The Business

Overview

NeoStem, Inc. (“we,” “NeoStem” or the “Company”) is a vertically integrated, clinical-stage biopharmaceutical company that is pursuing the preservation and enhancement of human health through the development of cell based therapeutics that leverage the body’s natural ability to heal and fight disease. Our diversified pipeline and unique capabilities for innovative, cost-effective and efficient in-house development set us apart in this emerging industry as we work to fundamentally change the treatment paradigm for several serious diseases.

Our most advanced clinical program is based on our dendritic cell/cancer cell technology. It is focused on the development of an innovative cancer treatment that is designed to target the cells responsible for tumor growth and metastasis, known as cancer or tumor initiating cells (CSCs), using purified CSCs from a patient’s own tumor as an antigen source to induce or enhance an anti-tumor immune response in the patient. Our lead product candidate based on this platform technology, NBS20, targets malignant melanoma as an initial indication. NBS20 is being studied in patients with recurrent Stage III or Stage IV metastatic melanoma. The program has been granted Fast Track and Orphan designation by the Food and Drug Administration (FDA) and the protocol for the Phase 3 study, known as the Intus study, is the subject of a Special Protocol Assessment (SPA). Our SPA letter states that our Phase 3 clinical trial is adequately designed to provide the necessary data that, depending on outcome, could support a Biologics License Application (BLA) seeking marketing approval of NBS20. This protocol calls for randomizing 250 patients. Patient screening began in 1Q15 and randomization of the first patient is expected in 2Q15. Interim analysis of the data is targeted for 4Q2017. We are also evaluating other clinical indications for which we may advance this program, including lung, colon, ovarian and liver cancers.

Our company is also developing therapies that are designed to utilize CD34 cells to prevent heart failure and major adverse cardiac events following a severe heart attack, known as an ST-elevation myocardial infarction (STEMI), through the use of CD34 cells to regenerate tissue impacted by ischemia. Ischemia occurs when the supply of oxygenated blood in the body is restricted, causing tissue distress and death. We seek to improve oxygen delivery to tissues through the development and formation of new blood vessels. NBS10 is our most clinically advanced product candidate in our ischemic repair program. At the American Heart Association’s Scientific Sessions in November 2014, we reported data from the primary analysis of our 161 patient PreSERVE (acute myocardial infarction) AMI study. We are also planning the release of our one year data from the phase 2 trial on March 15, 2015 at the Annual Scientific Sessions of the American College of Cardiology. PreSERVE AMI is a randomized, double-blinded, placebo-controlled Phase 2 clinical trial testing NBS10, a “personalized” adult stem cell product being developed for the treatment of patients with left ventricular dysfunction following a STEMI. The primary endpoints are measured by, (i) the change from baseline to six months in myocardial perfusion (RTSS) measured by an imaging technique (SPECT); and (ii) safety of bone marrow procurement and infusion as measured by occurrence of adverse events, serious adverse events (SAEs) and major adverse cardiac events (MACE). There are five secondary efficacy endpoints, two evaluating left ventricular ejection fraction, one evaluating MACE, and two evaluating quality of life. The reported data were based on all treated patients that had received six month follow-up for imaging. The median length follow up for mortality, adverse events, SAEs and MACE in these patients was twelve months. The reported results allowed for important observations about a potential dose-dependent treatment effect that will help guide the next phase of development. These observations about a potential dose dependent treatment effect were based on post hoc analyses of subsets of treated patients based on the number of cells they received. Notably, statistically significant dose-dependent increases in left ventricular function and decreases in serious adverse events were seen in patients who received the highest dose of cells (n=15 patients), though no statistical significance was observed when NBS10 overall was compared to placebo on these measures. With respect to mortality, at one year there were no treatment group deaths while the control group saw a mortality rate of 3.6% (n=3), equating to a statistically significant reduction in mortality. Regarding MACE, while more events occurred with NBS10 overall versus placebo, a non-significant trend toward fewer events was observed in patients who received higher doses of cells, with MACE occurring in 14% of placebo patients, 17% of patients who received less than 14 million cells, 10% of patients who received greater than 14 million cells and 7% of patients who received greater than 20 million cells. Finally, our hypothesis that SPECT used to measure perfusion could be used as a surrogate marker for the current medically relevant and regulatory endpoints was disproven, giving us valuable direction regarding endpoints and analyses for future clinical trials. We expect to complete the PreSERVE AMI study as defined through the final three-year follow-up and, in the meantime, plan to meet with the FDA to discuss our results and our proposal for the next step(s) in development. Finalization of the decision for next steps for NBS10 are expected in the second half of 2015. We also are evaluating other clinical indications that involve ischemia into which we may advance this program, including critical limb ischemia (CLI) and congestive heart failure (CHF).

Another platform technology we are developing is designed to utilize Regulatory T Cells (Tregs) to treat diseases caused by imbalances in an individual's immune system. This novel approach seeks to restore immune balance by enhancing Treg cell number and function. Tregs are a natural part of the human immune system and regulate the activity of T effector cells, the cells that are responsible for protecting the body from viruses and other foreign antigens. When Tregs function properly, only harmful foreign materials are attacked by T effector cells. In autoimmune disease, it is thought that deficient Treg activity permits the T effector cells to attack the body's own tissues. We have received a letter from the FDA stating that we may proceed on a Phase 2 study of NBS03D, a Treg based therapeutic being developed to treat type 1 diabetes mellitus (T1DM) in adolescents, and we plan to initiate the trial in late 2015 or 2016 depending on resource availability. We are evaluating other clinical indications into which we may advance this program, including graft versus host disease, chronic obstructive pulmonary disease (COPD), multiple sclerosis (MS), inflammatory bowel disease (IBD) and steroid resistant asthma.

Finally, we are actively exploring means by which we can take advantage of new regulations in Japan that permit conditional approval for regenerative medicine products that show sufficient safety evidence and signals of efficacy. Potential indications for this unique opportunity include our targeted cancer immunotherapy program in liver cancer and our ischemic repair program in CLI.

We believe that cell-based therapies have the potential to create a paradigm change in the treatment for a variety of diseases and conditions and we are evaluating other programs that we view as holding particular promise, including an aesthetics program for a topical skin application and a very small embryonic like (VSEL^TM) stem cell program for the treatment of retinal degeneration, bone restoration and wound healing.

Through our wholly owned subsidiary, Progenitor Cell Therapy, LLC (PCT), we are recognized as a world industry leader in providing high quality innovative and reliable manufacturing capabilities and engineering solutions (e.g. process development) in the development of cell-based therapies. We operate three current Good Manufacturing Practice (cCGMP) facilities in Allendale, NJ, Mountain View, CA and Irvine, CA, respectively, and are poised to expand our facilities internationally. In addition to leveraging this core expertise in the development of our own products, we partner opportunistically with other industry leaders who recognize our unique ability to significantly improve their manufacturing processes and supply clinical and commercial material.

We look forward to further advancement of our cell based therapies to the market and to helping patients suffering from life-threatening medical conditions. Coupling our development expertise with our strong process development and manufacturing capability, we believe the stage is set for us to realize meaningful clinical development or our own proprietary platform technologies and manufacturing advancements, further positioning NeoStem to lead the cell therapy industry.

We anticipate requiring additional capital in order to fund the development of cell therapy product candidates and to grow the PCT business. To meet our short and long term liquidity needs, we currently expect to use existing cash, cash equivalents and marketable securities balances, our revenue generating activities, and a variety of other means, including the continued use of a common stock purchase agreement with Aspire Capital. Other sources of liquidity could include additional potential issuances of debt or equity securities in public or private financings, additional warrant exercises, option exercises, partnerships and/or collaborations, and/or sale of assets. In addition, we will continue to seek as appropriate grants for scientific and clinical studies from various governmental agencies and foundations. We believe that our current cash, cash equivalents and marketable securities balances and revenue generating activities, along with access to funds under our agreement with Aspire Capital, will be sufficient to fund the business through the next 12 months. While we continue to seek capital through a number of means, there can be no assurance that additional financing will be available on acceptable terms, if at all. If we are unable to access capital necessary to meet our long-term liquidity needs, we may have to delay or discontinue the acquisition and development of cell therapies, and/or the expansion of our business or raise funds on terms that we currently consider unfavorable.

Basis of Presentation

The accompanying Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) and include the accounts of the Company and its wholly owned and partially owned subsidiaries, the operations of our former Regenerative Medicine - China segment through the deconsolidation date on March 31, 2012 (see Note 15), and the operations of our former Pharmaceutical Manufacturing - China segment through November 13, 2012, the date on which the segment was sold (see Note 15). These former segments are reported in discontinued operations. In the opinion of management, the accompanying Consolidated Financial Statements of the Company and its subsidiaries, include all normal and recurring adjustments considered necessary to present fairly the Company's financial position as of December 31, 2014 and 2013, and the results of its operations and its cash flows for the years ended December 31, 2014, 2013, and 2012.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. The Company bases its estimates on historical experience and other assumptions believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The Company makes critical estimates and assumptions in determining the fair values of goodwill for potential goodwill impairments for our reporting units, fair values of In-Process R&D assets, fair values of acquisition-related contingent considerations, useful lives of our tangible and intangible assets, allowances for doubtful accounts, and stock-based awards values. Accordingly, actual results could differ from those estimates and assumptions.

An accounting policy is considered to be critical if it is important to the Company’s financial condition and results of operations and if it requires management’s most difficult, subjective and complex judgments in its application.

Reclassifications

Certain reclassifications have been made to the Consolidated Financial Statements and Notes to the Consolidated Financial Statements for the year ended December 31, 2012 and 2013 to conform to the presentation for the year ended December 31, 2014.

Principles of Consolidation

The Consolidated Financial Statements include the accounts of NeoStem, Inc. and its wholly owned and partially owned subsidiaries and affiliates as listed below, as well as the operations of our former Regenerative Medicine - China segment through the deconsolidation date on March 31, 2012 (see Note 15), and the operations of our former Pharmaceutical Manufacturing - China segment through November 13, 2012, the date which the segment was sold (see Note 15). These former segments are reported in discontinued operations.



Entity	Percentage of Ownership	Location
NeoStem, Inc.	100%	United States of America
NeoStem Therapies, Inc.	100%	United States of America
Stem Cell Technologies, Inc.	100%	United States of America
Amorcyte, LLC	100%	United States of America
Progenitor Cell Therapy, LLC (PCT)	100%	United States of America
NeoStem Family Storage, LLC	100%	United States of America
Athelos Corporation (1)	96.2%	United States of America
PCT Allendale, LLC	100%	United States of America
NeoStem Oncology, LLC (2)	100%	United States of America

(1) Pursuant to the Stock Purchase Agreement signed in March 2011, our initial ownership in Athelos was 80.1%, and Becton Dickinson's (BD) initial minority ownership was 19.9%. Per the Agreement, BD will be diluted based on new investment in Athelos by us (subject to certain anti-dilution provisions). As of December 31, 2014, BD's ownership interest in Athelos was decreased to 3.8%, and our ownership increased to 96.2%. As a result in the change in ownership, approximately $0.7 million was transferred from additional paid in capital to non-controlling interests in 2014.

(2) On May 8, 2014, NeoStem acquired California Stem Cell, now known as NeoStem Oncology, LLC (see Note 3, Acquisition). Accordingly, the operating results of NeoStem Oncology, LLC prior to May 8, 2014 are not included in the Company's consolidated statements of operations and cash flows.