent License Agreement between Penn, Athelos and the University of Minnesota dated September 12, 2011. Athelos and ExCell are in the process of negotiating a direct license that would replace the existing assigned ExCell License. Pursuant to the Stockholders’ Agreement dated March 28, 2011, Athelos, PCT and BD have agreed, that, among other things, BD will have certain anti-dilution protection for the first $5 million of new investment in Athelos and certain board of directors’ observer rights. BD has assigned to Athelos, and Athelos assumed, all rights, title, interest and obligations of BD under a consulting agreement dated as of September 16, 2005 between David Horwitz, M.D. and BD, to be paid retroactively beginning as of January 1, 2011, for services rendered in advancing the Athelos TReg research and development platform. PCT had preliminarily valued BD’s share of the contributed intellectual properties in the quarter ended March 31, 2011 at $927,000 and characterized this acquired intangible asset as in-process research and development which has been recorded as expense within research and development expense. In the quarter ended September 30, 2011, PCT finalized its valuation of the intellectual properties received, and revised the fair value to $1,150,000, which is recorded as expense within research and development expense for the nine months ended September 30, 2011.

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- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 141 -Paragraph 51, 52 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. Reference 16: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -SubTopic 10 -Section 50 -Paragraph 7 -URI http://asc.fasb.org/extlink&oid=6909870&loc=d3e1524-128463 Reference 17: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Emerging Issues Task Force (EITF) -Number 88-16 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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