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EX-31.1 - CERTIFICATION - Cellular Biomedicine Group, Inc.cbmg_ex311.htm
EX-31.2 - CERTIFICATION - Cellular Biomedicine Group, Inc.cbmg_ex312.htm
EX-32.1 - CERTIFICATION - Cellular Biomedicine Group, Inc.cbmg_ex321.htm


 UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2013

OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 0-52282

Cellular Biomedicine Group, Inc.
(Exact name of registrant as specified in its charter)

Delaware
 
86-1032927
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

530 University Avenue, #17
Palo Alto, CA 94301
(Address of principal executive offices)
(Zip Code)

(650) 566-5064
(Registrant’s telephone number, including area code)
 
________________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ     No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period than the registrant was required to submit and post such files). Yes þ     No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer," and "large accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer 
o
Accelerated filer 
o
Non-accelerated filer 
o
Smaller reporting company 
þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o     No þ

As of August 5, 2013 the issuer has 6,174,519 shares of common stock, par value $.001, issued and outstanding.
 



PART I
FINANCIAL INFORMATION
     
         
Item 1.
Condensed Consolidated Financial Statements (unaudited)
       
     
3
 
     
4
 
     
5
 
     
6
 
           
   
25
 
           
   
45
 
           
   
45
 
           
PART II
OTHER INFORMATION
       
           
   
46
 
           
Item 1A. Risk Factors     46  
           
   
61
 
           
   
61
 
           
   
62
 
           
   
63
 

 
2

 
 
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
 
   
June 30,
   
December 31,
 
   
2013
   
2012
 
         
(restated)
 
 Assets
           
Cash
  $ 2,060,148     $ 4,144,896  
Accounts receivable
    -       20,683  
Other receivable
    166,785       128,681  
Inventory
    30,439       37,241  
Prepaid expenses
    173,112       18,118  
Other current assets
    50,000       -  
Total current assets
    2,480,484       4,349,619  
                 
Investments
    1,212,619       -  
Property, plant and equipment, net
    1,144,316       1,326,882  
Goodwill
    6,808,533       -  
Intangibles
    781,870       940,897  
Deferred tax asset
    134,210       119,427  
Long-term prepaid expenses
    -       14,802  
Total assets (1)
  $ 12,562,032     $ 6,751,627  
                 
Liabilities and Stockholders' Equity
               
                 
Liabilities:
               
Accounts payable
  $ 156,325     $ 23,931  
Accrued expenses
    1,498,500       97,454  
Tax payable
    10,121       -  
Deferred revenue
    251,834       -  
Advances payable to related party
    31,385       -  
Other current liabilities
    330,534       473,848  
Total current liabilities
    2,278,699       595,233  
                 
Deferred tax liability non-current
    76,544       -  
Total liabilities (1)
    2,355,243       595,233  
                 
Stockholders' equity:
               
                 
    Preferred stock, par value $.001, 50,000,000 shares
               
    authorized; none issued and outstanding
               
    as of June 30, 2013 and December 31, 2012, respectively
    -       -  
                 
    Common stock, par value $.001, 300,000,000 shares authorized;
               
    5,726,011 and 3,710,560 issued and outstanding
               
    as of June 30, 2013 and December 31, 2012, respectively
    5,726       3,711  
Additional paid in capital
    25,979,501       12,827,923  
Accumulated deficit
    (15,137,450 )     (6,736,866 )
Accumulated other comprehensive income (loss)
    (640,988 )     61,626  
Total stockholders' equity
    10,206,789       6,156,394  
                 
Total liabilities and stockholders' equity
  $ 12,562,032     $ 6,751,627  
___________
(1)
The Company’s consolidated assets as of June 30, 2013 and December 31, 2012 include $1,195,939 and $1,301,225, respectively, of assets of variable interest entities, or VIEs, that can only be used to settle obligations of the VIEs. These assets include property, plant and equipment, net, of $888,879 and $1,082,358 as of June 30, 2013 and December 31, 2012, respectively; cash and cash equivalents of $37,289 and $10,183 as of June 30, 2013 and December 31, 2012, respectively; other  receivable of $99,301 and $51,949 as of June 30, 2013 and December 31, 2012, respectively; intangibles of $79,585 and $79,468 as of June 30, 2013 and December 31, 2012, respectively; deferred tax asset of $0 and $39,615 as of June 30, 2013 and December 31, 2012, respectively; prepaid expenses and other assets of $67,302 and $4,420 as of June 30, 2013 and December 31, 2012, respectively; and inventory of $23,583 and $32,232 as of June 30, 2013 and December 31, 2012, respectively. The Company’s consolidated liabilities as of June 30, 2013 and December 31, 2012 included $476,215 and $555,248, respectively, being liabilities of VIEs whose creditors have no recourse to the Company. These liabilities include accrued expenses of $452,408 and $539,244 as of June 30, 2013 and December 31, 2012, respectively; tax payable of $15,094 and $0 as of June 30, 2013 and December 31, 2012, respectively; and accounts payable of $8,713 and $16,004 as of June 30, 2013 and December 31, 2012, respectively. See further description in Note 6, Variable Interest Entity.
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Revenues
  $ 111,434     $ 194,774     $ 111,434     $ 273,363  
                                 
Cost of goods sold
    -       85,358       -       113,048  
                                 
Gross profit
    111,434       109,416       111,434       160,315  
                                 
Operating expenses:
                               
General and administrative
    1,904,355       787,317       6,976,747       1,483,828  
Selling and marketing
    78,951       145,968       107,653       175,689  
Research and development
    639,276       55,181       1,119,781       311,135  
Total operating expenses
    2,622,582       988,466       8,204,181       1,970,652  
Operating loss
    (2,511,148 )     (879,050 )     (8,092,747 )     (1,810,337 )
                                 
Other income (expense)
                               
Interest expense
    (11 )     -       (257,761 )     -  
Interest income
    1,182       288       2,465       1,301  
Other expense
    14,135       -       (52,541 )     -  
Total other income (expense)
    15,306       288       (307,837 )     1,301  
Loss before taxes
    (2,495,842 )     (878,762 )     (8,400,584 )     (1,809,036 )
                                 
Income tax provision
    -       -       -       -  
Net loss
  $ (2,495,842 )   $ (878,762 )   $ (8,400,584 )   $ (1,809,036 )
Other comprehensive income (loss):
                               
Cumulative translation adjustment
  $ 31,959     $ (4,760 )   $ 31,959     $ 1,059  
Unrecognized loss on investments
    (112,253 )     -       (734,573 )     -  
Comprehensive net loss
  $ (2,576,136 )   $ (883,522 )   $ (9,103,198 )   $ (1,807,977 )
                                 
Earnings per share:
                               
  Basic and diluted
  $ (0.44 )   $ (0.30 )   $ (1.62 )   $ (0.63 )
                                 
Weighted average common shares outstanding:
                               
  Basic and diluted
    5,719,075       2,896,868       5,196,583       2,871,534  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)

   
For The Six Months Ended
 
   
June 30,
 
   
2013
   
2012
 
       
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net loss
  $ (8,400,584 )   $ (1,809,036 )
Adjustments to reconcile net loss to net cash used in operating activities:
               
Depreciation and amortization
    425,578       122,237  
Non-cash stock compensation expense
    665,210       -  
Amortization of deferred stock compensation
    862,434       -  
Common stock issued for services
    1,844,155       -  
Deferred tax asset
    (14,783 )     -  
Loss on the disposal of fixed assets
    -       1,477  
Loss on the disposal of investments
    69,071       -  
Changes in operating assets and liabilities:
               
Accounts receivables
    20,683       38,198  
Other receivables
    (38,104 )     (65,054 )
Inventory
    6,802       25,131  
Prepaid expenses
    (154,994 )     350,014  
Accounts payables
    (16,704 )     (10,812 )
Other payables
    (149,048 )     (550,704 )
Taxes payable
    -       (87,950 )
Accrued liabilities
    254,944       44  
Long-term prepaid expenses
    14,802       -  
Net cash used in operating activities
    (4,610,538 )     (1,986,455 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Acquisition of business, net of cash acquired
    2,568,995       -  
Proceeds from the sale of assets
    10,071       -  
Purchases of intangibles
    (12,880 )     (30,429 )
Purchases of assets
    (52,465 )     (871,411 )
Net cash provided by (used in) investing activities
    2,513,721       (901,840 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Common stock issued
    -       1,112,928  
Repayment of advances from affiliate
    (1,250 )     (5,651 )
Net cash provided by (used in) financing activities
    (1,250 )     1,107,277  
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    13,319       7,580  
                 
INCREASE (DECREASE) IN CASH
    (2,084,748 )     (1,773,438 )
CASH, BEGINNING OF PERIOD
    4,144,896       4,413,971  
CASH, END OF PERIOD
  $ 2,060,148     $ 2,640,533  
                 
SUPPLEMENTAL CASH FLOW INFORMATION
               
                 
Non cash transactions
               
Issuance of company stock for accrued liabilities and advances
  $ 149,475     $ -  
Issuance of stock for services
  $ 1,844,155     $ 113,750  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2013 AND 2012
 
NOTE 1 - DESCRIPTION OF BUSINESS

Overview

As of February 6, 2013, our principal line of business is in the field of biomedicine. Specifically, through our wholly-owned subsidiary Cellular Biomedicine Group Ltd. (BVI), we are involved in the development of new treatments for cancerous and degenerative diseases utilizing proprietary cell technologies, which include, without limitation, (i) TC-DC (tumor cell specific dendritic cells) for treatment of a board range of cancers, (ii) haMPC (human adipose-derived mesenchymal progenitor cells) for treatment of joint disease, (iii) huMPC (human umbilical cord-derived mesenchymal progenitor cells), (iv) MNP (human embryo-derived motor neuron precursor cells) and NP (human embryo-derived neuronal precursor cells) for treatment of central nervous system diseases. Leading up to our recent change of control, we were primarily engaged in financial consulting. We continue to operate our financial consulting business under a wholly owned subsidiary, as discussed in further detail below.

Corporate History

Cellular Biomedicine Group, Inc., a Delaware corporation (formerly known as EastBridge Investment Group Corporation) (the "Company"), was originally incorporated in the State of Arizona on June 25, 2001 under the name ATC Technology Corporation. ATC Technology Corporation changed its corporate name to EastBridge Investment Group Corporation in September 2005 and changed its business focus to providing investment related services in Asia, with a strong focus on high GDP growth countries, such as China. The Company provides consulting services necessary for small to medium-size companies to obtain capital to grow their business. The Company assists its clients in locating investment banking, financial advisory and other financial services necessary to become public companies in the United States or find joint venture partners or raise capital to expand their businesses. While it still maintains its consulting services business, effective with the merger in the first quarter of 2013, the Company has shifted its focus to the field of biomedicine.

Reorganization and Share Exchange

Effective January 18, 2013, the Company completed its reincorporation from the State of Arizona to the State of Delaware (the "Reincorporation"). The Company filed its Certificate of Incorporation and Certificate of Conversion with the Delaware Secretary of State on January 18, 2013. In connection with the Reincorporation, each 100 shares of common stock of the Company was converted into 1 share, with the same effect as a 1:100 reverse stock split, effective on January 31, 2013. Please refer to the Current Reports on Form 8-K, filed by the Company on January 25, 2013 and February 1, 2013. All share and per share information in this 10-Q, unless otherwise specified, are retroactively restated to reflect this conversion.

Merger with CBMG BVI

On November 13, 2012, EastBridge Investment Group Corporation, an Arizona corporation ("EastBridge"), CBMG Acquisition Limited, a British Virgin Islands company and the Company’s wholly-owned subsidiary ("Merger Sub") and Cellular Biomedicine Group Ltd. ("CBMG BVI"), a British Virgin Islands company, entered into a Merger Agreement, pursuant to which CBMG BVI was the surviving entity in a merger with Merger Sub whereby CBMG BVI became a wholly-owned subsidiary of the Company (the "Merger"). The Merger was consummated on February 6, 2013 (the "Closing Date"). Upon consummation of the Merger, CBMG BVI shareholders were issued 3,638,941 shares of common stock, par value $0.001 per share, of the Company (the "Company Common Stock") constituting approximately 70% of the outstanding stock of the Company on a fully-diluted basis and the then current Company shareholders retained 30% of the Company on a fully-diluted basis. Specifically, each of CBMG BVI’s ordinary shares ("CBMG BVI Ordinary Shares") were converted into the right to receive 0.020019 shares of Company Common Stock.

 
A copy of the Agreement and Plan of Merger dated November 13, 2012 and Amendments 1, 2 and 3 thereto, were included as Exhibits 2.1, 2.2, 2.3 and 2.4 to the Current Report on Form 8-K filed by the Company on February 12, 2013.

Also in connection with the Merger, the Company created a new Delaware subsidiary named EastBridge Investment Corp. ("EastBridge Sub"). Pursuant to a Contribution Agreement by and between the Company and EastBridge Sub dated February 5, 2013, the Company contributed all of its then current assets and liabilities to EastBridge Sub which continued the business and operations of the Company at the subsidiary level. A copy of the Contribution Agreement is attached as Exhibit 10.1 the Current Report on Form 8-K filed by the Company on February 12, 2013.

As a result of the Merger, CBMG BVI and EastBridge Sub became the two direct subsidiaries of the Company.

In connection with the Merger, effective on March 5, 2013, the Company (formerly named "EastBridge Investment Group Corporation") changed its name to "Cellular Biomedicine Group, Inc." In addition in March 2013, the Company changed its corporate headquarters to 530 University Avenue in Palo Alto, California.

NOTE 2 - BASIS OF PRESENTATION

As of February 6, 2013, in connection with the Merger, Cellular Biomedicine Group, Ltd. being the accounting acquirer thus resulting in a reverse merger for accounting purposes. Therefore, the accompanying financial statements are on a consolidated basis subsequent to February 6, 2013, but only reflect the operations of Cellular Biomedicine Group, Ltd. prior to the date of acquisition.
 
The results of operations for the three and six months ended June 30, 2013, are not necessarily indicative of the results to be expected for the full year. The information included in this Form 10-Q should be read in conjunction with the audited financial statements of Cellular Biomedicine Group, Ltd for the year ended December 31, 2012 filed on as Exhibit 99.1 to Form 8-K/A filed with the Securities and Exchange Commission on June 18, 2013. Unless otherwise noted in this report, any description of "us", "our" or "we" refers to Cellular Biomedicine Group, Inc. and its subsidiaries.

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates.

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company prepares its financial statements in accordance with U.S. GAAP. Significant accounting policies are as follows:

Principles of Consolidation

The consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles, or GAAP, and reflect the accounts and operations of the Company and its majority or wholly-owned subsidiaries, beginning with the date of their respective acquisition. In accordance with the provisions of Financial Accounting Standards Board ("FASB"), Accounting Standards Codification ("ASC") Section 810, or ASC 810, Consolidation, the Company consolidates any variable interest entity, or VIE, of which it is the primary beneficiary. The typical condition for a controlling financial interest ownership is holding a majority of the voting interests of an entity; however, a controlling financial interest may also exist in entities, such as variable interest entities, through arrangements that do not involve controlling voting interests. ASC 810 requires a variable interest holder to consolidate a VIE if that party has the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, and the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. The Company does not consolidate a VIE in which it has a majority ownership interest when the Company is not considered the primary beneficiary. The Company has determined that it is the primary beneficiary in a VIE—refer to Note 6, Variable Interest Entity. The Company evaluates its relationships with the VIE on an ongoing basis to ensure that it continues to be the primary beneficiary. All intercompany transactions and balances have been eliminated in consolidation.
 

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements.

These estimates and assumptions also affect the reported amounts of revenues, costs and expenses during the reporting period. Management evaluates these estimates and assumptions on a regular basis. Actual results could differ from those estimates.

Revenue Recognition

The Company utilizes the guidance set forth in the Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 104, regarding the recognition, presentation and disclosure of revenue in its financial statements.

For its Consulting segment, the Company engages in listing contracts with its clients which provide for the payment of fees, either in cash or equity, upon the achievement of certain milestones by the client, including the successful completion of a financial statement audit, the successful listing on a national stock exchange or over-the-counter market and the maintenance of ongoing 1934 Act reporting requirements with the Securities and Exchange Commission. In some instances, payment may be made in advance of performance; however, such payment is often refundable in the event that milestones are not reached.  The Company recognizes revenue on a systematic basis as milestones are reached in accordance with FASB’s ASC ("605-28-25"). Such guidance stipulates that revenue be recognized for individual elements in a multiple deliverable arrangement using the relative selling price method. The Company relies on internal estimates of the relative selling price of each element as objective third-party evidence is unattainable.

For its Biomedicine segment, the Company recognizes revenue when pervasive evidence of an arrangement exists, the price is fixed and determinable, collection is reasonably assured and delivery of products or services has been rendered.  Based on current estimates we expect our biomedicine business to generate revenues primarily from the development of therapies for the treatment of Knee Osteoarthritis within the next two years and Hepatocellular Carcinoma within the next three to five years.

Cash and Cash Equivalents
 
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At June 30, 2013 and December 31, 2012, respectively, cash and cash equivalents include cash on hand and cash in the bank. At times, cash deposits may exceed government-insured limits.

Accounts Receivable

Accounts receivable represent amounts earned but not collected in connection with the Company’s Biomedicine segment sales. The Company’s Consulting segment does not have accounts receivable from regular operations. Account receivables are carried at their estimated collectible amounts.

The Company plans to follow the allowance method of recognizing uncollectible accounts receivable. The Company recognizes bad debt expense based on specifically identifying customers and invoices that are anticipated to be uncollectable. At June 30, 2013 and December 31, 2012, an allowance was determined to not be needed as the Company is still performing clinical trials and has not yet generated revenues from its cell therapy candidates in the Biomedicine segment. Correspondingly the Company has not recorded any bad debt expense for the periods ended June 30, 2013 and December 31, 2012, respectively.


Inventory

Inventories consist of finished goods, raw materials, work-in-process, and low value consumable materials. Inventories are initially recognized at cost and subsequently at the lower of costs and net realizable value. First in first out cost is used to determine the cost. Finished goods are comprised of direct materials, direct labor, depreciation and manufacturing overhead. Net realizable value is the estimated selling price, in the ordinary course of business, less estimated costs to complete and dispose. The Company regularly inspects the shelf life of prepared finished goods and, if necessary, writes down their carrying value based on their salability and expiration dates into cost of goods sold.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost. Depreciation is provided for on the straight-line method over the estimated useful lives of the assets and begins when the related assets are placed in service. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Betterments or renewals are capitalized when incurred. Plant, property and equipment are reviewed each year to determine whether any events or circumstances indicate that the carrying amount of the assets may not be recoverable.
 
For the three and six months ended June 30, 2013, depreciation expense was $121,585 and $253,000, respectively and for the three and six months ended June 30, 2012 depreciation expense was $85,168 and $121,847, respectively.
 
Depreciation is provided for on the straight-line method over the following estimated useful lives:
 
Description   Estimated useful life
Office equipment
 
5 years
Manufacturing equipment
 
5 years
Leasehold improvements
 
5 years
Computer equipment
 
5 years
 
Goodwill and Other Intangibles

Goodwill represents the excess of the cost of assets acquired over the fair value of the net assets at the date of acquisition. Intangible assets represent the fair value of separately recognizable intangible assets acquired in connection with the Company’s business combinations. The Company evaluates its goodwill and other intangibles for impairment on an annual basis or whenever events or circumstances indicate that an impairment may have occurred. The Company intends to perform its annual impairment test in the fourth quarter of 2013. As of June 30, 2013 no impairment has been recorded with respect to any goodwill or intangible assets.

Income Taxes

Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance would be provided for those deferred tax assets for which if it is more likely than not that the related benefit will not be realized.
 

A full valuation allowance has been established against all net deferred tax assets as of June 30, 2013 based on estimates of recoverability. While the Company has optimistic plans for its business strategy, it has determined that such a valuation allowance was necessary given the current and expected near term losses and the uncertainty with respect to its ability to generate sufficient profits from its business model.

Share-Based Compensation

The Company periodically uses stock-based awards, consisting of shares of common stock, to compensate certain employees, officers and consultants. Shares are expensed on a straight-line basis over the requisite service period based on the grant date fair value, net of estimated forfeitures, if any.

Fair Value of Financial Instruments

Under the FASB’s authoritative guidance on fair value measurements, 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. In determining the fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable inputs. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:

       Level 1: Valuations for assets and liabilities traded in active exchange markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

       Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or similar assets or liabilities.

       Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. Level 3 valuations incorporate certain unobservable assumptions and projections in determining the fair value assigned to such assets.

All transfers between fair value hierarchy levels are recognized by the Company at the end of each reporting period. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement in its entirety, requires judgment, and considers factors specific to the investment. The inputs or methodology used for valuing financial instruments are not necessarily an indication of the risks associated with investment in those instruments.

The following is a description of the valuation methodologies used for instruments measured at fair value:

Investments

The fair value of "investments" is dependent on the type of investment, whether it is marketable or non-marketable.

Marketable securities held by the Company are held for an indefinite period of time and thus are classified as available-for-sale securities. The fair value is determined by the closing price for the investment as of the balance sheet date. Realized investment gains and losses are included in the statement of operations, as are provisions for other than temporary declines in the market value of available for-sale securities. Unrealized gains and unrealized losses deemed to be temporary are excluded from earnings (losses), net of applicable taxes, as a component of other comprehensive income (loss). Factors considered in judging whether an impairment is other than temporary include the financial condition, business prospects and creditworthiness of the issuer, the length of time that fair value has been less than cost, the relative amount of decline, and the Company’s ability and intent to hold the investment until the fair value recovers.
 

The carrying amounts of other financial instruments, including cash, other receivables, accounts payable and accrued liabilities, income tax payable and related party payable approximate fair value due to their short maturities.
 
Basic and Diluted Net Loss Per Share

Net loss per share was computed by dividing the net loss by the weighted average number of common shares outstanding during the period. The weighted average number of shares was calculated by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding. Diluted net loss per share for the Company is the same as basic net loss per share, as the Company has not issued any dilutive securities.

Comprehensive Loss
 
U.S. GAAP establishes standards for the reporting and display of comprehensive income or loss, requiring its components to be reported in a financial statement that is displayed with the same prominence as other financial statements. Our accumulated other comprehensive income (loss) was $(640,988) as of June 30, 2013 and $61,626 as of June 30, 2012.

Foreign Currency Translation

The Company's financial statements are presented in U.S. dollars ($), which is the Company’s reporting currency, while some of the Company’s subsidiaries’ functional currency is Chinese Renminbi (RMB). Transactions in foreign currencies are initially recorded at the functional currency rate ruling at the date of transaction. Any differences between the initially recorded amount and the settlement amount are recorded as a gain or loss on foreign currency transaction in the consolidated statements of income. Monetary assets and liabilities denominated in foreign currency are translated at the functional currency rate of exchange ruling at the balance sheet date. Any differences are taken to profit or loss as a gain or loss on foreign currency translation in the statements of income. In accordance with ASC 830, Foreign Currency Matters, the Company translates the assets and liabilities into USD from RMB using the rate of exchange prevailing at the applicable balance sheet date and the statements of income and cash flows are translated at an average rate during the reporting period. Adjustments resulting from the translation are recorded in shareholders' equity as part of accumulated other comprehensive income. The PRC government imposes significant exchange restrictions on fund transfers out of the PRC that are not related to business operations. These restrictions have not had a material impact on the Company because it has not engaged in any significant transactions that are subject to the restrictions.

Reclassification

Certain prior period amounts have been reclassified to conform to current year presentations.
 

Recent Accounting Pronouncements

In January 2013, the FASB issued Accounting Standards Update ASU No. 2013-01, "Balance Sheet (Topic 210): Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities." This Standard clarifies that ordinary trade receivables are not in the scope of ASU No. 2011-11, "Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities." Specifically, ASU 2011-11 applies only to derivatives, repurchase agreements and reverse purchase agreements, and securities borrowing and securities lending transactions that are either offset in accordance with specific criteria contained in the FASB Accounting Standards Codification or subject to a master netting arrangement or similar agreement. An entity is required to apply the amendments in ASU 2013-01 for fiscal years beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the required disclosures retrospectively for all comparative periods presented. The effective date is the same as the effective date of ASU 2011-11. The adoption of ASU No. 2013-01 is not expected to have a material impact on the consolidated financial statements.

In February 2013, the FASB issued ASU 2013-02, "Comprehensive Income – Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income." This update requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, entities are required to present, either on the face of the statement where net income is presented or in the notes to the financial statements, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, entities are required to cross-reference to the note where additional details about the effect of the reclassifications are disclosed. This ASU is effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this guidance is not expected to have a significant impact on the presentation of the Company's consolidated financial statements.

In March 2013, the Financial Accounting Standards Board ("FASB") issued ASU No. 2013-05, Foreign Currency Matters (Topic 830)—Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity, ("ASU 2013-05"). This amendment clarifies the applicable guidance for the release of cumulative translation adjustment into net earnings. When an entity ceases to have a controlling financial interest in a subsidiary or group of assets within a foreign entity, the entity is required to apply the guidance in ASC 830-30 to release any related cumulative translation adjustment into net earnings. Accordingly, the cumulative translation adjustment should be released into net earnings only if the sale or transfer results in the complete or substantially complete liquidation of the foreign entity in which the subsidiary or group of assets had resided. ASU 2013-05 is effective prospectively for fiscal years, and interim reporting periods within those years, beginning after December 15, 2013. Early adoption is permitted as of the beginning of the entity's fiscal year. The Company will adopt ASU 2013-05 as of the beginning of calendar 2014 and does not expect the adoption of ASU 2013-05 to have a material impact on the Company's consolidated financial position, cash flows, or results of operations.

NOTE 4 - RESTATEMENT AND RECLASSIFICATION

The Company presented the December 31, 2012 balance sheet in the 8-K/A filed on June 18, 2013, without properly applying ASC 810 Consolidation, with respect to the treatment of the Variable Interest Entity (VIE) relationship.  The correction was the result of other current receivables to the VIE treated as equity in the amount of $1,587,075.  In addition, reclassifications of account categorizations were made on the balance sheet. There was no material impact to the Company’s financial condition, operating cash flows or results of operations as a result of this correction.  Prior periods have been corrected to conform to the current period presentation.
 
 
The following table sets forth the impact of this correction on our balance sheet as of December 31, 2012:
 
CELLULAR BIOMEDICINE GROUP, INC.
CONSOLIDATED BALANCE SHEET
 
   
December 31, 2012
 
   
As Originally reported
   
Restatement adjustment
   
As Restated
 
 Assets
                 
Cash
  $ 4,144,896     $ -     $ 4,144,896  
Accounts receivable
    20,683       -       20,683  
Other receivable
    1,715,756       (1,587,075 )     128,681  
Inventory
    37,241       -       37,241  
Prepaid expenses
    18,118       -       18,118  
Total current assets
    5,936,694       (1,587,075 )     4,349,619  
                         
Property, plant and equipment, net
    1,326,882       -       1,326,882  
Intangibles
    940,897       -       940,897  
Deferred tax asset
            119,427       119,427  
Long-term prepaid expenses
    14,802       -       14,802  
Total assets (1)
  $ 8,219,275     $ (1,467,648 )   $ 6,751,627  
                         
Liabilities and Stockholders' Equity
                       
                         
Liabilities:
                       
Accounts payable
  $ 23,931     $ -     $ 23,931  
Accrued expenses
    97,454       -       97,454  
Tax payable
    (119,427 )     119,427       -  
Other current liabilities
    473,848       -       473,848  
Total current liabilities
    475,806       119,427       595,233  
                         
Deferred tax liability non-current
    -       -       -  
Total liabilities (1)
    475,806       119,427       595,233  
                         
Stockholders' equity:
                       
                         
    Preferred stock, par value $.001, 50,000,000 shares
                       
    authorized; none issued and outstanding
                       
    as of March 31, 2013 and December 31, 2012, respectively
    -       -       -  
                         
    Common stock, par value $.001, 300,000,000 shares authorized;
                       
    5,704,245 and 3,710,560 issued and outstanding
                       
    as of March 31, 2013 and December 31, 2012, respectively
    3,711       -       3,711  
Additional paid in capital
    14,414,998       (1,587,075 )     12,827,923  
    Accumulated deficit
    (6,736,866 )     -       (6,736,866 )
    Accumulated other comprehensive income (loss)
    61,626       -       61,626  
      Total stockholders' equity
    7,743,469       (1,587,075 )     6,156,394  
                         
Total liabilities and stockholders' equity
  $ 8,219,275     $ (1,467,648 )   $ 6,751,627  


NOTE 5 - BUSINESS COMBINATION
 
As indicated in Notes 1 and 2, as of February 6, 2013, EastBridge merged with Cellular Biomedicine Group, Ltd., with Cellular Biomedicine Group, Ltd. being the accounting acquirer thus resulting in a reverse merger for accounting purposes. After consummation of this transaction, the then current Company stockholders retained 30% of the Company on a fully-diluted basis. The Company has accounted for the merger as a business purchase of EastBridge by Cellular Biomedicine with the purchase price of $9,781,794 equal to the fair value of the shares retained by the then current Company stockholders.
 
The following table presents the initial allocation of the purchase price of EastBridge by Cellular Biomedicine:

Cash
  $ 2,568,995  
Other current assets
    50,000  
Investments
    2,026,334  
Goodwill
    6,808,533  
Total assets acquired
    11,453,862  
         
Accounts payable
    (149,098 )
Accrued expenses
    (1,156,223 )
Deferred revenue
    (251,834 )
Advances payable to related party
    (32,635 )
Other current liabilities
    (5,734 )
Deferred tax liability non-current
    (76,544 )
Total liabilities assumed
    (1,672,068 )
Net assets acquired
  $ 9,781,794  
 
The following unaudited pro forma consolidated results of operations for the three and six months ended June 30, 2013 and 2012 has been prepared as if the acquisition of EastBridge had occurred on January 1, 2012.
 
   
Three Months Ended June 30, 2013
   
Three Months Ended June 30, 2012
 
   
CBMG
As stated
   
EastBridge
Pro forma Adjustment
   
Pro forma
Consolidated
   
CBMG
As stated
   
EastBridge
Pro forma Adjustment
   
Pro forma
Consolidated
 
Net revenue
  $ 111,434     $ -     $ 111,434     $ 194,774     $ 166,771     $ 361,545  
Net loss
    (2,495,842 )     -       (2,495,842 )     (878,762 )     (171,725 )     (1,050,487 )
                                                 
Weighted average shares
    5,719,075       -       5,719,075       2,896,868       1,563,706       4,460,574  
Earnings per share
                                               
Basic and diluted
  $ (0.44 )   $ -     $ (0.44 )   $ (0.30 )   $ (0.11 )   $ (0.24 )
                                                 
                                                 
   
Six Months Ended June 30, 2013
   
Six Months Ended June 30, 2012
 
                                     
   
CBMG
As stated
   
EastBridge
Pro forma Adjustment
   
Pro forma
Consolidated
   
CBMG
As stated
   
EastBridge
Pro forma Adjustment
   
Pro forma
Consolidated
 
Net revenue
  $ 111,434     $ -     $ 111,434     $ 273,363     $ 166,771     $ 440,134  
Net loss
    (8,400,584 )     (230,707 )     (8,631,291 )     (1,809,036 )     (416,099 )     (2,225,135 )
                                                 
Weighted average shares
    5,196,583       313,930       5,510,513       2,871,534       1,563,706       4,435,240  
Earnings per share
                                               
Basic and diluted
  $ (1.62 )   $ (0.73 )   $ (1.57 )   $ (0.63 )   $ (0.27 )   $ (0.50 )
NOTE 6 - VARIABLE INTEREST ENTITY
 
VIEs are those entities in which a company, through contractual arrangements, bears the risk of, and enjoys the rewards normally associated with ownership of the entity, and therefore the company is the primary beneficiary of the entity.  Cellular Biomedicine Group Ltd (Shanghai) ("CBMG Shanghai") is a variable interest entity (VIE), through which the Company conducts stem cell research and clinical trials in China.  The shareholders of record for CBMG Shanghai are Cao Wei and Chen Mingzhe, who together own 100% of the equity interests in CBMG Shanghai. The initial capitalization and operating expenses of CBMG Shanghai are funded by our WFOE, Cellular Biomedicine Group Ltd. (Wuxi) ("CBMG Wuxi").  The registered capital of CBMG Shanghai is ten million RMB and was incorporated on October 19, 2011.

In February 2012, CBMG Wuxi provided financing to CBMG Shanghai in the amount of $1,587,075 for working capital purposes.  In conjunction with the provided financing, exclusive option agreements were executed granting CBMG Wuxi the irrevocable and exclusive right to convert the unpaid portion of the provided financing into equity interest of CBMG Shanghai at CBMG Wuxi’s sole and absolute discretion.  CBMG Wuxi and CBMG Shanghai additionally executed a business cooperation agreement whereby CBMG Wuxi is to provide CBMG Shanghai with technical and business support, consulting services, and other commercial services.  The shareholders of CBMG Shanghai pledged their equity interest in CBMG Shanghai as collateral in the event CBMG Shanghai does not perform its obligations under the business cooperation agreement.

The Company has determined it is the primary beneficiary of CBMG Shanghai by reference to the power and benefits criterion under ASC 810, Consolidation. This determination was reached after considering the financing provided by CBMG Wuxi to CBMG Shanghai is convertible into equity interest of CBMG Shanghai and the business cooperation agreement grants the Company and its officers the power to manage and make decisions that affect the operation of CBMG Shanghai.

There are substantial uncertainties regarding the interpretation, application and enforcement of PRC laws and regulations, including but not limited to the laws and regulations governing our business or the enforcement and performance of our contractual arrangements.  See Risk Factors below regarding "Risks Related to Our Structure". The Company has not provided any guarantees related to CBMG Shanghai and no creditors of CBMG Shanghai have recourse to the general credit of the Company.

As the primary beneficiary of CBMG Shanghai, the Company consolidates in its financial statements the financial position, results of operations, and cash flows of CBMG Shanghai, and all intercompany balances and transactions between the Company and CBMG Shanghai are eliminated in the consolidated financial statements.

The Company has aggregated the financial information of CBMG Shanghai in the table below. The aggregate carrying value of CBMG Shanghai’s assets and liabilities (after elimination of intercompany transactions and balances) in the Company’s consolidated balance sheet as of June 30, 2013 and December 31, 2012, are as follows:
 
   
June 30,
   
December 31,
 
   
2013
   
2012
 
 Assets
           
Cash
 
$
37,289
   
$
10,183
 
Other receivables
   
99,301
     
51,949
 
Inventory
   
23,583
     
33,232
 
Prepaid expenses
   
67,302
     
4,420
 
Total current assets
   
227,475
     
99,784
 
                 
Property, plant and equipment, net
   
888,879
     
1,082,358
 
Intangibles
   
79,585
     
79,468
 
Deferred tax asset
   
-
     
39,615
 
Total assets
 
$
1,195,939
   
$
1,301,225
 
                 
Liabilities
               
                 
Liabilities:
               
Accounts payable
 
$
8,713
   
$
16,004
 
Accrued expenses
   
452,408
     
539,244
 
Tax payable
   
15,094
     
-
 
Total liabilities
 
$
476,215
   
$
555,248
 
 
 

NOTE 7 - OTHER CURRENT ASSETS

Other Receivables

The Company pays deposits on various items relating to office expenses. Management has classified these deposits as receivables as the intention is to recover these deposits in less than 12 months. As of June 30, 2013 and December 31, 2012 the amounts of other receivables was $166,785 and $128,681, respectively.

NOTE 8 - INVENTORY
 
At June 30, 2013 and December 31, 2012, inventory consisted of the following:
 
   
June 30,
2013
   
December 31,
2012
 
             
Raw materials
  $ 30,439     $ 37,241  
Finished goods
    -       -  
    $ 30,439     $ 37,241  
 
This inventory is from the biomedicine segment. The consulting segment does not have inventory.
 
NOTE 9 - PROPERTY, PLANT AND EQUIPMENT
 
As of June 30, 2013 and December 31, 2012, property, plant and equipment, carried at cost, consisted of the following:
 
   
June 30,
2013
   
December 31,
2012
 
             
Office equipment
  $ 16,874     $ 16,586  
Manufacturing equipment
    686,348       644,909  
Computer equipment
    37,258       32,504  
Leasehold improvements
    710,336       762,579  
      1,450,816       1,456,578  
Less: accumulated depreciation
    (306,500 )     (129,696 )
    $ 1,144,316     $ 1,326,882  
 
 
NOTE 10 - FAIR VALUE ACCOUNTING

Assets measured at fair value on a recurring basis as of June 30, 2013 are summarized as follows:
 
     2013  
    Fair Value Measurements at Reporting Date Using:  
                         
         
Quoted Prices in
Active Markets for
Identical Assets
   
Significant Other
Observable
Inputs
   
Significant
Unobservable
Inputs
 
   
Total
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
Equity position in Alpha Lujo, Inc.
  $ 128,541     $ 128,541     $ -     $ -  
Equity position in Wonder International Education & Investment Group Corporation
    1,084,078       1,084,078       -       -  
    $ 1,212,619     $ 1,212,619     $ -     $ -  
 
The Company holds 2,142,350 and 2,409,062 shares in Alpha Lujo, Inc and Wonder International Education and Investment Group Corporation, respectively. The Company has valued these shares at the closing OTCBB quoted price on June 30, 2013. As such, the estimated fair values of these financial instruments subsequent to the reporting date may be different from the amounts reported at period end. No such assets existed as of December 31, 2012.

NOTE 11 - INTANGIBLE ASSETS

Intangible assets that are subject to amortization are reviewed for potential impairment whenever events or circumstances indicate that carrying amounts may not be recoverable. Assets not subject to amortization are tested for impairment at least annually. The Company evaluates the continuing value of the intangibles at each balance sheet date and records write-downs if the continuing value has become impaired. An impairment is determined to exist if the anticipated future cash flow attributable to the asset is less than its carrying value. The asset is then reduced to the net present value of the anticipated future cash flow. Goodwill is reviewed for possible impairment at least annually or more frequently upon the occurrence of an event or when circumstances indicate that a reporting unit’s carrying amount is greater than its fair value.
 
 
As of June 30, 2013 and December 31, 2012, intangible assets, at cost, consisted of the following:

Patent - 5 year
           
   
June 30, 2013
   
December 31, 2012
 
Cost basis
  $ 58,638     $ 48,286  
Less: accumulated amortization
    (2,803 )     (1,419 )
    $ 55,835     $ 46,867  
                 
Patent - 3 year
               
   
June 30, 2013
   
December 31, 2012
 
Cost basis
  $ 1,000,000     $ 1,000,000  
Less: accumulated amortization
    (305,556 )     (139,097 )
    $ 694,444     $ 860,903  
                 
Software
               
   
June 30, 2013
   
December 31, 2012
 
Cost basis
  $ 37,606     $ 34,259  
Less: accumulated amortization
    (6,015 )     (1,132 )
    $ 31,591     $ 33,127  
 
All software is provided by a third party vendor, not internally developed, it has an estimated useful life of 5 years. Amortization expense for the three and six months ended June 30, 2013 was $87,242 and $172,578, respectively, the amortization expense for the three and six months ended June 30, 2012 was $390, respectively. Estimated amortization expense for each of the ensuing years are as follows:
 
Year ending December 31,
 
Amount
 
       
2013
 
$
172,430
 
2014   
   
344,860
 
2015   
   
205,974
 
2016   
   
9,561
 
2017 and thereafter   
 
$
49,045
 
         
   
$
781,870
 
 
NOTE 12 - LEASES

Operating lease commitments
 
Our corporate headquarters are located at 530 University Avenue in Palo Alto, California. We currently pay rent in the amount of $1,400 per month on a month-to-month basis.

The Company also is leasing office space in Scottsdale, Arizona under a two year non-cancelable operating lease agreement initiated in August 2012. In 2012, the Company agreed to continue the lease agreement for housing in Beijing. This lease continues on a month to month basis. Rent expense for the six months ended June, 2013 and 2012 was $221,356 and $183,080, respectively, including events to related parties described in Note 13.
 

Additionally, the Company has agreed to enter six tenancy agreements. The details of the six tenancy agreements are as follows:

CBMG Wuxi, the lessee, has a tenancy agreement with Wuxi HuishanXin Cheng Life Technology Industry Development Co., LTD’s., the lessor, for lease of the demised premises in Room E2301, Life Technology Industry A Zone, 1619, Huishan Da Dao, Huishan District, Wuxi, P. R. China. The lease term is three years, commencing from March 1, 2011 to February 28, 2014.
 
CBMG Shanghai, the lessee, has a tenancy agreement with Shanghai Guilin Industry Company Ltd., the lessor, for lease of the demised premises in level 5 and level 6, Building 1,333 Guiping Road, Xuhui District, Shanghai, P.R. China. The lease term is three years, commencing from December 31, 2011 to November 30, 2014.

CBMG Shanghai, the lessee, has a tenancy agreement with HuiQian, the lessor, for lease of the demised premises in Room 202, Lianhua Road, Minhang District, Shanghai, P.R. China. The lease term is one year, commencing from February 12, 2012 to February 11, 2013.

CBMG Shanghai, the lessee, has a tenancy agreement with WangJing, the lessor, for lease of the demised premises in Room 3-308, Alley 1458, Gumei Road, Minhang District, Shanghai, P.R. China. The lease term is one year, commencing from August 5, 2012 to August 4, 2013.

Cellular Biomedicine Group (HK), the lessee, has a tenancy agreement with Global Incorporation Centre (HK) Limited, the lessor, for lease of the demised premises in Unit 402, 4th Floor, Fairmont House, No. 8 Cotton Tree Drive, Admiralty, Hong Kong. The lease term is one year, commencing from August 5, 2012 to August 4, 2013.
 
CBMG Shanghai, the lessee, has a tenancy agreement with Shanghai Xuhui Huizhong Public rental housing, the lessor, for lease of the demised premises in Room1210, NO. 36 Caodong Road, Xuhui District. The lease term is two years, commencing from December 17, 2012 to December 31, 2014.
 
As of June 30, 2013, the Company has the following future minimum lease payments due under the foregoing lease agreements:
 
Year ending December 31,
 
Amount
 
       
2013
  $ 193,648  
2014
    376,549  
    $ 570,197  
 
NOTE 13 - RELATED PARTY TRANSACTIONS

As of June 30, 2013, the accrued compensation liability to the former officers was $359,228 of which $881,929 was accrued as of December 31, 2012.  No such amounts are reflected as of December 31, 2012 as these represent liabilities of EastBridge whose assets are only reported subsequent to the date of merger.

The Company received advances from two of its directors, one of whom is also a major stockholder who holds approximately a 9% interest in the Company, in the ordinary course of business at a rate of 4.5% interest which is the federal long term interest rate. As of June 30, 2013 and December 31, 2012 advances payable to the Company’s two directors were $31,385 and $0, respectively.

Reference is made to the executive employment agreements and deferred compensation arrangement discussion in Note 16, which is incorporated into this Note 13.

NOTE 14 - EQUITY

Accounting Standard Codification Topic 505 Equity paragraph 505-50-30-6 establishes that share-based payment transactions with nonemployees shall be measured at the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. Accounting Standard Codification Topic 470 Debt paragraph 470-50-40-3, in an early extinguishment of debt through exchange for common or preferred stock, allows for the reacquisition price of the extinguished debt shall be determined by the value of the common or preferred stock issued or the value of the debt whichever is more clearly evident.  The Company’s policy is to record all stock transactions at the quoted market price on the day of issuance, as the most consistently reliable measurement of the transaction value.
 
As of June 30, 2013, Cellular Biomedicine Group, Inc. had 5,726,011 shares of common stock, par value $.001, issued and outstanding with 300,000,000 common shares authorized.

Immediately prior to the reverse merger the company had 1,571,130 shares outstanding. The Company issued 3,638,941 shares in connection with the merger. See Note 5 for a discussion of the accounting for the merger.

During the three and six months ended June 30, 2013, the Company issued 21,766 and 41,766 shares of common stock, respectively, for services rendered. The Company expensed $67,475 and $149,475, respectively, in connection with these issuances based on the quoted market prices on the dates of issuance.

During the six months ended June 30, 2013, the Company issued 60,000 shares of common stock, to the former officers of the Company. The Company expensed $360,000 in connection with these issuances based on the quoted market prices on the dates of issuance.  No such issuances were made during the three months ended June 30, 2013.

During the six months ended June 30, 2013, the Company issued 71,814 shares of common stock, to employees that had earned these shares as compensation as of the date of merger. The Company expensed $305,210 in connection with these issuances based on the quoted market prices on the dates of issuance. No such issuances were made during the three months ended June 30, 2013.

During the six months ended June 30, 2013, the Company issued 342,360 shares of common stock, to specific stockholders as the Company did not achieve ten Phase II clinical trials by March 31, 2013 in accordance with the terms and conditions of certain private placement agreements entered into by private investors in CBMG BVI and assumed by the Company. The Company expensed $1,694,682 in connection with these issuances based on the quoted market prices on the dates of issuance. There are no further milestones that would require additional stock issuances. No such issuances were made during the three months ended June 30, 2013.

During the three and six months ended June 30, 2012, the Company issued 3,003 and 6,109 shares of common stock, respectively, for services rendered. The Company expensed $75,000 and $113,750, respectively, in connection with these issuances based on the quoted market prices on the dates of issuance.
 
During the three and six months ended June 30, 2012, the Company issued 12,012 and 112,104, respectively, shares of common stock for cash in the amount of $200,000 and $2,700,000, respectively.
 
NOTE 15 - DEFERRED REVENUE

The following table represents the balance of deferred revenue that has not yet been recognized under the Company’s revenue recognition policies:
 
   
June 30,
   
December 31,
 
   
2013
   
2012
 
             
Kaida Road Construction Company
  $ 73,000     $ -  
AREM Pacific Corporation
    92,985       -  
Dwarf Technologies
    75,814       -  
LongWen
    10,035       -  
Deferred Revenue
  $ 251,834     $ -  
 
All of the deferrd revenue result from receipt of cash deposits from consulting segment clients in accordance with each specific listing agreement.
 
 
NOTE 16 - COMMITMENTS AND CONTINGENCIES

Executive Employment Agreements

At the closing of the merger with CBMG BVI, the Company entered into executive employment agreements with each of Wen Tao (Steve) Liu, Wei (William) Cao and Andrew Chan dated February 6, 2013 (each an "Employment Agreement," collectively, the "Employment Agreements"). Pursuant to their Employment Agreements, each of these officers receive an annual base salary of $150,000. The officers are also eligible to participate in the Company’s Amended and Restated 2011 Incentive Stock Option Plan (the "Plan") and receive an option grant thereunder for the purchase of common stock of the Company at the discretion of the board of directors of the Company (the "Board"). The term of the officers’ employment agreements are effective as of February 6, 2013 and continue for three years thereafter. After the three year term, if the officers continue to be employed, they will be employed on an at-will basis and their agreements shall automatically renew for successive one year terms, until and unless their employment is terminated.

Each of the above Executive Employment Agreements contain termination provisions that dependent on the reason an executive is terminated, severance payments and the payment of COBRA premiums may be triggered.
 
Copies of the Executive Employment Agreements were filed as Exhibits 10.2, 10.3 and 10.4 to our current report on Form 8-K filed February 12, 2013.
 
EastBridge Sub Employment Agreements with Norman Klein and Keith Wong

On February 6, 2013, EastBridge Sub entered into employment agreements with Norman Klein and Keith Wong (each a "Subsidiary Employment Agreement," collectively, the "Subsidiary Employment Agreements").

Pursuant to Mr. Wong’s Subsidiary Employment Agreement with EastBridge Sub, Mr. Wong is entitled to an annual base salary of $240,000. Mr. Wong is also eligible to participate in the Plan.

Pursuant to Mr. Klein’s Subsidiary Employment Agreement with EastBridge Sub, Mr. Klein is entitled to an annual base salary of $180,000. Mr. Klein is also eligible to participate in the Plan.

The Subsidiary Employment Agreements are effective as of February 6, 2013 and shall continue for three years thereafter unless earlier terminated. After the three year term, Mr. Wong and Mr. Klein shall continue to be employed on an at-will basis and their employment agreements automatically renew for successive one year terms until terminated.
 
Each of the above Subsidiary Employment Agreements contain termination provisions that depend on the reason employment is terminated, and severance payments and the payment of COBRA premiums may be triggered.

Copies of the Subsidiary Employment Agreements were attached as Exhibits 10.10 and 10.11 to our current report on Form 8-K filed February 12, 2013.

Deferred Compensation Arrangement with Former Officers

On February 5, 2013, the Company entered into a Deferred Compensation Agreement with Keith Wong and Norman Klein (the "Former Executives"), in which the Company agreed to: (i) pay its Former Executives certain accrued unpaid cash compensation consisting of $676,839 payable to Keith Wong and $459,300 payable to Norman Klein, plus aggregate accrued interest calculated at the simple rate of 12% per annum; and (ii) pay on August 31, 2013, a cash bonus payment of $204,723 to Mr. Wong and $152,577 to Mr. Klein. The Company accrued approximately $351,000 in interest and bonus in connection with Mr. Wong’s deferred compensation and approximately $262,000 in interest and bonus in connection with Mr. Klein’s deferred compensation. A copy of the Deferred Compensation Agreement was attached as Exhibit 10.9 to our current report on Form 8-K filed February 12, 2013.

 
NOTE 17 - STOCK BASED COMPENSATION

Our stock-based compensation arrangements include grants of stock options and restricted stock awards under the 2009 Stock Option Plan (the "2009 Plan") and the 2011 Incentive Stock Option Plan (the "2011 Plan"), and certain awards granted outside of these plans. Refer to Note 12, "Stock Based Compensation," in Item 8. "Financial Statements and Supplementary Financial Data" appearing in our Annual Report on Form 10-K for the year ended December 31, 2012, as amended, for further information on our stock-based compensation arrangements. The compensation cost that has been charged against income related to stock-based compensation for the three and six months ended June 30, 2013 was $203,366 and $862,433, respectively, and is included in general and administrative expense in our Condensed Consolidated Statements of Operations. There was no such compensation cost for the three and six months ended June 30, 2012. As of June 30, 2013, there was total unrecognized compensation expense of $1,408,857 related to non-vested stock option awards and $104,996 related to non-vested restricted stock awards. That cost is expected to be recognized over a weighted-average period of 2.46 years and 2.10 years for the stock option and restricted stock awards, respectively.
 
2009 Stock Option Plan

During the first quarter of 2009, the Company's Board of Directors approved and adopted the 2009 Plan and designated 100,000 shares of our common stock for issuance under the 2009 Plan to employees, directors or consultants of the Company in the form of restricted stock or stock option awards. Under the terms of the 2009 Plan, stock option awards shall be made with exercise prices not less than 100% of the fair market value of the shares of Common Stock on the grant date. Since adoption, the Company issued awards for an aggregate of approximately 95,000 shares of common stock under the 2009 Plan. These awards were not stock options but instead fully vested shares at the date of grant. For the six months ended June 30, 2013, the Company issued no shares of common stock under the 2009 Plan.

Amended and Restated 2011 Incentive Stock Option Plan

Awards granted under the 2011 Plan are typically granted with with following vesting or payment schedule: 30% on the first anniversary of the grant date, 30% on the second anniversary of the grant date, and 40% on the third anniversary of the grant date. As of June 30, 2013, a total of 63,133 restricted shares have been reserved for issuance to employees, that remain unearned.
 
During the six months ended June 30, 2013, the Company issued 264,738, shares of common stock under the 2011 Plan. All shares were issued to officers, directors and employees of the Company as stock based compensation. An additional 423,733 of common shares have been reserved under the 2011 Plan, but have not become issuable under options or issued as restricted share awards.
 
As of June 30, 2013, the following sets forth the total number of shares reserved and remaining available for issuance under the 2009 and 2011 plans.

   
Total shares
reserved
under the
plan
   
Remaining
shares available
for issuance
under the
plan
 
2009 Stock Option Plan
    100,000       4,593  
Amended and Restated 2011 Incentive Stock Option Plan
    780,000       88,161  
NOTE 18 - NET LOSS PER SHARE

Basic and diluted net loss per common share is computed on the basis of our weighted average number of common shares outstanding, as determined by using the calculations outlined below:
 
   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
   
2013
   
2012
   
2013
   
2012
 
                         
Net loss
  $ (2,495,842 )   $ (878,762 )   $ (8,400,584 )   $ (1,809,036 )
                                 
Weighted average shares of common stock
    5,719,075       2,896,868       5,196,583       2,871,534  
Dilutive effect of stock options
    -       -       -       -  
Common stock and common stock equivalents
    5,719,075       2,896,868       5,196,583       2,871,534  
                                 
Net loss per basic share
  $ (0.44 )   $ (0.30 )   $ (1.62 )   $ (0.63 )
Net loss per diluted share
  $ (0.44 )   $ (0.30 )   $ (1.62 )   $ (0.63 )
 
NOTE 19 - INCOME TAXES
 
Income taxes are accounted for under the asset and liability method.  Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period during which such rates are enacted.

We consider all available evidence to determine whether it is more likely than not that some portion or all of the deferred tax assets will be realized.  The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become realizable.  Management considers the scheduled reversal of deferred tax liabilities (including the impact of available carryback and carryforward periods), and projected taxable income in assessing the realizability of deferred tax assets.  In making such judgments, significant weight is given to evidence that can be objectively verified.  Based on all available evidence, in particular our three-year historical cumulative losses, recent operating losses and an expected U.S. pre-tax loss for the fiscal year ending December 31, 2012, we recorded a valuation allowance against our U.S. net deferred tax assets.  In order to fully realize the U.S. deferred tax assets, we will need to generate sufficient taxable income in future periods before the expiration of the deferred tax assets governed by the tax code.
 
 
NOTE 20 - SEGMENT INFORMATION

The Company operates two reporting segments. The majority of the Company's assets are held in its Biomedicine segment, with the majority of the Company's operations located in the People’s Republic of China. The Company’s Consulting segment provides services to foreign and domestic companies seeking access to the U.S. capital markets, and substantially all revenue generating activities in that segment are conducted in the United States. The Company intends to use gross profit as our measure of profit and loss for each business segment. The accounting principles applied at the operating segment level in determining gross profit are the same as those applied at the consolidated financial statement level. Our management evaluates performance and allocates resources based on net sales, gross profit and working capital in each of the reporting segments.
 
     
For the Three Months Ended June 30,
 
      2013     2012  
     
(in USD)
   
(% of Total)
   
(in USD)
   
(% of Total)
 
Biomedicine Segment
                         
 
Revenue
  $ -       0.0 %   $ 194,774       100.0 %
 
Cost of services
    -       0.0 %     85,358       100.0 %
 
Gross profit
  $ -       0.0 %   $ 109,416       100.0 %
 
Gross profit %
    0.0 %             56.2 %        
                                   
Consulting Segment
                                 
 
Revenue
  $ 111,434       0.0 %   $ -       0.0 %
 
Cost of services
    -       0.0 %     -       0.0 %
 
Gross profit
  $ 111,434       0.0 %   $ -       0.0 %
 
Gross profit %
    100.0 %             0.0 %        
                                   
Total:
                                 
 
Revenue
  $ 111,434       0.0 %   $ 194,774       100.0 %
 
Cost of services
    -       0.0 %     85,358       100.0 %
 
Gross profit
  $ 111,434       0.0 %   $ 109,416       100.0 %
 
Gross profit %
    100.0 %             56.2 %        
                                   
                                   
     
For the Six Months Ended June 30,
 
        2013       2012  
     
(in USD)
   
(% of Total)
   
(in USD)
   
(% of Total)
 
Biomedicine Segment
                                 
 
Revenue
  $ -       0.0 %   $ 273,363       100.0 %
 
Cost of services
    -       0.0 %     113,048       100.0 %
 
Gross profit
  $ -       0.0 %   $ 160,315       100.0 %
 
Gross profit %
    0.0 %             58.6 %        
                                   
Consulting Segment
                                 
 
Revenue
  $ 111,434       0.0 %   $ -       0.0 %
 
Cost of services
    -       0.0 %     -       0.0 %
 
Gross profit
  $ -       0.0 %   $ -       0.0 %
 
Gross profit %
    100.0 %             0.0 %        
                                   
Total:
                                 
 
Revenue
  $ 111,434       0.0 %   $ 273,363       100.0 %
 
Cost of services
    -       0.0 %     113,048       100.0 %
 
Gross profit
  $ 111,434       0.0 %   $ 160,315       100.0 %
 
Gross profit %
    100.0 %             58.6 %        
 
NOTE 21 - SUBSEQUENT EVENTS

On July 24, 2013, the Company entered into a Subscription Agreement ("Subscription Agreement") with selected investors (the "Purchasers") that met the criteria as "Accredited Investors" as defined in Rule 501(a) of Regulation D under the Securities Act of 1933 (the "Act"), and other investors who met the criteria as "non-U.S. persons" who agreed to comply with the applicable requirements of Regulation S under the Act. The Company offered to sell up to an aggregate of 1,194,030 shares of the Company’s common stock, $0.001 par value.  Under the Subscription Agreement, on July 24, 2013 in an initial closing the Company issued to the Purchasers 448,508 shares of common stock at a price per share of $6.70 for an aggregate purchase price of $3,005,006.  Additional information regarding this financing appears in the Company’s 8-K filed on July 25, 2013.



The following discussion and analysis summarizes the significant factors affecting our results of operations, financial condition and liquidity position for the three and six months ended June 30, 2013 and 2012, and should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this filing.

This report contains forward-looking statements. These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

Factors that might affect our forward-looking statements include, among other things:

overall economic and business conditions;

the demand for our products and services;

competitive factors in the industries in which we compete;

the results of our pending and future litigation;

the emergence of new technologies which compete with our product and service offerings;

our cash position and cash burn rate;

other capital market conditions, including availability of funding sources;

the strength of our intellectual property portfolio; and

changes in government regulations related to our industry.

In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "estimates," "projects," "predicts," "potential" and similar expressions. These statements reflect our current views with respect to future events and are based on assumptions and are subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in greater detail under the heading "Risk Factors" included in other reports we file with the Securities and Exchange Commission. Also, these forward-looking statements represent our estimates and assumptions only as of the date of the document containing the applicable statement.

Unless required by law, we undertake no obligation to update or revise any forward-looking statements to reflect new information or future events or developments. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in such forward-looking statements.

OVERVIEW

Recent Developments

As of the date of this report, our biomedicine business is engaged in two clinical trials for cell therapy candidates:
 
haMPC (Human Adipose-derived Mesenchymal Progenitor Cells) therapy for Knee Osteoarthritis (KOA): www.clinicaltrials.gov #NCT01809769
   
TC-DC Therapy for Hepatocellular Carcinoma (liver cancer): www.clinicaltrials.gov #NCT01828762
 
 
Our Phase I clinical trial for Knee Osteoarthritis (KOA), was launched in March 2013, has recruited over 50% of the patients required for the trial. Our Phase I clinical trial for TC-DC immunotherapy treatment for Heptocellular Carcinoma (HCC) was also launched in March of 2013, and has completed its recruitment of its required patients in July 2013. Our current expectation is for initial results from these clinical trials to be available in the third quarter of 2013.  The focus of each of these trials is primarily on safety, however these trials are also expected to yield preliminary results on efficacy. We presently anticipate that our Phase I clinical trial for KOA therapy will be completed in the third quarter of 2013, and our Phase I clinical trial for TC-DC Therapy for HCC to be completed in the fourth quarter of 2013.
 
With regard to our intellectual property portfolio, in the first quarter of 2013 we secured patents relating to the use of allogeneic stromal vascular fraction (SVF) or mesenchymal progenitor cells for the prevention, and treatment of Osteoarthritis and a patent for using allogeneic stromal vascular fraction and haMPCs or mesenchymal progenitor cells for the prevention and treatment of Rheumatoid Arthritis.

In the next 12 months, we aim to accomplish the following in our biomedicine business:

Approval of a Stromal Vascular Fraction (SVF) kit by the SFDA (SVF kits are 'toolboxes' used by physicians to safely extract cell samples from patients).

Adipose tissue transportation kit approval as a medical device (these kits permit safe and effective transportation of extracted or processed cells). 

Completion of KOA Phase I trial safety data and advanced staggered filing of Phase II trial.

Preliminary HCC Phase I trial results.

Approval of additional pending Patent Cooperation Treaty (PCT) patents.

For the three and six months ended June 30, 2012, the biomedicine business generated $194,774 and $273,363, respectively, in revenue from the sales of enzyme reagent kits. We expect our biomedicine business to generate revenues primarily from the development of therapies for the treatment of Knee Osteoarthritis in 2014 and Hepatocellular Carcinoma in 2015 or 2016.

Our three and six months ending June 30, 2013 operating expenses in the Biomedicine business were in line with management’s plans and expectations.  We incurred an increase in operating expenses of approximately $371,000 and $1,061,000, respectively, for the three and six months ended June 30, 2013 as compared to the three and six months ended June 30, 2012, which is attributable to our merger transaction, in addition to expenses related to being a public company.
 
In addition, for the  six months ended June 30, 2013 we issued 342,360 shares of common stock, for which we recorded an expense of $1,694,682, based on the quoted market prices on the dates of issuance. These issuances were made to certain pre-merger private investors in Cellular Biomedicine Group Limited (CBMG BVI) while it was a privately-held corporation. CBMG BVI agreed that if it did not achieve ten Phase II clinical trials by March 31, 2013 it would issue certain contingent shares to its private investors. This contingent share obligation to investors was assumed by the Company in the merger. On March 29, 2013 the Company issued the contingent shares to these pre-merger investors as requrired.
 
Corporate History

Merger Between CBMG and EastBridge Investment Group Corporation

On November 13, 2012, EastBridge Investment Group Corporation (then an Arizona corporation) signed an agreement to merge with Cellular Biomedicine Group Limited, at that time a British Virgin Islands Company (CBMG BVI). Under the merger agreement, EastBridge’s wholly-owned merger subsidiary agreed to merge with CBMG BVI, with CBMG BVI as the surviving entity. As a result of the merger, which was consummated on February 6, 2013, Cellular Biomedicine Group Ltd. became the wholly-owned subsidiary of EastBridge Investment Group Ltd. The transactions under the merger agreement as amended are referred to as the "Merger". Following the merger, the Company's primary business became its Biomedicine business. 
 

Also in connection with the Merger, the Company created a new Delaware subsidiary called EastBridge Investment Corp. ("EastBridge Sub"). Pursuant to a Contribution Agreement by and between EastBridge and EastBridge Sub dated February 6, 2013 (the "Contribution Agreement"), EastBridge contributed all of its current assets and liabilities to a newly formed, wholly-owned subsidiary of EastBridge, named "EastBridge Investment Corp.," which will continue the current business and operations of EastBridge. A copy of the agreement and plan of merger, and all related exhibits, were previously filed on Form 8-K filed on February 12, 2013. For additional information regarding our Merger, please refer to our current report on Form 8-K filed with the Securities and Exchange Commission on February 12, 2013 as amended on April 24, 2013, including all subsequent amendments, which reports are incorporated by reference. Effective on March 5, 2013 the Company changed its corporate name to "Cellular Biomedicine Group, Inc."
 
Biomedicine Business Overview
 
Our biomedicine business was founded in 2009 as a specialty biomedicine group by a team of experienced Chinese-American executives, scientists and doctors. In 2010 we established a manufacturing facility in Wuxi, and in 2012 we established a manufacturing facility in Shanghai, each of which are compliant with U.S. FDA "good manufacturing practice" (GMP) standard protocols. Our focus has been to monetize the rapidly growing health care market in China by marketing and commercializing stem cell and immune cell therapeutics, related tools and products from our patent-protected proprietary cell technology developed by our research and development team, as well as by utilizing exclusively in-licensed intellectual properties.
 
Our treatment focal points are cancer, neurodegenerative and other degenerative diseases comprised of Knee Osteoarthritis (KOA), Spinal Muscular Atrophy (SMA), Amyotrophic Lateral Sclerosis (ALS) and Stroke.
 
In the cancer field, our in-licensed product candidate Tumor Cell Targeted Dendritic Cell (TC-DC) has successfully completed a U.S. FDA Phase II clinical trial for the treatment of Metastatic Melanoma at the Hoag Medical Center in California. Under applicable international reciprocity procedures we are utilizing data generated in a U.S. Phase II clinical trial in an analogous China-based SFDA Phase I/II Clinical Trial for the treatment of Liver Cancer. Management believes we will be able to leverage skin cancer data produced in ongoing trials in the U.S., and apply it toward advancing our product candidate for the treatment of liver cancer and other cancer-related indications.
 
In addition, we plan to begin pre-clinical studies on the use of allogeneic Mesenchymal Stem Cells (MSC) for the treatment of Lupus and Rheumatoid Arthritis. We have also exclusively in-licensed Motor Neuron Precursor Cell and Neuronal Cell technology and plan to launch trials for its use in the treatment of ALS, SMA, and Stroke.
 
As the cancers which our potential therapies target all have relatively low survival rates, annual incidence (number of new cases) is roughly equivalent to existing served available market. If a disease span is long, the number of patients will be accumulative and larger than new cases per year. There are 300,000 new cases of Hepatocellular Carcinoma (HCC) per year in China. There are 30,000 new cases of Metastatic Melanoma, with those diagnosed to be Stage IV having a median survival time of 18 months. Additionally, there are 15 million people aged 60 or older with KOA in China. For Spinal Muscular Atrophy Type I (SMA-I), there are about 1,000 newborns with SMA-I disease in China annually. The median life span of these children is less than 6 months. Adult incidence is approximately 2 million in China.
 
Our plan calls for 120, 60 and 30 patients respectively in clinical trials for the treatment of each of the cancers, KOA, and SMA. We have employed a multinational Contract Research Organization (CRO) to manage trial design and to minimize errors and delays. The first safety/efficacy milestone report for the Cancer and KOA clinical trials are scheduled in the third quarter of 2013. The first potential patients relating to these indications are expected in the first half of 2014.
 
 
We have a long term joint venture with California Stem Cell Inc. (CSC). Under our joint venture arrangement we hold an exclusive license from CSC to develop and market Cancer (TC-DC), Motor Neuron Precursor Cells (MNP) and Neuronal Precursor Cells (NP) in greater China and Taiwan. These methodologies enable us to conduct certain clinical trials and commercialization. Our TC-DC therapy utilizes dendritic cells that have been taught the unique "signature" of the patient’s cancer, in order to trigger an effective immune response against cancer stem cells, the root cause of cancer metastasis and recurrence. We have a process to develop MNP and NP cells with high purity levels, validated by synapse formation, and have shown functional innervation with human muscle cells. These products enable us to conduct certain clinical trials and pursue commercialization of TC-DC therapy, and explore the development of new therapies for a variety of neurodegenerative diseases. Our four cellular technology platforms (TC-DC, adult adipose-derived, umbilical cells, and neural stem cells) enable us to create multiple cell formulations to develop potential treatments for specific medical conditions and diseases, as well as applying single cell types in a specific treatment protocol.

Our facilities are certified to meet the international standards NSF/ANSI 49, ISO-14644, ANSI/NCSL Z-540-1 and 10CFR21, as well as Chinese SFDA standards CNAS L0221. In addition to standard protocols, we use proprietary processes and procedures for manufacturing our cell lines comprised of:
 
Extraction, cultivation and banking processes that insure cell preservation and viability
 
DNA identification for stem cell ownership
 
Bio-safety testing at independently certified laboratories.

Our Strategy

Our biomedicine business is in the development stage. Presently we have two autologous cell therapy candidates undergoing clinical trials in China, HCC and KOA. If and when these therapies gain regulatory approval in the PRC, we will be able to market and offer them for clinical use. Although our biomedicine business was very recently organized, our technologies have been in development for decades, and our focus is on the latest translational stages of product development, principally from the pre-clinical trial stage to regulatory approval and commercialization of new therapies.
 
Our strategy is to develop safe and effective cellular medicine therapies for indications that represent a large unmet need in China, based on technologies developed both in-house and obtained through licensing arrangements with other companies. Our near term objective is to pursue successful clinical trials in China for our KOA application, followed by our HCC therapy. We intend to utilize our comprehensive cell platform to support multiple cell lines to pursue multiple therapies, both allogeneic and autologous. We intend apply U.S. Standard Operating Procedures (SOPs) and protocols while complying with Chinese regulations, while owning, developing and executing our own clinical trial protocols. We plan to establish domestic and international joint ventures or partnerships to set up cell laboratories and/or research facilities, in-license technology from outside of China, and build affiliations with hospitals, to develop a commercialization path for our therapies, once approved. We intend to use our first-mover advantage in China, against a backdrop of enhanced regulation by the central government, to differentiate ourselves from the competition and establish a leading position in the China cell therapeutic market.

CBMG initially plans to use its centralized manufacturing facility located in Shanghai to service multiple hospitals within 200 kilometers of the facility. We aim to complete clinical trials for our KOA and HCC therapy candidates via the medical technology pathway through designated hospitals. Our goal is to first obtain permission for commercial use of the therapies from the Ministry of Health, for the respective hospitals in which the trials are being conducted. CBMG plans to scale up its customer base by qualifying multiple additional hospitals for the post-trial use of therapies, once approved, by following guidelines administered by MOH. Based on current estimates we expect our biomedicine business to generate revenues primarily from the development of therapies for the treatment of Knee Osteoarthritis within the next two years and Hepatocellular Carcinoma within the next three to five years.
 
Additionally, CBMG participates in the formulation of stem cell policy in China as a member of the Class III Medical Technology Approval Committee within the Chinese Medical Doctor’s Association (CMDA), an advisory body for the State Food and Drug Administration (SFDA) and Ministry of Health (MOH) on stem cell policy and regulatory affairs. We believe that few competitors in China are as well-equipped as we are in clinical trial development, diversified U.S. FDA protocol compliant manufacturing, regulatory compliance and policy making participation, as well as a long-term presence in the U.S. with U.S.-based management and investor base.
 

Our Technology

CBMG’s Cellular Biomedicine Technology Platforms

In order to expedite fulfillment of patient treatment CBMG has been actively developing technologies and products with a strong IP fortification, including human adipose-derived mesenchymal progenitor cells (haMPC), derived from fat tissue, for the treatment of Knee Osteoarthritis (KOA) and other indications, and human umbilical cord derived mesenchymal progenitor cells (huMPC) for the treatment of Systemic Lupus Erythematosus (SLE) and other indications. CBMG has also been actively engaging in in-license partnerships with world leading scientists and companies, including tumor cell specific dendritic cells (TC-DC) therapy for Hepatocellular Carcinoma (Liver Cancer) treatment. In addition, through our joint venture arrangement with California Stem Cells, Inc., CBMG has rights to develop cell therapies based on motor neuron precursor cells (MNP) and neuronal precursor cells (NP).

CBMG’s proprietary and patent-protected production processes and clinical protocols enable us to produce raw material, manufacture cells, and conduct cell banking and distribution. Our proprietary cell lines (haMPC, huMPC, TC-DC, MNP, as further discussed below) provide us with the ability to customize specialize formulations to address complex diseases and debilitating conditions.
 
CBMG has been developing disease-specific clinical treatment protocols. These protocols are designed for each of these proprietary cell lines (haMPC, huMPC, TC-DC, MNP) to address patient-specific medical conditions. These protocols include medical assessment to qualify each patient for treatment, evaluation of each patient before and after a specific therapy, cell transplantation methodologies including dosage, frequency and the use of adjunct therapies, potential adverse effects and their proper management.
 
The protocols of haMPC therapy for knee osteoarthritis (KOA) and TC-DC therapy for hepatic cellular carcinoma (liver cancer) have been approved by the Institutional Review Board of qualified hospitals for clinical trials. Once the trials are completed, the clinical data will be analyzed by a qualified third party statistician and reports will be filed by the hospitals to regulatory agencies for approval for use in treating patients.

Our Cellular Technology Platforms

Human Adipose-Derived Mesenchymal Progenitor Cells (haMPC)

Adult mesenchymal stem cells can currently be isolated from a variety of adult human sources, such as liver, bone marrow, and adipose (fat) tissue. The advantages in using adipose tissue (as opposed to bone marrow or blood) are that it is a one of the richest sources of pluripotent cells in the body, the easy and repeatable access to fat via liposuction, and the simple cell isolation procedures that can begin to take place even on-site with minor equipment needs. The procedure we are testing for KOA involves extracting a very small amount of fat using a minimally invasive extraction process which takes up to 20 minutes, and leaves no scarring. The haMPC cells are then processed and isolated on site, and injected intra articularly into the knee joint with ultrasound guidance.

These haMPC cells are capable of differentiating into bone, cartilage, tendon, skeletal muscle, and fat under the right conditions. As such, human adipose-derived Mesenchymal Progenitor Cells (haMPC’s) are an attractive focus for medical research and clinical development. Importantly, we believe both allogenic and autologously sourced haMPC’s may be used in the treatment of disease. Numerous studies have provided preclinical data that support the safety and efficacy of allogenic and autologously derived haMPC, offering a choice for those where factors such as donor age and health are an issue.

Additionally, certain disease treatment plans call for an initial infusion of these cells in the form of Stromal Vascular Fraction (SVF), an initial form of cell isolation that can be completed and injected within ninety minutes of receiving lipoaspirate. The therapeutic potential conferred by the cocktail of ingredients present in the SVF is also evident, as it is a rich source for preadipocytes, mesenchymal stem cells, endothelial progenitor cells, T regulatory cells and anti-inflammatory macrophages.


Human Umbilical Cord Derived Mesenchymal Progenitor Cells (huMPC)

CBMG has developed a stem cell line called human umbilical cord derived mesenchymal progenitor cells (huMPC). These huMPCs have a tremendous capacity for self-renewal whilst also maintaining their multipotent ability to differentiate into osteoblasts, adipocytes, and chondrocytes as well as myocytes and neurons.

The youngest, most potent huMPCs are obtained from umbilical cord tissue, called Wharton’s jelly, which is normally discarded as medical waste after the birth of a newborn. This tissue contains a much higher concentration of huMPC’s compared to cord blood. Researchers have shown that allogeneic huMPCs have potential therapeutic effects in cerebral palsy, Autism, cardiovascular diseases, spinal cord injury, autoimmune diseases, cartilage damage, Alzheimer’s, Parkinson’s, and many other degenerative diseases. CBMG has built a huMPC line with a high safety profile and preliminary evidence suggests therapeutic use in systemic lupus erythematosus (SLE) and cerebral palsy (CP).

Tumor Cell Specific Dendritic Cells (TC-DC)

Recent scientific findings indicate the presence of special cells in tumors that are responsible for cancer metastases and relapse. Referred to as "cancer stem cells", these cells make up only a small portion of the tumor mass. The central concept behind Tumor Stem Cell Specific Dendritic Cell (TC-DC) therapy is to immunize against these cells. TC-DC therapy takes a sample of the patient’s own purified and irradiated cancer cells and combines them with specialized immune cells, thereby ‘educating’ the immune cells to destroy the cancer stem cells from which tumors arise. We believe the selective targeting of cells that drive tumor growth would allow for effective cancer treatment without the risks and side effects of current therapies that also destroy healthy cells in the body.
 
Motor Neuron Precursor Cells (MNP) and Neuronal Precursor Cells (NP)

Cellular Biomedicine Group has fully licensed and transferred technology from California Stem Cell to produce clinical-quality motor neuron and neuronal progenitor cells from human embryonic stem cells (heSC’s). These stem cell-derived motor neurons have potential applications in treating amyotrophic lateral sclerosis (motor neuron disease, also known as Lou Gehrig’s disease), a condition caused by a debilitating rapid progressive weakness, muscle atrophy and loss of motor function; and spinal muscular atrophy (SMA), a group of debilitating disorders characterized by degeneration of lower motor neurons situated in the lower spinal cord, causing atrophy of various muscle groups in the body. Presently none of these conditions or disorders have any known cure.

Our Targeted Indications and Potential Therapies

Knee Osteoarthritis (KOA)

We are currently conducting a Phase I clinical trial for the treatment of knee osteoarthritis (KOA). Enrollment of patients is ongoing, and is expected to be completed by May 2013. The treatment period for each patient is three months. Osteoarthritis (OA) is a degenerative disease of the joints. KOA is one of the most common types of OA. Pathological manifestation of OA is primarily local inflammation caused by immune response and subsequent damage of joints. Restoration of immune response and joint tissues are the objective of therapies.

Fifty-three percent of KOA patients will degenerate to the point of disability. Conventional treatment usually involves invasive surgery with painful recovery and physical therapy. Currently, patients suffering from osteoarthritis in China number approximately 40 million people. Of these, approximately 70% suffer from knee osteoarthritis. As drug-based methods of management are ineffective, some 1.5 million patients with this disability will degenerate to the point of requiring artificial joint replacement surgery every year. However, only forty thousand will actually be able to undergo replacement surgery, leaving the majority of patients to suffer from a life-long disability due to lack of effective treatment.
 

Human adipose-derived mesenchymal progenitor cells (haMPC’s) are currently being considered as a new and effective treatment for osteoarthritis, with a huge potential market. In 2009, the worldwide market for orthopedic, tissue repair and cell therapy related products reached $3.6 billion, and sales are expected to reach $5.5 billion in 2014.

In order to bring haMPC-based KOA therapy to market, our market strategy is to: (a) establish regional laboratories that comply with cGMP standards in Shanghai and Beijing that meet Chinese Ministry of Health (MOH) approval; and (b) file joint applications with Class AAA hospitals near our laboratories to use haMPC’s to treat knee osteoarthritis in a clinical trial setting.

Our competitors are pursuing treatments for osteoarthritis, such as Zimmer, Inc., which is developing a knee cartilage implant. However, unlike their approach, our KOA therapy is not surgically invasive – it uses a small amount (50ml) of adipose tissue obtained via liposuction from the patient, which is cultured and re-injected into the patient. Stromal Vascular Fraction (SVF) is prepared using 25 millimeters of adipose tissue for immediate injection into the knee area, with the remaining tissue to be further processed to purify, expand and banked haMPCs for additional injections 1 and 3 months later. The injections are designed to induce the body’s secretion of growth factors promoting immune response and regulation, and regrowth of cartilage. The down-regulation of the patient’s immune response is aimed at reducing and controlling inflammation which is a central cause of KOA.

We believe our proprietary SVF purification method and subsequent haMPC proliferation and processing know-how will enable haMPC therapy to be a low cost and relatively safe and effective treatment for KOA. Additionally, banked haMPCs can continue to be stored for additional use in the future.

CBMG entered into a clinical trial agreement with Renji Hospital in affiliation with Shanghai Jiaotong University on January 28, 2013 to begin a Phase I/II clinical trial in using haMPC’s to apply to KOA indications in accordance with Chinese regulatory requirements. The objective of this clinical trial is evaluate efficacy and safety of this therapy, with results primarily measured by the WOMAC score (developed in 1982 by at Western Ontario and McMaster Universities), a set of standardized metrics used by health professionals to evaluate the condition of patients with osteoarthritis. Upon the completion of Phase II of the clinical trial, CBMG in accordance with the terms of the clinical trial agreement will retain the intellectual property rights to all confidential information and other information, including but not limited to invention, patent and technical know-how. CMBG expects to use such information and then be free to partner with other Class AAA hospitals and apply for MOH approval in the use of haMPC’s in KOA therapy. Before the conclusion of the clinical trial, CBMG expects to file a joint technology license application with selected hospitals with MOH for haMPC-based KOA therapy. Hospitals that have received license approval may then offer haMPC-based therapy as a product, with haMPC preparation and production being done by CBMG, with the hospital receiving appropriate cell therapy fees determined by local government guidelines. CBMG plans to charge a cell therapy technology service fee to the hospital.
 
In order to expand our KOA therapy, new Class AAA hospitals will need to successfully complete a confirmatory clinical trial (post-market study) involving a total of 10-20 patients, in order to jointly apply to MOH for a license to carry out haMPC-based KOA therapy. If its potential KOA therapy candidate successfully passes through clinical trials, CBMG intends to build a network of Class-AAA hospitals for clinical applications by introducing and encouraging other hospitals to engage in post-market studies.

Independent research and development work can be done with CBMG’s haMPC isolation and culture kit, as well as standardizing technical training and the clinical treatment program, with a view toward enhancing the quality of KOA cell therapy technology.

Hepatocellular Carcinoma (HCC)

CBMG has exclusive rights to develop and market tumor cell-dendritic cell (TC-DC) therapy for late stage HCC in greater China. In January 2013, we commenced a Phase I clinical trial with PLA 85 hospital in Shanghai, for our HCC therapy. Enrollment of patients was completed in July 2013. The treatment period in this trial is five months. The purpose of this trial is to evaluate the safety of our autologous immune cell therapy in primary hepatocellular carcinoma (HCC) patients following resection (surgical tumor removal) and Transarterial Chemo Embolization (TACE) Therapy, a type of localized chemotherapy technique.
 

Recent scientific findings indicate that tumors contain specialized cells that allow for the generation of new tumors. Named cancer stem cells, these cells are responsible for both tumor metastases and recurrence. The central concept behind CBMG’s technology is to immunize against these cancer stem cells.

A number of our competitors are developing cancer treatment therapies, such as Promethera Biosciences of Belgium, and Beike. However unlike our competitors, we utilize the liver cancer stem cells as an antigen – these proliferating, self-renewing liver cancer stem cells provide a clean source of tumor antigens, without contamination from extraneous cells. The patient’s immune cells are isolated and trained to recognize, attack and eliminate the cancer cells.

Tumor stem cell specific dendritic cell (TC-DC) therapy was developed by Dr. Robert Dillman through more than 20 years of clinical research at the Hoag Cancer Center, California. The core idea of the TC-DC technique is to activate a patient’s immune system by exposure of cancer stem cell antigens to the key antigen presenting cells, dendritic cells (DC). In order to expose cancer stem cell antigens effectively, cancer tissue from patients is digested and its cancer stem cell is expanded and co-cultured with the patient’s own DCs in vitro. Together with GM-CSF the patient’s DCs are loaded with fixed cancer stem cells and are administered back to the patient in order to boost the patient’s immune system to recognize cancer stem cell antigens and then effectively eliminate them.

The safety and efficacy profiles of TC-DC are outstanding based on Phase II clinical trials of TC-DC therapy for metastatic melanoma (see Dillman, R.O., et al. 2009. Phase II Trial of Dendritic Cells Loaded with Antigens from Self-Renewing, Proliferating Autologous Tumor Cells as Patient-Specific Antitumor Vaccines in Patients with Metastatic Melanoma: Final Report. Cancer Biotherapy and Radiopharmaceuticals, Volume 24 Number 3.) The most recent Phase II clinical trial of metastatic melanoma has shown five-year survival rate of 54%, and this therapy has been shown to significantly reduce the rate of tumor recurrence and metastasis, improve patient longevity and quality of life.

According to existing laws in the PRC, this technology is considered a Category III medical technology and is managed and approved by the Ministry of Health. The current market strategy is for CBMG to contract with Class-AAA hospitals to set up either on-site or localized cGMP standard cell biology laboratories, and apply to MOH for Phase I/II clinical trials to use TC-DC therapy for liver cancer. Upon completion of these clinical trials, selected Class-AAA hospitals will jointly file applications to MOH for a license to treat liver cancer using TC-DC technology. For hospitals that have received a license, CBMG will provide liver cancer targeted DC cells, with the hospital charging appropriate cell therapy fees to the patient as determined by local government guidelines. We expect to derive revenues from service fees paid by hospitals.
 
One of the primary difficulties in administering effective cancer therapy is in the uniqueness of the disease – no two cancers are the same. Importantly, CBMG sources both immune and cancer cells directly from the patient, and our completely autologous approach to cancer therapy means that each dose is specific to each individual.

Using our cell production platform, CBMG has the ability to process, prepare and produce cancer stem cells directly from patient tissue. These cells are then purified and irradiated, and combined with specialized immune cells to destroy the cancer stem cells from which tumors arise. This therapy is delivered to the patient in the form of a minimally invasive subcutaneous injection.

After receiving resected tumor tissue at our lab, the first step is to perform an enzyme digest that breaks down the solid tumor into individual cells. These cells then enter a process and purification stage, where contaminating cells are eliminated. The next step is to establish a cell line in the expansion phase, which typically takes 6 weeks, depending on the quality and proliferation rate of the sample. Also during this stage, the patient undergoes a leukapheresis procedure in which circulating white blood cells are extracted, and further processed into dendritic cells in the lab. In the last step, the patient’s dendritic cells are combined with irradiated cancer stem cells and thus learn the particular cancer’s "signature", and finally these dendritic cells are delivered over a series of subcutaneous injections.

 
Systemic Lupus Erythematosus

Systemic lupus erythematosus, commonly known as lupus, is an incurable disease that turns the body’s immune system against itself, eating away at skin, kidneys, nervous system and joints. The current standard of treatment in more severe cases of lupus involves the use of immunosuppressive drugs to control the disease, but often leads to many negative side-effects making this treatment option difficult for the patient by affecting quality of life, as immunosuppressant therapy is often life-long.

Recent studies have shown that human adipose-derived mesenchymal progenitor cells (haMPC’s) have the capability to modulate and suppress the immune response in tissue where inflammation is occurring. As haMPC’s have also been proved to have little to no threat of rejection from the host’s immune system, these cells have the potential to become the basis of a new therapy for lupus patients.

Spinal Muscular Atrophy (SMA)

Spinal Muscular Atrophy (SMA) is the result of a genetic mutation that causes the death of motor neurons in the spinal cord, resulting in weakness and wasting of the muscles in the arms and legs of infants and children. SMA Type I, the most severe form of the disease, is evident at birth or within the first few months, and babies with this condition in many cases never acquire the power, strength or endurance to sit independently, to crawl, or to walk. SMA affects all the muscle systems in the body, and the vast majority of babies diagnosed with SMA Type I do not live past the age of two without being placed on permanent life support. From the onset of this disease, patients generally continue to deteriorate over time, and there is no known cure.

Critical Accounting Policies

We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.

The following summarizes critical estimates made by management in the preparation of the consolidated financial statements.

Stock-Based Compensation

We periodically use stock-based awards, consisting of shares of common stock or stock options, to compensate certain officers, employees, and consultants. Awards are expensed on a straight line basis over the requisite service period based on the grant date fair value, net of estimated forfeitures, if any.
 
Options - The compensation expense that has been charged against income related to stock-based compensation for the three and six months ended June 30, 2013 was $144,046 and $193,740, respectively, and is included in general and administrative expense in our Condensed Consolidated Statements of Operations. There was no such compensation cost for the three and six months ended June 30, 2012. As of June 30, 2013, there was $1,408,857 of total unrecognized compensation cost related to non-vested stock option awards. That cost is expected to be recognized over a weighted-average period of 2.46 years for the stock option awards.
 
Restricted shares - The compensation expense that has been charged against income related to stock-based compensation for the three and six months ended June 30, 2013 was $59,320 and $668,692, respectively, and is included in general and administrative expense in our Condensed Consolidated Statements of Operations. As of June 30, 2013, a total of 63,133 restricted shares awards have been granted that remain unearned. As of June 30, 2013, total unrecognized compensation expense related to unvested awards was $104,996 for which the weighted average period over which such compensation expense is to be recognized is 2.10 years.

Revenue Recognition

We utilize the guidance set forth in the Securities and Exchange Commission's Staff Accounting Bulletin (SAB) No. 104, regarding the recognition, presentation and disclosure of revenue in financial statements.
 

We engage in listing contracts with our clients which provide for the payment of fees, either in cash or equity, upon the achievement of certain milestones by our clients with our assistance, including the successful completion of a financial statement audit, the successful listing on a national stock exchange and the maintenance of ongoing Exchange Act registration requirements with the Securities and Exchange Commission. In some instances, payment may be made in advance of performance; however, such payment is often refundable in the event that milestones are not reached. We recognize revenue on a systematic basis as milestones are reached in accordance with FASB’s Accounting Standards Codification ("ASC") 605 "Revenue Recognition" Update No. 2009-13. Such guidance stipulates that revenue be recognized for individual elements in a multiple deliverable arrangement using the relative selling price method. We rely on internal estimates of the relative selling price of each element as objective third-party evidence is unattainable.
 
For its Biomedicine segment, the Company recognizes revenue when pervasive evidence of an arrangement exists, the price is fixed and determinable, collection is reasonably assured and delivery of products or services has been rendered.

Income Taxes