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Shareholders' Equity
9 Months Ended
Sep. 30, 2011
Shareholders' Equity
Note 9 – Shareholders’ Equity

Common Stock:

The authorized common stock of the Company is 500 million shares, par value $0.001 per share.

On March 3, 2011, the Company consummated a private placement pursuant to which five persons and entities acquired an aggregate of 2,343,750 shares of Common Stock for an aggregate consideration of $3,000,000 (purchase price $1.28 per share). The investors included Steven S. Myers (one of the Company’s directors) (who purchased 390,625 shares) and Dr. Andrew L. Pecora (the Chief Medical Officer of the Company’s subsidiary PCT, who is also now the Chief Medical Officer of NeoStem, and the Chief Scientific Officer of Amorcyte) (who purchased 78,125 shares). On April 5, 2011, the Company consummated a private placement pursuant to which nine persons and entities acquired an aggregate of 1,244,375 shares of Common Stock for an aggregate consideration of approximately $1,592,800 (purchase price $1.28 per share).  On June 13, 2011 the Company consummated a private placement pursuant to which one entity acquired 781,250 shares of Common Stock for an aggregate consideration of $1,000,000 (purchase price $1.28 per share).  On July 6, 2011, three then key Amorcyte stockholders (including a fund managed by a then Amorcyte director) invested an aggregate of $728,000 in a private placement of 568,750 shares of Common Stock (purchase price $1.28 per share).

On July 22, 2011, the Company completed an underwritten offering of 13,750,000 units at a purchase price of $1.20 per unit, with each unit consisting of one share of Common Stock and a five year warrant to purchase 0.75 of a share of Common Stock at an exercise price of $1.45 per share (the “Offering”).  The Company sold securities in the Offering under the Company’s previously filed shelf registration statement on Form S-3 (333-173855), which was declared effective by the Securities and Exchange Commission on June 13, 2011.  Lazard Capital Markets LLC (“Lazard”) and JMP Securities LLC (“JMP”) acted as representatives of the underwriters named in an Underwriting Agreement, dated as of July 19, 2011, by and among the Company, Lazard, JMP and such underwriters.  The Company received gross proceeds of $16,500,000, prior to deducting underwriting discounts and offering expenses payable by the Company, for net proceeds of approximately $14,667,000.

On September 28, 2011, the Company entered into a Common Stock Purchase Agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC, an Illinois limited liability company (“Aspire Capital”), which provides that, subject to certain terms and conditions, Aspire Capital is committed to purchase up to an aggregate of $20.0 million worth of shares of the Company’s common stock over the 24-month term of the Purchase Agreement. At the Company’s discretion, it may present Aspire Capital with purchase notices under the Purchase Agreement from time to time, to purchase the Company’s Common Stock, provided certain price and other requirements are met. The purchase price for the shares of stock will be based upon one of two formulas set forth in the Purchase Agreement depending on the type of purchase notice we submit to Aspire Capital from time to time, and will be based on market prices of the Company's common stock (in the case of regular purchases) or a discount of 5% applied to volume weighted average prices (in the case of VWAP purchases), in each case as determined by parameters defined in the agreement.   The Company and Aspire Capital shall not effect any sales under the Purchase Agreement on any date where the closing sales price is less than 75% of the closing sales price on the business day immediately preceding the date of the Purchase Agreement. The Company’s net proceeds will depend on the purchase price and the frequency of the Company’s sales of shares to Aspire Capital; provided, however, that the maximum aggregate proceeds from sales of  shares is $20.0 million, and the maximum number of shares that may be sold may not exceed 18,747,906 shares unless shareholder approval is obtained.  The Company’s delivery of purchase notices will be made subject to market conditions, in light of the Company’s capital needs from time to time and under the limitations contained in the Purchase Agreement. As consideration for entering into the Purchase Agreement, effective September 30, 2011, we issued 990,099 shares of our Common Stock to Aspire Capital (the “Commitment Shares”). The issuance of shares of common stock to Aspire Capital pursuant to the Purchase Agreement, including the Commitment Shares, and the sale of those shares from time to time by Aspire Capital to the public, are covered by an effective shelf registration statement on Form S-3.
 
Warrants:

The Company has issued common stock purchase warrants from time to time to investors in private placements and public offerings, and to certain vendors, underwriters, placement agents and consultants of the Company. A total of 35,208,817 shares of common stock are reserved for issuance upon exercise of outstanding warrants as of September 30, 2011 at prices ranging from $0.50 to $7.00 and expiring through January 2018.

During the three and nine months ended September 30, 2011 and 2010, the Company issued warrants for services as follows ($ in thousands, except share data):

   
Three Months Ended September 30,
    
Nine Months Ended September 30,
  
   
2011
    
2010
    
2011
    
2010
  
Number of Common Stock Purchase Warrants Issued
     -       25,000       370,000       627,000  
                                 
Value of Common Stock Purchase Warrants Issued
   $ -     $ 32.9     $ 289.5     $ 772.2  
 
The weighted average estimated fair value of warrants issued for services in the three and nine months ended September 30, 2011 was $0 and $0.78, respectively. The fair value of warrants at the date of grant was estimated using the Black-Scholes option pricing model. The expected volatility is based upon historical volatility of the Company’s stock. The expected term is based upon the contractual term of the warrants.

The range of assumptions used in calculating the fair values of warrants issued for services during the three and nine months ended September 30, 2011 and 2010, respectively, were as follows:
 
  Three Months Ended September 30,  
Nine Months Ended September 30,
 
2011
  
2010
  
2011
  
2010
Expected term (in years)
3 to 5
  
5
  
3 to 5
  
4 to 5
               
Expected volatility
81% - 83%
  
91% - 96%
  
80% - 86%
  
91% - 99%
               
Expected dividend yield
0%
  
0%
 
0%
  
0%
               
Risk-free interest rate
0.42% - 1.53%
  
1.27% - 1.60%
  
0.42% - 2.24%
  
1.27% - 2.04%
 
Activity related to warrants outstanding was as follows:
 
               
Weighted
        
               
Average
        
         
Weighted
    
Remaining
        
   
Number of
    
Average
    
Contractual
    
Aggregate
  
   
Shares
    
Exercise Price
    
Term (years)
    
Intrinsic Value
  
Balance at December 31, 2010
     21,843,507     $ 2.62              
Granted
     13,812,939 *     2.23              
Exercised
     -       -              
Expired
     (447,629 )     6.18              
Cancelled
     -       -              
Balance at September 30, 2011
     35,208,817       2.41       2.9     $ 3,600  
                                 
Warrants Exercisable at September 30, 2011
     33,933,317       2.29       2.7          
 
* Includes 3 million warrants issued pursuant to the PCT Merger Agreement - See Note 4, and 10,312,500 warrants issued in the
July 22, 2011 offering
  
 
The Company’s results include share-based compensation expense of approximately $5,600 and a benefit of $147,300 for the three months ended September 30, 2011 and 2010, respectively, and an expense of approximately $247,500 and $417,300 for the nine months ended September 30, 2011 and 2010, respectively.  The total fair value of shares vested for warrants issued for services during the three and nine months ended September 30, 2011 was approximately $60,100 and $235,800, respectively.  As of September 30, 2011, there was approximately $93,300 of total unrecognized service cost related to unvested warrants of which approximately $49,500 is related to warrants that vest over a weighted average life of 0.25 years. The remaining balance of unrecognized service cost of $43,800 is related to warrants that vest based on the accomplishment of business milestones as to which expense begins to be recognized when such milestones become probable of being achieved.
 
Options:

At the 2011 Annual Meeting of Shareholders of the Company held on October 14, 2011, the shareholders approved an amendment to increase the number of shares of common stock authorized for issuance under the 2009 Equity Compensation Plan (the “2009 Equity Plan”) from 17,750,000 to 23,750,000.  Effective October 14, 2011, concurrent with shareholder approval to increase the number of shares of common stock authorized for issuance under the 2009 Equity Plan by 6,000,000, the Company’s Board of Directors authorized a decrease in the shares available for issuance under the Non-U.S, Equity Plan from 8,700,000 to 5,700,000.

The Company’s results include share-based compensation expense of approximately $831,400 and $2,453,100 for the three months ended September 30, 2011 and 2010, respectively, and approximately $5,631,400 and $5,982,500 for the nine months ended September 30, 2011 and 2010, respectively. Options vesting on the accomplishment of business milestones will not be recognized for compensation purposes until such milestones are deemed probable of accomplishment. At September 30, 2011 there were options to purchase 654,928 shares outstanding that will vest upon the accomplishment of business milestones and will be accounted for as an operating expense when such business milestones are deemed probable of accomplishment.

On April 4, 2011, the Company entered into an amendment of its May 26, 2006 employment agreement with Dr. Robin L. Smith, pursuant to which, as previously amended (the “Agreement”), Dr. Smith serves as Chairman of the Board and Chief Executive Officer of the Company. Pursuant to the amendment, (i) the term of the Agreement was extended from December 31, 2011 to December 31, 2012; (ii) Dr. Smith will receive cash bonuses on October 1, 2011 and 2012 in the minimum amount of 110% of the prior year’s bonus; (iii) a failure to renew the Agreement at the end of the term regardless of reason shall be treated as a termination by the Company without cause; (iv) the Company shall pay Dr. Smith her base salary and COBRA premiums (a) for one year in the event of a termination of the agreement by Dr. Smith for other than good reason and (b) during any period during which she is bound by non-competition, non-solicitation or similar covenants with the Company (such payments shall not be made during the time Dr. Smith is also receiving payments under (iii) or (iv)(a)); (v) Dr. Smith was granted an option to purchase 1,500,000 shares of Common Stock at a per share exercise price equal to the closing price of the Common Stock on the date of the amendment, vesting as to 500,000 shares on each of the date of grant, December 31, 2011 and December 31, 2012; (vi) all other unvested options held by Dr. Smith were immediately vested; (vii) any vested options previously or hereafter granted to Dr. Smith during the remainder of the term shall remain exercisable following termination of employment for the full option term until the expiration date; (viii) the Company agreed that, with the exception of the period of time during which Dr. Smith is a Company affiliate and for 90 days thereafter (during which time any shares owned by or issued to Dr. Smith will bear the Company’s standard affiliate legend), the Company will not place legends on shares on Common Stock owned by Dr. Smith restricting the transfer of such shares so long as such shares are sold under an effective registration statement, pursuant to Rule 144 or are eligible for sale under Rule 144 without volume limitations; and (ix) if Dr. Smith ceases to be employed by the Company and for so long as she continues to own shares of Common Stock the sale of which would require that the current public information requirement of Rule 144 be met, the Company will use its reasonable best efforts to timely meet those requirements or obtain appropriate extensions or otherwise make available such information as is required. Except as set forth in the amendment, the Agreement remains unchanged.  Pursuant to the modification on April 4, 2011 of Dr. Smith’s stock options, the Company recognized $723,000 of incremental compensation cost during the nine months ended September 30, 2011.

The weighted average estimated fair value of stock options granted in the three and nine months ended September 30, 2011 was $0.50 and $1.10, respectively. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The expected volatility is based upon historical volatility of the Company’s stock. The expected term is based upon observation of actual time elapsed between date of grant and exercise of options for all employees.

The range of assumptions used in calculating the fair values of options granted during the three and nine months ended September 30, 2011 and 2010, respectively, were as follows:
 
 
Three Months Ended September 30,
  
Nine Months Ended September 30,
 
2011
  
2010
  
2011
  
2010
Expected term (in years)
1 to 6
 
2 to 10
  
1 to 10
  
2 to 10
               
Expected volatility
76% - 84%
  
91% - 99%
  
75% - 85%
  
91% - 122%
               
Expected dividend yield
0%
 
0%
 
0%
 
0%
               
Risk-free interest rate
0.13% - 1.82%
  
0.42% - 3.00%
  
0.13% - 3.45%
  
0.42% - 3.58%
 
Activity related to stock options outstanding under the U.S. Equity Plans was as follows:
 
               
Weighted
        
               
Average
        
         
Weighted
    
Remaining
        
   
Number of
    
Average
    
Contractual
    
Aggregate
  
   
Shares
    
Exercise Price
    
Term (years)
    
Intrinsic Value
  
Balance at December 31, 2010
     9,932,214     $ 1.87                  
Granted
     7,544,600       1.54                  
Exercised
     (5,000 )     1.42                  
Expired
     -       -                  
Cancelled
     (2,071,919 )     1.74                  
Balance at September 30, 2011
     15,399,895       1.73       7.5     $ -  
                                 
Options Exercisable at September 30, 2011
     8,812,002       1.84       6.7          
 
Activity related to stock options outstanding under the Non U.S. Equity Plan was as follows:
 
               
Weighted
        
               
Average
        
         
Weighted
    
Remaining
        
   
Number of
    
Average
    
Contractual
    
Aggregate
  
   
Shares
    
Exercise Price
    
Term (years)
    
Intrinsic Value
Balance at December 31, 2010
     3,100,000     $ 2.02                  
Granted
     650,000       1.74                  
Exercised
     -       -                  
Expired
     -       -                  
Cancelled
     (1,400,000 )     2.02                  
Balance at September 30, 2011
     2,350,000       1.94       8.6     $ -  
                                 
Options Exercisable at September 30, 2011
     950,000       2.07       8.3          
 
The total fair value of shares vested during the three and nine months ended September 30, 2011 was approximately $1,169,300 and $3,973,800, respectively.

The number of remaining shares authorized to be issued under the various equity plans at September 30, 2011 are as follows:
 
         
Non US Equity
  
   
US Equity Plan
    
Plan
  
Shares Authorized for Issuance under 2003 Equity Plan
     2,500,000       -  
Shares Authorized for Issuance under 2009 Equity Plan
     17,750,000       -  
Shares Authorized for Issuance under Non US Equity Plan
     -       8,700,000  
      20,250,000       8,700,000  
Outstanding Options - US Equity Plan
     (15,399,895 )     -  
Exercised Options
     (97,500 )     -  
Outstanding Options - Non US Equity Plan
     -       (2,350,000 )
Restricted stock or equity grants issued under Equity Plans
     (2,479,085 )     (885,000 )
Total common shares remaining to be issued under the Equity Plans
     2,273,520       5,465,000  
 
As of September 30, 2011, there was approximately $6,515,400 of total unrecognized compensation costs related to unvested stock option awards of which approximately $5,776,100 is related to stock options that vest over a weighted average life of 1.9 years. The remaining balance of unrecognized compensation costs of $739,300 is related to stock options that vest based on the accomplishment of business milestones which expense begins to be recognized when such milestones become probable of being achieved.  Effective October 14, 2011, concurrent with shareholder approval to increase the number of shares of common stock authorized for issuance under the 2009 Equity Plan by 6,000,000, the Company’s Board of Directors authorized a decrease in the shares available for issuance under the Non-U.S, Equity Plan from 8,700,000 to 5,700,000.
 
Changes in Stockholders Equity:
 
The changes in Stockholders Equity for the nine months ended September 30, 2011 were as follows:
 
   
Series B Convertible
                                      
   
Preferred Stock
    
Common Stock
                                
   
Shares
    
Amount
    
Shares
    
Amount
    
Additional Paid
in Capital
    
Accumulated
Other
Comprehensive
Income
    
Deficit
    
Non-
Controlling
Interest in
Subsidiary
    
Total
  
Balance at January 1, 2011
     10,000     $ 100       64,221,130     $ 63,813     $ 141,137,522     $ 2,779,066     $ (95,320,620 )   $ 37,827,738     $ 86,487,619  
Exercise of stock options
     -       -       5,000       5       7,095       -       -       -       7,100  
Share-based compensation
     -       -       2,394,530       2,395       8,162,419       -       -       -       8,164,814  
Proceeds from issuance of common stock
     -       -       19,678,224       19,678       21,148,004       -       -       -       21,167,682  
Shares issued for charitable contribution
     -       -       -       408       606,955       -       -       -       607,363  
Repayment of Series E Preferred Principal and Dividends
     -       -       3,462,559       3,462       3,404,477       -       (508,070 )     -       2,899,869  
Foreign currency translation
     -       -       -       -       -       2,222,569       -       (9,652 )     2,212,917  
Net income attributable to non-controlling interest
     -       -       -       -       -       -       -       559,079       559,079  
Dividends to related party
     -       -       -       -       -       -       -       (11,726,099 )     (11,726,099 )
Technology contributed to Athelos by Non-Controlling Interest
     -       -       -       -       920,000       -       -       230,000       1,150,000  
Net loss attributable to NeoStem, Inc.
     -       -       -       -       -       -       (28,287,815 )     -       (28,287,815 )
Shares issued in PCT Merger
     -       -       10,600,000       10,600       17,189,400       -       -       -       17,200,000  
Balance at September 30, 2011
     10,000     $ 100       100,361,443     $ 100,361     $ 192,575,872     $ 5,001,635     $ (124,116,505 )   $ 26,881,066     $ 100,442,529