Attached files
| file | filename |
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| EX-2.1 - CALADRIUS BIOSCIENCES, INC. | v197104_ex2-1.htm |
| EX-23.1 - CALADRIUS BIOSCIENCES, INC. | v197104_ex23-1.htm |
| EX-99.1 - CALADRIUS BIOSCIENCES, INC. | v197104_ex99-1.htm |
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
8-K
CURRENT
REPORT
PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
Date of
Report (Date of earliest event reported): September 23,
2010
NeoStem,
Inc.
(Exact
Name of Registrant as Specified in Charter)
|
Delaware
(State
or Other Jurisdiction of Incorporation)
|
0-10909
(Commission
File
Number)
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22-2343568
(IRS
Employer Identification No.)
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420 Lexington Avenue, Suite
450, New York, New York 10170
(Address
of Principal Executive Offices)(Zip Code)
(212)
584-4180
Registrant's
Telephone Number
Check
the appropriate box below if the Form 8-K filing is
intended to simultaneously satisfy the filing obligation of the registrant under
any of the following provisions (see General Instruction A.2.
below):
|
x
|
Written communications pursuant
to Rule 425 under the Securities Act (17 CFR
230.425)
|
|
o
|
Soliciting
material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
|
|
o
|
Pre-commencement communications pursuant
to Rule 14d-2(b) under the Exchange Act (17 CFR
240.14d-2(b))
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|
o
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Pre-commencement communications pursuant
to Rule 13e-4(c) under the Exchange Act (17 CFR
240.13e-4(c))
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Item
1.01.
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Entry
into a Material Definitive
Agreement.
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Agreement and Plan of
Merger
The Board
of Directors of NeoStem, Inc., a Delaware corporation (“NeoStem” or the
“Parent”) and
the Board of Managers of Progenitor Cell Therapy, LLC, a Delaware limited
liability company (“PCT”), have
unanimously approved the merger (the “Merger”) of NBS
Acquisition Company LLC, a newly formed wholly-owned subsidiary of NeoStem
(“Subco”), with
and into PCT pursuant to an Agreement and Plan of Merger, dated September 23,
2010 (as such agreement may be amended from time to time, the “Merger Agreement”),
among NeoStem, PCT and Subco. PCT, in its capacity as the limited
liability company surviving the Merger, is hereinafter sometimes referred to as
the “Surviving
Company.”
Pursuant
to the terms of the Merger Agreement, all of the membership interests of PCT
outstanding immediately prior to the effective time of the Merger (the “Effective Time”) will
be converted into the right to receive, in the aggregate, 11,200,000 shares of
the common stock, par value $0.001 per share, of NeoStem (the “NeoStem Common
Stock”) and warrants to purchase an aggregate of no less that 1,000,000
and a maximum of 3,000,000 shares of NeoStem Common Stock, based on the
following:
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(i)
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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 below) is accomplished within three (3) years of the
closing date of the Merger (the “Closing Date”);
and
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(ii)
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if
the volume weighted average of the closing prices of sales of NeoStem
Common Stock on the NYSE-Amex for the three (3) trading days ending on the
trading day that is two (2) days prior to the Closing Date (the “Parent Per Share
Value”) is less than $2.50, 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
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(iii)
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if
the Parent Per Share Value is less than $1.70, 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”).
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The $7.00
Warrants will not vest and will not become exercisable unless the Surviving
Company secures, prior to the third annual anniversary of the Closing Date, one
or more material binding commercial manufacturing contracts with one or more
third parties, each on an arm’s length basis, which commercial manufacturing
contracts result in aggregate revenues to the Surviving Company in excess of $5
million per year over
a period of at least three (3) years and in the reasonable judgment of the
Parent’s Board of Directors, the manufacturing contracts will be profitable each
year during the term of such contracts in accordance with generally accepted
accounting principles as in effect in the United States (“GAAP”).
The
shares of NeoStem Common Stock issuable in the Merger are subject to adjustment,
provided that in no event will NeoStem be required to issue more than 11,200,000
shares of NeoStem Common Stock, except pursuant to exercise of any
Warrants. The shares of NeoStem Common Stock issuable in the Merger
(not including any NeoStem Common Stock issuable in the future upon exercise of
any Warrants) are sometimes referred to herein as the “Stock
Consideration.” The Merger Agreement provides that to the
extent that PCT’s adjusted working capital (calculated in the manner described
in the Merger Agreement) on the Closing Date is less than the Target Working
Capital (as defined below) by more than Two Hundred Fifty Thousand Dollars
($250,000) (the “Collar”), the Stock
Consideration will be decreased by the amount by which such adjusted working
capital is less than the Target Working Capital minus the Collar. Any
such decrease will reduce the Stock Consideration on a dollar for dollar basis,
with each share of Stock Consideration valued at the Parent Per Share
Value. The “Target Working Capital” is $105,593, exclusive of at
least $353,860 of restricted cash (which restricted cash must also be available
to the Surviving Company at the closing of the Merger (the “Closing”)), but
inclusive of $392,192 of deferred
financing costs.
-2-
The Stock
Consideration will also be reduced (and not increased) by an amount equal to the
product of 250,000 shares of NeoStem Common Stock multiplied by any Net Lost
Agreements. "Net Lost Agreements"
is defined in the Merger Agreement to mean a number (not less than zero) equal
to (i) the number of material service agreements of PCT which are terminated
prior to the Closing Date, or as to which PCT receives a notice of termination
prior to the Closing Date minus (ii) the number of comparable new material
service agreements entered into and as to which services are provided by PCT to
the counterparty between the date of the Merger Agreement and the Closing
Date.
The
consummation of the Merger is subject to various conditions, including the
approval by NeoStem’s stockholders and PCT's Members; the affirmation by NeoStem
that it has $3 million available to it to repay certain indebtedness owed by PCT
to an affiliate of PCT's CEO; if requested by NeoStem, the receipt by NeoStem of
an updated valuation analysis; the absence of any legal proceeding preventing
the consummation of the Merger and other legal and regulatory
requirements.
The
Merger Agreement provides that the Stock Consideration will be placed in escrow
(the “Escrow
Account”) pursuant to an escrow agreement to be executed at the Closing,
for the purpose of paying any damages payable to NeoStem in accordance with the
indemnification provisions contained in the Merger Agreement. The
Escrow Account will continue from the Closing until the date (the “Termination Date”) which is two
(2) years and one day after the Closing Date (the “Escrow Period”). Up
to 25% of the shares of NeoStem Common Stock issuable to certain members of PCT
who hold in the aggregate 38.4% of the membership interests in PCT may be
released from the Escrow Account and distributed to those members on the 15th
day of the month that is at least one month after the Closing Date and at any
time thereafter, for the payment of income taxes by such
members. After the date that is one (1) year after the Closing Date,
a number of shares of NeoStem Common Stock will be released from the Escrow
Account such that 5,600,000 shares of NeoStem Common Stock (50% of the Stock
Consideration), plus any shares then being held with respect to pending
indemnification claims by NeoStem, will remain in the Escrow
Account. As soon as practical after the Termination Date, all shares
of NeoStem Common Stock then remaining in escrow will be released and
distributed to the former members of PCT; provided that NeoStem Common Stock
representing 120% of the maximum amount of any claim made pursuant to the
indemnification provisions of the Merger Agreement during the Escrow Period will
be withheld and remain in the Escrow Account pending resolution of such
claim. In addition, a number of shares of NeoStem Common Stock in the
Escrow Account which is necessary to satisfy any unsatisfied claims specified in
any indemnification claim previously delivered by NeoStem prior to the
Termination Date with respect to facts and circumstances existing prior to the
expiration of the Escrow Period, shall remain in the Escrow Account until such
claims have been resolved.
Pursuant
to a voting agreement (the “Voting Agreement”)
dated the same date as the Merger Agreement, holders of a sufficient number of
membership interests of PCT to approve the Merger Agreement and the Merger have
irrevocably agreed to vote in favor of the Merger Agreement and the Merger at
any meeting of the Members of PCT called to approve the Merger Agreement and
Merger (the "PCT Meeting")
and agreed to certain transfer restrictions with respect to their membership
interests prior to the Effective Time. Stockholders of NeoStem owning
greater than 50% of NeoStem Common Stock on the date of the Merger Agreement
have agreed to vote their shares in favor of the issuance of the NeoStem Common
Stock and Warrants in the Merger at a special meeting of stockholders which will
be held for such purpose.
-3-
By
approval of the Merger at the PCT Meeting, each member of PCT will be deemed to
have irrevocably constituted and appointed Andrew Pecora, currently the Chairman
and CEO of PCT, as the “PCT Representative” under the Merger
Agreement. The PCT Representative will act on behalf of all of the
members of PCT in executing various closing documents and in reviewing and, if
he deems it appropriate, disputing, any indemnification claims made against the
Escrow Account after the Closing.
The
Merger Agreement provides that as soon as reasonably practical after the
Closing, Andrew Pecora will be invited to join the Board of Directors of
NeoStem, and NeoStem will use its reasonable best efforts to cause Mr. Pecora to
be appointed to the Board of Directors and nominated for election as a director
at its annual meeting of shareholders when his initial term ends, provided
however, that in order to comply with the listing standards for the NYSE-Amex,
simultaneously with such appointment, and as a condition precedent, NeoStem also
must find and appoint to NeoStem’s Board of Directors, one (1) individual who
meets all conditions of independence imposed by the Securities and Exchange
Commission (the “SEC”) and the
NYSE-Amex, so that at all times a majority of the members of NeoStem’s Board of
Directors are independent. If such an independent person is not found
by NeoStem, and has not agreed to be so designated and appointed, NeoStem and
PCT will work together in good faith to find and designate another person
acceptable to NeoStem, through the Nominating Committee of its Board of
Directors, as an independent director. NeoStem has agreed that it
will not delay the appointment of Mr. Pecora by reason of such need to designate
another independent director for more than three (3) months after the Closing
Date.
Officers of
PCT
Andrew L.
Pecora, MD, FACP
Chairman,
Chief Executive Officer and Chief Medical Officer of PCT
Currently,
Dr. Pecora, age 53, is Chairman, Chief Executive Officer and Chief Medical
Officer of PCT, and is a member of the Board of Managers. He has held
these positions with PCT since 1999. Upon consummation of the Merger,
Dr. Pecora will serve as PCT’s Chief Medical Officer.
Dr.
Pecora has served as the Chairman and Director of the Cancer Center at
Hackensack University Medical Center (HUMC) since 2001, and Managing Partner of
the Northern New Jersey Cancer Center, which is a private physicians practice
group affiliated with HUMC, since 1996. He has also been a Professor
of Medicine at the University of Medicine and Dentistry of New Jersey since
2004. Additionally, Dr. Pecora is a scientific advisor for numerous
state, national, and international organizations. He is a Diplomate
of the American Board of Internal Medicine, subspecialty of hematology and
subspecialty of oncology, a member of the National Blue Cross and Blue Shield
Quality Centers for Transplant Experts Panel, a fellow of the Academy of
Medicine of New Jersey, a fellow of the American College of Physicians, and a
member of the American Society of Bone Marrow Transplantation, American Society
of Clinical Oncology and American Society of Hematology. Dr. Pecora
co-founded and serves as Chairman of Amorcyte, Inc., a biotechnology company
developing cell therapies for cardiovascular disease. He serves on
the board of Cancer Genetics and is chairman of the board of Tetralogics, Inc.,
a company developing small molecules to treat cancer. He has served on the Board
of Directors of the American Society of Bone Marrow Transplant and Cytotherapy
and was a member of Accreditation Committee of the Foundation for Accreditation
of Hematopoietic Cell Therapy. He has been a member of several
National Heart, Lung and Blood Institute/National Cancer Institute state of the
science meetings in transplantation and stem cell
therapies. Dr. Pecora is actively involved as principal
investigator and coinvestigator in many national research studies. He has been
invited to present his work at various scientific meetings and continues to
contribute to the published literature. Dr. Pecora received his
medical degree from the University of Medicine and Dentistry of New Jersey,
graduating with honors. He went on to complete his medical education in internal
medicine at New York Hospital and in hematology and oncology at Memorial
Sloan-Kettering Cancer Center, both in New York City. He is board certified in
internal medicine, hematology, and oncology.
-4-
Robert A.
Preti, PhD
President
and Chief Scientific Officer of PCT
Currently,
Dr. Preti, age 53, is President and Chief Scientific Officer for PCT, and is a
member of PCT’s Board of Managers. He has held these positions with
PCT since March 1999. Upon consummation of the Merger, Dr. Preti will
serve as PCT’s President.
Dr. Preti
was Scientific Director of Hackensack University Medical Center’s stem cell
laboratory from 1996-1999. Prior to that, he served as director at
the Clinical Services Division of the New York Blood Center from 1989 to
1996. He is one of the country’s leading authorities on cell
engineering and the principal investigator for a number of clinical trials
relating to stem cell transplantation. He was a founding member and
Treasurer of the International Society for Hematotherapy and Graft Engineering
and served for 10 years on its Executive Committee and Board of
Directors. He is now representing Cellular Therapy as a Director of
the American Association of Blood Banks. Dr. Preti has authored
numerous papers in the field and has been invited to speak at national and
international meetings relating to the manufacturing, regulatory and quality
aspects of cell therapy and regenerative medicine. In addition to
having served as an inspector for the Foundation for Accreditation of Cellular
Therapy, Dr. Preti also serves on professional and state committees charged with
the development of regulations for cellular therapy. Dr. Preti
received his Doctor of Philosophy degree from New York University, graduating
with distinction. During his tenure at NYU, Dr. Preti studied and
received his degrees in Cellular Biology, with a specialty in hematology,
studying erythropoiesis under the mentorship of Albert S. Gordon,
PhD. Immediately following his graduate work, Dr. Preti joined Marrow
Tech, Inc. (which later became Advanced Tissue Sciences) where he served as
Group Leader in the development Marrow Tech’s proprietary three-dimensional,
matrix-based hematopoietic culture system for ex vivo expansion of bone
marrow stem cells.
Daryl
LeSueur
Vice
President, Manufacturing Operations of PCT
Mr.
LeSueur, age 48, has served as PCT’s Vice President, Manufacturing Operations
since June 2007. As head of Manufacturing Operations, Mr. LeSueur is
responsible for managing and supervising the day-to-day conduct of the
manufacturing and packaging functions and the operational aspects of PCT’s
operating facilities. Mr. LeSueur will continue to serve as Vice
President, Manufacturing Operations upon completion of the Merger.
Prior to
joining PCT, Mr. LeSueur served as Vice President, Operations, Pomona, East
Hanover, Northvale, Cincinnati, New York and New Jersey for Barr Laboratories at
varying times during the period from 2004 to 2009. Mr. LeSueur brings
over 25 years of experience in manufacturing operations in a regulated
industry. His experience includes proven leadership and success in
developing and implementating operational initiatives to reduce production
costs, increase profitability and operational efficiencies. Prior to
joining Barr, Mr. LeSueur served as Vice President of Pharmaceutical Production
at Novartis Pharmaceutical Corporation, from 1997 to 2004. At
Novartis, he was responsible for managing all North American production
operations, specializing in solid dosage, raw material and transdermal systems
and oversaw a $70 million budget. Prior to Novartis, Mr LeSueur was
Associate Director of Pharmaceutical Production with Sandoz Pharmaceutical
Company.
Mr.
LeSueur has a BS in Chemistry from the State University of New York at
Plattsburgh and has completed the Leadership Program, Finance Program, and
Management Program at Harvard Business School.
-5-
George S.
Goldberger
Chief
Business and Financial Officer, Treasurer and Secretary of PCT
Mr.
Goldberger, age 63, is PCT’s Chief Business and Financial Officer. He
has held these positions since March 1999. He will serve as PCT’s
Vice President, Business Development upon consummation of the
Merger.
Before
joining PCT, Mr. Goldberger served as President and Chief Executive Officer of
Goldberger & Associates Inc., an international management consulting firm
with offices in New York, Budapest, Bucharest and Kiev, assisting multinational
companies in developing their business in Eastern Europe with a focus on
providing a variety of health care services. Through Goldberger &
Associates, Mr. Goldberger assisted National Medical Care (now part of Fresenius
Medical Care) in establishing and developing dialysis center operations in
Europe. Prior to that, Mr. Goldberger was in charge of mergers and
acquisitions at Figgie International Inc. (now Scott Technologies Inc.), a
diversified conglomerate. Before working at Figgie, Mr. Goldberger
was Assistant to J. Peter Grace, then Chairman and Chief Executive Officer of W.
R. Grace & Co., with corporate development and financial management
responsibilities in the United States and the Far East. While at
Grace, Mr. Goldberger served as project director on the Reagan Administration’s
President’s Private Sector Survey on Cost Control, also known as the Grace
Commission, and subsequently as president of Citizens Against Government Waste,
a nonprofit foundation established to eliminate waste, mismanagement, and
inefficiency in the federal government. He continues as the
foundation’s chairman of the board. Mr. Goldberger began his career
as a management consultant with Booz, Allen & Hamilton.
Mr.
Goldberger holds an MBA in Finance from the Wharton School of the University of
Pennsylvania and a BS in Systems Engineering from the Polytechnic Institute of
New York University.
Interests of Certain PCT
Officers in the Merger
Dr.
Pecora, Dr. Preti and Mr. Goldberger beneficially own 17.2%, 17.0% and 2.5%,
respectively, of the outstanding membership interests in PCT (or, on a fully
diluted basis, 17.5%, 17.0%, and 2.5%, respectively).
Employment
Agreements
All or
substantially all employees of PCT, including the executive officers, will
remain in the employ of PCT after the Merger at comparable salaries as prior to
the Merger. As a condition to the execution of the Merger Agreement,
NeoStem and PCT entered into employment agreements that become effective upon
consummation of the Merger (the “Commencement Date”)
with each of Robert Preti, Andrew Pecora, George Goldberger and Daryl
LeSueur. The following is a description of these
agreements:
Preti
Employment Agreement
Upon
consummation of the Merger, Robert Preti will serve as President of PCT and as
Chairman of the to be formed Quality Assurance and Ethics
Committee. The four year employment agreement dated as of September
23, 2010 between Dr. Preti, PCT and NeoStem (the “Preti Employment
Agreement”) provides for, among other things, (i) an initial annual base
salary of $330,000, which will be increased to $350,000 upon the first annual
anniversary of the Commencement Date, (ii) an option to purchase 400,000 shares
of NeoStem Common Stock under the Parent’s 2009 Equity Compensation Plan (“2009 Equity Plan”) at
an exercise price per share equal to closing price of NeoStem Common Stock on
the Commencement Date (the "Commencement Price")
which will vest in four equal annual installments beginning on the first annual
anniversary of the Commencement Date, and (iii) eligibility for cash bonuses as
determined by the compensation committee of the Parent’s Board of
Directors. The Preti Employment Agreement further provides that upon
Termination without Cause (as defined) or Resignation for Good Reason (as
defined), Dr. Preti will be entitled to certain post-termination benefits in
consideration of executing a release and compliance with certain non-competition
restrictive covenants, including (i) continuation of his base salary for up to
twelve (12) months in accordance with customary payroll practices, (ii)
reimbursement of COBRA healthcare premiums for up to twelve (12) months, and
(iii) the accelerated vesting for all unvested option shares that would have
vested during the twelve (12) months following termination of employment had Dr.
Preti remained in the employ of PCT. The Preti Employment Agreement
also gives PCT the option, in its sole discretion, to continue Dr. Preti’s base
salary for an additional twelve (12) months (for a total of twenty-four (24)
months) in consideration for a twelve month extension of the non-competition
restrictive covenants to which Dr. Preti is subject. The Company
intends to secure a key man life insurance policy with respect to Dr.
Preti.
-6-
Pecora
Employment Agreement
In addition to serving on the Board of
Directors of NeoStem, Andrew Pecora will serve as Chief Medical Officer of PCT
in a part-time capacity upon consummation of the Merger. The four
year employment agreement dated as of September 23, 2010 between Dr. Pecora, PCT
and NeoStem (the “Pecora Employment
Agreement”) provides for, among other things, (i) an annual base salary
of $180,000 and (ii) an option to purchase 400,000 shares of NeoStem Common
Stock under the Parent’s 2009 Equity Plan at the Commencement Price which will
vest in four equal annual installments beginning on the first annual anniversary
of the Commencement Date. The Pecora Employment Agreement further
provides that upon Termination without Cause (as defined) or Resignation for
Good Reason (as defined) Dr. Pecora will be entitled to continuation of his base
salary for three (3) months in accordance with customary payroll practices in
consideration for executing a release and compliance with certain
non-competition restrictive covenants.
Goldberger
Employment Agreement
Upon
consummation of the Merger, George Goldberger will serve as Vice President –
Business Development of PCT. The three year employment agreement
dated as of September 23, 2010 between Mr. Goldberger, PCT and NeoStem (the
“Goldberger Employment
Agreement”) provides for, among other things, (i) an annual base salary
of $200,000, (ii) an option to purchase 200,000 shares of NeoStem Common Stock
under the Parent’s 2009 Equity Plan at the Commencement Price which will vest in
three equal annual installments beginning on the first annual anniversary of the
Commencement Date and (iii) eligibility for an annual cash bonus of up to 30% of
his base salary. The Goldberger Employment Agreement further provides
that upon Termination without Cause (as defined) or Resignation for Good Reason
(as defined), in consideration for executing a release and compliance with
certain non-competition restrictive covenants, Mr. Goldberger will be entitled
to (i) continuation of his base salary for three (3) months in accordance with
customary payroll practices and (ii) the accelerated vesting for all unvested
option shares that would have vested during the twelve (12) months following
termination of employment had Mr. Goldberger remained in the employ of
PCT.
LeSueur
Employment Agreement
Upon
consummation of the Merger, Daryl LeSueur will serve as Vice President –
Manufacturing Operations of PCT. The three year employment agreement
dated as of September 23, 2010 between Mr. LeSueur, PCT and NeoStem (the “LeSueur Employment
Agreement”) provides for, among other things, (i) an annual base salary
of $250,000 and (ii) an option to purchase 200,000 shares of NeoStem Common
Stock under the Parent’s 2009 Equity Plan at the Commencement Price which will
vest in three equal annual installments beginning on the first annual
anniversary of the Commencement Date. The LeSueur Employment Agreement further
provides that upon Termination without Cause (as defined) or Resignation for
Good Reason (as defined), Mr. LeSueur will be entitled to continuation of his
base salary for one (1) month in accordance with customary payroll practices in
consideration of executing a release and compliance with certain non-competition
restrictive covenants. The LeSueur Employment Agreement also gives
PCT the option, in its sole discretion, to continue Mr. LeSueur’s base salary
for up to twenty-four (24) months in consideration for Mr. LeSueur being subject
to certain additional non-competition restrictive covenants for a period of up
to twenty-four (24) months.
-7-
Registration
Statement
In
connection with the Merger, NeoStem intends to file with the SEC a registration
statement on Form S-4 (including any amendments, supplements and exhibits
thereto, the “S-4”) to register the
NeoStem Common Stock (including the NeoStem Common Stock underlying the
Warrants) issuable in the Merger. The S-4 will contain a
prospectus/joint proxy statement pertaining to (a) the special meeting of
stockholders of NeoStem at which NeoStem’s stockholders will be asked to approve
the NeoStem Common Stock and Warrants issuable in the Merger and (b) the special
meeting of Members of PCT at which PCT's Members will be asked to approve the
Merger Agreement and Merger. It is expected that at the special
meeting, NeoStem’s stockholders will also be asked to vote upon a proposal to
increase the number of authorized shares under NeoStem’s 2009 Equity
Compensation Plan.
The
foregoing description of the Merger Agreement is not complete and is qualified
in its entirety by reference to the Merger Agreement, which is filed as Exhibit
2.1 hereto and incorporated herein by reference. On September 23,
2010, NeoStem issued a press release announcing the execution of the Merger
Agreement, a copy of which is filed as Exhibit 99.1 hereto and incorporated
herein by reference.
Business of
PCT
PCT is
engaged in a wide range of services in the stem cell therapy market for the
treatment of human disease, including but not limited to contract manufacturing,
product and process development, consulting, product characterization and
comparability, and storage, distribution, manufacturing and transport of cell
therapy products.
The
Field of Cell Therapy
All
living complex organisms start as a single cell that replicates, differentiates
(matures) and perpetuates in an adult through its lifetime. Cell
therapy is aimed at tapping into the power of cells to prevent and treat
disease, regenerate damaged or aged tissue and provide cosmetic
applications. The most common type of cell therapy has been the
replacement of mature, functioning cells such as through blood and platelet
transfusions. Since the 1970s, bone marrow and then blood and
umbilical cord-derived stem cells have been used to restore bone marrow and
blood and immune system cells damaged by chemotherapy and radiation used to
treat many cancers. These types of cell therapies have been approved
for use worldwide and are typically reimbursed by insurance.
Over the
past number of years, cell therapies have been in clinical development to treat
an array of human diseases. The use of autologous (self-derived)
cells to create vaccines directed against tumor cells in the body has been
demonstrated to be effective and safe in clinical trials. The
Dendreon Corporation’s Provenge therapy for prostate cancer received Food and
Drug Administration (“FDA”) approval in
early 2010. Companies are evaluating the effectiveness of cell therapy as a form
of replacement or regeneration of cells to treat diseases of the brain and
spinal cord, while others are developing cell therapies for cardiovascular
disease, including for the treatment of acute myocardial infarction (heart
attack) and chronic ischemia. Cell therapies are also being evaluated
for safety and effectiveness to treat autoimmune diseases such as diabetes,
inflammatory bowel disease and bone diseases. Finally, the
development of cell therapies to supplement or replace damaged or aged tissue
and organs is also under development by certain companies. While no
assurances can be given regarding future medical developments, management of PCT
believes that the field of cell therapy is a subset of biotechnology that holds
promise to better the human experience and minimize or ameliorate the pain and
suffering from many common diseases and from the process of aging.
-8-
Background
Founded
in 1997 by Dr. Pecora and Dr. Preti. as a New Jersey limited liability company,
PCT has become an internationally recognized cell therapy services and
development company. The intent was 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, process development, logistics, regulatory and quality
systems development services. In addition, through its network of
contacts throughout the cell therapy industry, PCT has historically targeted and
identified early stage development opportunities in the cell therapy field and
developed cell therapies to be spun off into independent entities using PCT’s
core capabilities for development.
PCT began
operations by acquiring the stem cell laboratory of Hackensack University
Medical Center (HUMC) on March 1, 1999, and as a part of the acquisition
arrangement, HUMC has agreed to use PCT as its exclusive provider of stem cell
services for its cancer patients. PCT benefited from HUMC’s national
reputation as a leading stem cell transplant center in the United States. Dr.
Preti, PCT’s current President and Chief Scientific Officer, was the Scientific
Director of HUMC’s stem cell laboratory at the time of the
acquisition.
In August
2002, PCT acquired a cell therapy manufacturing facility from the Dendreon
Corporation in Mountain View, California, thus establishing a second facility
and the capability of offering nationwide processing and distribution for
manufactured cell therapy products. Dendreon is a biotechnology company that
develops targeted therapies for cancer.
On
October 6, 2004, PCT converted from a New Jersey entity into a Delaware entity
by merging with and into a newly formed Delaware limited liability company
carrying the same name. The Delaware company is the surviving entity
of the merger.
In 2007,
PCT acquired an office condominium facility in Allendale, New Jersey that has
been developed into a cell therapy manufacturing facility. The
facility has been qualified to be accredited by the Foundation for Accreditation
of Cellular Therapy (FACT) and complies with cGMP guidelines promulgated by the
FDA.
PCT
Business
PCT
serves the developing cell therapy industry that includes biotechnology,
pharmaceutical and medical products companies, health care providers, and
academic investigators from licensed cell therapy manufacturing facilities in
Allendale, New Jersey and Mountain View, California. PCT supports the
research of leading academic investigators designed to expedite the broad
clinical application of cell therapy. PCT’s core strategy is to provide a global
network of cell therapy manufacturing and storage facilities and an integrated
and regulatory compliant distribution capacity for the evolving cell therapy
industry to meet international commercial demands.
-9-
|
cGMP
Cell Therapy
|
|
|
Manufacturing
Experience
|
|
|
HSC
|
Animal
cell processing
|
|
HPC
|
CD
34 selected cells
|
|
MISC
|
Keratinocytes
|
|
Gene
Tx
|
Fibroblasts
|
|
DC
|
DLI
|
|
APC
|
Cytokine
cell induction
|
|
T
Cell (Activated)
|
Ex-vivo
expansion
|
|
B
Cell
|
Cellular
cultures
|
|
NK
|
CD
34 selection
|
|
Macrophages
|
Adherent
neural stem cells
|
|
NSC
|
Porcine
islets
|
|
Cell
Matrix implants
|
Activated
T-cells
|
|
Artificial
Skin Membranes
|
|
PCT has
accumulated experience in the service and business of cell therapy manufacturing
for clinical use. PCT has served over 100 clients and is experienced
with more than 20 different cell based therapeutics, including neuronal and skin
based cells for brain and spinal cord repair, myoblast, mesenchymal cells and
bone marrow derived cells for heart disease, Tumor, T, B, NK and dendritic cells
and monocytes for cancer treatment, cord blood, peripheral blood, bone marrow
CD34+ selected cells for transplantation and islet cells for diabetes. PCT has
performed over 30,000 cell therapy procedures in its cell therapy manufacturing
facilities, processed and stored over 18,000 cell therapy products (including
approximately 7,000 umbilical cord blood, 10,000 blood and marrow derived stem
cells and 1,000 dendritic cells) and arranged the logistics and transportation
for over 14,000 cell therapy products for clinical use by over 5,000 patients
nationwide.
|
PCT’s
Contract Manufacturing Experience
|
||
|
Hematopoietic
replacement
|
Cancer,
genetic diseases
|
HSC,
HPC, MSC, Gene Tx
|
|
Immune
modulation
|
Cancer,
autoimmunity, infectious diseases
|
DC,
APC, T cell, B cell, NK, HSC, MSC, Macrophages, Gene Tx
|
|
Tissue
repair and regeneration
|
Cardiovascular,
spinal, neuronal, corneal, orthopedic
|
HSC,
MSC, NSC, Cell matrix implants
|
|
Wound
healing
|
Ulcers,
burns
|
Artificial
skin, membranes, MSC
|
The
management team of PCT has over 100 years of collective experience in the
business and science of cell therapy. Team members are recognized
experts in cell therapy product development and characterization, manufacturing,
delivery, and clinical development and use. PCT’s personnel have experience with
the design, validation, and operation of cGMP cell therapy manufacturing
facilities, participated in regulatory filings in the United States and Europe,
and have contributed over 100 peer reviewed cell therapy
publications. The team has extensive experience in biologics
development, sales, marketing, medical practice, hospital administration,
insurance contracting, and regulatory compliance. Collectively, the
management team has experience in all aspects of cell therapy product and
clinical development and use (other than with the use of embryonic stem cells),
covering cancer, autoimmunity, infectious diseases, cardiovascular diseases, and
spinal, brain, corneal, orthopedic, hormonal and skin regenerative
therapies.
-10-
Affiliated
Companies
Amorcyte,
Inc.
PCT’s
strategy has historically included the periodic formation of companies intended
to develop specific therapeutic products. From its vantage point in
the industry, PCT sought to identify, incubate, and spin off cell therapy-based
development companies that could become clients of PCT. To date, PCT
has spun off Amorcyte, Inc. (“Amorcyte”). Amorcyte
completed its Phase I clinical trial for a cell based product in the
cardiovascular area, relying on PCT’s management, scientific know how, and
preclinical and clinical manufacturing resources. Amorcyte was
initially formed as a wholly owned subsidiary of PCT and was spun off to its
members during 2005. It is a therapeutics company pursuing cell-based
therapies for cardiovascular diseases. Amorcyte’s primary product,
based on certain patents licensed from Baxter Healthcare Corporation and
intellectual property granted to Amorcyte, is an autologous stem cell product in
clinical trials for the treatment of damaged heart muscle following acute
myocardial infarction (AMI).
Amorcyte
is a Delaware corporation, originally formed in June 2004 as a subsidiary of
PCT. In July 2005, Amorcyte was spun off so that each member of PCT acquired a
direct ownership interest in Amorcyte pro rata to such member’s then existing
ownership interest in PCT. Certain members of management hold a small
percentage of preferred stock in Amorcyte and the remainder of the outstanding
preferred stock was issued to outside investors who provided equity financing to
Amorcyte beginning in 2006. Amorcyte plans to develop bone marrow derived stem
cell therapies to treat a variety of cardiovascular diseases using certain
technology licensed from Baxter Healthcare Corporation. PCT has
entered into (i) a Cell Processing Agreement with Amorcyte dated as of May 31,
2005, pursuant to which PCT is the exclusive provider of cell processing
services to Amorcyte in exchange for a payment to Amorcyte of $200,000 (an
“evergreen” arrangement), and (ii) a Line of Credit and Security Agreement with
Amorcyte dated as of May 19, 2005, pursuant to which PCT has agreed to make up
to $500,000 available to Amorcyte. While members of PCT are also
stockholders of Amorcyte from the spin-off, and PCT provides Amorcyte with
management services through a management agreement, Amorcyte is an
independent company and its value and revenue is not included in those of
PCT.
PCT has
benefited from its relationship with Amorcyte as its exclusive, evergreen
provider of cell processing services. For the six months ended June
30, 2010 and the year ended December 31, 2009, PCT recognized revenue under the
Cell Processing Agreement with Amorcyte of $93,000 and $428,000
respectively.
During
June 2010, PCT made an investment in Amorcyte in the purchase of Series A
Redeemable Preferred Stock totaling $50,000.
DomaniCell,
LLC
PCT
formed DomaniCell, LLC (“DomaniCell”) as a
Delaware limited liability company in May 2005. DomaniCell is a wholly owned
subsidiary of PCT which assists hospitals with providing umbilical cord blood
unit collection and long-term storage services to patients for potential future
therapeutic use. DomaniCell provides the front-end interface and
support services to hospitals and in turn employs PCT’s cell therapy
manufacturing facilities network for the processing and long-term storage of
umbilical cord blood units.
-11-
Market
Review and Analysis of the Core Business
PCT
believes that an increasing portion of healthcare spending in the United States
will be directed to cell and tissue based therapies in the coming years, driven
by aging baby boomers accustomed to seeing continual medical advancement within
their lifetime. An excerpt from “2020: A New Vision - A Future for
Regenerative Medicine” from the U.S. Department of Health and Human Services,
dated January, 2005, highlights the potential
of cell therapy, given present demand:
|
|
·
|
250,000
patients receive heart valves, at a cost of $27 billion annually;
and
|
|
|
·
|
950,000
people die of heart disease or stroke, at a cost of $351 billion
annually.
|
According
to the same report, “Regenerative medicine is the vanguard of 21st century
healthcare. We are on the cusp of a worldwide explosion of activity in this
rapidly growing field of biomedicine that will revolutionize health care
treatment. Regenerative medicine (cell therapies) will lead to the
creation of fully biological or bio-hybrid tissues and organs that can replace
or regenerate tissues and organs damaged by disease, injury, or congenital
anomaly.” Regenerative medicine offers the promise to address many of
these conditions by replacing or repairing malfunctioning
tissues. The same report also indicated that a large fraction of the
costs cited above are attributable to tissue loss or organ failure, with
approximately eight million surgical procedures being performed annually in the
United States to treat these disorders. If approved and effective,
cell therapies may have the effect of cutting health care cost as they may
facilitate functional restoration of damaged tissues and not just abatement or
moderation of symptoms.
Aside
from early tissue-based therapies approved in the 1990s, e.g., therapies
developed by Genzyme and Organogenesis, the regenerative medicine industry is
yet to mature to the point of having a number of approved therapies available on
the market. However, there are a number of companies in late-stage clinical
trials and one company, PCT’s former client Dendreon, has received approval from
the FDA for the use of a cellular product as a cancer therapy. In
addition, the growing interest in storing one’s own stem cells has the potential
to further fuel the cell therapy field.
The scope
of the evolving field of regenerative medicine entails:
|
|
·
|
Cell Therapy, which is
the use of cells (adult or embryonic, donor or patient, stem or
differentiated) for the treatment of many debilitating injuries and
diseases. Near term, therapeutic applications include heart disease,
diabetes, Parkinson’s and Alzheimer’s diseases, vision impairments,
orthopedic diseases and spinal cord injuries. This sector also includes
the development of growth factors and serums and natural reagents that
promote and guide cell development.
|
|
|
·
|
Tissue Engineering,
which is the combination of cells with biomaterials (also called
“scaffolds”) to generate partially or fully functional tissues and organs.
Some natural materials, like collagen, can be used as biomaterial, but
advances in materials science have resulted in a variety of synthetic
polymers with attributes that would make them uniquely attractive for
certain applications. Near term, therapeutic applications include heart
patch, bone re-growth, wound repair, replacement bladders, inter-vertebral
disc and spinal cord repair.
|
|
|
·
|
Tools & Devices,
i.e., creating cell lines that embody genetic defects or disease
characteristics that are used for the discovery and development of new
drugs. This sector also includes companies developing devices that are
designed and optimized for regenerative medicine techniques, such as
specialized catheters for the delivery of cells, tools for the extraction
of stem cells, cell-based diagnostic tools,
etc.
|
-12-
|
|
·
|
Aesthetic Medicine,
which includes developing cell therapies, tissues and biomaterials
for cosmetic applications. This sector comprises hair follicle cells for
hair regeneration, and collagen-secreting human dermal fibroblasts for
facial wrinkles and other skin
disorders.
|
PCT
believes, based on clients it has served, that PCT’s manufacturing service and
developmental offerings are strategically aligned to participate in all aspects
of the evolving cell therapy (regenerative medicine) industry as defined
above. Since its formation, PCT’s goal has been to position itself as
the recognized leader of cell therapy manufacturing and development services for
this emerging industry.
PCT’s
Client Services
PCT
provides services to clients who are pursuing the development and
commercialization of cell therapies for a broad array of human diseases,
disorders and injuries, including:
|
|
·
|
Pre-clinical
and clinical process and product development including outsourcing of cell
therapy manufacturing for clinical trials by therapeutic
companies;
|
|
|
·
|
Processing
or manufacture of cell-based products for cell therapy or tissue
engineering companies or academic
programs;
|
|
|
·
|
Development
and manufacture of stem cell lines for diagnostic purposes for
pharmaceutical companies;
|
|
|
·
|
Development
and validation studies on behalf of tool and device
companies;
|
|
|
·
|
Processing
and transporting hematopoietic stem cells, immune system cells and
umbilical cord blood cells used for blood and marrow stem cell
transplantation by academic clinical stem cell transplantation programs;
and
|
|
|
·
|
Consulting
in the areas of FDA guideline compliance, technology evaluations, clinical
trials design, process optimization and product development, product
characterization, assay development, and facility or system design for
therapeutics, device, or investment companies or academic
programs.
|
PCT’s
Client Base
PCT’s
client portfolio focuses on meeting the existing needs of the cell
therapy/regenerative medicine market. Clients include:
|
|
·
|
Academic
and Other Hospitals and Clinics – These clients may be conducting
cell therapy research and/or treating patients with cell and tissue
therapies. This includes the processing for stem cell transplant
programs. For over 20 years, blood and marrow stem cell
transplants have been used following radiation and/or chemotherapy for
certain cancers – particularly leukemia, lymphoma and
myeloma. While the number of patients diagnosed with one of
these cancers in the United States has not grown significantly from year
to year, growth in bone marrow transplants has grown at a faster rate, due
in part to the establishment of the National Marrow Donor
Program. This program facilitates cell type matching, which was
previously a significant limiting factor in the use of blood and bone
marrow transplants.
|
|
|
·
|
Private
Sector Customer Base - There are currently about 350 cell and
tissue/regenerative medicine therapeutic product companies globally and
over 500 companies in the sector when including technology, device, and
service companies. PCT believes that a significant percentage
of the therapeutic companies outside the United States are viable customer
prospects for PCT and, in fact, already represent one of PCT’s fastest
growing customer bases. Currently, these companies retain PCT
for their expansion into the United States market. If PCT is
able to develop operations outside the United States within geographic
proximity of such clients, the percentage of these companies that retain
PCT in connection with their local markets should
increase. Additionally, there is a steady stream of new
entrants into the cell therapy and regenerative medicine market both in
the United States and globally.
|
-13-
|
|
·
|
Strategic
Relationships – These are relationships into which PCT has entered
with product and service providers complimentary to PCT’s service
offerings and intended to bolster both PCT’s revenue as well as its market
position. The relationships currently take the form of
subsidiary or affiliated companies as well as independent companies with
which PCT has a co-marketing and/or co-development
relationship.
|
|
|
·
|
Investors
– Investors use PCT to evaluate the technologies, development
capabilities, and development capacities of companies in which they are
invested or potentially investing.
|
Management
believes that PCT's long-term client base will look very similar to its current
client base but is expected to also include pharmaceutical companies requiring
manufacturing of stem cell lines for use in drug discovery.
For each
type of client, the cell therapy sector presents unique challenges, which
provide PCT with opportunities to position its expertise and services as
potential solutions. For example, in pharmaceutical drug development,
after FDA approval, typically, a large quantity (batch) of drug is manufactured,
a sample is tested for potency and identity, and then the batch is released by
the manufacturer for packaging in multiple doses, distribution and
sales. Typically, a dose of a drug can be stored for prolonged
periods before it is dispensed to the patient. In contrast, the cells
used for cell therapy usually originate from the patient for whom the cell
treatment is intended. The biologic shelf life is measured in hours
to days as opposed to months to years as is the case with pharmaceutical drugs.
PCT believes it has more relevant experience manufacturing and delivering
cell-based therapies than most traditional pharmaceutical drug developers. PCT’s
facilities and personnel can create value for corporate clients that are
developing a cell-based therapy by decreasing development time, optimizing the
manufacturing process and saving capital otherwise needed to build and staff
cGMP facilities for current and future clinical trials. PCT’s offering generally
decreases the time and cost of commercializing these technologies, bringing
value to PCT’s client base.
PCT’s
Operations
Facilities
PCT
presently operates two cell therapy manufacturing facilities, in Allendale, New
Jersey and in Mountain View, California. In 2007, PCT acquired the
30,067 square foot facility in Allendale, New Jersey which has been developed
into a cell manufacturing facility. Longer-term plans could include
the acquisition and development of a number of such buildings throughout the
country and outside of the United States, to be developed into replicable and
scalable manufacturing facilities, strategically located to best serve clients
needs. Inherent in the nature of cell therapy today is the biologic
shelf life of the cell therapy product itself. This limits the
transit times between the time the cell product is extracted from a patient
until it arrives at a PCT facility and the time that a processed product leaves
the PCT facility and arrives for re-infusion in the
patient. Therefore, it is preferable for cell therapy manufacturing
facilities to be located in major population centers and within close proximity
of major airport hubs.
-14-
PCT's
Allendale facility is a 30,000 square foot facility of which 22,000 square feet
have been developed. This facility is comprised of ISO Class 7, Class
10,000, ISO Class 8, Class 100,000 manufacturing suites, in addition to quality
control, research and development laboratories and support
facilities. It has been designed to meet the accreditation
requirements of the Foundation for the Accreditation of Cellular Therapy (FACT)
and to comply with the FDA’s requirements, including applicable cGMP
regulations, and to meet the standards of the American Association of Blood
Banks (AABB). The facility is also in compliance with a range of
state and federal regulatory and licensing requirements.
PCT’s
Mountain View facility is also a licensed cell therapy manufacturing facility,
encompassing 25,024 square feet within a single building, of which 17,425 square
feet is developed. The developed space is presently used for
manufacturing client products. Mountain View is equipped with ISO Class 7 and
Class 10,000 manufacturing suites, quality control, research and development
laboratories and support facilities. PCT plans to further develop space for cell
therapy manufacturing within the facility on an as needed basis. The
Mountain View facility is subject to a lease agreement.
Because
of the specialized nature of these cell processing facilities and the time
required to conceptualize, design, build, and obtain certification and operating
authority, it takes approximately nine months to go from concept to operations
once space has been qualified.
|
PCT’s
Facilities
Space
in Square Feet
|
|||
|
Present
|
|||
|
Manufacturing
Facilities
|
Developed
|
Undeveloped
|
Total
|
|
Mountain
View, California
|
17,425
|
7,599
|
25,024
|
|
Allendale,
New Jersey
|
22,000
|
8,067
|
30,067
|
|
Total
|
39,425
|
15,666
|
55,091
|
Transportation
Network
PCT
believes that today’s commercially available transportation systems are not set
up for shipment of biological or other perishable goods and will not be able to
meet the demands of the emerging cell therapy market. To succeed, the
large-scale commercialization of cell therapy products will need to overcome the
present weaknesses of the major air carriers, including the lack of a true
point-to-point chain of control, non-controlled X-ray and inspection, no
guarantee of package orientation, handling or storage conditions and in many
cases no standard, documented and tracked operating procedures.
A
successful transportation network for cell therapy will require a completely
secure point-to-point chain of control and custody; cGMP standard operating
procedures in all phases of transit; a highly specialized and trained air and
ground courier network; quality assurance at each transfer point; and real-time
package tracking.
PCT
strives to maintain high standards in transportation and handling of client cell
products. Shipments of products are tracked as PCT and its clients
develop confidence in the abilities of PCT’s transportation
partners. PCT is laying the groundwork for such a network as part of
its business development process.
-15-
While
reliable ground carriers with experience in the transport of blood products
already exist in major metropolitan areas of the country, air carriers meeting
such needs are limited. PCT evaluated the major domestic express
carriers, including Federal Express and UPS, and concluded that even their
highest-level services are inadequate to meet the sector’s
needs. However, PCT identified and validated AirNet Systems, Inc., a
specialty air carrier with a fleet of over 100 aircraft serving over 100 cities
nationwide, as a transportation partner. AirNet has built its business on check
delivery and other services to banks, and it now specializes in shipping medical
products, including whole blood and blood products, tissue for transplantation,
and diagnostic specimens. AirNet also handles cryopreserved specimens
and biologics. PCT currently use the services of AirNet for its
transportation needs and has a co-marketing agreement with AirNet centered on
combining their logistical expertise and transportation infrastructure with
PCT’s point-to-point logistics and handling protocols to provide a
non-integrated but complimentary and comprehensive transportation network for
the shipment of cell therapy products.
Current Good Manufacturing
Practices (cGMP) Standards
FDA
current Good Manufacturing Practices (cGMP) requirements, set forth in Title 21,
Parts 210 and 211, of the Code of Federal Regulations (21 CFR Parts 210 and 211)
are federal regulations that govern the manufacture, processing, packaging and
holding of drug and cell therapy products. The objective of
compliance with cGMP standards is to protect the public health and safety by
ensuring that:
|
|
·
|
Products
have the identity, strength, quality and purity that they purport or are
represented to possess;
|
|
|
·
|
Products
meet their specifications; and
|
|
|
·
|
Products
are free of objectionable microorganisms and
contamination.
|
A central
focus of the cGMP requirements is to design and build quality into the
manufacturing processes and the facilities in which products are produced. This
is done by implementing quality systems and processes, such as:
|
|
·
|
Identifying
critical points that need to be controlled, monitored and
tested.
|
|
|
·
|
Preparing
a set of written instructions or procedures, including product
specifications, to ensure consistency and reproducibility of results and
product characteristics.
|
|
|
·
|
Designing
systems and procedures to prevent contamination and ensure product
integrity.
|
|
|
·
|
Documentation
of product testing results and
procedures.
|
|
|
·
|
Validating
the process and test methods to ensure reliability of results and
consistency in processing.
|
|
|
·
|
Protecting
the product from introduction of contamination or objectionable
microorganisms by manufacturing in a clean room environment, which
includes control of particulates and microorganisms while ensuring
adequate space and proper facility
controls.
|
PCT’s
processing typically occurs in class 10,000, Controlled Environment Rooms (CER)
in a class 100 Biologic Safety Cabinet (BSC). Environmental monitoring, done
weekly, includes air sampling, contact plates for surface monitoring, and Met
One particle counts. PCT’s cleaning and sanitizing program involves daily,
weekly, monthly, and quarterly cleaning protocols for the equipment and the
rooms with bactericidal and sporicidal agents to control introduction of
microorganisms and insect and pest control procedures. PCT has ongoing equipment
validation, calibration and preventive maintenance programs to ensure
reproducibility and consistency of results.
-16-
PCT
employs an inspection and testing program for incoming materials, and for
in-process and final products, as required. PCT employs scientifically sound
procedures approved by a quality assurance function, and performs product
sterility testing and release assays reviewed by the quality assurance
department. PCT has labeling controls to prevent product mix-ups,
employs a materials management program to ensure that only approved materials
are used in manufacturing and to provide forward and backward traceability; a
supplier approval program to ensure that the raw materials used are made under
acceptable conditions and to provide a high degree of confidence in their
efficacy. A separate quality unit is charged with the responsibility
for review and approval of anything that affects the identity, strength,
quality, and purity of the cell therapy product.
Sales & Marketing
Strategy
PCT
targeted what it believes to be the most promising companies for aggressive
sales and business development efforts. Among early stage
regenerative medicine companies, PCT's strategy is to aggressively market the
advantages of outsourcing cell and tissue manufacturing for clinical trials,
testing and processing. Among later stage companies, the strategy is
to explore opportunities for collaboration without compromising the ability to
remain independent. PCT believes that the expertise of its founders
and senior management team, combined with PCT’s practical experience, provides a
competitive advantage over potential competitors in marketing to our customer
prospects in the private sector.
PCT’s
Potential to Develop Cell Therapy Products
PCT
believes that it is qualified and experienced to reduce the risk of development
of cell therapy products because:
|
|
·
|
PCT
has the expertise to cost efficiently and rapidly analyze the potential
for product development through
commercialization.
|
|
|
·
|
PCT
has the structure in place to develop new cell therapy products and to
enable the commencement of Phase I clinical trials for such
products.
|
|
|
·
|
PCT
has the personnel and facilities in place to offer cost effective
development and manufacturing
services.
|
|
|
·
|
PCT
has the technical, scientific, clinical, and business expertise to make
timely go/no go development decisions for potential cell therapy
products.
|
|
|
·
|
PCT
has the fiscal discipline and low incremental capital investment to cut
project development early if chances for success are low thus preserving
resources for future product
development.
|
PCT’s
initial effort to incubate a cell therapy product development company resulted
in the development, spin-off, and subsequent infusion of capital from outside
investors into Amorcyte. Experience with Amorcyte has provided the management
team with guidelines for key factors for future development of cell therapy
products. PCT’s new product development opportunities include
therapies for cancer, diabetes, cardiovascular disease, neurological disorders,
and skin repair.
-17-
In
summary, historically the key elements of PCT’s business strategy were
to:
|
|
·
|
Establish
a nationwide and then international infrastructure, capacity and expertise
to meet clients needs;
|
|
|
·
|
Maximize
penetration of startup companies in the
sector;
|
|
|
·
|
Optimize
use of PCT's physical plants;
|
|
|
·
|
Evaluate
international opportunities and enter markets as
necessary;
|
|
|
·
|
Develop
information systems, logistics and create proprietary intellectual
property (e.g., process patents);
|
|
|
·
|
Collaborate
closely with the FDA (and other regulatory authorities as appropriate);
and
|
|
|
·
|
Invest
in research to diversify PCT's portfolio of
services.
|
In light
of the above, PCT's business development has focused on all stages of
regenerative medicine, cell and tissue therapeutic product companies, academic
stem cell and other cell therapy clinical trials, device companies serving the
regenerative medicine sector, investors and pharmaceutical companies with an
interest in a cell or tissue therapeutic or research product, and any other
client with needs in the manufacturing and development of a cell or tissue-based
product. Serving such clients PCT aimed to:
|
|
·
|
Be
the global leader in services for the development, regulatory approval and
commercialization of cell and tissue therapies around the
world;
|
|
|
·
|
Be
the leader in the development and manufacture of cells and tissues as
therapeutic agents in cGTP/cGMP (current Good Manufacturing Practices and
current Good Tissue Practices) compliant
facilities;
|
|
|
·
|
Continue
to expand PCT's facilities, capacity, expertise, and experience to meet
the demand for quality and value-driven services for companies in the
regenerative medicine sector; and
|
|
|
·
|
Leverage
PCT’s domain experience to create product-based companies which would
exclusively use PCT’s services for manufacturing, delivery and
commercialization.
|
Competition
With its
core business, PCT has identified a small number of direct competitors with
substantially greater resources than PCT and a number of potential competitors,
classified as follows:
|
|
o
|
Medical
and Research Centers - Medical and research centers with interest
or expertise in regenerative medicine and the handling and manipulating of
cell products offer competitive services. This group includes
the major blood and bone marrow transplant centers around the country, the
American Red Cross and major medical research
institutions. Such research institutions include the Johns
Hopkins Medical Center in Baltimore, Maryland, Baylor College of Medicine
in Houston, Texas, the National Institutes of Heath-funded, multi-center
Production Assistance for Cellular Therapies Network, and the Fred
Hutchinson Cancer Research Center in Seattle,
Washington.
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Other
For-Profit Corporations – Other for profit
corporations who are our direct competitors include: the Lonza Group Ltd,
with the acquisition of the bioservices division of Cambrex Corporation
with cell therapy manufacturing facilities in the United States and
continental Europe; Cognate Bioservices, owned by Toucan Capital and which
services its own internal sister-portfolio companies, as well as offering
its services to external customers, with facilities in Maryland and
California; Euffets, part of the Fresenius Medical Care group, with a
facility in Germany and which has an existing network of apheresis
centers; Angel Biotechnology in the United Kingdom, currently
restructuring to focus exclusively in cell therapies; Cell Therapies Pty
Ltd in Melbourne, Australia. In addition, there are other
providers of support services with a peripheral offering or interest in
cell or tissue therapy development or
manufacturing.
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Divisions
of Biotechnology Companies -- The development and
manufacturing divisions of selected major biotechnology companies (e.g.,
Genzyme and Cell Genesys) which provide services using their existing
spare infrastructure to offset costs also present competition to
PCT. Moreover, they may be able to offer such unused capacity
as a loss leader and at lower rates than those offered by
PCT.
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Early
Stage Companies. Some early stage companies, which constitute a
portion of our target market, have their own development and manufacturing
facilities. These companies are competitive not only in that
they may leverage their capacity by making it available to others but also
in that, their decision to “build” precludes them – at least for the
interim – from deciding to “buy” from
PCT.
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However,
the decision by therapeutic companies to develop and / or manufacture their own
product remains PCT’s most significant competition in the early stages of this
sector, other than specialized contract manufacturing organizations
(CMOs). This competition is analogous to the evolution of earlier
therapeutic biotechnology sectors and is expected to decrease as the sector
matures. In terms of capability, efficiency and price, PCT’s
management believes that PCT is positioned and perceived in the marketplace to
be positioned as the leading company among its direct
competitors. The Lonza Group Ltd., based in Basel, Switzerland, is
PCT’s primary corporate competitor.
The
leading bone marrow transplant centers are experienced in handling stem cells
and other blood products. However, PCT believes generally that many
of these centers do not operate profitably and may not be capable of doing so
unless and until they gain independence from the institutions in which they
currently operate. PCT is not aware of any transplant center that is
planning to attain such independence. Similarly, while the larger
not-for-profit research institutions are well financed, such institutions may be
hampered by geographical limitations and political
considerations. Finally, it is not within the mission of the
organizations owning these facilities to provide large-scale manufacturing for
the private sector.
Certain
divisions of biotechnology companies are well financed and have existing
capacity with related experience. However, most of these
biotechnology product companies may not be in the manufacturing service business
for the long-term despite short-term forays into the service business to offset
infrastructure costs for extra capacity. In addition, because many of
the larger public companies have much larger and more pressing business issues
(e.g., patent expirations and pipeline management), PCT believes that they will
not commit significant capital or management resources to regenerative medicines
in the near term. Finally, in PCT’s view, the cell and tissue
manufacturing and delivery system could represent a new and challenging
distribution model for these companies. PCT believes that a number of
pharmaceutical and biotechnology product companies, having seen the merits of
outsourced manufacturing in their traditional business, will perceive the
benefits of PCT’s business model as they prepare to commercialize regenerative
medicines themselves.
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The
smaller biotech companies, which are a significant part of PCT’s target market,
may also decide to expand their laboratory facilities and offer their services
to others. However, we expect that it is unlikely, given the
relatively limited resources of such companies and the risk that such a change
in strategy would detract from their core research and development
efforts. It is likely that these companies, like their larger and
more established peers, will very quickly be confronted with a “build versus
buy” decision, and the case for outsourcing cell manufacturing will appeal to
these companies.
Business
of DomaniCell
Overview
DomaniCell
is a wholly owned subsidiary of PCT, which assists hospitals with providing
umbilical cord blood unit collection, and long-term storage services to patients
for potential future therapeutic use. DomaniCell provides the
front-end interface and support services to hospitals and in turn employs PCT’s
cell therapy manufacturing facilities network for the processing and long-term
storage of umbilical cord blood units. PCT intends to leverage its
position in the market place as an industry leader in cell therapy
manufacturing, storage, and distribution for clinical use to expand the
umbilical cord blood collection and storage business of DomaniCell.
Background and
Market
Stem
cells are the building blocks of the immune system and scientific evidence
indicates that they may be effective in treating a variety of life-threatening
diseases including leukemia, cancers, and many blood and immune
disorders. Research indicates that billions of dollars are currently
being spent on research that is solely focused on cellular therapy to treat the
diseases of age. Medical science has shown that the body will respond
best to such treatments arising from its own cells. Only your own cells are a
perfect genetic match to your body – thus minimizing the toxicity associated
with allogeneic (someone else’s cells) cellular therapy and improving the
chances of success.
As these
therapies advance, a limiting factor as to their use may eventually be the
availability of each individual’s healthy cells. Umbilical cord blood
has been shown to be a plenteous and rich source of stem cells. Each
day, our stem cells get older and have been shown to become less effective with
age. Our stem cells have something called “telomeres” that get
shorter and shorter every day until there are no more telomeres left on the
cells and then the cells die. Studies have shown that the decline in
telomere length is even faster in people with disease than in people without
disease. For example, people with diseases like diabetes will show a
rapid decline in the quality of their stem cells. There may even be
evidence that stem cells of people affected by cardiovascular disease are less
healthy and decreased in quantity than in people without this
disease.
PCT
believes that just as people plan for their own financial future, they can plan
towards their health future by storing their own stem cells for their own
use. The banking of cord blood is marketed and sold to expecting
parents as “biological insurance.” PCT’s own research showed that
while this practice is gaining in acceptance, the market is still in its infancy
with cord blood banking occurring for only 3.5% of total births in the United
States. Patients regardless of age can choose stem cell and immune
system cell collection and storage as personal insurance that their stem cells
will be available for their own use if needed in the future. Based on
current science, the preferable time for collection is when one is healthy and
unlikely to have stem cells already programmed for disease or before the immune
system is damaged by disease or toxins (drugs including chemotherapy or
radiation).
However,
there remains scepticism in the marketplace with recently published articles
pointing out how certain doctors believe it is a waste of money to store the
cord blood privately, since it gives a false sense of security to the parent at
a substantial cost at times. An important advantage of the national,
public cord blood collection system is that it costs nothing for patients to
donate their cord blood. Additionally, major medical organizations,
including the American Academy of Pediatrics (AAP), the American Medical
Association (AMA), the American College of Obstetricians and Gynaecologists
(ACOG), and the American Society of Blood and Marrow Transplantation (ASBMT) do
not recommend private storage, except in very limited
instances. Further, PCT believes that the medical community is
currently supportive of public cord blood donation and of the national cord
blood registry that is administered by the National Marrow Donor
Program.
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DomaniCell’s
Approach
Management
of PCT believes that central to increasing market share for umbilical cord blood
collection and storage is compliance with cGMP and documented experience in the
clinical distribution and usage of cells as therapies. These are both
advantages that PCT can offer DomaniCell. PCT intends to leverage PCT’s position
in the market place for cell therapy manufacturing, storage, and distribution
for clinical use to expand the umbilical cord blood collection and storage
business of DomaniCell.
GOVERNMENT
REGULATION
The
health care industry is one of the most highly regulated industries in the
United States. The federal government, individual state and local
governments, as well as private accreditation organizations, oversee and monitor
the activities of individuals and businesses engaged in the development,
manufacture and delivery of health care products and
services. Federal laws and regulations seek to protect the health,
safety, and welfare of the citizens of the United States, as well as to prevent
fraud and abuse associated with the purchase of health care products and
services with federal monies. The relevant state and local laws and
regulations similarly seek to protect the health, safety, and welfare of the
states’ citizens and prevent fraud and abuse. Accreditation
organizations help to establish and support industry standards and monitor new
developments. The following is a general description of the current
material laws and regulations.
FDA
Regulation of Cell Therapy Facilities
Manufacturing
facilities that produce cellular therapies are subject to extensive regulation
by the FDA. In particular, FDA regulations set forth requirements
pertaining to establishments that manufacture human cells, tissues, and cellular
and tissue-based products (“HCT/Ps”). Title
21, Code of Federal Regulations, Part 1271 (21 CFR Part 1271) provides for a
unified registration and listing system, donor-suitability, current good tissue
practices, and other requirements that are intended to prevent the introduction,
transmission, and spread of communicable diseases by HCT/Ps. More specifically,
key elements of Part 1271 include:
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Registration
and listing requirements for establishments that manufacture
HCT/Ps;
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Requirements
for determining donor eligibility, including donor screening and
testing;
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Current
good tissue practice requirements, which include requirements pertaining
to the manufacturer’s quality program, personnel, procedures,
manufacturing facilities, environmental controls, equipment, supplies and
reagents, recovery, processing and process controls, labeling, storage,
record-keeping, tracking, complaint files, receipt, pre-distribution
shipment, distribution, and donor eligibility determinations, donor
screening, and donor testing;
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Adverse
reaction reporting;
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Labeling
of HCT/Ps; and
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FDA
inspection, retention, recall, destruction, and cessation of manufacturing
operations.
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Additional
FDA laws and regulations apply to cellular therapies comprised of HCT/Ps that
are regulated as a drug, biological product, or medical device. (See 21 CFR
1271.10(a)). These laws and regulations include requirements for
current Good Manufacturing Practices (“cGMP”). In
summary, FDA’s cGMP requirements embody a set of principles that govern a
facility’s laboratory and manufacturing operations. These
requirements are designed to ensure that a facility’s processes – and products
resulting from those processes – meet defined safety requirements and have the
identity, strength, quality and purity characteristics that they are represented
to have.
PCT
currently collects, processes, stores and manufactures HCT/Ps, as well as
manufactures cellular therapy products that are regulated as biological
products. DomaniCell also collects, processes, and stores
HCT/Ps. Therefore, both PCT and DomaniCell must comply with Part 1271
and with the cGMP guidelines that apply to biological products. PCT’s
management believes that other requirements pertaining to biological products,
such as requirements pertaining to premarket approval, do not currently apply to
PCT because PCT does not intend to market and sell cellular therapy
products. However, these additional requirements may apply to
companies that PCT incubates and spins off, such as Amorcyte, if these companies
pursue marketing of cellular therapy products. Additionally, if
either PCT or DomaniCell changes its business operations in the future, the FDA
requirements that apply to PCT or DomaniCell may also change.
Compliance
with FDA requirements can be time consuming, costly and can result in delays in
product approval or product sales. Further, failure to comply with
applicable FDA requirements can result in regulatory inspections and associated
observations, warning letters, other requirements of remedial action, and, in
the case of failures that are more serious, suspension of manufacturing
operations, seizure, injunctions, product recalls, fines, and other
penalties. PCT believes that its facilities are in material
compliance with applicable existing FDA requirements, and intends to continue to
comply with new requirements that may apply in the future.
Additionally,
FDA, other regulatory agencies, or the United States Congress may be
considering, and may enact laws or regulations regarding the use and marketing
of stem cells, cell therapy products, or products derived from human cells or
tissue. These laws and regulations can affect PCT directly or the
business of some of PCT’s clients and therefore the amount of business PCT
receives from these clients.
State
Regulation of Cell Therapy
Certain
state and local governments regulate cell-processing facilities by requiring
them to obtain other specific licenses. As required under applicable
state law, PCT’s New Jersey and California facilities are licensed,
respectively, as a blood bank in New Jersey and as a drug manufacturing facility
in California. PCT also maintains licenses with respect to states
that require licensure of out-of-state facilities that process cell, tissue
and/or blood samples of residents of such states (e.g., New York and
Maryland). PCT has the relevant state licenses needed for processing
and is AABB (American Association of Blood Banks) accredited for this
purpose. PCT’s management believes that it is in material compliance
with currently applicable federal, state, and local laboratory licensure
requirements, and intends to continue to comply with new licensing requirements
that may become applicable in the future.
Certain
states may also have enacted laws and regulations, or may be considering laws
and regulations, regarding the use and marketing of stem cells or cell therapy
products, such as those derived from human embryos. While these laws and
regulations should not directly affect PCT’s business, they could affect the
business of some of PCT’s clients and therefore the amount of business PCT
receives from these clients.
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Federal
Regulation of Clinical Laboratories
The
Clinical Laboratory Improvement Act Amendments of 1988 (“CLIA”) extends
federal oversight to clinical laboratories that examine or conduct testing on
materials derived from the human body for the purpose of providing information
for the diagnosis, prevention, or treatment of disease or for the assessment of
the health of human beings. CLIA requirements therefore include those
laboratories that handle biological matter. CLIA requires that these
laboratories be certified by the government, satisfy governmental quality and
personnel standards, undergo proficiency testing, be subject to biennial
inspections, and remit fees. The sanctions for failure to comply with
CLIA include suspension, revocation, or limitation of a laboratory’s CLIA
certificate necessary to conduct business, fines, or criminal
penalties. Additionally, CLIA certification may sometimes be needed
when an entity, such as PCT or DomaniCell, desire to obtain accreditation,
certification, or license from non-government entities for cord blood
collection, storage, and processing. Currently CLIA certification is not
required for our facilities in New Jersey and in California. However,
to the extent that any of the activities of PCT or DomaniCell (for example, with
regard to processing or testing blood and blood products) require CLIA
certification, PCT intends to obtain and maintain such certification and/or
licensure.
Health
Insurance Portability and Accountability Act – Protection of Patient Health
Information
The
Administrative Simplification provisions of the Health Insurance Portability and
Accountability Act of 1996 (“HIPAA”) require
health care plans, health care providers and health care clearinghouses,
collectively defined under HIPAA as “Covered Entities,” to comply with standards
for the use and disclosure of health information within such organizations and
with third parties. These include standards for:
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Common
health care transactions, such as claims information, plan eligibility,
payment information and the use of electronic
signatures;
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Unique
identifiers for providers, employers, health plans and individuals;
and
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Security
and privacy of health information.
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Although
the obligations of HIPAA only apply directly to Covered Entities, any Covered
Entity that uses third parties (referred to in HIPAA as “Business Associates”)
to perform functions on its behalf involving the creation or use of certain
patient health information is required to have a contract with the Business
Associate that limits the use and disclosure of such information by the Business
Associate.
While
PCT’s management believes that the current business operations of PCT or
DomaniCell would not cause either of them to be considered a Covered Entity,
there is a risk that due to conflicting interpretations of the regulations,
DomaniCell may be a Covered Entity. If DomaniCell is a Covered
Entity, there is a risk of liability that DomaniCell may not be complying fully
with all HIPAA requirements. PCT has signed Business Associate
Agreements where requested by PCT’s customers who are Covered Entities, which
would require compliance with certain privacy and security requirements relating
to individually identifiable health information created or used in connection
with such relationships. PCT is in substantial compliance with such Business
Associate Agreements. However, given its complexity and the
possibility that the regulations may change and may be subject to changing and
even conflicting interpretation, PCT’s ability to comply fully with all of the
HIPAA requirements and requirements of its Business Associate Agreements is
uncertain.
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Stem
Cell Therapeutic and Research Act of 2005
The Stem
Cell Therapeutic and Research Act of 2005 established a national donor bank of
cord blood and created a national network for matching cord blood to
patients. The National Marrow Donor Program (NMDP) carries out this
legislation, which entails acting as the nation’s Cord Blood Coordinating Center
and actively recruiting parents for cord blood donations. The NMDP
also administers the National Cord Blood Inventory (NCBI), which has a goal of
collecting 150,000 cord blood units that could be used to treat patients all
over the United States. Importantly, the legislation also authorized
federal funding to support the legislation’s goals for collecting cord blood
units.
The
existence and proliferation of this public cord blood bank may adversely affect
PCT and/or the business of DomaniCell, because parents may opt to donate their
newborn’s cord blood to the public registry and to use the public registry if
stem cells from cord blood are needed for treatment purposes. In this
regard, an important advantage of the national, public cord blood collection
system is that it costs nothing for patients to donate their cord
blood. Additionally, major medical organizations, including the
American Academy of Pediatrics (AAP), the American Medical Association (AMA),
the American College of Obstetricians and Gynaecologists (ACOG), and the
American Society of Blood and Marrow Transplantation (ASBMT) do not recommend
private storage, except in very limited instances. Further, this
national, public cord blood registry is widely accepted by the medical
community, and therefore physicians and others in the health care community may
be less willing to use or recommend a private cord blood facility.
Other
Applicable Laws
In
addition to those described above, other federal and state laws and regulations
that could directly or indirectly affect PCT’s ability to operate the business
and/or financial performance of PCT and DomaniCell include:
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State
and local licensure, registration and regulation of laboratories, the
processing and storage of human cells and tissue, and the development and
manufacture of pharmaceuticals and
biologics;
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Other
laws and regulations administered by the United States Food and Drug
Administration, including the Federal Food Drug and Cosmetic Act and
related laws and regulations and the Public Health Service Act and related
laws and regulations;
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Laws
and regulations administered by the United States Department of Health and
Human Services, including the Office for Human Research
Protections;
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State
laws and regulations governing human subject
research;
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Federal
and state coverage and reimbursement laws and regulations, including laws
and regulations administered by the Centers for Medicare & Medicaid
Services and state Medicaid
agencies;
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The
federal Medicare and Medicaid Anti-Kickback Law and similar state laws and
regulations;
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The
federal physician self-referral prohibition commonly known as the Stark
Law, and state equivalents of the Stark
Law;
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Occupational
Safety and Health (“OSHA”)
requirements;
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State
and local laws and regulations dealing with the handling and disposal of
medical waste; and
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The
Intermediate Sanctions rules of the IRS providing for potential financial
sanctions with respect to “Excess Benefit Transactions” with HUMC or other
tax-exempt organizations.
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Enactment
of Comprehensive Health Care Reform
In late
March 2010, the Federal government enacted a comprehensive health care reform
package which consists of the Patient Protection and Affordable Care Act, as
amended by the Health Care and Education Reconciliation Act of 2010 ("Health
Reform"). Among other provisions, the Health Reform imposes
individual and employer health insurance requirements, provides certain
insurance subsidies (e.g., premiums and cost sharing), mandates extensive
insurance market reforms, creates new health insurance access points (e.g.,
State-based health insurance exchanges), expands the Medicaid program, promotes
research on comparative clinical effectiveness of different technologies and
procedures, and makes a number of changes to how products and services will be
reimbursed by the Medicare program.
There are
a number of provisions in the Health Reform that may directly impact our
customers and, therefore, indirectly affect us. For example, the
Health Reform expands the number of individuals that will be covered by either
private or public health insurance, which may, in turn, increase the pool of
potential purchasers for our customers’ products to the extent they are
reimbursable by private or public health insurance. The Health Reform
also requires health insurance issuers in the individual and small group markets
to cover certain “essential health benefits,” which include prescription drugs
and which may increase coverage for our customers’ products. In
addition, the Health Reform reduces income and raises costs for our customers
through, for instance, the imposition of drug price discounts for Medicare Part
D enrollees in the “donut hole” and the imposition of an annual fee on
prescription drug and biologic manufacturers. Such provisions may
cause our customers to seek to restrain costs in other areas, including the
services which we provide.
The
Health Reform also authorizes the FDA to approve biosimilar products (sometimes
referred to as “generic” biologic products). The new law established a period of
12 years of data exclusivity for the original, reference products in order to
preserve incentives for future innovation. The statute also sets
forth approval standards for biosimilars, which require a demonstration of
biosimilarity via analytical and clinical studies, as well as similarities in
the products’ conditions for use, route of administration, and other factors.
With the introduction of a pathway for the approval of biosimilars in the United
States, demand for our services may increase.
The
effective dates of the various provisions within the Health Reform are staggered
over the next several years, with some changes occurring
immediately. Much of the interpretation of the Health Reform will be
subject to administrative rulemaking, the development of agency guidance, and
court interpretation. Therefore, the consequences of the Health
Reform on PCT’s services are unknown and speculative at this point.
OTHER
RELATIONSHIPS BETWEEN THE PARTIES
On
January 9, 2009, PCT entered into a Cell Processing and Storage Customer
Agreement (the “PCT
Agreement”) with NeoStem. Under the PCT Agreement, PCT will
provide to NeoStem autologous adult stem cell processing and storage services
utilizing cGMP standards. Such services will be provided at both
PCT’s California and New Jersey facilities. NeoStem agrees to use PCT
for processing and storage services for commercial purposes on an exclusive
basis commencing with such time as PCT completes certain preliminary services
and is ready and able to start the processing and storage services as required
by the agreement. PCT agreed to provide to NeoStem stem cell
processing and long term storage services for NeoStem’s business on an exclusive
basis. Prior to commencing these services, PCT agreed to provide
certain preliminary services consisting of technology transfer and protocol
review and revision to ensure that the processing and storage services are cGMP
compliant. The agreement sets forth agreed upon fees for the delivery
of the services as well as providing for a one-time payment of $35,000 for the
preliminary services which has been paid. The agreement is for a four
year term, subject to earlier termination on 365 days notice as set forth in the
agreement. Pursuant to the PCT Agreement, in April 2009, NeoStem’s
cryopreservation operations were transferred from NeoStem’s California facility
to PCT’s California facility.
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As of
December 31, 2009, NeoStem, NeoStem (China), Inc., ("NeoStem China") its
subsidiary, and PCT entered into an Agreement whereby NeoStem and NeoStem China
engaged PCT to perform the services necessary to construct in Beijing, China a
facility consisting of a clean room for adult stem cell clinical trial
processing and other stem cell collections which will have the processing
capacity on an annual basis sufficient for at least 10,000 samples, research and
development laboratory space, collection and stem cell storage area and offices,
together with the furnishings and equipment and the installation of quality
control systems consisting of materials management, equipment maintenance and
calibration, environmental monitoring and compliance and adult stem cell
processing and preservation which comply with cGMP standards and regulatory
standards that would be applicable in the United States under GTP standards, as
well as all regulatory requirement applicable to the program under the laws of
the People's Republic of China. The aggregate cost of the program,
including the phase 1 equipment purchases, is expected to be approximately $3
million.
RISK
FACTORS
You are
urged to read all relevant documents filed with the SEC concerning the Merger,
including, without limitation, the S-4 and the prospectus/joint proxy statement
contained therein, when such documents are available, because they will contain
important information about NeoStem and the proposed Merger, including risk
factors relating thereto. Set forth below are certain risk factors
relating to the proposed Merger of which you should be aware.
-26-
Risks Related
to PCT and PCT’s Business
PCT’s
business is highly speculative and subject to a high degree of
risk. The risks and uncertainties described below are not the only
ones that could affect PCT. Additional risks and uncertainties of
which PCT is aware, or currently believes are immaterial, may become important
factors affecting PCT’s business. If any of the following risks
occur, PCT’s business, financial condition or operating results could be
materially harmed, or differ materially from those expressed in any
forward-looking statements.
Cell
therapy is still a developing field and a significant global market for the
services of PCT and DomaniCell is yet to emerge.
Cell
therapy is still a developing area of research, with few cell therapy products
approved for clinical use. At the PCT level, the current market and
current contracts principally consist of providing manufacturing of cell and
tissue-based therapeutic products in clinical trial and processing of stem cell
products for transplantation programs. PCT’s subsidiary, DomaniCell,
provides services related to the collection and storage of umbilical cord blood
units. There is no significant global market for stem cell processing
or their collection and storage, nor is there any guarantee that such markets
will develop in the near future. Major medical institutions do not
recommend private storage and PCT believes that the medical community is
supportive of the public cord blood collective system. Patients can
donate their cord blood to the system without charge. The market for
cell and tissue-based therapies is early-stage, substantially research oriented,
and financially speculative. Very few companies have been successful
in their efforts to develop and commercialize a stem cell
product. Stem cell products in general may be susceptible to various
risks, including undesirable and unintended side effects, unintended immune
system responses, inadequate therapeutic efficacy, or other characteristics that
may prevent or limit their approval or commercial use. The demand for
stem cell processing and the number of people who may use cell or tissue-based
therapies is difficult to forecast. As there are no real experts who
can forecast this market with accuracy, there is limited data from which the
future use of our services may be forecasted. The success of PCT and
its subsidiary, DomaniCell is dependent on the establishment of a large global
market for their products and services and their ability to capture a share of
this market.
PCT
has had a history of losses and may continue to incur such losses for the near
future. PCT faces liquidity issues.
Since PCT
began operations in 1999, cumulative expenses have exceeded our cumulative
revenues, resulting in losses, accumulating to a deficit of $11,815,365 million through June 30,
2010.
PCT has
not generated any significant amount of revenue nor been profitable in any
quarter since inception. Operations have been funded through the sale
of equity, loans from affiliates and a mortgage on PCT’s
property. PCT has limited working capital for development and growth;
as of June 30, 2010, PCT had negative working capital of $6,143,954. PCT cannot
provide any assurance that PCT will generate a profit from its operations in the
near future to fund its growth.
As of
June 30, 2010 and December 31, 2009, respectively, PCT had unrestricted cash
balances of $775,848 and $1,127,138. See Notes to 4 and 6 of the
Notes to the Consolidated Financial Statements of PCT filed as an exhibit to
this Current Report on Form 8-K for outstanding loan obligations, commitments
and contingencies.
A
significant portion of PCT's current revenues are derived from a small number of
customers.
Revenues
recognized over the past two fiscal years and the six months ended June 30, 2010
received to date are concentrated with three customers. These three
customers make up 20%, 13% and 15% of revenue (a total of 48% for all three) for
the six months ended June 30, 2010 and 18%, 15% and 12% of revenue (a total of
45% for all three) for the year ended December 31, 2009. One of these
is a related party. The loss of one or more of our customers or
material changes to the contracts with or payment terms of these customers may
result in significant business downturn through reduced revenues, reduced cash
flows, delays in revenues or cash flows and such delays or reductions could have
a material impact on the future revenue growth and profitability of
PCT. See Note 11 to the PCT Consolidated Financial Statements filed
as an exhibit to this Current Report on Form 8-K.
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PCT
and its subsidiaries will require additional funding, and there is no certainty
that either will be able to obtain such financing. If PCT's capital requirements
are not met, the business of PCT and its subsidiaries may be adversely
affected.
PCT and
its subsidiaries will require additional financing to fund ongoing operations,
as current sales and revenue growth are insufficient to meet its operating costs
and perhaps its maturing obligations. Its inability to obtain necessary capital
or financing to fund these needs could adversely affect its business, results of
operations and financial condition. Additional financing may not be
available when needed or may not be available on acceptable terms. If
adequate funds are not available, PCT and its subsidiaries will most likely be
required to delay, scale back or eliminate one or more of its business
strategies, which may affect its overall business results of operations and
financial condition.
PCT
may be subject to significant product liability claims and
litigation.
The
business of PCT exposes it to potential product liability risks inherent in the
testing, processing and marketing of cell therapy products. Such liability
claims may be expensive to defend and result in large judgments against
PCT. PCT presently has product liability insurance limited to $2
million per incident and $2 million in annual aggregate, and also maintains
errors and omissions, directors and officers, workers’ compensation and other
insurance appropriate to the activities of PCT and those of
DomaniCell. If PCT or DomaniCell were to be subject to a claim in
excess of this coverage or to a claim not covered by PCT’s insurance and the
claim succeeded, PCT would be required to pay the claim from its own limited
resources, which could have a material adverse effect on the financial
condition, results of operations and business of PCT. Additionally,
liability or alleged liability could harm the business of PCT by diverting the
attention and resources of management and damaging the reputation of PCT and
that of its subsidiaries.
-28-
PCT
and its subsidiaries may fail to compete effectively, particularly against
larger, more established biotechnology and life science companies, which may
adversely affect their ability to develop and market its services and
products.
The
biotechnology and life science industries are highly
competitive. They include multinational biotechnology and life
science, pharmaceutical and chemical companies, academic and scientific
institutions, governmental agencies, and public and private research
organizations. Many of these companies or entities have significantly
greater financial and technical resources and production and marketing
capabilities than PCT. The biotechnology and life science industries
are characterized by extensive research and development, and rapid technological
progress. Competitors may successfully develop services or products
superior or less expensive than cell therapy services or products, rendering our
services less valuable or marketable.
PCT
has limited manufacturing capabilities.
PCT’s
management believes that it can provide services and produce materials for
clinical trials and for human use at its existing facilities, which it believes
are compliant with FDA requirements for current Good Manufacturing Practices
(“cGMP”) and
current Good Tissue Practices (“cGTP”). PCT’s
management also believes that PCT has sufficient capacity to meet expected near
term demand. However, PCT may need to, depending on demand, expand
its manufacturing capabilities for cell therapy services and products in the
future. In 2007, PCT acquired an additional facility in Allendale,
New Jersey, which is a cGMP compliant facility. The demand for PCT’s
services and products could, at times, exceed existing manufacturing
capacity. If PCT does not meet rising demand for products and
services on a timely basis or is not able to maintain cGMP compliance standards
then PCT’s clients and potential clients may elect to obtain the
products and services from competitors, which could materially and adversely
affect PCT’s revenues.
Current
cell therapy products have a limited biologic shelf life as a result of which
there are constraints on transit times between the time stem cells are extracted
from a patient and the time that a processed product leaves PCT’s facility and
arrives for re-infusion in the patient. Thus, PCT’s current business
model has to assume that, in order to effectively provide many of PCT’s services
in a market, PCT needs to have a suitable facility that can provide timely
service in such market. This could add significantly to PCT’s capital
requirements and be a limiting factor on the growth and profitability of
PCT.
Current
cell therapy products have a limited shelf life, in certain instances limited to
less than 12 hours. Thus, there are constraints on transit times
between the time the cell product is extracted from a patient and the product
arrives at one of PCT’s facilities for processing, as well as constraints on the
time that a processed product leaves PCT’s facility and arrives for re-infusion
in the patient. Therefore, cell therapy facilities need to be located
in major population centers in which patients of the cell therapy products are
likely to be located and within close proximity of major airports from which
they can be timely delivered. Building new facilities requires
significant commitments of time and capital, which PCT may not have available in
a timely manner. Even if such new facilities are established, there
may be challenges to ensuring that they are compliant with cGMP, other FDA
requirements, and/or applicable state or local regulatory
requirements. PCT cannot be certain that it would be able to recoup
the costs of establishing a facility and attaining regulatory compliances in a
given market. Thus, the limited biologic shelf life of cell therapy
products is a hindrance on the rate at which PCT can expand its cell processing
and manufacturing services into new geographic markets and requires significant
capital risk by PCT, which PCT may or may not be able to recover.
-29-
Technologies
for the treatment of cancer and other diseases and processes used by PCT are
subject to rapid change, and the development of treatment strategies that are
more effective than PCT’s products and services could render the services of PCT
and its subsidiaries obsolete. Given their exclusive focus on the
field of cell therapy, such obsolescence could jeopardize the success or
long-term survival of PCT and/or its subsidiaries.
The
activities of PCT and DomaniCell involve treatment modalities and protocols
influenced by advancements in technology. Various methods for
treating cancer and other diseases, of which cell therapy is but only one,
currently are, and in the future may be expected to be, the subject of extensive
research and development. There is no assurance that cell therapies
will achieve the degree of success envisioned by PCT in the treatment of cancer
and other diseases. Nor is there any assurance that new technological
improvements and techniques will not render processes currently used by PCT and
DomaniCell obsolete. In addition, the successful development and
acceptance of any one or more alternative forms of treatment could render the
need for our services obsolete. PCT is exclusively focused on cell
therapy, and if this field is substantially unsuccessful, this could jeopardize
the long-term survival of PCT and/or its subsidiaries.
There
is a scarcity of experienced professionals in the field of cell therapy and PCT
may not be able to retain key officers or employees or hire new key officers or
employees needed to implement its business strategy and develop its products and
businesses. For example, DomaniCell does not have any management at
the current time and is being managed by PCT with assistance from outside
consultants. If PCT is unable to retain or hire key officers or employees, it
may be unable to continue to grow its business or to implement its business
strategy, and its business may be materially and adversely
affected.
Given the
specialized nature of cell therapy and the fact that it is a young field, there
is an inherent scarcity of experienced personnel in the field. PCT
and DomaniCell are substantially dependent on the skills and efforts of current
senior management of PCT for their management and operations, as well as for the
implementation of their business strategy. As a result of the
difficulty in locating qualified new management, the loss or incapacity of
existing members of management or unavailability of qualified management or as
replacements for management of PCT who resign or are terminated could adversely
affect the operations of PCT or DomaniCell, as the case may be. The
future success of both PCT and DomaniCell also depends upon their ability to
attract and retain additional qualified personnel to support their anticipated
growth. There can be no assurance that PCT will be successful in
attracting or retaining personnel required by PCT to continue and grow its
operations. The loss of a key employee, the failure of a key employee
to perform in his or her current position or PCT’s or DomaniCell’s inability to
attract and retain skilled employees, as needed, could result in the inability
of PCT and DomaniCell to continue to grow their business or to implement their
business strategy, or may have a material adverse effect on PCT’s business,
financial condition and operating results.
-30-
PCT,
DomaniCell, and their customers conduct business in a heavily regulated
industry. If one or more of these companies fail to comply with
applicable current and future laws and government regulations, PCT’s business
and financial results could be adversely affected.
The
healthcare industry is one of the most highly regulated industries in the United
States. The federal government, individual state and local
governments and private accreditation organizations all oversee and monitor the
activities of individuals and businesses engaged in the delivery of health care
products and services. Current laws, rules and regulations that could
directly or indirectly affect the ability of PCT, DomaniCell and their customers
to operate each of their businesses could include, without limitation, the
following:
|
|
·
|
State
and local licensure, registration and regulation of laboratories, the
collection, processing and storage of human cells and tissue and cord
blood, and the development and manufacture of pharmaceuticals and
biologics;
|
|
|
·
|
The
federal Clinical Laboratory Improvement Act and amendments of
1988;
|
|
|
·
|
Laws
and regulations administered by the FDA, including the Federal Food Drug
and Cosmetic Act and related laws and
regulations;
|
|
|
·
|
The
Public Health Service Act and related laws and
regulations;
|
|
|
·
|
Laws
and regulations administered by the United States Department of Health and
Human Services, including the Office for Human Research
Protections;
|
|
|
·
|
State
laws and regulations governing human subject
research;
|
|
|
·
|
Occupational
Safety and Health requirements;
|
|
|
·
|
State
and local laws and regulations dealing with the handling and disposal of
medical waste;
|
|
|
·
|
The
federal Medicare and Medicaid Anti-Kickback Law and similar state laws and
regulations;
|
|
|
·
|
Federal
and state coverage and reimbursement laws and regulations, including laws
and regulations administered by the Centers for Medicare & Medicaid
Services;
|
|
|
·
|
The
federal Health Insurance Portability and Accountability Act of 1996
(“HIPAA”), including the amendments included in the American Recovery and
Reinvestment Act of 2009, commonly known as the HITECH Act, and
regulations promulgated thereunder;
|
|
|
·
|
The
federal physician self-referral prohibition, commonly known as the Stark
Law, and state equivalents of the Stark
Law;
|
|
|
·
|
State
funding decisions on stem cell research and the development of cellular
therapies; and
|
|
|
·
|
The
Intermediate Sanctions rules of the IRS providing for potential financial
sanctions with respect to “Excess Benefit Transactions” with HUMC or other
tax-exempt organizations.
|
In
addition, as PCT expands into other parts of the world, it will need to comply
with the applicable laws and regulations in such foreign
jurisdictions. PCT has not yet thoroughly explored the requirements
or feasibility of such compliance. It is possible that it may not be
permitted to expand its business into one or more foreign
jurisdictions.
-31-
Although
PCT intends to conduct its business in compliance with applicable laws and
regulations and believes that PCT and DomaniCell are in material compliance with
applicable governmental healthcare laws and regulations, the laws and
regulations affecting these relationships are complex, and many aspects of such
relationships have not been the subject of judicial or regulatory
interpretation. Furthermore, the cell therapy industry is the topic
of significant government interest, and thus the laws and regulations applicable
to PCT and its business are subject to frequent change and/or
reinterpretation. There also can be no assurance that the laws and
regulations applicable to PCT and DomaniCell will not be amended or interpreted
in a manner that adversely affects their business, financial condition, or
operating results. For example, the federal government could issue
tighter restrictions on private cord blood banking that prevents DomaniCell from
collecting cord blood for private banking. While PCT is not aware of
any such developments or that any court or federal or state government is
reviewing PCT’s operations, it is possible that such a review could result in a
determination that would have a material adverse effect on the business,
financial condition and operating results of PCT.
It
is uncertain to what extent the government, private health insurers and
third-party payors will approve coverage or provide reimbursement for the
therapies and products to which the services of PCT and DomaniCell
relate. Availability for such reimbursement may be further limited by
an increasing uninsured population and reductions in Medicare and Medicaid
funding in the United States.
To the
extent that the health care provider customers of PCT and DomaniCell cannot
obtain coverage or reimbursement for therapies and products related to which PCT
and DomaniCell provide services, they may elect not to provide such therapies
and products to their patients and, thus, may not need our
services. Further, as cost containment pressures are increasing in
the health care industry, government and private payors adopt strategies
designed to limit the amount of reimbursement paid to health care
providers. Such cost containment measures may include:
|
·
|
Reducing
reimbursement rates;
|
|
·
|
Challenging
the prices charged for medical products and
services;
|
|
·
|
Limiting
services covered;
|
|
·
|
Decreasing
utilization of services;
|
|
·
|
Negotiating
prospective or discounted contract
pricing;
|
|
·
|
Adopting
capitation strategies; and
|
|
·
|
Seeking
competitive bids.
|
Similarly,
the trend toward managed health care and bundled pricing for health care
services in the United States, which may accelerate under the Health Reform,
could significantly influence the purchase of healthcare services and products,
resulting in lower prices and reduced demand for cancer therapies.
PCT
currently receives a small portion of its revenues from services rendered to
patients enrolled in federal health care programs, such as Medicare, and
DomaniCell may also directly or indirectly receive revenues from federal health
care programs. Federal health care programs are subject to changes in
coverage and reimbursement rules and procedures, including retroactive rate
adjustments. These contingencies could materially decrease the range
of services covered by such programs or the reimbursement rates paid directly or
indirectly for our products and services. To the extent that any
health care reform favors the reimbursement of other cancer therapies over stem
cell therapies, such reform could affect the ability of PCT to sell its
services, which may have a material adverse effect on its revenues.
-32-
The
limitation on reimbursement available from private and government payors may
reduce the demand for, or the price of, the services of PCT, which would have a
material adverse effect on their revenues. Additional legislation or
regulation relating to the health care industry or third-party coverage and
reimbursement may be enacted in the future which could adversely affect the
revenues generated from the sale of the products and services of
PCT.
Furthermore,
there has been a trend in recent years towards reductions in overall funding for
Medicare and Medicaid. There has also been an increase in the number
of people who do not have any form of health care coverage in recent years and
who are not eligible for or enrolled in Medicare, Medicaid or other governmental
programs. The extent to which the reforms brought about under Health
Reform may be successful in reducing the number of such uninsured is unclear,
and the reduced funding of governmental programs and increase in uninsured
populations could have a negative impact on the demand for the services of PCT
to the extent they relate to products and services which are reimbursed by
government and private payors.
Health
care companies have been the subjects of federal and state investigations, and
PCT or DomaniCell, could become subject to investigations in the
future.
Both
federal and state government agencies have heightened civil and criminal
enforcement efforts. There are numerous ongoing investigations of
health care companies, as well as their executives and managers. In
addition, amendments to the Federal False Claims Act, including under Health
Reform, have made it easier for private parties to bring “qui tam”
(whistleblower) lawsuits against companies under which the whistleblower may be
entitled to receive a percentage of any money paid to the
government. The Federal False Claims Act provides, in part, that an
action can be brought against any person or entity that has knowingly presented,
or caused to be presented, a false or fraudulent request for payment from the
federal government, or who has made a false statement or used a false record to
get a claim approved. The government has taken the position that
claims presented in violation of the federal anti-kickback law, Stark Law or
other healthcare–related laws, including laws enforced by the FDA, may be
considered a violation of the Federal False Claims Act. Penalties
include substantial fines for each false claim, plus three times the amount of
damages that the federal government sustained because of the act of that person
or entity and/or exclusion from the Medicare program. In addition, a
majority of states have adopted similar state whistleblower and false claims
provisions.
PCT’s
management is not aware of any government investigations involving any of the
facilities or management of PCT or DomaniCell. While management
believes that PCT and DomaniCell are in material compliance with applicable
governmental healthcare laws and regulations, any future investigations of PCT,
DomaniCell or their executives or managers could result in significant
liabilities or penalties, as well as damage to the reputation of both
companies.
Failure
to comply with applicable licensure, registration, certification, and
accreditation standards may result in loss of licensure, certification or
accreditation or other government enforcement actions.
FDA laws
and regulations provide for registration and listing requirements for
establishments that manufacture human cells, tissues, and cellular and
tissue-based products (“HCT/Ps”), and
additional FDA requirements may apply to HCT/Ps, or products comprised of
HCT/Ps, that are regulated as a drug, biological product, or medical
device. This includes the cellular therapy products that PCT may
manufacture for itself or on behalf of its customers. In addition,
certain state and local governments regulate stem cell laboratories by requiring
them to be licensed or to register with the state or
locality. Currently, PCT is licensed as a blood bank with respect to
its activities in New Jersey, as a tissue bank with respect to its activities in
New York and as a drug manufacturer with respect to its facility in California.
PCT’s management
believes that PCT and DomaniCell are in material compliance with current
federal, state, and local stem cell laboratory licensure
requirements. However, the licensing requirements in the states where
it is currently licensed may change, and PCT and/or DomaniCell may become
subject to the additional licensing, registration and/or compliance requirements
of other states, local governments and/or the federal government as it expands
its network and as new regulations are implemented. If PCT and/or
DomaniCell fails to comply with the various licensure requirements,
certification and accreditation standards to which it is subject, PCT and/or
DomaniCell may be subject to a loss of licensure, certification, or
accreditation that could adversely affect them.
-33-
Additionally,
certain non-government entities have promulgated standards for certification,
accreditation, and licensing of cord blood businesses that may apply to PCT
and/or DomaniCell’s operations. These organizations include, but may
not be limited to, AABB (formerly the American Association of Blood Banks), the
Foundation for the Accreditation of Cellular Therapy (FACT), and the American
Association of Tissue Banks (AATB). While currently these standards
are voluntary, in some cases compliance with them may be necessary for a cord
blood business to be accepted and competitive in the
marketplace. Compliance with these standards and obtaining the
applicable accreditation, certification, or license can be costly and
time-consuming. These accreditation, certification, or license
requirements may also change and new standards may be developed. If
PCT fails to comply with applicable standards, or fail to obtain or maintain
applicable accreditations, certifications, or licenses, PCT and/or DomaniCell
may be adversely affected.
Unintended
consequences of recently adopted health reform legislation in the U.S. may
adversely affect PCT’s business.
The
healthcare industry is undergoing fundamental changes resulting from political,
economic and regulatory influences. In the U.S., comprehensive
programs are under consideration that seek to, among other things, increase
access to healthcare for the uninsured and control the escalation of healthcare
expenditures within the economy. On March 23, 2010, health reform
legislation was approved by Congress and has been signed into
law. While PCT does not believe this legislation will have a direct
impact on its business, the legislation has only recently been enacted and
requires the adoption of implementing regulations, which may have unintended
consequences or indirectly impact PCT's business. For instance, the
scope and implications of the recent amendments pursuant to the Fraud
Enforcement and Recovery Act of 2009 (“FERA”), have yet to
be fully determined or adjudicated and as a result it is difficult to predict
how future enforcement initiatives may impact PCT's business. Also,
in some instances PCT’s clients may be health insurers that will be subject to
limitations on their administrative expenses and new federal review of
“unreasonable” rate increases which could impact the prices they pay for PCT's
services. If the legislation causes such unintended consequences or
indirect impact, it could have a material adverse effect on our business,
financial condition and results of operations.
Recent
legislation regarding the establishment and funding of public cord blood
collection and storage may adversely affect the business of
DomaniCell.
The Stem
Cell Therapeutic and Research Act of 2005 established requirements for a
national donor bank of cord blood and for a national network for matching cord
blood to patients. The federal government has entered into contracts
with the National Marrow Donor Program (NMDP) to carry out the provisions of
this legislation. Under these contracts, the NMDP acts as the
nation’s Cord Blood Coordinating Center and actively recruits parents for cord
blood donations. The NMDP also administers the National Cord Blood
Inventory (NCBI), which has a goal of collecting 150,000 cord blood units that
may be used for patients throughout the United States. The
legislation also authorized federal funding to support its goals and
requirements.
-34-
Parents
may opt to donate their newborn’s cord blood to the public registry and to use
the public registry if stem cells from cord blood are needed for treatment
purposes. In this regard, an important advantage of the national,
public cord blood collection system is that it costs nothing for patients to
donate their cord blood. This national, public cord blood registry
has also been widely accepted and supported by the medical community, so
physicians and others in the health care community may be less willing to use or
recommend a private cord blood facility when public collection is
available. Additionally, major medical organizations, including the
American Academy of Pediatrics (AAP), the American Medical Association (AMA),
the American College of Obstetricians and Gynaecologists (ACOG), and the
American Society of Blood and Marrow Transplantation (ASBMT) do not recommend
private storage, except in very limited instances. Further, PCT
believes that the medical community is currently supportive of public cord blood
donation and the national cord blood registry that is administered by the
National Marrow Donor Program. For these reasons, a significant
amount of patients may choose to use to donate their cord blood to the national,
public cord registry instead of privately banking cord blood. The
medical community could also issue stronger recommendations and opinions that
favor the use of the national registry. Therefore, the existence and
proliferation of the national registry may adversely affect the business of PCT
and/or DomaniCell.
DomaniCell
is an early-stage company and faces substantial risks and challenges, which
could negatively affect the overall value of PCT.
DomaniCell
was formed in 2005 and, as any company with a short history of operations, it is
subject to all of the risks that similar entities are subject to,
including:
|
·
|
The
ability to attract and retain competent and experienced management and
operating personnel;
|
|
·
|
The
ability to secure appropriate debt and equity capital to finance desired
growth;
|
|
|
·
|
The
ability to develop and protect intellectual property through patents,
trademarks and other protective methods and
licenses;
|
|
·
|
The
maintenance and development of good relations with referral
sources;
|
|
·
|
The
efficient management of its everyday business operations;
and
|
|
·
|
The
ability to implement its growth
strategy.
|
PCT is
yet to hire permanent management for DomaniCell and intends to continue to
manage and fund the operations of DomaniCell until it has its own management and
generates enough revenues to sustain its own operations. There can be no
assurance that DomaniCell will be able to grow its business or achieve
profitability in the near future and may, in fact, continue to generate losses,
which would negatively affect the overall value of PCT.
If
PCT’s processing and storage facilities are damaged or destroyed, the business,
programs, and prospects of DomaniCell could be negatively affected and could
adversely affect the value of PCT as a whole.
PCT
processes and stores the umbilical cord blood of customers of DomaniCell at
PCT’s facility in Allendale, New Jersey, and may do so at PCT’s Mountain View,
California facility in the future. If these facilities or the
equipment in these facilities was to be significantly damaged or destroyed, PCT
could suffer a loss of some or all of the stored cord blood
units. Depending on the extent of loss, such an event could reduce
the ability of DomaniCell to provide cord blood stem cells when requested, could
expose DomaniCell to significant liability from its cord blood banking
customers, and could affect its ability to continue to provide umbilical cord
blood preservation services. While PCT believes that it has insured
against losses from damage to or destruction of its facilities consistent with
typical industry practices, if PCT has underestimated its insurance needs, PCT
may not have sufficient insurance to cover losses beyond the limits on its
policies. Such events could have a material adverse effect on the
value of PCT as a whole.
-35-
Competitors
of DomaniCell, may have greater resources or capabilities or better technologies
than DomaniCell, or may succeed in developing better service than DomaniCell,
and DomaniCell may not be successful in competing with them.
The
private umbilical cord banking business is a relatively new, highly competitive,
and an evolving field. DomaniCell competes with companies such as ViaCell, Inc.,
a subsidiary of the Perkin-Elmer Corporation, CBR Systems, Cryo-Cell
International, Inc., CorCell, Inc., a subsidiary of Cord Blood America Inc., and
LifeBank USA, a division of Celgene Cellular Therapeutics, a wholly owned
subsidiary of Celgene Corporation. Any of these companies may choose
to invest more in sales, marketing, and research and product development than
DomaniCell.
DomaniCell
will also have to compete with the national, public program, which has the
support of the medical community and which receives federal
funding. In this regard, DomaniCell also competes with public cord
blood banks such as the New York Blood Center (National Cord Blood Program),
University of Colorado Cord Blood Bank, Milan Cord Blood Bank, Dusseldorf Cord
Blood Bank, and other public cord blood banks around the world. Public cord
blood banks provide families with the option of donating their cord blood for
public use at no cost. The Stem Cell Therapeutic Act provides
financing for a national system of public cord blood banks in the United States
to encourage cord blood donations from an ethnically diverse
population. In addition, many states are evaluating the feasibility
of establishing cord blood repositories for transplantation
purposes. An increase in the number and diversity of publicly
available cord blood units from public banks would increase the probability of
finding suitably matched cells for a family member, which may result in a
decrease in the demand for private cord blood banking. If the science
of human leukocyte antigens, or HLA, typing advances, then unrelated cord blood
transplantation may become safer and more efficacious, similarly reducing the
clinical advantage of related cord blood transplantation. Such events could
negatively affect our forecasts regarding the business and revenues of
DomaniCell and of PCT.
Commercially
available transportation systems are not set up for shipment of biological or
other perishable goods and will not be able to meet the demands of the emerging
cell therapy market. To succeed, the large-scale commercialization of cell
therapy products will need to overcome the present weaknesses of the major air
carriers.
PCT has
determined that the weaknesses in existing transportation carriers include the
lack of a true point-to-point chain of control, non-controlled X-ray and
inspection, no guarantee of package orientation, handling or storage conditions
and in many cases no standard, documented and tracked operating
procedures. While reliable ground carriers with experience in the
transport of blood products already exist in major metropolitan areas of the
country, air carriers meeting such needs are limited. PCT evaluated the major
domestic express carriers, and concluded that even their highest-level services
are inadequate to meet the sector’s needs. However, PCT identified
and validated only one specialty air carrier as a transportation partner, which
specializes in shipping medical products, including whole blood and blood
products, tissue for transplantation, and diagnostic specimens There
are presently no alternative sources for the safe transportation of cell therapy
products. If this carrier should cease its medical shipping
operations or otherwise be unable to properly meet PCT's transportation needs.
The lack of access to safe and effective transportation options could adversely
affect PCT's business.
-36-
PCT is
required to comply with good manufacturing practice requirements an its failure
to do so may subject it to fines and other penalties that will delay or prevent
PCT or its affiliates and related parties from marketing and selling their
products and services.
FDA
current Good Manufacturing Practices (cGMP) requirements, set forth in Title 21,
Parts 210 and 211, of the Code of Federal Regulations (21 CFR Parts 210 and 211)
are federal regulations that govern the manufacture, processing, packaging and
holding of drug and cell therapy products. PCT must comply with cGMP,
requirements demanded by customers and enforced by the FDA through its
facilities inspection program. These requirements include quality
control, quality assurance and the maintenance of records and
documentation. PCT may be unable to comply with these cGMP
requirements and with other FDA, state and foreign regulatory
requirements. These requirements may change over time and PCT or
third party manufacturers may be unable to comply with the revised
requirements. A failure to comply with these requirements may result
in fines and civil penalties, suspension of production, suspension or delay in
product approval, product seizure or recall, or withdrawal of product
approval. If the safety of any quantities supplied by third-parties
is compromised due to their failure to adhere to applicable laws or for other
reasons, PCT may not be able to obtain regulatory approval for or successfully
commercialize product candidates that it may develop.
PCT
has a limited marketing staff and budget.
The
degree of market acceptance of PCT’s services depends upon a number of factors,
including the strength of its sales and marketing support. If PCT’s
marketing is not effective, its ability to generate revenues could be
significantly impaired. Due to capital constraints, PCT’s marketing
and sales activities are somewhat limited and thus PCT may not be able to make
its services known to a sufficient number of potential customers and
partners. Limitations in PCT’s marketing and sales activities, and
the failure to attract enough customers, will affect PCT’s ability to operate
profitably.
The demand for PCT’s services depends
in part on its customers’ research and development and marketing efforts. PCT’s
business, financial condition and results of operations may be harmed if its
customers spend less on, or are less successful in, these
activities.
Many of
PCT's customers are engaged in research, development, production and
marketing. The amount of customer spending on research, development,
production and marketing has a large impact on PCT's revenues
and profitability, particularly the amount customers choose to spend
on outsourcing. Customers determine the amounts that they will spend
based upon, among other things, available resources and their need to develop
new products, which, in turn, is dependent upon a number of factors, including
their competitors’ research, development and production initiatives, and the
anticipated reimbursement scenarios for specific products and therapeutic
areas. In addition, consolidation in the industries in which PCT’s
customers operate may have an impact on such spending as customers integrate
acquired operations, including research and development departments and their
budgets. PCT’s customers finance their research and development
spending from private and public sources. A reduction in spending by
PCT’s customers could have a material adverse effect on its business, financial
condition and results of operations. If PCT’s customers are not
successful in attaining or retaining product sales due to market conditions,
reimbursement issues or other factors, PCT’s results of operations
may be materially impacted
The
nature and duration of PCT contracts can yield varying revenues and
profits.
PCT's
contracts with customers may be subject to repeated renegotiation and amendments
which change the objectives of PCT's work and the milestones which determine
when revenues are received by PCT. Due to the fact that PCT's
customers are engaged in businesses that are in many instances experimental, the
objectives of such customer relationships with PCT are subject to change as
customer research and development and business models
develop. Additionally, most of these customers are subject to
regulatory controls and approval processes over their businesses and
products. If such customers fail to comply with such processes or do
not receive necessary approvals, PCT may be required to alter or halt the
activities for which such customers have contracted with PCT. Each of
these factors may have an adverse affect on PCT's revenues.
-37-
The
mortgage on PCT's Allendale facility contains various covenants that limit its
ability to take certain actions and PCT's failure to comply with any of the
covenants could have a material adverse effect on PCT's business.
The
mortgage on PCT's Allendale facility a contains debt coverage and total debt to
tangible net worth financial covenants which limit its ability to incur
additional debt and make capital expenditures. The mortgage note is
secured by substantially all of the assets of PCT, including a first mortgage on
the Allendale facility. In connection with the mortgage PCT assigned an amount
approximately equal to 18 months debt service to be held in escrow.
Risks Relating to the
Merger
A
condition to consummation of the Merger is that NeoStem or PCT obtains certain
consents or approvals from third parties. In addition, the
stockholders of NeoStem must approve the issuance of the securities to be issued
in the Merger and the Members of PCT must approve the Merger Agreement and
Merger. There can be no assurance that NeoStem or PCT will be able to
obtain all such relevant consents and approvals on a timely basis or at
all. NeoStem has incurred, and expects to continue to
incur, significant costs and expenses in connection with the proposed
Merger. Any failure to obtain, or delay in obtaining, the necessary
consents or approvals would prevent NeoStem from being able to consummate, or
delay the consummation of, the transactions contemplated by the Merger
Agreement, which could materially adversely affect the business, financial
condition and results of operations of NeoStem. There is no guarantee
that such approvals will be obtained or that such conditions will be
satisfied.
Failure
to satisfy closing conditions and complete the Merger could cause NeoStem’s
stock price to decline and could harm NeoStem’s business and operating
results.
The
Merger Agreement contains conditions which NeoStem must meet in order to
consummate the Merger, including that NeoStem affirm to PCT that it has $3
million available to repay certain indebtedness owed by PCT to an affiliate of
PCT’s CEO. No assurance can be given that the condition will be
satisfied. In addition, the Merger Agreement may be terminated by
either NeoStem or PCT under certain circumstances. If the Merger is
not completed for any reason, NeoStem may be subject to a number of risks,
including the following:
|
|
·
|
the
market price of NeoStem Common Stock may decline to the extent that the
relevant current market price previously reflected a market assumption
that the Merger will be completed;
|
|
|
·
|
many
costs related to the Merger, such as legal, accounting and financial
printing fees, must be paid regardless of whether the Merger is completed;
and
|
|
|
·
|
there
may be substantial disruption to the business of NeoStem and distraction
of its workforce and management
team.
|
-38-
The
announcement of the Merger may adversely affect NeoStem and PCT.
In
response to the announcement of the Merger, customers or suppliers of NeoStem
and/or PCT may delay, defer or cancel purchase or other
decisions. Any delay, deferral or cancellation in purchase or other
decisions by customers or suppliers could harm the business of the relevant
company, regardless of whether the Merger is completed. Similarly,
current and prospective NeoStem and/or PCT employees may experience uncertainty
about their future roles with NeoStem or PCT until the Merger is
completed. As a result, the ability of NeoStem and/or PCT to attract
and retain key management, sales, marketing and technical personnel could
suffer. Any such disruption of purchases and/or orders, as well as
any uncertainty regarding professional roles, could harm the business, financial
condition and operating results of the constituent entities, and such setbacks
could carry over into the combined entity.
Any
acquisition exposes a company to additional risks.
Acquisitions
may entail numerous risks for NeoStem, including:
|
|
·
|
difficulties
in assimilating acquired operations, technologies or products, including
the loss of key employees from acquired
businesses;
|
|
|
·
|
diversion
of management’s attention from NeoStem’s core
business;
|
|
|
·
|
risks
of entering markets in which NeoStem has limited or no prior
experience;
|
|
|
·
|
competing
claims for capital resources; and
|
|
|
·
|
NeoStem’s
management team has limited experience in purchasing and integrating new
businesses.
|
NeoStem’s
failure to successfully complete the integration of PCT could have a material
adverse effect on NeoStem’s business, financial condition and operating
results.
Failure
of the Merger to achieve potential benefits could harm the business and
operating results of the combined company.
NeoStem
and PCT expect that the combination of their businesses will result in potential
benefits for the combined company. Achieving these potential benefits
will depend on a number of factors, some of which include:
|
|
·
|
retention
of key management, marketing and technical personnel after the
Merger;
|
|
|
·
|
the
ability of the combined company to increase its customer base and to
increase the sales of products and services;
and
|
|
|
·
|
competitive
conditions in the industry surrounding the collection, processing, and
storage of stem cells.
|
The
failure to achieve anticipated benefits could harm the business, financial
condition and operating results of the combined company.
-39-
NeoStem
will need additional financing to continue operations successfully.
The
historic NeoStem business will require additional capital to fund NeoStem’s
current operating plan for NeoStem’s business, including the development of
NeoStem’s VSEL technology. The PCT business also will require
financing. Cash requirements may vary materially from those now
planned because of expenses relating to marketing, advertising, sales,
distribution, research and development and regulatory affairs, as well as the
costs of maintaining, expanding and protecting NeoStem’s intellectual property
portfolio, including potential litigation costs and
liabilities. Additional financing may not be available when needed or
may not be available on terms acceptable to us. The combined
company's inability to obtain necessary capital or financing to fund these needs
could adversely affect the combined company's business, results of operations
and financial condition.
NeoStem’s
outstanding warrants may negatively affect NeoStem’s ability to raise additional
capital.
As part
of the Merger, NeoStem will be issuing warrants to purchase up to an additional
3,000,000 shares of NeoStem Common Stock. NeoStem already had, at
June 30, 2010, approximately 29.9 million stock options and warrants
outstanding. Holders of NeoStem’s outstanding warrants are given the
opportunity to profit from a rise in the market price of NeoStem Common
Stock. So long as these warrants are outstanding, the terms on which
NeoStem could obtain additional capital may be adversely
affected. The holders of these warrants might be expected to exercise
them at a time when NeoStem would, in all likelihood, be able to obtain any
needed capital by a new offering of securities on terms more favorable than
those provided by these warrants.
If the market for the combined company’s
products and/or technology does not experience significant growth or if the
combined company’s products and/or technology do not achieve broad acceptance,
the combined company’s operations will suffer.
NeoStem
and PCT cannot accurately predict the future growth rate or the size of the
market for the combined company’s products and technology. The
expansion of this market depends on a number of factors, such as:
|
|
·
|
the
cost, performance and reliability of the combined company’s
products/technologies, and the products/technologies offered by
competitors;
|
|
|
·
|
customers’
perceptions regarding the benefits of the combined company’s products and
technologies;
|
|
|
·
|
public
perceptions regarding the use of the combined company’s products and
technologies;
|
|
|
·
|
customers’
satisfaction with the products and technologies;
and
|
|
|
·
|
marketing
efforts and publicity regarding the products and
technologies.
|
If
the combined company is unable to manage growth in its business, its prospects
may be limited and its future results of operations may be adversely
affected.
The
combined company intends to expand its sales and marketing programs, its
manufacturing capacity, and its provision of innovative therapies as needed to
meet future demand. Any significant expansion may strain the combined
company’s managerial, financial and other resources. If the combined
company is unable to manage its growth, its business, operating results and
financial condition could be adversely affected. The combined company
will need to continually improve its operations, financial and other internal
systems to manage its growth effectively, and any failure to do so may lead to
inefficiencies and redundancies, and result in reduced growth prospects and
diminished operational results.
As a
result of the Merger, the equity holders of PCT will own approximately 16.5% of
the NeoStem Common Stock outstanding immediately after the Merger (exclusive of
the warrants to be issued to the PCT equity holders). This represents
dilution of the ownership interests and voting power of the current NeoStem
stockholders.
-40-
The
shares of NeoStem Common Stock issued to PCT and distributed to PCT's equity
holders will be freely tradable in the public market once released from escrow
(approximately 10% one month after Closing, 40% one year after Closing and 50%
two years after Closing). The market price of NeoStem Common Stock
could fall in response to sales of a large number of shares of NeoStem Common
Stock in the market after the release of the shares or in response to the
perception that sales of a large number of shares could occur. In
addition, these sales could create the perception by the public of difficulties
or problems with NeoStem’s products and services. As a result, these
sales also might make it more difficult for NeoStem to sell equity or
equity-related securities in the future at a time and price that its board of
directors deems appropriate.
Safe Harbor for
Forward-Looking Statements
This
Current Report on Form 8-K contains “forward-looking” statements within the
meaning of the Private Securities Litigation Reform Act of
1995. These statements are typically preceded by words such as
“believes,” “expects,” “anticipates,” “intends,” “will,” “may,” “should,” or
similar expressions. These forward-looking statements are subject to
risks and uncertainties that may cause actual future experience and results to
differ materially from those discussed in these forward-looking
statements. Important factors that might cause such a difference
include, but are not limited to, costs related to the Merger; failure of
NeoStem's stockholders to approve the issuance of NeoStem securities in the
Merger; NeoStem's or PCT’s inability to satisfy the conditions of the Merger;
NeoStem's inability to maintain its American Stock Exchange listing; the
inability to integrate NeoStem’s and PCT’s businesses successfully; the need for
outside financing to meet capital requirements; and other events and factors
disclosed previously and from time to time in NeoStem’s filings with the SEC,
including NeoStem’s Annual Report on Form 10-K for the year ended December 31,
2009, as amended (the “10-K”), Quarterly Reports on Form 10-Q filed after such
10-K and, when filed with the SEC, the S-4. NeoStem does not
undertake any obligation to release publicly any revisions to such
forward-looking statements to reflect events or circumstances after the date
hereof or to reflect the occurrence of unanticipated events.
This
Current Report on Form 8-K may be deemed to be solicitation material in respect
of the proposed Merger. The directors and executive officers of each
of NeoStem and PCT may be deemed to be participants in the solicitation of
proxies from the holders of NeoStem Common Stock in respect of the proposed
transaction. Information about the directors and executive officers
of NeoStem is set forth in the NeoStem Form 10-K. Investors may
obtain additional information regarding NeoStem and its directors and executive
officers, and PCT and its Board of Managers and executive officers, in
connection with the proposed Merger by reading the S-4 and the prospectus/joint
proxy statement contained therein, when it becomes available.
-41-
|
Item
9.01.
|
Financial
Statements and Exhibits.
|
The
following financial statements and exhibits are filed with this Current Report
on Form 8-K.
|
(a)
|
Financial
Statements of Businesses Acquired:
|
Progenitor
Cell Therapy, LLC and Subsidiaries Consolidated Financial Statements for the
Years Ended December 31, 2009, 2008 and 2007 and the Six Months Ended June 30,
2010 and 2009 (Unaudited)
|
(b)
|
Pro
Forma Financial Information:
|
Unaudited
Pro Forma Condensed Combined Financial Statements
|
(d)
|
Exhibits:
|
Exhibit
2.1 – Agreement and Plan of Merger, dated as of September 23, 2010, by and
among NeoStem, PCT and Subco.*
Exhibit
23.1 – Consent of EisnerAmper LLP.
Exhibit
99.1 – Press release, dated September 23, 2010.
________________
* The
schedules to this agreement have been omitted from this filing pursuant to Item
601(b)(2) of Regulation S-K. NeoStem will furnish copies of any
schedules to the SEC upon request.
-42-
SIGNATURE
Pursuant to the requirements of the
Securities Exchange Act of 1934, NeoStem has duly caused this Report to be
signed on its behalf by the undersigned hereunto duly authorized.
|
NEOSTEM,
INC.
|
|||
|
By:
|
/s/
Catherine Vaczy
|
||
|
Name: Catherine
M. Vaczy
|
|||
|
Title: Vice
President and General Counsel
|
|||
Date:
September 23, 2010
-43-
PROGENITOR
CELL THERAPY, LLC AND SUBSIDIARIES
CONSOLIDATED
FINANCIAL STATEMENTS
FOR
THE YEARS ENDED DECEMBER 31, 2009, 2008, AND 2007
AND
SIX MONTHS ENDED JUNE 30, 2010 AND 2009 (UNAUDITED)
|
Page
|
||
|
Report
of Independent Registered Accounting Firm
|
1
|
|
|
Consolidated
Balance Sheets
|
2
|
|
|
Consolidated
Statements of Operations
|
3
|
|
|
Consolidated
Statements of Members’ Equity
|
4
|
|
|
Consolidated
Statements of Cash Flow
|
5
|
|
|
Notes
to the Consolidated Financial Statements
|
6 –
17
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors of
Progenitor
Cell Therapy, LLC and Subsidiaries
Allendale,
New Jersey
We have
audited the accompanying consolidated balance sheet of Progenitor Cell Therapy,
LLC and Subsidiaries as of December 31, 2009, 2008 and 2007 and the related
consolidated statements of income, changes in stockholders’ equity,
comprehensive income (loss) and cash flows for each of the three years in the
period ended December 31, 2009. These consolidated financial
statements are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements and financial
statement schedule based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express
no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Progenitor Cell
Therapy, LLC and Subsidiaries as of December 31, 2009, 2008 and 2007 and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2009, in conformity with accounting
principles generally accepted in the United States of America.
EisnerAmper
LLP
Hackensack,
New Jersey
September
17, 2010
-1-
PROGENITOR
CELL THERAPY, LLC
CONSOLIDATED
BALANCE SHEETS
|
June 30,
|
December 31,
|
December 31,
|
December 31,
|
|||||||||||||
|
2010
|
2009
|
2008
|
2007
|
|||||||||||||
|
(unaudited)
|
||||||||||||||||
|
ASSETS
|
||||||||||||||||
|
Current
Assets
|
||||||||||||||||
|
Cash
and cash equivalents
|
$ | 775,848 | $ | 1,127,138 | $ | 1,582,026 | $ | 1,214,035 | ||||||||
|
Accounts
receivable, less allowance for doubtful accounts of $67,255, $67,255,
$67,255 and $67,255, at June 30, 2010 and December 31, 2009,
2008 and 2007, respectively
|
768,882 | 1,534,447 | 1,051,436 | 814,374 | ||||||||||||
|
Prepaid
expenses and other current assets
|
488,099 | 446,824 | 235,248 | 213,045 | ||||||||||||
|
Deferred
project costs
|
3,315,945 | 2,116,118 | 450,329 | 953,434 | ||||||||||||
|
Total
Current Assets
|
5,348,774 | 5,224,527 | 3,319,039 | 3,194,888 | ||||||||||||
|
Property
and equipment, net of accumulated depreciation
|
9,728,815 | 7,519,638 | 6,686,212 | 7,317,976 | ||||||||||||
|
Other
Assets
|
||||||||||||||||
|
Restricted
cash and cash equivalents
|
353,860 | 353,860 | 353,860 | 353,860 | ||||||||||||
|
Other
assets
|
196,090 | 146,090 | 99,646 | 200,449 | ||||||||||||
| $ | 15,627,539 | $ | 13,244,115 | $ | 10,458,757 | $ | 11,067,173 | |||||||||
|
LIABILITIES
AND MEMBERS' EQUITY
|
||||||||||||||||
|
Current
Liabilities
|
||||||||||||||||
|
Current
maturities of long term debt
|
$ | 106,165 | $ | 103,521 | $ | 98,413 | $ | 1,093,128 | ||||||||
|
Borrowings
under line of credit - related party
|
3,400,000 | 1,080,000 | 500,000 | - | ||||||||||||
|
Accounts
payable
|
1,590,295 | 1,032,974 | 559,106 | 480,562 | ||||||||||||
|
Accrued
expenses and other current liabilities
|
336,941 | 672,497 | 309,456 | 302,859 | ||||||||||||
|
Due
to Amorcyte, Inc.
|
500,000 | 500,000 | 500,000 | 500,000 | ||||||||||||
|
Deferred
revenues
|
5,559,327 | 4,295,965 | 1,606,923 | 3,118,433 | ||||||||||||
|
Total
Current Liabilities
|
11,492,728 | 7,684,957 | 3,573,898 | 5,494,982 | ||||||||||||
|
Long-term
debt, net of current maturities
|
2,763,222 | 2,817,172 | 2,920,704 | 3,011,747 | ||||||||||||
|
Deferred
lease liability
|
107,393 | 108,642 | 96,838 | 49,628 | ||||||||||||
|
Total
Liabilities
|
14,363,343 | 10,610,771 | 6,591,440 | 8,556,357 | ||||||||||||
|
Commitments
and Contingencies
|
||||||||||||||||
|
Members'
Equity
|
||||||||||||||||
|
Members'
contributions and other, net
|
13,079,561 | 12,678,399 | 12,104,722 | 9,961,784 | ||||||||||||
|
Accumulated
deficit
|
(11,815,365 | ) | (10,045,055 | ) | (8,237,405 | ) | (7,456,365 | ) | ||||||||
|
Total
Members' Equity
|
1,264,196 | 2,633,344 | 3,867,317 | 2,505,419 | ||||||||||||
| $ | 15,627,539 | $ | 13,244,115 | $ | 10,458,757 | $ | 11,061,776 | |||||||||
See
accompanying notes to consolidated financial statements.
-2-
PROGENITOR
CELL THERAPY, LLC
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE
SIX MONTHS ENDED JUNE 30, 2010 AND JUNE 30, 2009 (UNAUDITED)
AND THE
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
|
Six Months Ended June 30,
|
Year Ended December 31,
|
|||||||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||||||
|
Revenues
|
||||||||||||||||||||
|
Clinical
services
|
$ | 4,271,316 | $ | 4,372,862 | $ | 8,238,159 | $ | 9,741,581 | $ | 6,990,443 | ||||||||||
|
Operating
expenses
|
||||||||||||||||||||
|
Clinical
services
|
2,762,598 | 2,474,681 | 5,479,897 | 6,618,197 | 4,978,891 | |||||||||||||||
|
Selling,
general and administrative expenses
|
2,944,514 | 2,147,255 | 4,369,808 | 3,688,919 | 5,050,646 | |||||||||||||||
|
Total
operating expenses
|
5,707,112 | 4,621,936 | 9,849,705 | 10,307,116 | 10,029,537 | |||||||||||||||
|
Loss
from operations
|
(1,435,796 | ) | (249,074 | ) | (1,611,546 | ) | (565,535 | ) | (3,039,094 | ) | ||||||||||
|
Other
income (expense)
|
||||||||||||||||||||
|
Interest
income
|
1,335 | 3,048 | 5,502 | 16,487 | 142,987 | |||||||||||||||
|
Interest
expense
|
(335,849 | ) | (76,694 | ) | (280,220 | ) | (247,663 | ) | (56,426 | ) | ||||||||||
|
Other
income (expense)
|
- | (460 | ) | (460 | ) | 15,671 | (2,690 | ) | ||||||||||||
|
Gain
on asset disposal
|
- | - | 79,074 | - | - | |||||||||||||||
|
Net
loss
|
$ | (1,770,310 | ) | $ | (323,180 | ) | $ | (1,807,650 | ) | $ | (781,040 | ) | $ | (2,955,223 | ) | |||||
See
accompanying notes to consolidated financial statements.
-3-
PROGENITOR
CELL THERAPY, LLC
CONSOLIDATED
STATEMENT OF MEMBERS' EQUITY
FOR THE
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007
AND SIX
MONTHS ENDED JUNE 30, 2010 (UNAUDITED)
|
Number of
|
Contributions
|
Accumulated
|
||||||||||||||
|
Units
|
and other, net
|
Deficit
|
Total
|
|||||||||||||
|
Balance
at January 1, 2007
|
6,820,843 | $ | 10,211,968 | $ | (4,501,142 | ) | $ | 5,710,826 | ||||||||
|
Distributions
to Members
|
- | (257,424 | ) | - | (257,424 | ) | ||||||||||
|
Stock-based
compensation
|
- | 7,240 | - | 7,240 | ||||||||||||
|
Net
loss for the year ended December 31, 2007
|
- | - | (2,955,223 | ) | (2,955,223 | ) | ||||||||||
|
Balance
at December 31, 2007
|
6,820,843 | 9,961,784 | (7,456,365 | ) | 2,505,419 | |||||||||||
|
Contributions
from members
|
322,458 | 2,125,000 | - | 2,125,000 | ||||||||||||
|
Stock-based
Compensation
|
- | 17,938 | - | 17,938 | ||||||||||||
|
Net
loss for the year ended December 31, 2008
|
- | - | (781,040 | ) | (781,040 | ) | ||||||||||
|
Balance
at December 31, 2008
|
7,143,301 | 12,104,722 | (8,237,405 | ) | 3,867,317 | |||||||||||
|
Contributions
from members
|
42,719 | 229,444 | - | 229,444 | ||||||||||||
|
Stock-based
Compensation
|
- | 17,938 | - | 17,938 | ||||||||||||
|
Beneficial
conversion feature of issued warrant
|
- | 326,295 | - | 326,295 | ||||||||||||
|
Net
loss for the year ended December 31, 2009
|
- | - | (1,807,650 | ) | (1,807,650 | ) | ||||||||||
|
Balance
at December 31, 2009
|
7,186,020 | 12,678,399 | (10,045,055 | ) | 2,633,344 | |||||||||||
|
Stock-based
Compensation (unaudited)
|
- | 8,970 | - | 8,970 | ||||||||||||
|
Beneficial
conversion feature of issued warrant (unaudited)
|
- | 392,192 | - | 392,192 | ||||||||||||
|
Net
loss for the six months ended June 30, 2010 (unaudited)
|
- | - | (1,770,310 | ) | (1,770,310 | ) | ||||||||||
|
Balance
at June 30, 2010 (unaudited)
|
7,186,020 | $ | 13,079,561 | $ | (11,815,365 | ) | $ | 1,264,196 | ||||||||
See
accompanying notes to consolidated financial statements.
-4-
PROGENITOR
CELL THERAPY, LLC
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR THE
YEARS ENDED DECEMBER 31, 2009, 2008 AND 2007 AND
THE SIX
MONTHS ENDED JUNE 30, 2010 AND 2009 (UNAUDITED)
|
Six
Months Ended June 30,
|
Year
Ended December 31,
|
|||||||||||||||||||
|
2010
|
2009
|
2009
|
2008
|
2007
|
||||||||||||||||
|
(unaudited)
|
(unaudited)
|
|||||||||||||||||||
|
Cash
Flows from Operating Activities
|
||||||||||||||||||||
|
Net
loss
|
$ | (1,770,310 | ) | $ | (323,180 | ) | $ | (1,807,650 | ) | $ | (781,040 | ) | $ | (2,955,223 | ) | |||||
|
Adjustments
to reconcile net loss to net cash provided by (used in) operating
activities:
|
||||||||||||||||||||
|
Depreciation
and amortization
|
475,016 | 430,124 | 848,979 | 882,832 | 730,989 | |||||||||||||||
|
Provision
for doubtful accounts
|
- | 125,000 | - | - | - | |||||||||||||||
|
Non-cash
compensation for services
|
8,970 | 8,969 | 17,938 | 17,938 | 7,240 | |||||||||||||||
|
Amortization
of deferred financing costs
|
206,081 | - | 120,214 | - | - | |||||||||||||||
|
Deferred
lease liability
|
(1,249 | ) | 13,054 | 11,805 | 47,210 | 42,528 | ||||||||||||||
|
Net
gain from sale of fixed assets
|
- | - | (79,074 | ) | - | - | ||||||||||||||
|
(Increase)
decrease in:
|
||||||||||||||||||||
|
Accounts
receivable
|
765,565 | 56,072 | (483,011 | ) | (237,062 | ) | 80,105 | |||||||||||||
|
Prepaid
expenses and other current assets
|
144,837 | 131,462 | (5,495 | ) | (22,203 | ) | 94,297 | |||||||||||||
|
Deferred
project costs
|
(1,199,827 | ) | (782,032 | ) | (1,665,789 | ) | 503,105 | (533,088 | ) | |||||||||||
|
Increase
(decrease) in:
|
||||||||||||||||||||
|
Accounts
payable
|
557,321 | 44,382 | 473,867 | 78,544 | (288,692 | ) | ||||||||||||||
|
Accrued
expenses and other current liabilities
|
(335,556 | ) | 39,426 | 363,041 | 6,597 | (207,437 | ) | |||||||||||||
|
Deferred
revenue
|
1,263,362 | 669,957 | 2,689,042 | (1,511,510 | ) | 1,113,482 | ||||||||||||||
|
Net
Cash Provided by (Used in) Operating Activities
|
114,210 | 413,234 | 483,867 | (1,015,589 | ) | (1,915,799 | ) | |||||||||||||
|
Cash
Flows from Investing Activities
|
||||||||||||||||||||
|
Payments
for purchases of property and equipment
|
(2,684,194 | ) | (298,126 | ) | (1,753,331 | ) | (251,068 | ) | (5,457,998 | ) | ||||||||||
|
Restricted
cash and cash equivalents
|
- | - | - | - | 120,775 | |||||||||||||||
|
Proceeds
from sale of equipment
|
- | - | 150,000 | - | - | |||||||||||||||
|
Change
in other assets
|
(50,000 | ) | (13,207 | ) | (46,444 | ) | 100,803 | (69,991 | ) | |||||||||||
|
Net
Cash Used in Investing Activities
|
(2,734,194 | ) | (311,333 | ) | (1,649,775 | ) | (150,265 | ) | (5,407,214 | ) | ||||||||||
|
Cash
Flows from Financing Activities
|
||||||||||||||||||||
|
Proceeds
from notes payable
|
2,320,000 | - | 1,080,000 | 1,500,000 | 4,120,000 | |||||||||||||||
|
Principal
payments of notes payable
|
(51,306 | ) | (540,859 | ) | (598,424 | ) | (2,085,758 | ) | (15,128 | ) | ||||||||||
|
Principal
payments on capital lease obligations
|
- | - | - | (5,397 | ) | (8,968 | ) | |||||||||||||
|
Distributions
to members
|
- | - | - | - | (257,424 | ) | ||||||||||||||
|
Contributions
from members
|
- | 229,444 | 229,444 | 2,125,000 | - | |||||||||||||||
|
Net
Cash Provided by (Used in) Financing Activities
|
2,268,694 | (311,415 | ) | 711,020 | 1,533,845 | 3,838,480 | ||||||||||||||
|
Net
change in cash and cash equivalents
|
(351,290 | ) | (209,514 | ) | (454,888 | ) | 367,991 | (3,484,533 | ) | |||||||||||
|
Cash
and cash equivalents - beginning of period
|
1,127,138 | 1,582,026 | 1,582,026 | 1,214,035 | 4,698,568 | |||||||||||||||
|
Cash
and cash equivalents - ending of period
|
$ | 775,848 | $ | 1,372,512 | $ | 1,127,138 | $ | 1,582,026 | $ | 1,214,035 | ||||||||||
Supplementary
Disclosures of Cash Flow Information
|
Cash
paid during the period for interest
|
$ | 129,768 | $ | 76,694 | $ | 160,006 | $ | 246,849 | $ | 52,000 | ||||||||||
|
Beneficial
conversion feature of warrant issuance
|
$ | 392,192 | $ | - | $ | 326,295 | $ | - | $ | - |
See
accompanying notes to consolidated financial statements.
-5-
PROGENITOR
CELL THERAPY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - NATURE OF OPERATIONS AND
LIQUIDITY
Nature of
Operations
Progenitor
Cell Therapy, LLC (“PCT” or the “Company”) was originally organized as a New
Jersey limited liability company. The Company was formed on
December 16, 1997 and began operations on February 27, 1999 pursuant
to an operating agreement (the “Operating Agreement”) entered into by the
members (the “Members”). Effective August 31, 2004, PCT was
merged into Progenitor Cell Therapy, LLC, a Delaware limited liability
company. Members are not personally liable for any debts or losses of
PCT in excess of the Members’ capital contributions. PCT is engaged
in a wide range of services in the stem cell therapy market for the treatment of
human disease. Substantially all of the Company’s operations are in
New Jersey and California.
DomaniCell,
LLC (“DomaniCell”) is a Delaware limited liability company and is wholly owned
by its sole member, PCT. DomaniCell was formed on May 10, 2005
and began its operations thereafter. DomaniCell is engaged in the
collection and storage of stem cells derived from umbilical cord blood units for
the treatment of human disease.
PCT
Allendale, LLC (“Allendale”) is a New Jersey limited liability company and is
wholly owned by its sole member, PCT. Allendale was formed on August
22, 2007 and is the owner of the Company’s building in Allendale, New
Jersey.
Liquidity
The
Company has experienced net losses in the past and has limited capital resources
to fund its operations. An affiliated company of our CEO has provided
short term financing as needed. The Company believes there is
adequate liquidity at June 30, 2010 combined with projected operating results to
fund future operations; however, the Company operates in a competitive industry
and should projected future operations be negatively impacted for any reason,
future operations would need to be scaled back or discontinued.
NOTE
2 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Basis of
Presentation
The
accompanying interim consolidated financial statements of the Company as of June
30, 2010 and for the six months ended June 30, 2010 and 2009 are unaudited, but
in the opinion of management, reflect all adjustments, consisting of normal,
recurring adjustments, necessary for a fair presentation of the results for the
interim period. Accordingly, they do not include all information and notes
required by generally accepted accounting principles for complete financial
statements. The results of operations for interim periods are not
necessarily indicative of results to be obtained for a full fiscal
year.
Principles of
Consolidation
The
consolidated financial statements of the Company include the accounts of PCT,
DomaniCell, Allendale; all intercompany balances and transactions have been
eliminated in consolidation.
Revenue
Recognition
The
Company enters into contracts with corporations, hospitals, private physicians,
physicians’ practices and medical centers for the processing of human cells in
patient specimens. The cell processing involves multiple related
sequential procedures. The Company recognizes revenue from cell
processing of patient specimens as a multiple element arrangement in accordance
with Codification Topic 605: “Revenue Recognition.” In accordance with Topic
605, the Company recognizes revenue when there is persuasive evidence of an
arrangement, title and risk of loss have passed, product is shipped or the
services have been rendered, the sales price is fixed or determinable and
collection of the related receivable is reasonably assured.
Thus,
revenue resulting from the processing of a patient’s specimen is recognized upon
completion of the processing. If revenue is deferred because such
processing is not complete, the associated costs, if material, are also deferred
and are classified as deferred costs on the accompanying Consolidated Balance
Sheets. Milestone contract billings in excess of revenue recognized
are included in deferred revenue on the balance sheet.
-6-
PROGENITOR
CELL THERAPY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Revenue Recognition
(continued)
The
Company also provides a cell storage service, for which a separate defined fee
is charged. Revenue for cell storage services is deferred and
recognized ratably over the storage period. In certain instances, the
Company will charge a customer a single fee, which will include cell processing
and storage. In these situations, the fair value fee of the storage
is separated from the total fee, and is deferred and recognized pro rata over
the cell storage period.
The
Company has adopted the requirements of ASC Codification Topic 605: “Revenue
Recognition,” for recognizing revenue on reimbursed program
costs. This pronouncement allows the Company to record its
contractual expense reimbursements as a component of its revenue on a gross
basis, since it is the primary obligor of the reimbursable costs, has discretion
over the supplier choice and bears the underlying credit risk. The
Company will reflect the expense reimbursements received as revenue and the
related expenses as a contra revenue account.
Interest
income is recognized as earned.
Accounts Receivable and
Allowance for Doubtful Accounts
The
Company extends credit to certain customers, primarily with terms up to 30
days. Bad debts are provided on the allowance method based on
management’s evaluation of outstanding accounts receivable based on the length
of time the receivables are outstanding, the current business environment and
historical experience. Accounts are written off when they are deemed
uncollectible. The Company does not require collateral from its
customers.
Property and
Equipment
Laboratory
and office equipment, computers, building and improvements, and furniture and
fixtures are stated at cost and are depreciated on a straight-line basis over
their estimated useful lives. Leasehold improvements are stated at
cost and are amortized on a straight-line basis over the life of the lease or of
the improvement, whichever is shorter.
Expenditures
for maintenance and repairs that do not materially extend the useful lives of
the assets are charged to expense as incurred. The cost and
accumulated depreciation of assets retired or sold are removed from the
respective accounts and any gain or loss is recognized in
operations.
Cash and Cash
Equivalents
The
Company considers all highly liquid investments that have maturities of three
months or less, when acquired, to be cash equivalents.
Restricted Cash and Cash
Equivalents
Restricted
cash and cash equivalents of $353,860 at June 30, 2010, and December 31, 2009,
2008 and 2007 is related to amounts held in escrow as required under the
mortgage agreement which is described in Note 4.
Deferred
Rent
The
Company recognizes rental expense for leases with scheduled rent increases on a
straight-line basis over the life of the lease. The Company records a
deferred rent liability to account for the difference between the actual
payments and the straight-line expense, which will reverse in future years when
the actual payments will exceed the straight-line expense.
Income
Taxes
PCT,
Allendale and DomaniCell are organized as limited liability companies, which are
treated as partnerships for income tax purposes. Accordingly, there
is no provision for income taxes in the accompanying financial
statements. Individual owners have the responsibility to include
their share of taxable income or to deduct their share of the Company’s losses
in their own income tax return.
-7-
PROGENITOR
CELL THERAPY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Income Taxes
(continued)
On July
1, 2007, the Financial Accounting Standards Board (“FASB”) issued ASC 740-10,
“Income Taxes” (“ASC 740-10”). ASC 740-10 provides recognition
criteria and a related measurement model for uncertain tax positions taken or
expected to be taken in income tax returns. ASC 740-10 requires that
a position taken or expected to be taken in a tax return be recognized in the
financial statements when it is more likely than not that the position would be
sustained upon examination by tax authorities. Tax positions that
meet the more likely than not threshold are then measured using a probability
weighted approach recognizing the largest amount of tax benefit that is greater
than 50% likely of being realized upon ultimate settlement. It also
provides guidance on derecognition, measurement, and classification of amounts
relating to uncertain tax positions, accounting for and disclosure of interest
and penalties, accounting in interim periods, disclosures and transition
relating to the adoption of the new accounting standard. The Company
adopted Topic 7401-0 on January 1, 2009. The adoption of Topic 740-10
did not have a material impact on the Company’s financial position and results
of operation.
Estimates
The
preparation of financial statements in accordance with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Significant estimates include
useful lives of fixed assets, estimates used to test asset impairments, deferred
project costs, collectibility of accounts receivable and valuation of the
Company’s equity-based instruments. Actual results could differ from
those estimates.
Equity-Based
Compensation
The
Company follows ASC Codification Topic 718: “Compensation – Stock Compensation,”
which requires that compensation cost relating to share based payment awards
made to employees and directors be recognized in the financial
statements. The cost for awards issued is measured at the grant date
based on the calculated fair value of the award. The value of the
portion of the award that is ultimately expected to vest is recognized over the
requisite service periods (generally the vesting period of the equity award) in
the accompanying Consolidated Statements of Operations.
Advertising
The
Company expenses advertising costs as they are incurred. Advertising
expenses for the six months ended June 30, 2010 and 2009 and the years ended
December 31, 2009, 2008 and 2007 were approximately $63,000, $68,000, $86,000,
$152,000 and $284,000, respectively.
Fair Value
Measurement
The
Company’s financial instruments include cash and cash equivalents, accounts
receivable from customers, accounts payable, and accruals which are short-term
in nature. The Company believes the carrying amounts of these financial
instruments reasonably approximates their fair value. We believe the
carrying value of our notes payable approximates their fair value given the
interest rates charged and other terms of the instruments.
The
Company adopted ASC 820 Fair
Value Measurements (“ASC 820”) in January 2009. ASC 820
defines fair value, establishes a common framework for measuring fair value
under U.S. GAAP, and expands disclosures about fair value measurements for
assets and liabilities. ASC 820 does not require additional assets or
liabilities to be accounted for at fair value beyond that already required under
other U.S. GAAP accounting standards.
-8-
PROGENITOR
CELL THERAPY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
2 - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
New Accounting
Pronouncements
In April
2010, the FASB
issued ACS Topic 605,
Milestone Method of Revenue Recognition. FASB Topic 605 provides guidance
on defining a milestone and determining when it may be appropriate to apply the
milestone method of revenue recognition for research or development
transactions. Consideration that is contingent on achievement of a milestone in
its entirety may be recognized as revenue in the period in which the milestone
is achieved only if the milestone is judged to meet certain criteria to be
considered substantive. Milestones should be considered substantive in their
entirety and may not be bifurcated. An arrangement may contain both substantive
and nonsubstantive milestones, and each milestone should be evaluated
individually to determine if it is substantive. FASB Topic 605 is
effective on a prospective basis for milestones achieved in fiscal years, and
interim periods within those years, beginning on or after June 15, 2010. The
adoption of FASB Topic 605 is not expected to have a material impact on the
Company’s financial position and results of operations.
In June
2009, the FASB issued FASB ASC Topic 105, Generally Accepted Accounting
Principles, which establishes the FASB Accounting Standards Codification
as the sole source of authoritative generally accepted accounting
principles. Pursuant to the provisions of FASB ASC 105, the Company
has updated references to GAAP in its financial statements issued for the period
ended December 31, 2009. The adoption of FASB ASC Topic did not
impact the Company’s financial position or results of
operations.
NOTE
3 - PROPERTY AND
EQUIPMENT
Property and equipment consists
of the following at:
|
Estimated
Useful Lives
|
June 30,
2010
|
December
31, 2009
|
December
31, 2008
|
December
31, 2007
|
||||||||||||||
|
Computer
equipment
|
3
years
|
$ | 325,110 | $ | 292,661 | $ | 259,034 | $ | 244,559 | |||||||||
|
Laboratory
and office equipment*
|
7
years
|
3,209,289 | 2,938,007 | 2,667,467 | 2,497,311 | |||||||||||||
|
Furniture
and fixtures
|
12
years
|
181,789 | 179,311 | 174,279 | 173,007 | |||||||||||||
|
Leasehold
improvements
|
Life
of lease
|
2,647,055 | 2,632,526 | 2,450,180 | 2,429,230 | |||||||||||||
|
Building
and improvements
|
25
years
|
7,862,673 | 5,503,038 | 4,332,585 | 4,298,280 | |||||||||||||
| 14,225,916 | 11,545,543 | 9,883,545 | 9,642,387 | |||||||||||||||
|
Less,
Accumulated depreciation
and
amortization
|
(4,497,101 | ) | (4,025,905 | ) | (3,197,333 | ) | (2,324,411 | ) | ||||||||||
| $ | 9,728,815 | $ | 7,519,638 | $ | 6,686,212 | $ | 7,317,976 | |||||||||||
Depreciation
and amortization expense for the six months ended June 30, 2010 and 2009, and
the years ended December 31, 2009, 2008 and 2007 was approximately
$475,000, $430,000, $849,000, $883,000, and $731,000,
respectively.
*Net of
approximately $823,000 as of June 30, 2010, December 31, 2009 and 2008, and
$813,000 as of December 31, 2007, with respect of grant received (see Note 10 – Grant
Agreement).
NOTE
4 - LONG-TERM
DEBT
Mortgage
On
October 31, 2007, the Company entered into a note to borrow $3,120,000 (the
“Note”) in connection with its $3,818,500 purchase of condominium units of an
existing building in Allendale, New Jersey (the “Property”) that the Company
intends to use as a laboratory and stem cell processing
facility.
-9-
PROGENITOR
CELL THERAPY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4 - LONG-TERM DEBT
(continued)
Mortgage
(continued)
The Note
is payable in 239 consecutive monthly payments of principal and interest, based
on a 20 year amortization schedule; and one final payment of all outstanding
principal plus accrued interest then due. The current monthly
installment is $20,766, which includes interest at an initial rate of 5.00%; the
interest rate and monthly installments payments are subject to adjustment on
October 1, 2017. On that date, upon prior written notice, the lender
shall have the option to declare the entire outstanding principal balance,
together with all outstanding interest, due and payable in full. The
Note is secured by substantially all of the assets of the Company, including a
first mortgage on the Property and assignment of an amount approximately equal
to eighteen months debt service held in escrow (see Note 2 – Restricted Cash and
Cash Equivalents). The Note matures on October 1, 2027 if not called by the
lender on October 1, 2017. The Note is subject to certain debt service coverage
and total debt to tangible net worth financial covenant ratios. The Company was
not in compliance with such covenants through June 30, 2010, and has obtained a
covenant waiver letter from the lender for all periods through June 30,
2010. The outstanding balance was approximately $2,869,000
at June 30, 2010 and $2,921,000, $3,019,000 and $3,105,000 at December 31, 2009,
2008 and 2007, respectively.
Northern New Jersey Cancer
Associates
On March
14, 2008 the Company arranged for a $2,000,000 line of credit with Northern New
Jersey Cancer Associates (“NNJCA”). The Company’s Chief Executive
Officer is also Co-Managing Partner of NNJCA. The term of the
agreement is one year and interest on amounts drawn down from the line of credit
will accrue at the prime rate plus 2% and will be payable
monthly. NNJCA may elect to receive payment of the outstanding
balance in cash or in membership interest of PCT. For calculating the
membership interest that NNJCA will receive if it so chooses, the Company will
be valued at the valuation offered to investors with the Company’s next round of
equity financing. A one-time origination fee of $20,000 was paid in
April 2008 for the line-of-credit.
On March
26, 2008, the Company borrowed $1,500,000 against the NNJCA line of credit and
used $1,000,000 of the proceeds to repay in full the StemCells, Inc. loan
borrowed in December 2007. The balance remaining at December 31, 2008
was $500,000. As of April 14, 2009, the entire amount of the loan was
re-paid.
On
September 14, 2009, the Company entered into a line of credit and security
agreement with NNJCA for $3,000,000. The credit line has an interest
rate of 5.5% accruing on the first $2,000,000 and 6% thereafter. The
advance and accrued interest is due and payable on June 30, 2010. The
Note is secured by substantially all of the assets of the Company. In
conjunction with this credit line warrant to purchase shares were issued by the
company to NNJCA. The holder is entitled to purchase, at its option,
up to 73,052 Shares of Limited Liability Company Interests at an exercise price
of $6.16 per Share. The warrant is for seven years and expires
September 14, 2016. The warrant is accounted for under the
Black-Scholes pricing model. This resulted in deferred financing cost
of approximately $326,000, which will be amortized to interest expense over the
tem of the loan. During 2009, approximately $120,000 was amortized;
in the six months ended June 30, 2010, approximately $206,000 was
amortized.
On June 30, 2010, the above agreement
with NNJCA was amended. The revised credit line is $3,400,000; the
entire amount with accrued interest is due and payable on June 30,
2011. The remaining $400,000 of availability under the credit line,
which was drawn on June 30, 2010, is subject to an interest rate of
6%. The amended agreement entitled the holder to purchase at its
option, up to 85,000 units of Limited Liability Company interest at an exercise
price of $4.00 per Unit. The warrant is accounted for under the
Black-Scholes pricing model. This resulted in deferred financing cost
of approximately $392,000, which will be amortized to interest expense over the
term of the loan.
Interest
expense related to the NNJCA loan for the six months ended June 30, 2010 and
2009, and the year ended December 31, 2009 and 2008 was approximately $57,400,
$8,000, $12,500, and $76,900, respectively.
-10-
PROGENITOR
CELL THERAPY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
4 - LONG-TERM DEBT
(continued)
Other
Loans
On
December 3, 2007, the Company borrowed $1,000,000 from StemCells, Inc, one of
its customers. The note carries an interest rate of 5.00% and was due
in full by the maturity date of July 30, 2008. The Company repaid the
entire amount of the loan on April 7, 2008.
Future
maturities of long-term debt, including the borrowings under the NNJCA facility,
at June 30, 2010 are:
|
12 Months Ended
June 30,
|
June 30, 2010
|
|||
|
2011
|
$ | 3,506,165 | ||
|
2012
|
111,295 | |||
|
2013
|
117,449 | |||
|
2014
|
123,543 | |||
|
2015
|
129,954 | |||
|
Thereafter
|
2,280,981 | |||
| 6,269,387 | ||||
|
Less:
current maturities
|
3,506,165 | |||
|
Long-term
portion
|
$ | 2,763,222 | ||
NOTE
5 - MEMBERS’ EQUITY
In
October, 1998, the founding Members entered into a Formation Agreement and
contributed a total of $82,564. Pursuant to the Operating Agreement
(see Note 1), as amended
on August 4, 1999, each Member is required to make an initial capital
contribution in exchange for a percentage ownership interest in the Company
(“Membership Interest”) and to make future contributions as determined by the
Members. New Members may be admitted to the Company, subject to
approval of the Company’s Board of Managers, upon execution of the Operating
Agreement and payment of a contribution determined by the Board of
Managers. Membership interests entitle each Member to the Member’s
share of the Company’s net profits, net losses and the right to receive
distributions of the Company’s assets in the event of liquidation and to vote,
as defined. There are 10,000,000 units authorized, and 7,186,020,
7,186,020, 7,143,301, and 6,820,843 are issued and outstanding at June 30, 2010
and December 31, 2009, 2008 and 2007, respectively.
On April
30, 2009, with the receipt of $229,444, the Company closed out Private Placement
#4 (the “Offering”). In connection with the offering, the Company
sold a total of 365,177 units for gross proceeds of $2,354,444 from 2008 to
2009. The Company received $2,125,000 during the fourth quarter of
2008.
NOTE
6 - COMMITMENTS AND
CONTINGENCIES
Operating
Leases
On
April 1, 1999, the Company entered into an operating lease with Hackensack
University Medical Center (“HUMC”), a member – see Note 7, for stem cell
laboratory and office space at HUMC (the “HUMC Lease”). The HUMC
Lease has a term of 10 years with an option, by the Company, for renewal for an
additional five-year period. The HUMC Lease provides for an
escalation of base rent on the fifth anniversary date and for additional charges
for operating expenses and real estate taxes (the “Additional
Charges”). Upon expiration of the 10 year term, the Company began
renewing the lease on a month-to-month basis. Rent expense for the
six months ended June 30, 2010 and 2009, and the years ended December 31, 2009,
2008 and 2007 was approximately $107,000, $110,000, $110,000,
$110,000 and $50,000, respectively.
In
October 2004, PCT entered into a two-year lease for laboratory space in the
Jurist Institute in Hackensack, New Jersey (the “Jurist Lease”). The
lease provides for monthly base rent which includes a provision for certain
utilities. The lease has been extended several times, most recently
through December 2010 at a monthly base rent of $3,174.
-11-
PROGENITOR
CELL THERAPY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6 - COMMITMENTS AND
CONTINGENCIES (continued)
Operating Leases
(continued)
In
September 2005, PCT entered into a one-year lease directly with Vanni
Business Park, LLC, the landlord for the Mountain View, California laboratory
space (the “Vanni Lease”), leasing the entire building. A portion of
this space was previously occupied by PCT under the “Jurist Lease”, which is
described above. This new lease commenced July 1, 2006, with a
monthly base rent of $26,275. In July 2006, PCT entered into an
agreement to amend this lease and extended the term through June 30, 2012,
for an initial monthly base rent of $33,782, with yearly escalations
thereafter.
In
February 2006, PCT entered into a five-year lease agreement for its new
office headquarters location in Hackensack, New Jersey (the “Court Plaza
Lease”). The Court Plaza Lease term commenced April 1, 2006 with
a base rent of $77,500 per annum, subject to a real estate tax and operating
expense escalation adjustment to be determined annually. The lease
included two months of free rent that is being expensed ratably over the life of
the lease.
In June
2010, PCT sublet the above mentioned headquarters office space in Hackensack,
New Jersey to Springstead & Maurice, LLC for the remaining term of the Court
Plaza lease. The sublease is for approximately $3,500 per
month.
For the
six months ended June 30, 2010 and 2009, and the years ended December 31, 2009,
2008 and 2007, rent expense under all operating leases was approximately
$479,000, $454,000, $715,000, $728,000 and $696,000, respectively. As
of June 30, 2010 and December 31, 2009, 2008 and 2007 the total rent expense
recognized in excess of scheduled rent payments, referred to as “deferred lease
liability”, totaled approximately $107,000, $109,000, $97,000 and $49,000,
respectively.
Future
minimum rental payments under the operating leases noted above are
approximately:
|
12
months Ended
June
30,
|
Amount
|
|||
|
2011
|
$ | 604,000 | ||
|
2012
|
278,000 | |||
| $ | 882,000 | |||
Capital
Leases
The
Company leases certain equipment under various non-cancelable capital lease
agreements (the “Capital Leases”). The Capital Leases are for periods
ranging from two to four years, after which the Company: (i) either has the
option or is required to purchase the equipment at defined monthly amounts,
(ii) may extend the lease upon agreed-upon terms at defined monthly
amounts, or (iii) is required to return the equipment as per the respective
lease agreement. Leased equipment included as a component of fixed
assets at June 30, 2010 and December 31, 2009, 2008 and 2007 was $88,000 at all
dates. Related accumulated depreciation was $88,000,
$88,000, $87,000 and $82,000 for the same dates. The capital leases
were paid in full in 2009.
Funding Obligation -
Amorcyte
On
May 19, 2006, the Company entered into a line of credit agreement with
Amorcyte Inc. (“Amorcyte”), an entity which was spun out of the Compaony in
2006, whereby PCT agreed to loan Amorcyte up to $500,000 at an annual interest
rate of 5%. The line of credit agreement was a condition to Amorcyte
closing the Series A Preferred Stock Financing rounds completed during 2006, and
therefore could be required to be funded by the Company at the discretion of
Amorcyte. The Company did not loan any amount to Amorcyte under this
agreement through June 30, 2010; however, the maximum obligation of $500,000 was
recorded as a liability.
The line
of credit agreement expires on the earlier of (i) the date on which the
Company declares the outstanding principal and accrued interest due and payable
based on an event of default as defined within the agreement, or (ii) the
date of closing of the first debt or equity financing of Amorcyte following the
initial borrowing of the principal. These events have not occurred to
date.
-12-
PROGENITOR
CELL THERAPY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
6 - COMMITMENTS AND CONTINGENCIES
(continued)
Litigation
The
Company may be subject to legal proceedings, claims and litigation arising in
the ordinary course of business, including one case of alleged breach of
employment contract with a former employee. In 2007, the Company paid
approximately $70,000 of severance pay plus interest in connection with this
case; this amount was recorded as an accrued expense in the Company's 2006
financial statements and was paid during 2007. In February 2009, the
parties have reached a settlement to resolve all claims under which the former
employee paid the Company $54,000 to purchase 0.23% of PCT's fully diluted
equity.
NOTE
7 - RELATED PARTY
TRANSACTIONS
Hackensack University
Medical Center – Services Agreements
In
connection with the Company’s LLC agreement, HUMC is entitled to a seat on the
Company’s Board of Managers as long as it remains a member. On
February 27, 1999, the Company and HUMC, a Member, entered into two
services agreements
|
|
(i)
|
A
Stem Cell Services Agreement, under which HUMC agreed to use the Company
as the sole provider of stem cell services as long as HUMC remains a
Member. During the term of the Stem Cell Services Agreement,
the Company will provide such
services, and related supply and testing expenses, at its cost, which will
be paid monthly by HUMC. In the event HUMC is able to obtain
stem cell services below the Company’s cost, the Company will have the
right to meet the lower price. Either party may terminate the
Stem Cell Services Agreement upon written notice of breach by the other
party that is not cured within 30 days. For the six months
ended June 30, 2010 and 2009, and the years ended December 31, 2009, 2008
and 2007, revenue recognized under the Stem Cell Services Agreement
amounted to approximately $1,078,000, $1,009,000, $2,003,000,
$2,220,000 and $1,970,000, respectively. At June 30,
2010 and December 31, 2009, 2008 and 2007
approximately $129,000, $94,000, $156,000 and $267,000
respectively, related to the Stem Cell Services Agreement were recorded as
accounts receivable.
|
|
|
|
(ii)
|
A
Support Services Agreement, under which HUMC will be the exclusive
provider of support services, as defined, for the Company’s stem cell
laboratory at HUMC as long as HUMC remains a Member. During the
term of the Support Services Agreement, HUMC will provide services to the
Company at its cost, payable monthly. Either party may
terminate the Support Services Agreement without cause upon 90 days’
written notice or upon written notice of breach by the other party that is
not cured within 30 days. For the six months ended June 30,
2010 and 2009, and the years ended December 31, 2009, 2008 and 2007,
expense recognized under the Support Services Agreement amounted to
approximately $18,500, $39,000, $76,900, $93,500 and $48,100,
respectively. At June 30, 2010 and
December 31, 2009, 2008 and 2007, approximately $13,600,
$17,400, $6,900 and $8,800, respectively, related to the Support Services
Agreement were recorded as accounts
payable.
|
Nexell of California,
Inc.
On
August 4, 1999, the Company and Nexell, a Member, entered into a Supply
Agreement (the “Nexell Supply Agreement”) under which the Company will purchase,
exclusively from Nexell, all supplies, as defined, required by the Company for
use in its stem cell processing and storage business, subject to certain
exceptions, as defined. The Nexell Supply Agreement will continue as
long as Nexell remains a Member and may be extended upon mutual written
agreement of the parties. Either party may terminate the Nexell
Supply Agreement upon written notice of breach by the other party that is not
cured within ten days. During 2002, the parties agreed that Nexell’s
obligations under this agreement will be fulfilled by Baxter International,
Inc., which assumed the obligations of Nexell. For the six months
ended June 30, 2010 and 2009, and the years ended December 31, 2009, 2008 and
2007, expense recognized under the Nexell Supply Agreement amounted to
approximately $106,400, $64,000, $153,000, $5,100
and $12,200, respectively. At June 30, 2010 and December 31, 2009,
2008 and 2007, approximately $25,000, $33,100, $300 and $700,
respectively, related to the Nexell Supply Agreement were recorded as accounts
payable.
-13-
PROGENITOR
CELL THERAPY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 - RELATED PARTY
TRANSACTIONS (continued)
Amorcyte,
Inc.
On
May 31, 2005, the Company entered into a Cell Processing Agreement with
Amorcyte (the “Amorcyte Agreement”) whereby Amorcyte engaged PCT to be its
exclusive provider of cell processing procedures and related services at rates
specified within the agreement that include a monthly fee during the clinical
trial period for oversight services. The term of the Amorcyte
Agreement extends beyond the initial clinical period (defined within the
agreement as of one year from initiation of clinical trials), after which time
the service rates can be renegotiated.
In the
event of commercialization of any product of Amorcyte, PCT and Amorcyte shall
mutually agree upon charges for services related to such
commercialization. In the event that the parties are unable to agree
on such charges, then Amorcyte shall pay to PCT an amount equal to 125% of PCT’s
direct and indirect costs in connection with the services
provided. Also pursuant to the Amorcyte Agreement, PCT paid $200,000
to Amorcyte in 2006 as consideration for exclusivity granted to PCT under the
Amorcyte Agreement. This amount is being amortized over the minimum
estimated benefit period of the exclusivity, which is the completion of
Amorcyte’s Phase I clinical trials. For the six months ended June 30,
2010 and 2009, and the years ended December 31, 2009, 2008 and 2007, $0, $0, $0,
$50,000 and $95,000, respectively, of the consideration was recorded as
expense. The intangible asset was fully amortized as of December 31,
2008.
For the
six months ended June 30, 2010 and 2009, and the years ended December 31, 2009,
2008 and 2007, revenue recognized under the Amorcyte Agreement amounted
to $93,000, $253,000, $428,000, $327,000 and $415,000,
respectively. At June 30, 2010 and December 31, 2009, 2008 and 2007,
approximately $115, $300, $500 and $47200, respectively, due from
Amorcyte were recorded as accounts receivable.
During
June 2010, PCT made an investment in Amorcyte in the purchase of Series A
Redeemable Preferred Stock totaling $50,000, which is included in other assets
on the accompanying consolidated balance sheet.
Becton, Dickinson and
Company
On
August 25, 2006, the Company and Becton, Dickinson and Company (“BD”), a
Member, entered into a one year Consulting and Product Development Services
Agreement (the “BD Agreement”), whereby the Company will provide consulting and
product development services and advice to BD for fees not to exceed $480,000,
plus reimbursement for approved out-of-pocket expenses. On February
20, 2008, the parties entered into a subsequent agreement whereby PCT agrees to
provide a laboratory investigational study service to BD. For the six
months ended June 30, 2010 and 2009, and the years ended December 31, 2009, 2008
and 2007, revenue recognized under the BD Agreement, amounted to $0,
$35,000 $35,000, $25,000 and $230,000, respectively. Amounts recorded as revenue
for reimbursement for approved out-of-pocket expenses under the BD Agreement for
the six months ended June 30, 2010 and 2009, and the years ended December 31,
2009, 2008 and 2007, totaled approximately $0, $0, $0, $0 and
$141,000. At June 30, 2010 and December 31, 2009, 2008 and 2007,
approximately $0, $0, $2,500 and $29,500, respectively, due from BD were
recorded as accounts receivable.
-14-
PROGENITOR
CELL THERAPY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
7 - RELATED PARTY
TRANSACTIONS (continued)
StemCells,
Inc.
On March
2, 2006, the Company entered into a Cell Processing Agreement with StemCells
Inc. whereby Stem Cells engaged PCT to be its exclusive provider of cell
processing procedures and related services at rates specified within the
agreement that include a monthly fee during the clinical trial period for
oversight services. For the six months ended June 30, 2010 and 2009,
and the years ended December 31, 2009, 2008 and 2007, revenue recognized from
Stem Cells amounted to approximately $723,000, $761,000, $1,724,000,
$1,460,000 and $1,303,000, respectively. As further explained in
Note 4, the Company
borrowed $1,000,000 from StemCells, Inc. on December 3, 2007 and repaid the
entire amount of the loan on April 7, 2008.
All of the Company’s related parties,
with the exception of StemCells, Inc., are also unit holders.
NOTE
8 - OPTIONS TO ACQUIRE
MEMBER’S UNITS (“STOCK OPTIONS”)
In August
2007 the Company entered into agreements with five individuals to serve on the
Wellness Advisory Board (the “WAB”) of Domani, all of whom are non-employees of
the Company. The WAB members agree to serve as advisors on the development of
Domani’s stem cell banking program and related business
activities. The term of the WAB Agreement is three years and can be
terminated by either party by written notice at any time and for any
reason. The Company paid four of the WAB members an initiation fee of
$10,000 upon execution of the WAB Agreement; one member received an option to
acquire 961 member units of PCT (“Shares”) at an exercise price of $10.41 per
share in lieu of the $10,000 cash payment. These 961 share options vested
immediately.
As
consideration of their service on the WAB, the Company has issued options to
purchase 3,756 member units of PCT to each of the five members of the WAB at an
exercise price of $10.41 per share. Options vest in tranches of 313 shares, with
the first tranche vesting on the last day of the fiscal quarter following the
fiscal quarter in which the options were granted and an additional tranche
vesting on the last day of each subsequent consecutive fiscal
quarter. Options are fully vested three years after the date of grant
and are exercisable within ten years after the date of grant. The
weighted average fair value of the options on the date of grant was $2.87, which
was calculated using the Black-Scholes option pricing model with the following
assumptions:
|
Risk-free
interest rate
|
4.61 | % | ||
|
Expected
life
|
6.00
years
|
|||
|
Expected
volatility
|
82.47 | % | ||
|
Expected
dividends
|
None
|
|||
The
Company had no historical data to use in determining its expected life
assumption and therefore used the simplified method for determining expected
life that is described in SEC Staff Accounting Bulletin No. 107. The
simplified method is used when companies have difficulty making an estimate of
the expected term and under this method the expected term would equal the
vesting term plus the contractual term divided by two. Additionally,
the Company had no historical data to determine expected volatility and
therefore estimated its volatility assumptions based on the volatility of
comparable companies. The Company did not calculate the forfeiture
rate for the stock options since there were only five grants issued to WAB
members and no forfeiture is forecasted.
Stock
based compensation recognized in the financial statements during for the six
months ended June 30, 2010 and 2009 and the years ended December 31, 2009, 2008
and 2007 amounted to approximately $9,000, $9,000, $18,000, $18,000
and $7,200, respectively. At June 30, 2010 total unrecognized stock
based compensation amounted to approximately $4,500. The intrinsic
value of stock options outstanding at December 31, 2009 is minimal.
-15-
PROGENITOR
CELL THERAPY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
8 - OPTIONS TO ACQUIRE MEMBER’S
UNITS (“STOCK OPTIONS”) (continued)
A summary
of changes in the stock options outstanding for the three years ended December
31, 2009 and the six months ended June 30, June 30, 2010 is as
follows:
|
Number of
options
|
Weighted Average
Exercise
Price
|
|||||||
|
Outstanding
at December 31, 2006
|
48,930 | $ | 6.37 | |||||
|
Granted
|
- | - | ||||||
|
Exercised
|
- | - | ||||||
|
Forfeited
|
- | - | ||||||
|
Outstanding
at December 31, 2007
|
48,930 | $ | 6.37 | |||||
|
Granted
|
- | - | ||||||
|
Exercised
|
- | - | ||||||
|
Forfeited
|
- | - | ||||||
|
Outstanding
at December 31, 2008
|
48,930 | $ | 6.37 | |||||
|
Granted
|
- | - | ||||||
|
Exercised
|
- | - | ||||||
|
Forfeited
|
- | - | ||||||
|
Outstanding
at December 31, 2009
|
48,930 | $ | 6.37 | |||||
|
Granted
|
- | - | ||||||
|
Exercised
|
- | - | ||||||
|
Forfeited
|
- | - | ||||||
|
Outstanding
at June 30, 2010
|
48,930 | $ | 6.37 | |||||
Summarized
information about stock options outstanding as of June 30, 2010 is as
follows:
|
Options Outstanding
|
Options Exercisable
|
||||||||||||
|
Exercise Price
|
Number of
Options
|
Weighted
Average
Remaining Life
(in Years)
|
Number of Options
|
||||||||||
| $ | 1.00 | 20,660 |
No
expiry date
|
20,660 | |||||||||
| $ | 10.00 | 8,529 |
3.16
|
8,529 | |||||||||
| $ | 10.41 | 19,741 |
7.62
|
8,786 | |||||||||
|
Total
|
48,930 | 37,975 | |||||||||||
NOTE
9 - PHANTOM EQUITY
PLAN
On
April 13, 2000 the Company adopted a Phantom Equity Plan (the “Plan”),
under which a committee of the Board of Managers (the “Committee”) may grant to
officers, full-time employees and independent contractors of the Company (the
“Grantee”) a right to receive in cash, or property of equal value, the
difference in the (a) fair value of the award on the date of grant and
(b) the fair value of the award on the date the award is exercised by the
Grantee (the “Award”). The fair value of an Award shall be equal to
the product of: (a) either the total value of the Company’s equity as most
recently determined by the Committee prior to the date of grant or payout, or an
amount determined by a triggering event, as defined, and (b) the percentage
interest represented by the Award. Awards vest on a straight-line
basis over five years, unless specified otherwise by the Committee, and may only
be exercised in the last two months of a fiscal year. Upon the
occurrence of a triggering event, all Awards will become immediately
vested. Upon termination of service by a Grantee, the Company, at the
discretion of the Committee, may choose to pay out the fair value of the
terminated Grantee’s vested balance. Cash payments made under the
Plan are subject to limitation clauses, whereby the amount payable at any time
will be limited to defined thresholds. The Plan may be terminated at
any time by the Committee, in which case the terms of all outstanding Awards
will continue until exercised or forfeited. As of December 31,
2009, 2008 and 2007 and June 30, 2010 there are no outstanding awards under this
plan.
-16-
PROGENITOR
CELL THERAPY, LLC AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - GRANT AGREEMENT
On
August 26, 2005, the Company entered into a $900,000 grant agreement (the
“Grant”) with the New Jersey Economic Development Authority (the "EDA"), a
department of the State of New Jersey, to design and develop a software system
dealing with cell product testing and storage (the
“Project”). $810,000 of the Grant was advanced to the Company in
2005, and the remaining final disbursement of $90,000 was received by the
Company in April 2007. All costs for the Project in excess of
$900,000 are the sole responsibility of the Company. For financial
reporting purposes, the Grant proceeds reduced the amount capitalized as
internally developed software.
All Grant
funds advanced to PCT are included in current liabilities until actual Project
costs are incurred. Project costs are capitalized as assets when
incurred and are offset by the amount remaining in the Grant
liability. Through December 31, 2009, costs of approximately $
823,000, were incurred with respect to the Project, and at June 30, 2010
and December 31, 2009 was $77,000 of unexpended Grant funds are
included in deferred revenue.
NOTE
11 - CONCENTRATION
OF CREDIT RISK
Financial
instruments that potentially subject the Company to concentrations of credit
risk consist of cash and cash equivalents. At June 30, 2010, the
Company held its cash and cash equivalents principally in two financial
institutions, respectively. The Company cash balances may exceed
federally insured limits at times during the year.
Major
Customers
The
Company enters into contracts for the processing and storing of human
cells. In 2010 and 2009, the Company’s revenue is mainly derived from
agreements with Hackensack University Medical Center (“HUMC”), StemCells, Inc.,
and Sangamo Biosciences, Inc. These three customers make up 20%, 13%
and 15% of revenue (total of 48% for all three customers) for the six
months ended June 30, 2010, and 19%, 15% and 13% of revenue (total of 47% for
all three customers) for the six months ended June 30, 2009,
respectively. These three customers make up 18%, 15% and 12% of
revenue (total of 45% for all three customers) for the year ended December 31,
2009. In 2008, the Company’s revenue is mainly derived from HUMC,
StemCells, Inc., and Microislet, Inc. These three customers make up
23%, 12% and 11% of revenue (total of 46% for all three customers) for the year
ended December 31, 2008. In 2007, the Company’s revenue is mainly
derived from agreements with HUMC and Dendreon Corporation. These two
customers make up 28% and 23% (total of 51% for both customers) for the year
ended December 31, 2007. The only major customer that is also
currently a related party is HUMC.
Four
customers, one of which is a related party, made up 24%, 16%, 11% and
11% of total accounts receivable (a total of 62%) at June 30,
2010. The significant customer base may change from year to year as
projects are completed and new contracts are entered into.
Major
customers are considered to be those who accounted for more than 10% of total
sales.
NOTE
12 - SUBSEQUENT EVENTS
In August
2010, the members of the Company agreed in principle to be acquired by a
publicly traded international biopharmaceutical company. However,
there can be no assurances that the transaction will be successfully
consummated.
-17-
Unaudited
Pro Forma Condensed Combined Balance Sheets
June
30, 2010
(
in $000's)
|
NeoStem
|
Progenitor
Cell Therapy
|
Proforma
Adjustments
|
Pro
Forma
|
|||||||||||||||
|
ASSETS
|
||||||||||||||||||
|
Current
assets:
|
||||||||||||||||||
|
Cash
and cash equivalents
|
$ | 10,958.8 | $ | 775.8 | $ | - | $ | 11,734.6 | ||||||||||
|
Short
term investments
|
294.0 | - | - | 294.0 | ||||||||||||||
|
Restricted
Cash
|
4,096.2 | 353.9 | - | 4,450.1 | ||||||||||||||
|
Accounts
receivable trade, less allowances for doubtful accounts
|
6,013.8 | 768.9 | - | 6,782.7 | ||||||||||||||
|
Inventories
|
16,381.6 | - | - | 16,381.6 | ||||||||||||||
|
Deferred
project costs
|
- | 3,316.0 | 2,223.7 |
(d)
|
5,539.7 | |||||||||||||
|
Prepaid
expenses and other current assets
|
1,015.4 | 488.1 | (392.2 | ) |
(k)
|
1,111.3 | ||||||||||||
|
Total
current assets
|
38,759.8 | 5,702.7 | 1,831.5 | 46,294.0 | ||||||||||||||
|
Property,
plant and equipment, net
|
30,192.1 | 9,728.9 |
(e)
|
- | 39,921.0 | |||||||||||||
|
Prepaid
land use rights, net
|
4,659.0 | - | - | 4,659.0 | ||||||||||||||
|
Goodwill
|
34,425.7 | - | 12,139.0 |
(b)
|
46,564.7 | |||||||||||||
|
Intangible
assets, net
|
15,493.1 | - | 11,000.0 |
(c)
|
26,493.1 | |||||||||||||
|
Other
assets
|
317.8 | 196.1 |
(e)
|
- | 513.9 | |||||||||||||
| $ | 123,847.5 | $ | 15,627.7 | $ | 24,970.5 | $ | 164,445.7 | |||||||||||
|
LIABILITIES
AND SHAREHOLDERS' EQUITY
|
||||||||||||||||||
|
Current
liabilities:
|
||||||||||||||||||
|
Notes
payable and credit line
|
$ | 10,902.3 | $ | 3,400.0 |
(e)
|
$ | - | $ | 14,302.3 | |||||||||
|
Due
to Amorcyte, Inc.
|
- | 500.0 |
(e)
|
- | 500.0 | |||||||||||||
|
Accounts
payable
|
9,350.1 | 1,590.3 | - | 10,940.4 | ||||||||||||||
|
Accrued
liabilities
|
4,993.1 | 337.0 | - | 5,330.1 | ||||||||||||||
|
Current
maturities of long-term debt
|
106.2 |
(e)
|
- | 106.2 | ||||||||||||||
|
Unearned
revenues
|
1,432.5 | 5,559.3 |
(e)
|
- | 6,991.8 | |||||||||||||
|
Total
current liabilities
|
26,678.0 | 11,492.8 | - | 38,170.8 | ||||||||||||||
|
Long-term
liabilities
|
||||||||||||||||||
|
Long
term debt
|
- | 2,763.2 |
(e)
|
- | 2,763.2 | |||||||||||||
|
Deferred
tax liability
|
4,319.5 | - | 5,289.5 |
(f)
|
9,609.0 | |||||||||||||
|
Unearned
revenues
|
203.7 | - | - | 203.7 | ||||||||||||||
|
Deferred
lease liability
|
- | 107.4 |
(e)
|
- | 107.4 | |||||||||||||
|
Amount
due related party
|
7,855.2 | - | - | 7,855.2 | ||||||||||||||
|
EQUITY
|
||||||||||||||||||
|
Shareholders'
equity:
|
||||||||||||||||||
|
Series
B convertible redeemable preferred stock
|
0.1 | - | - | 0.1 | ||||||||||||||
|
Common
stock
|
56.7 | - | 11.2 |
(a)
|
67.9 | |||||||||||||
|
Members'
contributions
|
- | 13,079.7 | (13,079.7 | ) |
(l)
|
- | ||||||||||||
|
Additional
paid-in capital
|
129,485.7 | - | 20,934.1 |
(a)
|
150,419.8 | |||||||||||||
|
Accumulated
deficit
|
(81,839.6 | ) | (11,815.4 | ) | 11,815.4 |
(l)
|
(81,839.6 | ) | ||||||||||
|
Accumulated
other comprehensive loss
|
99.8 | - | - | 99.8 | ||||||||||||||
|
Total
shareholders' equity
|
47,802.7 | 1,264.3 | 19,681.0 | 68,748.0 | ||||||||||||||
|
Non-controlling
interests
|
36,988.4 | - | - | 36,988.4 | ||||||||||||||
|
Total
equity
|
84,791.1 | 1,264.3 | 19,681.0 | 105,736.4 | ||||||||||||||
| $ | 123,847.5 | $ | 15,627.7 | $ | 24,970.5 | $ | 164,445.7 | |||||||||||
|
Unaudited
Pro Forma Condensed Combined Statements of Operations
|
|||||||||||||||||
|
For
the Six Months Ended June 30, 2010
|
|||||||||||||||||
|
(in
$000's)
|
|||||||||||||||||
|
NeoStem
|
Progenitor
Cell Therapy
|
Proforma
Adjustments
|
Pro
Forma
|
||||||||||||||
|
Revenues
|
$ | 35,240.7 | $ | 4,271.3 | $ | (822.8 | ) |
(h),
(i)
|
$ | 38,689.2 | |||||||
|
Costs
and expenses:
|
|||||||||||||||||
|
Cost
of revenue
|
23,763.4 | 2,762.6 | 525.0 |
(g)
|
26,743.1 | ||||||||||||
| (21.7 | ) |
(i)
|
|||||||||||||||
| (286.2 | ) |
(h)
|
|||||||||||||||
|
Research
and development
|
3,433.5 | - | (1.4 | ) |
(i)
|
3,432.1 | |||||||||||
|
Selling,
general and administrative
|
14,155.0 | 2,944.5 | 75.0 |
(g)
|
17,400.5 | ||||||||||||
| 226.0 |
(j)
|
||||||||||||||||
|
Operating
loss
|
(6,111.2 | ) | (1,435.8 | ) | (1,339.5 | ) | (8,886.5 | ) | |||||||||
|
Other
income (expense):
|
|||||||||||||||||
|
Other
income (expense)
|
(14.5 | ) | 1.3 | - | (13.2 | ) | |||||||||||
|
Interest
expense
|
(14.7 | ) | (335.8 | ) | 206.1 |
(k)
|
(144.4 | ) | |||||||||
| (29.2 | ) | (334.5 | ) | 206.1 | (157.6 | ) | |||||||||||
|
Loss
from operations before provision for
|
|||||||||||||||||
|
income
taxes and non-controlling interests
|
(6,140.4 | ) | (1,770.3 | ) | (1,133.4 | ) | (9,044.1 | ) | |||||||||
|
Provision
for income taxes
|
905.2 | - | (240.0 | ) |
(g)
|
665.2 | |||||||||||
|
Net
loss
|
(7,045.6 | ) | (1,770.3 | ) | (893.4 | ) | (9,709.3 | ) | |||||||||
|
Less
- Net income attributable to
|
|||||||||||||||||
|
non-controlling
interests
|
2,940.2 | - | - | 2,940.2 | |||||||||||||
|
Net
loss attributable to controlling interests
|
(9,985.8 | ) | (1,770.3 | ) | (893.4 | ) | (12,649.5 | ) | |||||||||
|
Preferred
dividends
|
153.5 | - | - | 153.5 | |||||||||||||
|
Net
loss attributable to common shareholders
|
$ | (10,139.3 | ) | $ | (1,770.3 | ) | $ | (893.4 | ) | $ | (12,803.0 | ) | |||||
|
Basic
and diluted loss per share
|
|||||||||||||||||
|
Weighted
average common shares outstanding
|
44,419,734 | 55,619,734 | (m) | ||||||||||||||
|
Net
loss attributable to common shareholders
|
$ | (0.23 | ) | $ | (0.23 | ) | |||||||||||
|
Unaudited
Pro Forma Condensed Combined Statements of Operations
|
|||||||||||||||||
|
For
the Twelve Months Ended December 31, 2009
|
|||||||||||||||||
|
(in
$000's)
|
|||||||||||||||||
|
NeoStem
|
Progenitor
Cell Therapy
|
Proforma
Adjustments
|
Pro
Forma
|
||||||||||||||
|
Revenues
|
$ | 11,565.1 | $ | 8,238.2 | $ | (270.0 | ) |
(i)
|
$ | 19,533.3 | |||||||
|
Costs
and expenses:
|
|||||||||||||||||
|
Cost
of revenues
|
9,504.2 | 5,479.9 | 1,050.0 |
(g)
|
15,902.9 | ||||||||||||
| (131.2 | ) |
(i)
|
|||||||||||||||
|
Research
and development
|
4,318.8 | - | (8.1 | ) |
(i)
|
4,310.7 | |||||||||||
|
Selling,
general and administrative
|
23,431.2 | 4,369.8 | 150.0 |
(g)
|
28,272.3 | ||||||||||||
| (130.7 | ) |
(i)
|
|||||||||||||||
| 452.0 |
(j)
|
||||||||||||||||
|
Operating
loss
|
(25,689.1 | ) | (1,611.5 | ) | (1,652.0 | ) | (28,952.6 | ) | |||||||||
|
Other
income (expense):
|
|||||||||||||||||
|
Other
income (expense)
|
(1.4 | ) | 84.1 | - | 82.7 | ||||||||||||
|
Interest
expense
|
(37.8 | ) | (280.2 | ) | 120.2 |
(j)
|
(197.8 | ) | |||||||||
| (39.2 | ) | (196.1 | ) | 120.2 | (115.1 | ) | |||||||||||
|
Loss
from operations before provision for income taxes
|
|||||||||||||||||
|
and
non-controlling interests
|
(25,728.3 | ) | (1,807.6 | ) | (1,531.8 | ) | (29,067.7 | ) | |||||||||
|
Provision
for income taxes
|
64.2 | - | (480.0 | ) |
(g)
|
(415.8 | ) | ||||||||||
|
Net
loss
|
(25,792.5 | ) | (1,807.6 | ) | (1,051.8 | ) | (28,651.9 | ) | |||||||||
|
Less
- Net income attributable to non-controlling
interests
|
300.5 | - | - | 300.5 | |||||||||||||
|
Net
loss attributable to controlling interests
|
(26,093.0 | ) | (1,807.6 | ) | (1,051.8 | ) | (28,952.4 | ) | |||||||||
|
Preferred
dividends
|
5,612.0 | - | - | 5,612.0 | |||||||||||||
|
Net
loss attributable to common shareholders
|
$ | (31,705.0 | ) | $ | (1,807.6 | ) | $ | (1,051.8 | ) | $ | (34,564.4 | ) | |||||
|
Basic
and diluted loss per share
|
|||||||||||||||||
|
Weighted
average common shares outstanding
|
13,019,518 | 24,219,518 | (m) | ||||||||||||||
|
Net
loss attributable to common shareholders
|
$ | (2.44 | ) | $ | (1.43 | ) | |||||||||||
Notes
to the NeoStem Unaudited Proforma Condensed Combined Financial
Statements
On
September 16, 2010, the Board of Directors of NeoStem, Inc., a Delaware
corporation (“NeoStem”) and on
September 22, 2010 the Board of Managers of Progenitor Cell Therapy, LLC, a
Delaware limited liability company (“PCT”), unanimously
approved the merger (the “Merger”) of NBS
Acquisition Sub Co., LLC, a newly formed wholly-owned subsidiary of NeoStem
(“Subco”), with
and into PCT pursuant to an Agreement and Plan of Merger, dated
September 23, 2010 (as such agreement may be amended from time to time, the
“Agreement and Plan of
Merger”), among NeoStem, PCT and Subco.
Pursuant
to the terms of the Agreement and Plan of Merger, all of the membership
interests of PCT outstanding immediately prior to the effective time of the
Merger (the “Effective
Time”) will be converted into the right to receive, in the aggregate,
11,200,000 shares of the common stock, par value $0.001 per share, of NeoStem
(the “NeoStem Common
Stock” or the “Parent Common Stock”)
and, subject to the satisfaction of certain conditions, warrants to purchase up
to an aggregate of 3,000,000 shares of NeoStem Common Stock, as
follows:
|
(i)
|
common
stock purchase warrants to purchase one million (1,000,000) shares of
Parent 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 is accomplished within three (3) years of the closing date of
the Merger; and
|
|
(ii)
|
common
stock purchase warrants to purchase one million (1,000,000) shares of
Parent Common Stock exercisable over a seven year term at an exercise
price of $3.00 per share (the “$3.00
Warrants”), if the volume weighted average of the closing prices of
sales of Parent Common Stock on the NYSE-Amex for the three (3)
trading days ending on the trading day that is two (2) days prior to the
closing date of the Merger (the “Parent Per Share
Value”) is less than $2.50;
and
|
|
(iii)
|
common
stock purchase warrants to purchase one million (1,000,000) shares of
Parent 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”), if
the Parent Per Share Value is less than
$1.70.
|
The
shares of Parent Common Stock issuable in the Merger are subject to adjustment,
provided that in no event will NeoStem be required to issue more than 11,200,000
shares of NeoStem Common Stock.
Pursuant
to a consent and voting agreement dated the same date as the Agreement and Plan
of Merger, holders of a sufficient number of membership interests of PCT to
approve the Agreement and Plan of Merger and the Merger have irrevocably
consented to the Agreement and Plan of Merger and the Merger and agreed to
certain transfer restrictions with respect to their membership interests prior
to the Effective Time. Stockholders of NeoStem owning greater than
50% of NeoStem Common Stock on the date of the Agreement and Plan of Merger have
agreed to vote their shares in favor of the issuance of the NeoStem Common Stock
and Warrants in the Merger at a special meeting of stockholders which will be
held for such purpose.
The
statements contained in this section may be deemed to be forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act
of 1934, as amended, and Section 27A of the Securities Act of 1933, as
amended. Such statements are intended to be covered by the safe harbor to
“forward-looking statements” provided by the Private Securities Litigation
Reform Act of 1995. Forward-looking statements are typically identified by the
words “believe,” “expect, “anticipate,” “intend,” “estimate” and similar
expressions. These forward-looking statements are based largely on management’s
expectations and are subject to a number of uncertainties. Actual results could
differ materially from these forward-looking statements. NeoStem, Inc. does not
undertake any obligation to update publicly or revise any forward-looking
statements.
Basis
of Presentation
The
unaudited pro forma condensed combined financial statements set forth above have
been prepared by NeoStem and give effect to the following
transactions:
|
1)
|
The
acquisition of the membership interests of PCT for aggregate consideration
of approximately $20.9 million,
and;
|
|
2)
|
The
issuance of 11.2 million shares of common stock and 3 million common stock
purchase warrants.
|
The
unaudited condensed combined proforma results of operations for the six months
ended June 30, 2010 and the year ended December 31, 2009 are presented to give
effect to the acquisition of PCT as if it had occurred on January 1,
2009. The unaudited condensed combined proforma balance sheet is
presented to give effect to the acquisition of PCT as if it had occurred on June
30, 2010. This proforma information is based on, derived from, and should be
read in conjunction with, the historical consolidated financial statements of
NeoStem for the year ended December 31, 2009, included in our Annual
Report on Form 10-K filed on March 31, 2010 and for the quarter ended
June 30, 2010 included in our Quarterly Report on Form 10-Q filed on August 16,
2010 and the historical financial statements of PCT for the year ended
December 31, 2009, and as of and for the unaudited six months ended June
30, 2010, which are included elsewhere in this document. We have not adjusted
the historical financial statements of either entity for any costs recognized
during the year that may be considered to be nonrecurring.
All
unaudited interim financial statements incorporated by reference or furnished
herein reflect all adjustments which are, in the opinion of management,
necessary to present a fair statement of the results for the interim periods
presented. All such adjustments are of a normal and recurring
nature.
The
unaudited proforma condensed combined financial statements were prepared using
the assumptions described below and in the related notes.
The
unaudited proforma condensed combined financial statements are provided for
illustrative purposes only. They do not purport to represent what NeoStem’s
consolidated results of operations and financial position would have been had
the transaction actually occurred as of the dates indicated, and they do not
purport to project NeoStem’ future consolidated results of operations or
financial position.
The
actual adjustments to our consolidated financial statements upon the closing of
the acquisition of PCT will depend on a number of factors, including additional
information that becomes available. Therefore, the actual adjustments
will differ from the unaudited pro forma adjustments, and the differences may be
material.
The
acquisition of PCT will be accounted for under the acquisition method of
accounting. For the purposes of determining the unaudited pro forma adjustments,
the assets and liabilities of PCT have been measured based on various
preliminary estimates using assumptions that NeoStem management believes are
reasonable utilizing information currently available.
The
process for estimating the fair values of in-process research and development,
identifiable intangible assets, and certain tangible assets requires the use of
significant estimates and assumptions, including estimating future cash flows,
developing appropriate discount rates, and estimating the costs, timing and
probability of success to complete in-process projects. Transaction costs are
not included as a component of consideration transferred. The excess of the
purchase price (consideration transferred) over the estimated amounts of
identifiable assets and liabilities of PCT as of the effective date of the
acquisition will be allocated to goodwill. The purchase price allocation is
subject to finalization of NeoStem’s analysis of the fair value of the assets
and liabilities of PCT as of the effective date of the acquisition. Accordingly,
the purchase price allocation in the unaudited pro forma condensed combined
financial statements presented above is preliminary and will be adjusted upon
completion of the final valuation. Such adjustments could be material. The final
valuation is expected to be completed as soon as practicable but no later than
one year after the consummation of the acquisition.
For
purposes of measuring the estimated fair value of the assets acquired and
liabilities assumed as reflected in the unaudited pro forma condensed combined
financial statements, fair value is the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date (an exit price). Market participants are
assumed to be buyers and sellers in the principal (most advantageous) market for
the asset or liability. Additionally, fair value measurements for an asset
assume the highest and best use of that asset by market participants. As a
result, NeoStem may be required to value assets at fair value measures that do
not reflect NeoStem’s intended use of those assets. Use of different estimates
and judgments could yield different results.
In
connection with the Merger, four PCT executives have entered into employment
agreements with PCT that will become effective on the closing date of the
Merger. These employment agreements are specific to each executive and specify
the employment term (3 to 4 years), salary levels and in certain circumstances
performance bonuses. Each employment agreement contains non-compete provisions
and each individual will be granted a NeoStem stock option vesting over term of
the agreement. A total of 1,200,000 stock options will be granted to these
individuals.
When
these transactions are completed, NeoStem will account for these transactions in
accordance with Accounting Standards Codification 805-10 (“ASC 805-10”). ASC
805-10 provides revised guidance for recognizing and measuring identifiable
assets and goodwill acquired, liabilities assumed, and any noncontrolling
interest in the acquiree. ASC 805-10 also requires that assets acquired and
liabilities assumed in a business combination that arise from contingencies be
recognized at fair value if fair value can be reasonably estimated. If the fair
value of an asset or liability cannot be determined, the asset or liability that
arises from a contingency, the asset or liability would be recognized in
accordance with Accounting Standards Codification 30-1 (“ASC 30-1”) and if the
fair value is not determinable no asset or liability would be recognized. At the
present time, we are not in possession of all of the information to apply ASC
805-10 or ASC 30-1 to these unaudited proforma condensed combined financial
statements and will not be in possession of such information until the Effective
Date. Therefore, for the purposes of preparing these unaudited proforma
condensed combined financial statements we have established an estimated fair
value of the equities being offered in this transaction as of September 10,
2010. The preliminary purchase price allocation is
based on management’s estimate of acquired tangible and intangible assets and
will be adjusted based on the final valuation to be completed within one year
from the acquisition date. The excess of the total purchase price over the fair
value of the net assets acquired, including the estimated fair value of the
identifiable intangible assets, has been allocated to goodwill. We expect that the fair value of current
assets and remaining machinery and equipment will approximate the book value of
these assets and that the excess of purchase price over net deficit will be
assigned to Goodwill and intangible assets including, customer lists, in process
research and development, specialized manufacturing knowledge and any
non-compete agreements. The useful lives of these intangible assets are expected
to range between 5 years and 10 years based on the useful lives of the various
assets.
Calculation
of Estimated Consideration Transferred and Preliminary Allocation of
Consideration Transferred to Net Assets Acquired
The fair
value of equity securities issued as consideration transferred will be measured
using the market price of NeoStem common stock on the closing date. As of
September 10, 2010 the estimated fair value of the various equities being issued
is as follows:
|
Calculation
of Estimated Consideration Transferred (in $000's)
|
||||||||||||
|
Number
of Shares
|
Fair
Value Per Share at September 10, 2010
|
Fair
Value at September 10, 2010
|
||||||||||
|
Common
Stock
|
11,200,000 | $ | 1.73 | $ | 19,376.0 | |||||||
|
Common
Stock Purchase Warrants
|
3,000,000 | 1,569.3 | ||||||||||
| $ | 20,945.3 | |||||||||||
Based on
the terms and conditions of each of the warrants to be issued, we have
determined that all warrants are to be accounted for as an equity instrument and
included in the purchase price based on the probability that each warrant will
be issued or vested.
Assuming
a $0.50 change in NeoStem’s closing common stock price, the estimated
consideration transferred would increase or decrease by approximately $5.6
million which would have a corresponding offset to estimated
goodwill.
|
Preliminary
Allocation of Consideration Transferred to Net Assets
Acquired
|
||||
|
(in
$000's)
|
||||
|
Identifiable
intangible assets
|
$ | 11,000.0 | ||
|
Property,
plant and equipment
|
9,728.9 | |||
|
Deferred
costs
|
5,539.7 | |||
|
Other
non-current assets
|
196.1 | |||
|
Current
assets, excluding deferred costs
|
1,994.5 | |||
|
Current
liabilities
|
(11,492.8 | ) | ||
|
Deferred
income taxes
|
(5,289.5 | ) | ||
|
Long-term
debt, net of current maturities
|
(2,763.2 | ) | ||
|
Deferred
lease liability
|
(107.4 | ) | ||
|
Goodwill
|
12,139.0 | |||
|
Estimated
purchase price to be allocated
|
$ | 20,945.3 | ||
Proforma
Adjustments for the Unaudited Proforma Condensed Combined Financial Statements
(Dollar amounts in $000’s):
|
(a)
|
This
entry records the acquisition of the membership interests of PCT for
aggregate consideration of approximately $20,945.3, through the issuance
of 11,200,000 shares of NeoStem common stock and 3,000,000 common stock
purchase warrants.
|
|
(b)
|
This
entry records the estimated goodwill that will be recorded in connection
with the Merger.
|
|
(c)
|
This
entry records the intangible assets management expects to acquire in the
Merger. The preliminary purchase price allocation is based on management’s
estimate of acquired tangible and intangible assets and will be adjusted
based on the final valuation to be completed within one year from the
acquisition date. The excess of the total purchase price over the fair
value of the net assets acquired, including the estimated fair value of
the identifiable intangible assets, has been allocated to goodwill. Below
is a preliminary summary of the significant intangible assets that NeoStem
expects to acquire in the
Merger:
|
|
Preliminary
Summary of Intangible Assets (in $000's)
|
||||||||||||
|
Estimated
Value
|
Useful
Life
|
Estimated
Annual Amortization
|
||||||||||
|
Customer
list and other related intangibles
|
$ | 1,500.0 | 10 | $ | 150.0 | |||||||
|
In
process R&D
|
500.0 | * | - | |||||||||
|
Non-compete
agreements
|
1,500.0 | 5 | 300.0 | |||||||||
|
Knowledge
related to manufacturing clinical and patient specific
therapeutics
|
7,500.0 | 10 | 750.0 | |||||||||
| $ | 11,000.0 | $ | 1,200.0 | |||||||||
*
This amount will be capitalized and accounted for as an indefinite-life
intangible asset, subject to impairment testing. NeoStem will evaluate this
intangible asset at least annually to determine if any impairment has
occurred.
|
(d)
|
This
entry records the capitalization of estimated gross profit associated with
PCT projects in process at June 30, 2010 based on the total estimated
gross profit to be earned and the estimated percentage of completion for
each project at June 30, 2010.
|
|
(e)
|
For
the purposes of these proforma combined financial statements it is assumed
that the carrying value of this asset or liability approximates its fair
value.
|
|
(f)
|
This
entry records the estimated tax liability to be paid in the future due to
the non-deductibility of the identifiable intangible assets and increase
in deferred project costs expected to be acquired in the
Merger.
|
|
(g)
|
This
entry reflects the impact of amortizing the estimated value of the
intangible assets that will be acquired in the Merger and realization of
the related deferred tax liability. The amortization is based on the
estimated useful lives of these intangibles ranging between 5 and 10
years.
|
|
(h)
|
On
December 31, 2009, NeoStem and PCT entered into a construction management
agreement for the construction of NeoStem’s stem cell laboratory in
Beijing, China. This transaction has been reflected on NeoStem’s balance
sheet at June 30, 2010 in property, plant and equipment, and PCT reflected
this transaction in revenue and cost of revenue in its statement of
operations for the six months ended June 30, 2010. This entry eliminates
the intercompany revenue and intercompany profit that exists on these
transactions.
|
|
(i)
|
On
January 9, 2009, NeoStem and PCT entered into an agreement which calls for
PCT to provide stem cell cryopreservation services and stem cell storage
services, and on March 6, 2009, NeoStem and PCT entered into a consulting
agreement in connection with the design of a stem cell laboratory in
Beijing, China. This entry eliminates the intercompany sales and
intercompany profit that exists on these transactions for the year ended
December 31, 2009 and the six months ended June 30,
2010.
|
|
(j)
|
In
connection with the Merger, four PCT executives have entered into
employment agreements with PCT that will become effective on the closing
date of the Merger. These employment agreements are specific to each
executive and specify the employment term (3 to 4 years), salary levels
and in certain circumstances performance bonuses. Each employment
agreement contains non-compete provisions and each individual will be
granted NeoStem stock options vesting over term of the agreement. A total
of 1,200,000 stock options will be granted to these individuals. This
entry records the stock option compensation associated with these
collective grants.
|
|
(k)
|
On
September 14, 2009, PCT entered into a line of credit for $3.0
million. The credit line has an interest rate of 5.5% accruing
on the first $2.0 million and 6% thereafter. The advance and
accrued interest was due and payable on June 30, 2010. In
conjunction with the original credit line, a warrant to purchase shares
were issued by PCT to the lender. The holder is entitled to
purchase, at its option, up to 73,052 Shares of Limited Liability Company
Interests (PCT’s ownership interests are expressed as shares of ownership
with a maximum of 10,000,000 ownership shares authorized to be issued) at
an exercise price of $6.16 per Share. NeoStem has agreed to payoff this
credit line shortly after the Closing Date. The warrant is for seven years
and expires September 14, 2016. The warrant was accounted for
as deferred financing costs and valued using the Black-Scholes pricing
model. This resulted in deferred financing cost of
approximately $326 thousand which was amortized as interest expense over
the term of the loan ($120.2 thousand in 2009 and $206.1 thousand in
2010). On June 30, 2010, PCT increased the maximum amount of
the line of credit from $3.0 million to $3.4 million and the line of
credit now has a revised maturity date of June 30, 2011. In connection
with the revision of the credit line PCT issued a warrant for 85,000
Shares of Limited Liability Company Interests that had a fair value of
$392.2 thousand and has been reflected on PCT’s balance sheet as deferred
financing costs categorized within prepaids and other current assets. This
entry reverses the expense charges associated with the warrant issued in
June 2009, that were recognized in 2009 and 2010, since the charges will
not continue after the close of the Merger. In addition, this entry also
eliminates the value of the warrant issued in June 2010 for the extension
of the credit line. In accordance with the terms of the Merger Agreement
these warrants will be cancelled and not replaced with equity instruments
issued by NeoStem.
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(l)
|
This
entry eliminates the equity accounts of
PCT.
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(m)
|
At
the conclusion of this transaction, an additional 11,200,000 common shares
will have been issued and for the purposes of calculating the unaudited
proforma earnings/(loss) per share it has been assumed that these shares
were outstanding as of January 1,
2009.
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