Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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☑ ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2016
OR
☐ TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
transition period from _____
to _____
Commission
File Number: 001-36498
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CELLULAR BIOMEDICINE GROUP, INC.
(Exact name of registrant as specified in its charter)
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Delaware
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86-1032927
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State of Incorporation
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IRS Employer Identification No.
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19925 Stevens Creek Blvd., Suite 100
Cupertino, California 95014
(Address of principal executive offices)
(408) 973-7884
(Registrant's telephone number)
Securities registered pursuant to Section 12(b) of the Exchange
Act:
Common Stock, par value $.001 per share
Securities registered pursuant to Section 12(g) of the Exchange
Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. ☐ Yes ☑
No
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes
☑ No
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 ☑ No ☐
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 during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post
such files). Yes ☑ No ☐
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K.
☐
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer or a smaller
reporting company. See definitions of "large accelerated filer,"
"accelerated filer" and "smaller reporting company" in Rule 12b-2
of the Exchange Act. (Check one):
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Large
accelerated filer
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☐
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Accelerated
filer
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☑
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Non-accelerated
filer
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☐
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Smaller
reporting company
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☐
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Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). ☐ Yes ☑
No
State
the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at
which the common equity was last sold, or the average bid and asked
price of such common equity, as of the last business day of the
registrant's most recently completed second fiscal quarter –
$ 117,728,971 as of June 30, 2016.
Indicate
the number of shares outstanding of each of the registrant’s
classes of common stock, as of the latest practicable date: As of
February 28, 2017, there were 14,281,380 shares of common stock,
par value $.001 per share issued and outstanding.
Documents
Incorporated By Reference –None
CELLULAR BIOMEDICINE GROUP, INC.
FORM 10-K ANNUAL REPORT
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2016
TABLE OF CONTENTS
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Page
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ITEM
1.
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BUSINESS
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4
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ITEM
1A.
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RISK
FACTORS
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29
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ITEM
2.
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PROPERTIE
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60
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ITEM
3.
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LEGAL
PROCEEDINGS
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60
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ITEM
4.
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MINE
SAFETY DISCLOSURES
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61
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ITEM
5.
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MARKET
FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
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61
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ITEM
6.
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SELECTED
FINANCIAL DATA
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66
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ITEM
7.
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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69
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ITEM
7A.
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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84
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ITEM
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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85
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ITEM
9.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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85
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ITEM
9A.
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CONTROLS
AND PROCEDURES
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85
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ITEM
9B.
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OTHER
INFORMATION
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85
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ITEM
10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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86
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ITEM
11.
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EXECUTIVE
COMPENSATION
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94
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ITEM
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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114
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ITEM
13.
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CERTAIN
RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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117
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ITEM
14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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117
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ITEM
15.
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EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
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119
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SIGNATURES
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123
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2
Cautionary Note Regarding Forward-looking Statements and Risk
Factors
This Annual Report on Form 10-K, or this Annual Report, may contain
“forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, which are subject to the “safe harbor”
created by those sections. Our actual results could differ
materially from those anticipated in these forward-looking
statements. This annual report on Form 10-K of the Company may
contain forward-looking statements which reflect the Company's
current views with respect to future events and financial
performance. The words "believe," "expect," "anticipate,"
"intends," "estimate," "forecast," "project," and similar
expressions identify forward-looking statements. All statements
other than statements of historical fact are statements that could
be deemed to be forward-looking statements, including plans,
strategies and objectives of management for future operations;
proposed new products, services, developments or industry rankings;
future economic conditions or performance; belief; and assumptions
underlying any of the foregoing. Although we believe that we have a
reasonable basis for each forward-looking statement contained in
this report, we caution you that these statements are based on a
combination of facts and factors currently known by us and our
projections of the future, about which we cannot be certain. Such
"forward-looking statements" are subject to risks and uncertainties
set forth from time to time in the Company's SEC reports and
include, among others, the Risk Factors set forth under Item 1A
below.
The risks included herein are not exhaustive. This annual report on
Form 10-K filed with the SEC include additional factors which could
impact the Company's business and financial performance. Moreover,
the Company operates in a rapidly changing and competitive
environment. New risk factors emerge from time to time and it is
not possible for management to predict all such risk factors.
Further, it is not possible to assess the impact of all risk
factors on the Company's business or the extent to which any
factor, or combination of factors, may cause actual results to
differ materially from those contained in any forward-looking
statements. Forward-looking statements in this report include, but
are not limited to, statements about:
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the success, cost
and timing of our product development activities and clinical
trials;
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our ability and the
potential to successfully advance our technology platform to
improve the safety and effectiveness of our existing product
candidates;
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the potential for
our identified research priorities to advance our cancer and
regenerative disease technologies;
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our ability to
obtain drug designation or breakthrough status for our product
candidates and any other product candidates, or to obtain and
maintain regulatory approval of our product candidates, and any
related restrictions, limitations and/or warnings in the label of
an approved product candidate;
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the ability to
generate or license additional intellectual property relating to
our product candidates;
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regulatory
developments in China, United States and other foreign
countries;
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the potential of
the technologies we have acquired, such as the acquisitions of the
technologies from AG, Blackbird, and the PLAGH (as defined
below);
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fluctuations in the
exchange rate between the U.S. dollars and the Chinese
Yuan;
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our plans regarding
our move to the new Zhangjiang building in Shanghai;
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our plans to
continue to develop our manufacturing facilities.
Readers are cautioned not to place undue reliance on such
forward-looking statements as they speak only of the Company's
views as of the date the statement was made. The Company undertakes
no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events
or otherwise.
3
PART I
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ITEM 1. BUSINESS.
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As used
in this annual report, "we", "us", "our", "CBMG", "Company" or "our
company" refers to Cellular Biomedicine Group, Inc. and, unless the
context otherwise requires, all of its subsidiaries or deemed
controlled companies.
Overview
Cellular
Biomedicine Group, Inc. is a biopharmaceutical company, principally
engaged in the development of new treatments for cancerous and
degenerative diseases utilizing proprietary cell-based
technologies. Our technology includes two major cell
platforms: (i) Immune Cell therapy for treatment of a broad range
of cancers using : Chimeric Antigen Receptor T cell (CAR-T), cancer
vaccine, and T Central Memory Cell (Tcm) technology, and (ii) human
adipose-derived mesenchymal progenitor cells (haMPC) for treatment
of joint and autoimmune diseases, with primary research and
manufacturing facilities in China.
We are
focused on developing and marketing safe and effective cell-based
therapies based on our cellular platforms, to treat serious
diseases such as cancer, orthopedic diseases, various inflammatory
diseases and metabolic diseases. We have developed proprietary
practical knowledge in the use of cell-based therapeutics that we
believe could be used to help a great number of people suffering
from cancer and other serious chronic diseases. We are conducting
clinical studies in China for stem cell based therapies to treat
knee osteoarthritis (“KOA”). We have completed Phase
IIb autologous haMPC KOA clinical study and published its promising
results. Led by Shanghai Renji Hospital, one of the largest
teaching hospitals in China, we launched Phase I clinical trial of
an off-the-shelf allogeneic haMPC (AlloJoin™) therapy for
KOA. We have completed patient recruitment and treatment for Phase
I clinical studies of KOA on August 5, 2016. We also initiated
multiple dose preclinical studies in a Chronic Obstructive
Pulmonary Disease ("COPD") animal model, and plan to initiate
manufacturing of (AlloJoin™) product for KOA preclinical and
clinical studies in the United States in 2017.
Our
primary target market is Greater China. We believe that the results
of our research, acquired knowhow and clinical study results will
help to cure or alleviate illness and suffering of the patient. We
expect to carry out clinical studies leading to eventual CFDA
approval through IND filings and authorized treatment centers
throughout Greater China.
With
our acquisition of the University of South Florida’s license
on the next generation GVAX vaccine (CD40LGVAX) and its related
standard operational procedures (SOPs), we have expanded our
immuno-oncology portfolio significantly. We plan to use the
knowledge we obtained from the previous phase l clinical study
conducted in the U.S. by Moffitt Cancer Center to support an
investigator sponsored trial to evaluate the potential synergistic
effect of the combination of CD40LGVAX with an anti-PD1 checkpoint
inhibitor, to treat a selected segment of late stage non-small cell
lung cancer (NSCLC) adenocarcinoma patients. We may also seek
approval to conduct clinical trials with leading non-U.S. medical
centers or seek partnership for CD40LGVAX sub-license
opportunities.
With
our recent build-up of multiple cancer therapeutic technologies, we
have prioritized our clinical efforts on launching multiple trials
for CAR-Ts in several indications and are not actively pursuing the
fragmented technical services opportunities. We are striving to
build a highly competitive research and development function, a
translational medicine team, along with a well established cellular
manufacturing capability for clinical grade materials, to support
the development of multiple assets in several cancer indications.
These efforts will allow us to boost the Company's Immuno-Oncology
presence, and pave the way for future partnerships.
Corporate History
Cellular
Biomedicine Group, Inc. was incorporated in the State of Delaware
and its corporate headquarters located at 19925 Stevens Creek
Blvd., Suite 100 in Cupertino, California. The Company is focusing
its resources on becoming a biotechnology company bringing
therapies to improve the health of patients in China.
Cellular
Biomedicine Group, Inc., a Delaware corporation (formerly known as
EastBridge Investment Group Corporation), was originally
incorporated in the State of Arizona on June 25, 2001. The
Company's principal activity through June 30, 2005 was to
manufacture mobile entertainment products.
4
In
2005, the Company decided to exit the mobile entertainment market
and dedicate its activities to providing investment related
services in Asia, with a strong focus on high GDP growth countries,
such as China. The Company concentrated its efforts in the Far East
(Hong Kong, mainland China, Australia) and in the United States and
sought to provide consulting services necessary for small to
medium-size companies to obtain capital to grow their business,
either to become public companies in the United States or to find
joint venture partners or raise capital to expand their
businesses
On
February 6, 2013, we completed a merger to acquire Cellular
Biomedicine Group Ltd.
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 we changed our
corporate headquarters to 530 University Avenue, #17, Palo Alto,
California 94301.
From February 6, 2013 to June 23, 2014, we operated the Company in
two separate reportable segments: (i) Biomedicine Cell Therapy
(“Biomedicine”); and (ii) Financial Consulting
(“Consulting”). The Consulting segment was
conducted through EastBridge Sub. On June 23, 2014, the
Company announced the discontinuation of the Consulting segment as
it no longer fit into management’s long-term strategy and
vision. The Company is continuing to focus its resources
on becoming a biotechnology company bringing therapies to improve
the health of patients in China.
On
September 26, 2014, the Company completed its acquisition of
Beijing Agreen Biotechnology Co. Ltd. ("AG") and the U.S. patent
held by AG’s founder. AG is a biotech company with operations
in China, engaged in the development of treatments for cancerous
diseases utilizing proprietary cell technologies, which include
without limitation, preparation of subset T Cell and clonality
assay platform technology for treatment of a broad range of
cancers.
Merger with Cellular Biomedicine Group Ltd.
On
November 13, 2012, EastBridge Investment Group Corporation
(“EastBridge”
or “Parent”)
and CBMG Acquisition
Limited, a British Virgin Islands company and the Company’s
wholly-owned subsidiary (“Merger
Sub”)
entered into an Agreement and Plan of Merger (“Merger
Agreement”) by and among EastBridge, Merger Sub and Cellular
Biomedicine Group Ltd., a British Virgin Islands company
(“CBMG BVI”), as amended on January 15, 2013, January
31, 2013 and February 6, 2013, pursuant to which the parties agreed
that Merger Sub shall merge with and into CBMG BVI, with CBMG BVI
as the surviving entity. The transactions under the Merger
Agreement as amended are referred to as the
“Merger”. The Merger was subject to customary
closing conditions, including, among other things, (a) approval by
the shareholders of CBMG BVI, (b) resignations of the departing
directors and officers of EastBridge, Merger Sub and CBMG BVI, and
(c) execution of certain ancillary agreements, including, but not
limited to, executive employment agreements with EastBridge,
compliance certificates, lock up agreement and opinions of counsel,
as referenced in Article VII of the Merger Agreement.
On
December 20, 2012 CBMG BVI obtained shareholder approval by holding
an extraordinary general meeting of the shareholders, in which
holders of a majority of its capital stock approved the merger
pursuant to British Virgin Islands law. Since the Merger was
structured as a triangular merger in which a wholly owned merger
subsidiary of EastBridge merged with CBMG BVI, no stockholder
approval on the part of the EastBridge stockholders was required
under Delaware law. We note that although EastBridge issued
in excess of 20% of its shares in the merger, since its shares are
not listed on a national exchange, no stockholder approval
requirement applied to this transaction under any exchange
rules.”
On
February 5, 2013, the registrant formed a new Delaware subsidiary
named EastBridge Investment Corp. (“EastBridge Sub”).
Pursuant to a Contribution Agreement by and between the registrant
and EastBridge Sub dated February 5, 2013 (the “Contribution
Agreement”), the registrant contributed all assets and
liabilities related to its consulting services business, to its
newly formed subsidiary, EastBridge Investment Corp., from and
after which it continued to conduct the consulting services
business and operations of EastBridge at the subsidiary
level.
5
On
February 6, 2013 (the “Effective Date”), the Parties
executed all documents and filed the Plan of Merger with the
registrar of the British Virgin Islands. Upon consummation of the
Merger on the Effective Date, CBMG BVI shareholders were issued
3,638,932 shares of common stock, par value $0.001 per share,
of EastBridge (the “EastBridge Common Stock”)
constituting approximately 70% of the outstanding stock of
EastBridge on a fully-diluted basis and the EastBridge stockholders
retained 30% of the Company on a fully-diluted basis. Specifically,
each of CBMG BVI’s ordinary shares (“CBMG Ordinary
Shares”) was converted into the right to receive 0.020019 of
a share of EastBridge Common Stock.
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”). In connection with the
Reincorporation, the Company exchanged every 100 shares of the
Arizona entity for 1 share of the successor Delaware entity, with
the same effect as a 1:100 reverse stock split, which became
effective on January 31, 2013. All share and per share information
in this Annual Report (including in the above paragraph), unless
otherwise specified, reflects this reverse split.
Recent Developments
In
January 2015, we initiated patient recruitment to support a
phase II clinical study, in China, of ReJoin® human
adipose derived mesenchymal progenitor cell (“haMPC”)
therapy for Cartilage Damage (“CD”) resulting from
osteoarthritis (“OA”) or sports injury. The study is
based on the same science that has shown significant progress in
the treatment of Knee
Osteoarthritis (“KOA”). Both arthroscopy and the
use of magnetic resonance imaging (“MRI”) will be
deployed to further demonstrate the regenerative efficacy of
ReJoin® on CD.
On February 4, 2015, the Company announced its agreement related to
the acquisition of Chinese PLA General Hospital's ("PLAGH",
Beijing, also known as "301 Hospital") Chimeric Antigen Receptor T
cell (“CAR-T”) therapy, its recombinant expression
vector CD19, CD20, CD30 and Human Epidermal Growth Factor
Receptor's (EGFR or HER1) Immuno-Oncology patents applications, and
Phase I clinical data of the aforementioned therapies and
manufacturing knowledge. The 301 Hospital team has conducted
several preliminary clinical studies of various CAR-T constructs
targeting CD19-positive acute lymphocytic leukemia, CD20-positive
advanced B-cell Non-Hodgkin’s lymphoma, CD30-positive
Hodgkin's lymphoma and EGFR-HER1-positive advanced lung cancer,
cholangiocarcinoma, pancreatic cancer, and renal cell carcinoma.
Pursuant to the terms of the Transfer Agreement, PLAGH agreed to
transfer to the Company all of its right, title and interest in and
to certain technologies currently owned by PLAGH (including,
without limitation, four technologies and their pending patent
applications) that relate to genetic engineering of chimeric
antigen receptor (CAR)-modified T cells and its applications
(collectively, the “Technology”). In addition, PLAGH is
responsible for obtaining governmental approval for the clinical
trial related to the Technology.
We announced interim Phase IIb trial
results for our ReJoin® haMPC therapy for KOA on March
25, 2015, which confirmed that the primary and secondary endpoints
of ReJoin™ therapy groups have all improved
significantly compared to their baseline. We released positive
48-week follow-up data in January 2016.
In January 2016, we launched a Phase I clinical trial of an
off-the-shelf allogeneic haMPC AlloJoin™ therapy for
KOA.
On March 25, 2015, the Company announced results of the Phase I
clinical studies on CAR-CD19 (CBM-C19.1) and CAR-CD20 (CBM-C20.1).
The Phase I trial data showed an optimistic response rate under
controllable toxicities. In comparison with leading
clinical research reports on CAR-CD19 therapies by peers, we
believe that the efficacy profile of both CBM-C19.1 and CBM-C20.1
therapies are distinguished for the following reasons:
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I.
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The
patient selection criteria of this study is highly
selective. The participants enrolled in the studies were
advanced, relapsed, and refractory to other standard-of-care
therapies. This selection criterion is highly distinguishable from
other studies, which avoided higher risk patients. Most of these
high severity patients would not have been eligible for other
entities’ studies because of extramedullary involvement or
because the presence of bulky tumors were deemed too risky for
their trials.
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6
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II.
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The
treatment program design of this study is very
stringent.
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a. Our higher risk patients did not receive conditioning
chemotherapy, which is known as a beneficial facilitator of
adoptive T cell therapies.
b. Moreover, our higher risk patients did not receive
subsequent Hematopoietic Stem Cell transplantation (HSCT), which is
also known as a beneficial facilitator of adoptive T cell
therapies.
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From April 2015, the Company commenced cooperation with
agents/hospitals through which it started to provide immune-cell
therapy technology consulting services to hospitals located in
Beijing, Shandong, Anhui and Shanghai. The Company subsequently
decided not to focus on the cell therapy technology service section
and accordingly ceased its cooperation with Jihua Hospital and
several agents. For the year ended December 31, 2016, revenue of
$0.6 million was derived from this service.
On May 27, 2015, the Company announced the appointment of Richard
L. Wang, Ph.D., MBA, PMP as Chief Operating Officer. Dr. Wang, a
seasoned and accomplished scientist and industry professional,
brings operational, project management, and R&D governance
experience from multinational pharmaceutical companies, to support
the Company’s research of osteoarthritis and oncology
therapeutics. Dr. Wang oversees the Company’s research
collaborations, technology transfers, drug development clinical
trials, regulatory affairs, production, and oversight of the
Company’s multicenter operations.
At the 10th Annual World Stem Cells
& Regenerative Medicine Congress in London, UK on May 21, 2015,
the Company announced results of the Phase I clinical studies of
CD30-directed CAR-T therapy on CD30-positive Stage III and
IV Hodgkin's lymphoma patients. The results of this trial
demonstrated that five out of seven patients responded to the
treatment, and the therapy was demonstrated in this trial to be
safe, feasible and efficacious.
On June 26, 2015, the Company completed the acquisition of
Blackbird BioFinance, LLC (“Blackbird”)’s license
from University of South Florida (“USF”) on the next
generation cancer immunotherapy vaccine CD40LGVAX, its related
technologies and technical knowledge. Of the total
consideration to be delivered to Blackbird for the purchased
assets, $2,500,000 was delivered in cash and 28,120 shares of
Company common stock (the "Closing Shares"), representing
$1,050,000 of the purchase consideration (based on the 20-day
volume-weighted average price of the Company’s stock on the
closing date), was issued and delivered to Blackbird. Another
18,747 shares (the “Holdback Shares”), representing
$700,000 of the purchase consideration (based on the 20-day
volume-weighted average price of the Company’s stock on the
closing date), was issued and delivered to Blackbird in November
2015. Based on the terms of the license, we believe the
Company will pay potentially more than $25 million in future
milestones and royalty payments.
We
believe this technological addition may address meaningful and
sizable unmet medical needs. Based on the latest data available
from NCCN Clinical Practice Guidelines in Oncology Non-Small Cell
Lung Cancer (“NSCLC”) (Version 4. 2014), an estimated
224,210 people in the United States were diagnosed with lung cancer
in 2014, with an estimated 159,260 deaths occurring because of the
disease. In China, 728,552 individuals were diagnosed with lung
cancer in 2012, and 592,410 individuals in China died of lung
cancer in 2012 (source: Chinese Cancer Registry Annual Report 2012
& GMCD40L Study Synopsis).
Despite
the advances of targeted therapies and recent breakthroughs with
immune checkpoint inhibitors, such as anti-PD1 or PDL1 monoclonal
antibody treatments, there are still significant unmet medical
needs in NSCLC, and the disease remains largely incurable. We
believe the CD40LGVAX vaccine, in combination with an anti-PD1
monoclonal antibody, may provide synergistic and improved clinical
benefits in both PDL1 positive and negative patients. We previously
anticipated a phase I/II clinical trial for the CD40LGVAX vaccine
combined with PD-1 antibody to commence in the second half of
2015. We are currently evaluating both U.S. and non-U.S.
options for furthering clinical trials for the CD40LGVAX vaccine
following Moffitt Cancer Center’s notification to us that it
will not be continuing its sponsorship of the U.S. CD40LGVAX Trial.
In the third quarter of 2015, we reviewed and modified the design
of CD40LGVAX trial by expanding the number of patient recruitment,
changing from single site to multi-sites trial and adding
stratification to the trial. We are converting the
CD40LGVAX Investigator Sponsor Research (“ISR”) to a
CBMG IND trial.
7
On June 26, 2015, the Russell Investments Group reconstituted its
comprehensive set of U.S. indexes, the Company was selected to be
included in the broad-market Russell 3000®
Index. The Russell 3000® Index encompasses the
3,000 largest U.S.-traded stocks by objective,
market-capitalization rankings and style attributes. This weighted
index by market capitalization was constructed to provide a
comprehensive barometer of the broad market and it now represents
approximately 98% of the investable U.S. equity market. Membership
in this index, which remains in place for one year, means automatic
inclusion in the small-cap Russell 2000® Index as well as the
appropriate growth and value style indexes. Russell
indexes are widely used by investment managers and institutional
investors for index funds and as benchmarks for active investment
strategies.
In July 2015, the Company has
received two new certifications from the China Food and Drug
Administration (the “CFDA”) for its proprietary cell
and tissue preservation media kits, in accordance with the
CFDA’s new regulations announced on June 1, 2015. These
certified kits enable long-term preservation and long distance
shipment of cells and tissue, without freezing them down, from and
to the point of care for ready applications by physicians. The
latest certifications further strengthen our Vertically Integrated
Cell Manufacturing System (VICMS) to centralize the processing and
supplying of autologous cell therapies, and reinforce our potential
to be a world-class biotechnology company, serving large unmet
medical needs.
On
August 26, 2015 the Company filed new patents - “Preparation
of HER1 chimeric antigen receptor and NKT cells and
application” for China patent and PCT and “Preparation
of CD19 chimeric antigen receptor and NKT cells and
application” for China patent.
On
September 26, 2015, the Company presented at the 2015 European
Cancer Congress’ (“ECCO”) annual meeting held in
Vienna, Austria results from the first 11 NSCLC patients in the
trial outlined in the abstract, entitled Chimeric Antigen Receptor-Modified T-Cells for
the Immunotherapy of Patients with HER-1 Expressing Advanced
Relapsed/Refractory Non-Small Cell Lung Cancer.
On
September 28, 2015, the Company announced results of the Phase I
clinical studies of CAR-T EGFR-HER1 (“CBM-EGFR.1”) for
the treatment of patients with EGFR expressing advanced
relapsed/refractory solid tumors. Based on the results from 24
patients treated with CBM-EGFR.1 (17 patients with non-small cell
lung cancer, 5 patients with cholangiocarcinoma, 1 patient with
pancreatic cancer and 1 patient with renal cell carcinoma
(“RCC”)), the early results showed that CBM-EGFR.1
immunotherapy was safe, well tolerated, and had positive signal of
clinical activity in several indications. The data was selected for
a late-breaking oral presentation entitled EGFR-Targeted
Chimeric Antigen Receptor-Modified T Cells Immunotherapy for
Patients With EGFR-Expressing Advanced or Relapsed/Refractory Solid
Tumors at the 5th
World Congress on Cancer Therapy in Atlanta,
Georgia. Highlight of Phase I/II clinical trial for CBMG
CAR-T products in multiple advanced, refractory/relapsing solid
tumors is as follow:
|
●
|
First
known report of positive safety and signal of clinical activity of
EGFR CAR-T in multiple solid tumor indications,
|
|
●
|
Most
NSCLC patients treated with CBM-EGFR.1 failed EGFR-TKI therapy
prior to CBM-EGFR.1 treatment,
|
|
●
|
Overall
disease control rate (DCR) is 79% (19 of 24). 100% DCR in
cholangiocarcinoma (5/5), 71% DCR in NSCLC (12/17),
|
|
●
|
Objective
response rate (ORR) of 25% in combined indications: 2 complete
response (CR) and 1 partial response (PR) in cholangiocarcinoma, 2
PR in NSCLC and 1 PR in pancreatic cancer.
|
The September 2015 reports on CBM-EGFR.1 therapy for late stage
solid tumors have demonstrated our ability to innovate, advance
boundaries between basic research and translational medicine and
streamline the production of CAR-T and clinical
treatment. With the talent addition of our COO and CSO,
and the maturing of working relationship with PLAGH cancer immune
cell therapy resources, we plan to evaluate and prioritize our
cancer clinical trial indications for commercialization using safe
and most effective therapy or combination therapies. The Company
believes that, when integrated with CBMG's state-of-the-art
infrastructure and clinical platform, the aforementioned acquired
AG, 301 Hospital and USF technologies will improve our cancer
immune cell therapies clinical pathway and pave the way for
collaboration with renowned institutions. We plan to initiate
certain cancer clinical trials upon receiving acceptance of the
clinical trial designs with principal investigators and obtaining
the requisite approvals.
8
On November 9, 2015, the Company announced the opening of its new
state-of-the-art facility in the PKUCare Industrial Park, Changping
District, Beijing, China. Eight hundred square meters of the 1,400
square meter site has been equipped with four independent
production lines to support clinical batch production and
commercial scale manufacturing. Designed and built to GMP
standards, the facility has been certified by the Beijing Institute
for Drug Control, accredited bodies of the China National
Accreditation Service (CNAS) and
China Metrology Accreditation (CMA). With this expansion
into Beijing, the Company now operates three GMP facilities in
China that currently houses twelve independent production lines
with the capacity to host more than 200,000 individual cell
sources. With our integrated Plasmid, Viral Vectors, and CAR-T
cells Chemistry, Manufacturing, and Controls process as well as
planned capacity expansion, we are highly distinguishable with
other companies in the cellular medicine space.
In
January 2016, we launched a Phase I clinical trial of an
off-the-shelf allogeneic haMPC AlloJoin™ therapy for KOA (the
“Allogenic KOA Phase I Trial”) to
evaluate the safety and efficacy of AlloJoin™, an
off-the-shelf allogeneic adipose derived progenitor cell (haMPC)
therapy for the treatment of KOA.
On
March 23, 2016, the Company filed a Form S-3 Registration Statement
(the “S-3 Registration Statement”) with the SEC, which
was declared effective on June 17, 2016. The S-3 Registration
Statement contains three prospectuses:
●
Offering
Prospectus. A base prospectus which covers the offering, issuance
and sale by us of up to $150,000,000 of our common stock, preferred
stock, debt securities, warrants, rights and/or units;
●
Resale Prospectus.
A prospectus to be used for the resale by the selling stockholders
of up to 3,824,395 shares of the Common Stock; and
●
Sales Agreement
Prospectus. A sales agreement prospectus covering the offering,
issuance and sale by the registrant of up to a maximum aggregate
offering price of $50,000,000 of the Common Stock that may be
issued and sold under a sales agreement with Cantor Fitzgerald
& Co.
On
August 5, 2016 we completed patient treatment for the Allogenic KOA
Phase I Trial. And on December 9, 2016 we announced interim 3-month
safety data from the Allogenic KOA Phase I Trial in China. The
interim analysis of the trial has preliminarily demonstrated a
safety and tolerability profile of AlloJoinTM in the three doses
tested, and no serious adverse events (SAE) have been observed. The
trial is on schedule to be completed by the third quarter of
2017.
On
November 29, 2016 we announced the approval and commencement of
patient enrollment in China for our CARD-1 (“CAR-T Against
DLBCL”) Phase I clinical trial utilizing its optimized
proprietary C-CAR011 construct of CD19 chimeric antigen receptor
T-cell (CAR-T) therapy for the treatment of patients with
refractory Diffuse Large B-cell Lymphoma (DLBCL). The CARD-1 trial
has begun enrollment with final data expected to be available in
the second half of 2017.
On
December 9, 2016 we announced interim 3-month safety data from our
Phase I clinical trial in China for AlloJoinTM off-the-shelf
allogeneic stem cell therapy for KOA. The preliminary data was
presented on December 8th at the World Stem Cell Summit in West
Palm Beach, Florida. The interim analysis of the trial has
preliminarily demonstrated a safety and tolerability profile of
AlloJoinTM
in the three doses tested, and adverse events (AE) are similar to
that of our prior autologous trials. No serious adverse events
(SAE) have been observed. The trial is on schedule to be completed
by the third quarter of 2017.
9
In
the next 12 months, we aim to accomplish the following, though
there can be no assurances that we will be able to accomplish any
of these goals:
●
Confirm
the safety and tolerability profile in an investigator sponsored
phase I trial of C-CAR011 in refractory (r/r)
CD19+
B-cell Acute Lymphoblastic Leukemia (ALL), and to prepare for a
follow up multi-center phase IIb trial;
●
Initiate
a phase I-IIb trial to evaluate the safety and efficacy of CBM-CD19
in CD19+ refractory/relapsing adult B-ALL patients;
●
Submit
to the CFDA of IND package for CBM-CD19 in CD19+ B-cell
malignancies;
●
Initiate
an investigator sponsored phase I trial of CBM-CD20 in CLL
patients;
●
Seek
opportunities to file new CAR-T and other patents in China and
potentially the rest of the world;
●
Continue
to seek advanced technologies and partnerships to bolster our CAR-T
China market position;
●
Bolster
R&D resources to fortify our intellectual properties portfolio
and scientific development. Continue to develop a competitive
Immuno-oncology pipeline for CBMG;
●
Complete
the Allogeneic KOA Phase I Trial in China;
●
Complete
CMC and other required preclinical study data package to prepare
for Allogeneic KOA IND filing in the United States;
●
Evaluate
feasibility of initiating clinical study to support the New Drug
Application (NDA) for an allogeneic haMPC Knee Osteoarthritis
therapy (“Allo KOA”) study in the United
States;
●
Complete
preclinical efficacy evaluation to decide development path for COPD
indication;
●
Continue
to seek advanced technologies to bolster our CAR-T China market
position;
●
Bolster
R&D resources to fortify our intellectual properties portfolio
and scientific development;
●
Improve
liquidity and fortify our balance sheet by courting institutional
investors;
●
Evaluate
new regenerative medicine technology platform for other
indications;
●
Explore
new CAR-T international collaboration and /or partnership;
and
●
Expand our cell manufacturing capacity and
capabilities.
For the years ended December 31, 2016, 2015 and 2014, we generated
$0.6 million, $2.5 million and $0.6 million in revenue,
respectively. The revenue since July 2014 is all from our
technology consulting service. Before July 2014, our revenue was
mainly from sales of A-Stromal™ enzyme reagent kits. We
expect our biopharmaceutical business to generate revenues
primarily from immune therapy and the development of therapies for
the treatment of KOA in the next three to four years.
Our operating expenses for year ended December 31, 2016 were in
line with management’s plans and expectations. We incurred an
increase in total operating expenses of approximately $6 million
for the year ended December 31, 2016, as compared to the year ended
December 31, 2015, which is primarily attributable to an increase
in professional service costs and increased input into expenditures
for R&D projects.
10
Corporate Structure
Our
current corporate structure is illustrated in the following
diagram:
11
Following
the completion of our merger on February 6, 2013, we had the
following subsidiaries (including a controlled VIE
entity):
Cellular
Biomedicine Group HK Limited, a Hong Kong company limited by
shares, is a holding company and wholly owned subsidiary of the
Company.
Cellular
Biomedicine Group Ltd. (Wuxi), license number 320200400034410 (the
“WFOE”) is a wholly foreign-owned entity that is 100%
owned by Cellular Biomedicine Group HK Limited. This
entity’s legal name in China translates to “Xi Biman
Biological Technology (Wuxi) Co. Ltd.” WFOE
controls and holds ownership rights in the business, assets and
operations of Cellular Biomedicine Group Ltd. (Shanghai)
(“CBMG Shanghai”) through variable interest entity
(VIE) agreements. We conduct certain biopharmaceutical
business activities through WFOE, including lab kit production and
research.
Cellular
Biomedicine Group Ltd. (Shanghai) license number 310104000501869
(“CBMG Shanghai”), is a PRC domestic corporation, which
we control and hold ownership rights in, through WFOE and the
above-mentioned VIE agreements. This entity’s
legal name in China translates to “Xi Biman Biotech
(Shanghai) Co., Ltd.” We conduct certain
biopharmaceutical business activities through our controlled VIE
entity, CBMG Shanghai, including clinical trials and certain other
activities requiring a domestic license in the PRC. Mr.
Chen Mingzhe and Mr. Lu Junfeng together are the record holders of
all of the outstanding registered capital of CBMG Shanghai.
Mr. Chen and Mr. Lu are also directors of CBMG Shanghai
constituting the entire management of the same. Mr.
Chen and Mr. Lu receive no compensation for their roles as managers
of CBMG Shanghai.
Beijing
Agreen Biotechnology Co., Ltd. is a PRC domestic corporation and
wholly owned subsidiary of CBMG Shanghai.
Wuxi
Cellular Biopharmaceutical Group Ltd. was established on January
17, 2017 and it is a PRC domestic corporation and wholly owned
subsidiary of CBMG Shanghai.
Shanghai Cellular
Biopharmaceutical Group Ltd. was established on January 18, 2017
and it is a PRC domestic corporation and wholly owned subsidiary of
CBMG Shanghai.
Eastbridge
Investment Corporation (“Eastbridge Sub”), a Delaware
corporation, is a wholly owned subsidiary of the
Company.
Cellular
Biomedicine Group VAX, Inc. (“CBMG VAX”), a California
corporation, is a wholly owned subsidiary of the
Company.
Variable Interest Entity (VIE) Agreements
Through
our wholly foreign-owned entity and 100% subsidiary, Cellular
Biomedicine Group Ltd. (Wuxi), we control and have ownership rights
by means of a series of VIE agreements with CBMG Shanghai. The
shareholders of record for CBMG Shanghai were Cao Wei and Chen
Mingzhe, who together owned 100% of the equity interests in CBMG
Shanghai before October 26, 2016. On October 26, 2016, Cao Wei,
Chen Mingzhe and Lu Junfeng entered into an equity transfer
agreement and a supplementary agreement (“Equity Transfer
Agreement”), pursuant to which Cao Wei transferred his equity
interests in CBMG Shanghai to Chen Mingzhe and Lu Junfeng. As a
result of the transfer, each of Mr. Chen and Mr. Lu now owns a 50%
equity interest in CBMG Shanghai. On the same day, WFOE, CBMG
Shanghai, Cao Wei and Chen Mingzhe entered into a termination
agreement, pursuant to which, the series of VIE agreements executed
among the WFOE, CBMG Shanghai, Chen Mingzhe and Cao Wei were
terminated and a new set of VIE agreements were executed. The
following is a description of each of these VIE
agreements:
Exclusive Business Cooperation
Agreement. Through the WFOE, we are a party
to an exclusive business cooperation agreement dated October 26,
2016 with CBMG Shanghai, which provides that (i) the WFOE shall
exclusively provide CBMG Shanghai with complete technical support,
business support and related consulting services; (ii) without
prior written consent of the WFOE, CBMG Shanghai may not accept the
same or similar consultancy and/or services from any third party,
nor establish any similar cooperation relationship with any third
party regarding same matters during the term of the agreement;
(iii) CBMG Shanghai shall pay the WFOE service fees as calculated
based on the time of service rendered by the WFOE multiplying the
corresponding rate, plus an adjusted amount decided by the board of
the WFOE; and (iv) CBMG Shanghai grants to the WFOE an irrevocable
and exclusive option to purchase, at its sole discretion, any or
all of CBMG Shanghai’s assets at the lowest purchase price
permissible under PRC laws. The term of the agreement is
10 years, provided however the agreement may extended at the option
of the WFOE. Since this agreement permits the WFOE to determine the
service fee at its sole discretion, the agreement in
effect provides the WFOE with rights to all earnings of the
VIE.
12
Loan Agreement. Through the WFOE, we are a party
to a loan agreement with CBMG Shanghai, Lu Junfeng and Chen Mingzhe
dated October 26, 2016, in accordance with which the WFOE agreed to
provide an interest-free loan to CBMG Shanghai. The term
of the loan is 10 years, which may be extended upon written consent
of the parties. The method of repayment of CBMG Shanghai
shall be at the sole discretion of the WFOE, including but not
limited to an acquisition of CBMG Shanghai in satisfaction of its
loan obligations.
Exclusive Option Agreement with Lu
Junfeng. Through the WFOE, we are a party to an
option agreement with CBMG Shanghai and Lu Junfeng dated October
26, 2016, in accordance with which: (i) Lu Junfeng irrevocably
granted the WFOE an irrevocable and exclusive right to purchase, or
designate another person to purchase the entire equity interest in
CBMG Shanghai as then held by him, at an aggregate purchase price
to be determined; and (ii) any proceeds obtained by Lu Junfeng
through the above equity transfer in CBMG Shanghai shall be used
for the payment of the loan provided by the WFOE under the
aforementioned Loan Agreement.
Exclusive Option Agreement with Chen
Mingzhe. Through the WFOE, we are a party to an
exclusive option agreement with CBMG Shanghai and Chen Mingzhe
dated October 26, 2016, under which: (i) Chen Mingzhe irrevocably
granted the WFOE an irrevocable and exclusive right to purchase, or
designate another person to purchase the entire equity interest in
CBMG Shanghai for an aggregate purchase price to be determined; and
(ii) any proceeds obtained by Chen Mingzhe through the above equity
transfer in CBMG Shanghai shall be used for the payment of the loan
provided by the WFOE under the aforementioned Loan
Agreement.
Power of Attorney from Lu Junfeng. Through the
WFOE we are the recipient of a power of attorney executed by Lu
Junfeng on October 26, 2016, in accordance with which Lu Junfeng
authorized the WFOE to act on his behalf as his exclusive agent
with respect to all matters concerning his equity interest in CBMG
Shanghai, including without limitation to attending the shareholder
meetings of CBMG Shanghai, exercising voting rights and designating
and appointing senior executives of CBMG Shanghai.
Power of Attorney from Chen Mingzhe. Through the
WFOE we are the recipient of a power of attorney executed by Chen
Mingzhe on October 26, 2016, in accordance with which Chen Mingzhe
authorized the WFOE to act on his behalf as his exclusive agent
with respect to all matters concerning his equity interest in CBMG
Shanghai, including without limitation to attending the
shareholders meetings of CBMG Shanghai, exercising voting rights
and designating and appointing senior executives of CBMG
Shanghai.
Equity Interest Pledge Agreement with Lu
Junfeng. Through the WFOE, we are a party to an
equity interest pledge agreement with CBMG Shanghai and Lu Junfeng
dated October 26, 2016, in accordance with which: (i) Lu Junfeng
pledged to the WFOE the entire equity interest he holds in CBMG
Shanghai as security for payment of the consulting and service fees
by CBMG Shanghai under the Exclusive Business Cooperation
Agreement; (ii) Lu Junfeng and CBMG Shanghai submitted all
necessary documents to ensure the registration of the Pledge of the
Equity Interest with the State Administration for Industry and
Commerce (“SAIC”), and the pledge became effective
on November 22, 2016; (iii) on the occurrence of any event of
default, unless it has been successfully resolved within 20 days
after the delivery of a rectification notice by the WFOE, the WFOE
may exercise its pledge rights at any time by a written notice to
Lu Junfeng.
Equity Interest Pledge Agreement with Chen
Mingzhe. Through the WFOE we are a party to
an equity interest pledge agreement with CBMG Shanghai and Chen
Mingzhe dated October 26, 2016, in accordance with which: (i) Chen
Mingzhe pledged to the WFOE the entire equity interest he holds in
CBMG Shanghai as security for payment of the consulting and service
fees by CBMG Shanghai under the Exclusive Business Cooperation
Agreement; (ii) Chen Mingzhe and CBMG Shanghai submitted all
necessary documents to ensure the registration of the Pledge of the
Equity Interest with SAIC, and the pledge became effective
on November 22, 2016; (iii) on the occurrence of any event of
default, unless it has been successfully resolved within 20 days
after the delivery of a rectification notice by the WFOE, the WFOE
may exercise its pledge rights at any time by a written notice to
Chen Mingzhe.
Our
relationship with our controlled VIE entity, CBMG Shanghai,
through the VIE agreements, is subject to various operational and
legal risks. Management believes the Mr. Chen and Mr. Lu
as record holders of the VIE’s registered capital have no
interest in acting contrary to the VIE
agreements. However, if Mr. Chen and Lu as shareholders
of the VIE entity were to reduce or eliminate their ownership of
the registered capital of the VIE entity, their interests may
diverge from that of CBMG and they may seek to act in a manner
contrary to the VIE agreements (for example by controlling the VIE
entity in such a way that is inconsistent with the directives of
CBMG management and the board; or causing non-payment by the VIE
entity of services fees). If such circumstances were to
occur the WFOE would have to assert control rights through the
powers of attorney and other VIE agreements, which would require
legal action through the PRC judicial system. While we
believe the VIE agreements are legally enforceable in the PRC,
there is a risk that enforcement of these agreements may involve
more extensive procedures and costs to enforce, in comparison to
direct equity ownership of the VIE entity. We believe
based on the advice of local counsel that the VIE agreements are
valid and in compliance with PRC laws presently in
effect. Notwithstanding the foregoing, if the applicable
PRC laws were to change or are interpreted by authorities in the
future in a manner which challenges or renders the VIE agreements
ineffective, the WFOE’s ability to control and obtain all
benefits (economic or otherwise) of ownership of the VIE entity
could be impaired or eliminated. In the event of
such future changes or new interpretations of PRC law, in an effort
to substantially preserve our rights we may have to either amend
our VIE agreements or enter into alternative arrangements which
comply with PRC laws as interpreted and then in
effect.
13
For
further discussion of risks associated with the above, please see
the section below titled “Risks Related to Our
Structure.”
BIOPHARMACEUTICAL BUSINESS
Our
biopharmaceutical business was founded in 2009 as a newly formed
specialty biomedicine company by a team of seasoned
Chinese-American executives, scientists and doctors. In 2010, we
established a facility designed and built to GMP standards in Wuxi,
and in 2012 we established a U.S. Food and Drug Administration
(“FDA”) GMP standard protocol-compliant manufacturing
facility in Shanghai. In October 2015, we opened a facility
designed and built to GMP standards in Beijing. Our focus has been
to serve 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
homegrown and acquired cell technology, as well as by utilizing
exclusively in-licensed and other acquired intellectual
properties.
Our
current treatment focal points are cancer and other degenerative
diseases such as KOA.
Cancer. In the cancer field, with the recent build-up
of multiple cancer therapeutic technologies, we have prioritized
our clinical efforts on CAR-T, technologies, Vaccine, Tcm and TCR
clonality technologies, and are not actively pursuing the
fragmented Tcm technical services opportunities. We are integrating
CBMG's state-of-the art infrastructure and clinical platform with
the technologies platform to boost the Company's immuno-oncology
presence and pave the way for future partnerships. We plan to
initiate certain cancer clinical trials in China upon receiving
acceptance of the clinical trial designs with the principal
investigator and obtaining the requisite regulatory approval. On
November 29, 2016,we announced the approval and commencement of
patient enrollment in China for its CARD-1 (“CAR-T Against
DLBCL”) Phase I clinical trial utilizing its optimized
proprietary C-CAR011 construct of CD19 chimeric antigen receptor
T-cell (CAR-T) therapy for the treatment of patients with
refractory Diffuse Large B-cell Lymphoma (DLBCL). The CARD-1 trial
has begun enrollment with final data expected to be available in
the second half of 2017. On January 9, 2017 we announced the
approval and commencement of patient enrollment in China for its
CALL-1 (“CAR-T against Acute Lymphoblastic Leukemia”)
Phase I clinical trial utilizing its optimized proprietary C-CAR011
construct of CD19 chimeric antigen receptor T-cell
(“CAR-T”) therapy for the treatment of patients with
relapsed or refractory (r/r) CD19+ B-cell Acute Lymphoblastic
Leukemia (“ALL”). The CALL-1 trial has begun enrollment
with final data expected to be available at the end of 2017.
Depending on the Phase I CARD-1 and CALL-1 results, we expect to
initiate larger Phase II clinical trials as soon as
practicable.
KOA. In 2013, we completed a Phase I/IIa clinical
study, in China, for our Knee Osteoarthritis (“KOA”)
therapy named ReJoin®. The trial tested the safety and
efficacy of intra-articular injections of autologous haMPCs in
order to reduce inflammation and repair damaged joint cartilage.
The 6-month follow-up clinical data showed ReJoin® therapy to
be both safe and effective.
In Q2
of 2014, we completed patient enrollment for the Phase IIb clinical
trial of ReJoin® for KOA. The multi-center study enrolled 53
patients to participate in a randomized, single blind trial. We
published 48 weeks follow-up data of Phase I/IIa on December 5,
2014. The 48 weeks data indicated that patients
have reported a decrease in pain and a significant improvement in
mobility and flexibility, while the clinical data shows our
ReJoin® regenerative medicine treatment to be
safe. We announced interim 24 week results for
ReJoin® on March 25, 2015 and released positive
Phase IIb 48 week follow-up data in January 2016, which shows the
primary and secondary endpoints of ReJoin® therapy group
having all improved significantly compared to their baseline, which
has confirmed some of the Company’s Phase I/IIa results. Our
ReJoin® human adipose-derived mesenchymal progenitor cell
(haMPC) therapy for KOA is an interventional therapy using
proprietary device, process, culture and medium:
●
Obtain adipose
(fat) tissue from the patient using our CFDA approved medical
device, the A-Stromal™ Kit;
●
Expand haMPCs using
our proprietary culture medium (serum-free and antibiotics-free);
and
●
Formulated for
ReJoin therapy using our proprietary formulation.
14
Our
process is distinguishable from sole Stromal Vascular Fraction
(SVF) therapy. The immunophenotype of our haMPCs exhibited multiple
biomarkers such as CD29+, CD73+, CD90+, CD49d+, HLA-I+, HLA-DR-,
Actin-, CD14-, CD34-, and CD45-. In contrast, SVF is
merely a heterogeneous fraction including preadipocytes,
endothelial cells, smooth muscle cells, pericytes, macrophages,
fibroblasts, and adipose-derived stem cells (ASCs).
In
January 2016, we launched the Allogeneic KOA Phase I Trial in China
to evaluate the safety and efficacy of AlloJoin™, an off-the
shelf allogeneic adipose derived progenitor cell (haMPC) therapy
for the treatment of KOA. On August 5, 2016 we completed patient
treatment for the Allogeneic KOA Phase I trial, and on December 9,
2016 we announced interim 3-month safety data from the Allogenic
KOA Phase I Trial in China. The interim analysis of the trial has
preliminarily demonstrated a safety and tolerability profile of
AlloJoin™ in the three doses tested, and no serious adverse
events (SAE) have been observed. The trial is on schedule to be
completed by the third quarter of 2017.
In
January 2015, we initiated patient recruitment in a phase II
clinical study, in China, of ReJoin (human adipose derived
mesenchymal progenitor cell or “haMPC”) in Cartilage
Damaged (“CD”) patients resulting from osteoarthritis
(“OA”) or sports injury, in further support of KOA
indication. The study is based on the same technology that has
shown significant efficacy in the treatment of Knee Osteoarthritis
(“KOA”), but requires two arthroscopic examinations and
the use of magnetic resonance imaging (“MRI”) to
further demonstrate the regenerative efficacy of ReJoin. Upon
further review of the protocol and the difficulty of getting
patients back for a second arthroscopic examination , we determined
to terminate the study.
The
unique lines of adult adipose-derived stem cells and the immune
cell therapies enable us to create multiple cell formulations in
treating specific medical conditions and diseases, as well as
applying single cell types in a specific treatment protocol.
Management believes that our adult adipose-derived line will become
commercially viable and market-ready in China within three to four
years. In addition, we plan to assess and initiate cancer clinical
trials leading to commercialization using safe and most effective
therapy or combination therapies. The quality management systems of
CBMG Shanghai and CBMG Wuxi were issued a Certificate of
ISO-9001:2008 by SGS /ANAB (ANSI-ASQ National Accreditation Board).
Our facility in Shanghai was issued a Certificate of Compliance by
ENV Services, Inc., and ISO Inspection Service Provider that (i)
its rooms 1-7, 10 are certified to ISO Class 7 per ISO-14644 in
accordance with cGMP; (ii) its biological safety cabinets are
certified per NSF/ANSI 49 and to ISO Class 5;and (iii) its
instrumentation calibration has been certified to perform in
accordance with ANS/NCSL Z-540-1 and document in accordance with
10CFR21.Our facility in Shanghai was issued a Testing Report by
Shanghai Food and Drug Packaging Material Control Center concluding
that some testing items of the cleanrooms are in compliance with
the Good Manufacturing Practice for Drugs (2010 Revision) of China.
The cleanrooms in Beijing are certified to meet the standard of
CNAS L1669; and Wuxi has been certified to meet the CNAS L0221
standard.
In
addition to standard protocols, we use proprietary processes and
procedures for manufacturing our cell lines, comprised
of:
|
●
|
Banking processes
that ensure cell preservation and
viability;
|
|
●
|
DNA identification
for stem cell ownership; and
|
|
●
|
Bio-safety testing
at independently certified laboratories.
|
Regenerative Medicine and Cell Therapy
Regenerative
medicine is the “process of replacing or regenerating human
cells, tissues or organs to restore or establish normal
function”. Cell therapy as applied to regenerative medicine
holds the promise of regenerating damaged tissues and organs in the
body by rejuvenating damaged tissue and by stimulating the
body’s own repair mechanisms to heal previously irreparable
tissues and organs. Medical cell therapies are classified into two
types: allogeneic (cells from a third-party donor) or autologous
(cells from one’s own body), with each offering its own
distinct advantages. Allogeneic cells are beneficial when the
patient’s own cells, whether due to disease or degeneration,
are not as viable as those from a healthy donor. Similarly, in
cases such as cancer, where the disease is so unique to the
individual, autologous cells can offer true personalized
medicine.
15
Regenerative
medicine can be categorized into major subfields as
follows:
|
●
|
Cell
Therapy. Cell therapy involves the use of cells, whether
derived from adults, third party donors or patients, from various
parts of the body, for the treatment of diseases or injuries.
Therapeutic applications may include cancer vaccines, cell based
immune-therapy, arthritis, heart disease, diabetes,
Parkinson’s and Alzheimer’s diseases, vision
impairments, orthopedic diseases and brain or spinal cord injuries.
This subfield also includes the development of growth factors and
serums and natural reagents that promote and guide cell
development.
|
|
●
|
Tissue
Engineering. This subfield involves using a combination of
cells with biomaterials (also called “scaffolds”) to
generate partially or fully functional tissues and organs, or using
a mixture of technology in a bioprinting process. Some natural
materials, like collagen, can be used as biomaterial, but advances
in materials science have resulted in a variety of synthetic
polymers with attributes that would make them uniquely attractive
for certain applications. Therapeutic applications may include
heart patch, bone re-growth, wound repair, replacement neo-urinary
conduits, saphenous arterial grafts, inter-vertebral disc and
spinal cord repair.
|
|
●
|
Diagnostics
and Lab Services. This subfield involves the production and
derivation of cell lines that may be used for the development of
drugs and treatments for diseases or genetic defects. This sector
also includes companies developing devices that are designed and
optimized for regenerative medicine techniques, such as specialized
catheters for the delivery of cells, tools for the extraction of
stem cells and cell-based diagnostic tools.
|
All
living complex organisms start as a single cell that replicates,
differentiates (matures) and perpetuates in an adult through its
lifetime. Cell therapy is aimed at tapping into the power of cells
to prevent and treat disease, regenerate damaged or aged tissue and
provide cosmetic applications. The most common type of cell therapy
has been the replacement of mature, functioning cells such as
through blood and platelet transfusions. Since the 1970s, bone
marrow and then blood and umbilical cord-derived stem cells have
been used to restore bone marrow and blood and immune system cells
damaged by chemotherapy and radiation used to treat many cancers.
These types of cell therapies have been approved for use world-wide
and are typically reimbursed by insurance.
Over
the past number of years, cell therapies have been in clinical
development to attempt to treat an array of human diseases. The use
of autologous (self-derived) cells to create vaccines directed
against tumor cells in the body has been demonstrated to be
effective and safe in clinical trials. Researchers around the globe
are evaluating the effectiveness of cell therapy as a form of
replacement or regeneration of cells for the treatment of numerous
organ diseases or injuries, including those of the brain and spinal
cord. Cell therapies are also being evaluated for safety and
effectiveness to treat heart disease, autoimmune diseases such as
diabetes, inflammatory bowel disease, joint diseases and cancerous
diseases. While no assurances can be given regarding future medical
developments, we believe that the field of cell therapy is a subset
of biotechnology that holds promise to improve human health, help
eliminate disease and minimize or ameliorate the pain and suffering
from many common degenerative diseases relating to
aging.
Recent Developments in Cancer Cell Therapy
According to the
U.S. National Cancer Institute’s 2013 cancer topics research
update on CAR-T-Cells, excitement is growing for
immunotherapy—therapies that harness the power of a
patient’s immune system to combat their disease, or what some
in the research community are calling the “fifth
pillar” of cancer treatment.
One
approach to immunotherapy involves engineering patients’ own
immune cells to recognize and attack their tumors. And although
this approach, called adoptive cell transfer ("ACT"), has been
restricted to small clinical trials so far, treatments using these
engineered immune cells have generated some remarkable responses in
patients with advanced cancer. For example, in several early-stage
trials testing ACT in patients with advanced acute lymphoblastic
leukemia ("ALL") who had few if any remaining treatment options,
many patients’ cancers have disappeared entirely. Several of
these patients have remained cancer free for extended
periods.
16
Equally
promising results have been reported in several small clinical
trials involving patients with lymphoma. Although the lead
investigators cautioned that much more research is needed, the
results from the trials performed thus far indicate that
researchers can successfully alter patients’ T cells so that
they attack their cancer cells. As an example, we look
to Spectrum Pharmaceutical’s Folotyn approved in September
2009 for treatment of R/R peripheral T-cell lymphoma with approval
supported by a single arm trial observing an overall response rate
of 27% and median duration of response of 9.4 months. In addition,
CTI Therapeutics Pixuvri received a complete response letter in
April 2010 in R/R aggressive NHL in which a 37% overall response
rate and 5.5 month duration of response was observed.
ACT’s
building blocks are T cells, a type of immune cell collected from
the patient’s own blood. After collection, the T cells are
genetically engineered to produce special receptors on their
surface called chimeric antigen receptors ("CARs"). CARs are
proteins that allow the T cells to recognize a specific protein
(antigen) on tumor cells. These engineered CAR T cells are then
grown in the laboratory until they number in the billions. The
expanded population of CAR T cells is then infused into the
patient. After the infusion, if all goes as planned, the T cells
multiply in the patient’s body and, with guidance from their
engineered receptor, recognize and kill cancer cells that harbor
the antigen on their surfaces. This process builds on a similar
form of ACT pioneered from NCI’s Surgery Branch for patients
with advanced melanoma. According to
www.cancer.gov/.../research-updates/2013/CAR-T-Cells, in 2013
NCI’s Pediatric Oncology Branch commented that the CAR T
cells are much more potent than anything they can achieve with
other immune-based treatments being studied. Although investigators
working in this field caution that there is still much to learn
about CAR T-cell therapy, the early results from trials like these
have generated considerable optimism. Researchers opined that CAR
T-cell therapy eventually may become a standard therapy for some
B-cell malignancies like ALL and chronic lymphocytic
leukemia.
The
traditional cancer treatment includes surgery, chemotherapy, and
radiation therapy. In the last decade, we witnessed a boom in
targeted therapies including monoclonal antibody and small molecule
therapies, such as Iressa and Tarciva that targets EGFR activating
mutations in the NSCLC, Herceptin that treats breast cancer
patients with HER2 overexpression, Crizotinib that targets NSCLC
patients with positive ALK fusion gene.
So
far, chimeric antigen receptor T cell therapy (“CAR-T”)
such as CD19 CAR-T, have been tested in several hematological
indications on patients that are refractory/relapsing to
chemotherapy, and many of them have relapsed after stem cell
transplantation. All of these patients had very limited
treatment option prior to CAR-T therapy. CAR-T has shown
positive clinical efficacy in many of these patients. Some of have
them lived for years post CAR-T treatment.
On July
2016, Juno Therapeutics, Inc. reported the death of patients
enrolled in the U.S. Phase II clinical trial of JCAR015 for the
treatment of relapsed or refractory B cell acute lymphoblastic
leukemia (B-ALL). The US FDA put the trial on hold and lifted the
hold within a week after Juno provided satisfactory explanation and
solution. Juno believes that the patient deaths were caused by the
use of Fludarabine preconditioning and they will use only
cyclophosphamide pre-conditioning in the future enrollment. The
trial was halted in November of 2016 after two more deaths occurred
after the trial resumed. The Company believes that its product and
study are distinguishable from Juno Therapeutics and plans to
continue to monitor any toxicities associated with the
study.
Market for Cell-Based Therapies
In
2013, U.S. sales of products which contain stem cells or progenitor
cells or which are used to concentrate autologous blood, bone
marrow or adipose tissues to yield concentrations of stem cells for
therapeutic use were, conservatively, valued at $236 million at the
hospital level. It is estimated that the orthopedics industry used
approximately 92% of the stem cell products.
The
forecast is that in the United States, shipments of treatments with
stem cells or instruments which concentrate stem cell preparations
for injection into painful joints will fuel an overall increase in
the use of stem cell based treatments and an increase to $5.7
billion in 2020, with key growth areas being Spinal Fusion, Sports
Medicine and Osteoarthritis of the joints. According to Centers for
Disease Control and Prevention. Prevalence of doctor-diagnosed
arthritis and arthritis-attributable activity limitation United
States. 2010-2012, Osteoarthritis (OA) is a chronic disease that is
characterized by degeneration of the articular cartilage,
hyperosteogeny, and ultimately, joint destruction that can affect
all of the joints. According to Dillon CF, Rasch EK, Gu Q et al.
Prevalence of knee osteoarthritis in the United States: Arthritis
Data from the Third National Health and Nutrition Examination
Survey 1991-94. J Rheumatol. 2006, the incidence of OA is 50% among
people over age 60 and 90% among people over age 65. KOA accounts
for the majority of total OA conditions and in adults, OA is the
second leading cause of work disability and the disability
incidence is high (53%). The costs of OA management have grown
exponentially over recent decades, accounting for up to 1% to 2.5%
of the gross national product of countries with aging populations,
including the U.S., Canada, the UK, France, and Australia.
According to the American Academy of Orthopedic Surgeons (AAOS),
the only pharmacologic therapies recommended for OA symptom
management are non-steroidal anti-inflammatory drugs (NSAIDs) and
tramadol (for patients with symptomatic osteoarthritis). Moreover,
there is no approved disease modification therapy for OA in the
world. Disease progression is a leading cause of hospitalization
and ultimately requires joint replacement surgery. In 2009, the
U.S. spent over $42 billion on replacement surgery for hip and knee
joints alone. International regulatory guidelines on clinical
investigation of medicinal products used in the treatment of OA
were updated in 2015, and clinical benefits (or trial outcomes) of
a disease modification therapy for KOA has been well defined and
recommended. Medicinal products used in the treatment of
osteoarthritis need to provide both a symptom relief effect for at
least 6 months and a structure modification effect to slow
cartilage degradation by at least 12 months. Symptom relief is
generally measured by a composite questionnaire Western Ontario and
McMaster Universities Osteoarthritis Index (WOMAC) score, and
structure modification is measured by MRI, or radiographic image as
accepted by international communities. The Company uses the WOMAC
as primary end point to demonstrate symptom relief, and MRI to
assess structure and regeneration benefits as a secondary
endpoint.
17
According to the
Foundation for the National Institutes of Health, there are 27
million Americans with Osteoarthritis (OA), and symptomatic Knee
Osteoarthritis (KOA) occurs in 13% of persons aged 60 and older.
The International Journal of Rheumatic Diseases, 2011 reports that
approximately 57 million people in China suffer from KOA. Currently
no treatment exists that can effectively preserve knee joint
cartilage or slow the progression of KOA. Current common drug-based
methods of management, including anti-inflammatory medications
(NSAIDs), only relieve symptoms and carry the risk of side effects.
Patients with KOA suffer from compromised mobility, leading to
sedentary lifestyles; doubling the risk of cardiovascular diseases,
diabetes, and obesity; and increasing the risk of all causes of
mortality, colon cancer, high blood pressure, osteoporosis, lipid
disorders, depression and anxiety. According to the Epidemiology of
Rheumatic Disease (Silman AJ, Hochberg MC. Oxford Univ. Press,
1993:257), 53% of patients with KOA will eventually become
disabled.
The
current data on CAR T-cell therapies, presented from various
institutions including MSKCC, University of Pennsylvania, National
Cancer Institute, and Fred Hutchinson Cancer Center, Novartis and
Kite Pharma, Inc have been very positive. Novartis
CAR-T technology has made breakthroughs in treating B cell lymphoma
using genetically modified T cell technology. Both Kite and
Novartis are on track to submit their respective CAR-T registration
trial data to the US FDA for BLA in the near future.
Approved cell
therapies have been appearing on the market in recent years. In
2011, however, the industry was dealt two setbacks when Geron
Corporation discontinued its embryonic program, and when
Sanofi-Aventis acquired Genzyme Corporation and did not acquire the
product rights relating to the allogeneic cell technology of Osiris
Therapeutics, Inc., a partner of Genzyme and a leader in the field.
In both cases there were difficulties navigating the U.S.
regulatory requirements for product approval. Inadequate trial
designs were cited in the executive summary of the 2012 New York
Stem Cell Summit Report as contributing to these
failures.
The
number of cell therapy companies that are currently in Phase 2 and
Phase 3 trials has been gathering momentum, and we anticipate that
new cellular therapy products will appear on the market within the
next several years.
Management believes
the remaining risk in monetizing cancer immune cell therapies is
concentrated in late stage clinical studies, speed-to-approval,
manufacturing and process optimization.
18
Our Strategy
The
majority of our biopharmaceutical business is in the development
stage. We intend to concentrate our business on cell therapies and
in the near-term, carrying our KOA stem cell therapy and cancer
immune cell therapies to commercialization.
We are
developing our business in cell therapeutics and capitalizing on
the increasing importance and promise that adult stem cells have in
regenerative medicine. Our most advanced candidate involves
adipose-derived mesenchymal stem cells to treat KOA. Based on
current estimates, we expect our biopharmaceutical business to
generate revenues primarily through the development of therapies
for the treatment of KOA within the next three to four
years.
Presently we have
two KOA cell therapy clinical studies in China, a completed Phase
IIb autologous study and an on-going Phase I allogeneic study. If
and when either therapy obtains regulatory approval in the PRC, we
will be able to market and offer the therapy for clinical use. Our
focus is on the latest translational stages of product development,
principally from the pre-clinical 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 acquisition, licensing and collaboration arrangements
with other companies. Our near term objective is to pursue
successful clinical trials in China for our KOA application,
followed by our CD and Asthma therapies. We intend to
utilize our comprehensive cell platform to support multiple cell
lines to pursue multiple therapies, both allogeneic and autologous.
We intend to 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, acquire technology or 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. We also intend to out-license our technologies
to interested parties and are exploring the feasibility of a U.S.
allogeneic KOA clinical study with the FDA.
CBMG
initially plans to use its centralized manufacturing facility
located in Shanghai to service multiple hospitals within 200 km of
the facility. We aim to complete clinical trials for our
KOA therapy candidate as soon as practicable. Our goal is to first
obtain regulatory permission for commercial use of the therapies
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 regulatory guidelines. Based
on current regulation and estimates we expect our biopharmaceutical
business to generate revenues primarily from the development of
therapies for the treatment of KOA within the next four to six
years.
With
the AG acquisition we intend to monetize AG’s U.S. and
Chinese intellectual property for immune cell therapy preparation
methodologies and patient immunity assessment by engaging with
prominent hospitals to conduct pre-clinical and clinical studies in
specific cancer indications. The T Cell clonality analysis
technology patent, together with AG’s other know-how for
immunity analysis, will enable the Company to establish an
immunoassay platform that is crucial for immunity evaluation of
patients with immune disorders as well as cancerous diseases that
are undergoing therapy.
We
believe that few competitors in China are as well-equipped as we
are in the clinical trial development, diversified U.S. FDA
protocol compliant manufacturing facilities, 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.
We
intend to continue our business development efforts by adding other
proven domestic and international biotechnology partners to
monetize the China health care market.
In
order to expedite fulfillment of patient treatment CBMG has been
actively developing technologies and products with a strong
intellectual properties protection, including haMPC, derived from
fat tissue, for the treatment of KOA and other indications.
CBMG’s acquisition of AG provides an enlarged opportunity to
expand the application of its cancer therapy-enabling technologies
and to initiate clinical trials with leading cancer
hospitals. With the AG acquisition, we will continue to
seek to empower hospitals' immune cell cancer therapy development
programs that help patients improve their quality of life and
improve their survival rate.
19
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. Applying our proprietary
intellectual property, we will be able 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 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
protocol of allogeneic haMPC therapy for KOA has been approved by
Shanghai Renji Hospital’s Institutional Review Board for
clinical studies. Once the studies are completed, the clinical data
will be analyzed by qualified third party statisticians and reports
will be published.
We
operate our manufacturing facilities under good manufacturing
practice ("GMP") conditions in the ISO accredited laboratories
standard. We employ an institutionalized and proprietary process
and quality management system to optimize reproducibility and to
hone our efficiency. Three facilities designed and built to GMP in
Beijing, Shanghai and Wuxi, China meet international standards. In
any precision setting, it is vital that all controlled-environment
equipment meet certain design standards. To achieve this goal, our
Shanghai cleanroom facility underwent rigorous cleanroom
certification. Our facility in Shanghai was issued a Certificate of
Compliance by ENV Services, Inc., and ISO Inspection Service
Provider that (i) its rooms 1-7, 10 are certified to ISO Class 7
per ISO-14644 in accordance with cGMP; (ii) its biological safety
cabinets are certified per NSF/ANSI 49 and to ISO Class 5; and
(iii) its instrumentation calibration has been certified to perform
in accordance with ANS/NCSL Z-540-1 and document in accordance with
10CFR21. The cleanrooms in Beijing are certified to meet the
standard of CNAS L1669; and Wuxi has been certified to meet the
CNAS L0221 standard. With our integrated Plasmid, Viral Vectors,
and CAR-T cells Chemistry, Manufacturing, and Controls process
as well as planned capacity expansion, we are highly
distinguishable with other companies in the cellular medicine
space.
In
total, our cGMP facilities have over 47,300 sq. ft. of space with
the capacity for 19 independent cell production lines. We are
expanding our GMP facilities to approximately 70,000 sq. ft. of
space and aim to be able to treat approximately 10,000 cancer
patients and 10,000 patients per year by the end of
2017.
Most
importantly, our most experienced team members have more than 20
years of relevant experience in China, European Union, and the
United States. All of these factors make CBMG a high quality cell
products manufacturer in China.
Our Targeted Indications and Potential Therapies
Knee Osteoarthritis (KOA)
We are
currently pursuing two primary therapies for the treatment of KOA:
our ReJoin ® therapy and our AlloJoinTM therapy.
We
completed the Phase I/IIa clinical trial for the
treatment of KOA. The trial tested the safety and efficacy of
intra-articular injections of autologous haMPCs in order to reduce
inflammation and repair damaged joint cartilage. The 6-month
follow-up clinical data showed ReJoinTM therapy to be both
safe and effective.
In the
second quarter of 2014, we completed patient enrollment for the
Phase IIb clinical trial of ReJoin® for KOA. The multi-center
study has enrolled 53 patients to participate in a randomized,
single blind trial. We published 48 weeks follow-up data of Phase
I/IIa on December 5, 2014. The 48 weeks data indicated
that patients have reported a decrease in pain and a significant
improvement in mobility and flexibility, while the clinical data
shows our ReJoin® regenerative medicine treatment to be safe.
We announced positive Phase IIb 48-week follow-up data in January
2016, with statistical significant evidence that ReJoin®
enhanced cartilage regeneration, which concluded the planned phase
IIb trial.
20
In January 2016, we launched the Allogeneic KOA
Phase I Trial in China to
evaluate the safety and efficacy of AlloJoin™, an off-the
shelf allogeneic adipose derived progenitor cell (haMPC) therapy
for the treatment of KOA. On August 5, 2016 we completed patient
treatment for the Allogeneic KOA Phase I trial. On August 5,
2016 we completed patient treatment for the Allogenic KOA Phase I
Trial, and on December 9, 2016, we announced interim 3-month safety
data from the Allogenic KOA Phase I Trial in China. The interim
analysis of the trial has preliminarily demonstrated a safety and
tolerability profile of AlloJoin™ in the three doses tested,
and no serious adverse events (SAE) have been observed. The trial
is on schedule to be completed by the third quarter of
2017.
Osteoarthritis is a
degenerative disease of the joints. KOA is one of the most common
types of osteoarthritis. Pathological manifestation of
osteoarthritis 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.
According
to International Journal of
Rheumatic Diseases, 2011, 53% of KOA patients will
degenerate to the point of disability. Conventional treatment
usually involves invasive surgery with painful recovery and
physical therapy. As drug-based methods of management are
ineffective, the same journal estimates that some 1.5 million
patients with this disability will degenerate to the point of
requiring artificial joint replacement surgery every year. However,
only 40,000 patients 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.
haMPCs
are currently being considered as a new and effective treatment for
osteoarthritis, with a huge potential
market. Osteoarthritis is one of the ten most disabling
diseases in developed countries. Worldwide estimates are that 9.6%
of men and 18.0% of women aged over 60 years have symptomatic
osteoarthritis. It is estimated that the global OA therapeutics
market was worth $4.4 billion in 2010 and is forecast to grow at a
compound annual growth rate (“CAGR”) of 3.8% to reach
$5.9 billion by 2018.
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
regulatory approval; and (b) file joint applications with Class AAA
hospitals to use haMPCs to treat KOA in a clinical trial
setting.
Our
competitors are pursuing treatments for osteoarthritis with knee
cartilage implants. However, unlike their approach, our
KOA therapy is not surgically invasive – it uses a small
amount (30ml) of adipose tissue obtained via liposuction from the
patient, which is cultured and re-injected into the patient. 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 method, 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.
Immuno-oncology (I/o)
We
continue to fortify our cancer breakthrough technology platform
with I/o, programmed cell death and vaccine
technology.
Our
CAR-T platform is built on well-studied lenti-virial vector and
second-generation CAR design, which is used by most of the current
trials and studies. We rigorously select the patient population for
each asset and indication to allow the optimal path forward for
regulatory approval. We also fully integrate the state of art
translational medicine effort into each clinical study to aid in
dose selection, to confirm the mechanism of action and proof of
concept, and to identify the optimal targeting patient population
whenever appropriate. We plan to continue to grow our translational
medicine team and engage key opinion leaders to meet the
demand.
21
Because
there are many differences between hematological and solid tumors,
drug penetration or infiltration into solid tumors sites is more
challenging than hematological cancer. Antibody dependent
cell-mediated (“ADCC”) toxicity works much better in
hematological cancers. Hematological cancers usually carry fewest
mutations among all cancers and are usually less molecularly
heterogeneous than that of solid tumors. As such,
routinely hematological cancers respond better to therapeutic
interventions, there are more complete, as well as partial
responses. And the duration of response is usually
longer.
Solid
tumors pose more challenges than hematological
cancers. The patients are more heterogeneous, making it
difficult to have one drug to work effectively in the majority of
the patients in any cancer indication. The duration of
response is most likely shorter and patients are likely to relapse
even after initial positive clinical response. We believe
that CAR-T therapy can successfully treat hematopoietic cancers
because the therapy can deplete all B cells or T cells including
normal and cancer cells in leukemia and lymphoma. When the stem
cells are not targeted these stem cells can regenerate normal B and
T cells. In contrast, effective tumor specific antigens found to be
less to target in solid tumors. When the drugs kill
tumor cells, they also kill the normal cells to a certain degree,
leading to different degrees of toxicity. We will
continue to make an effort to develop CAR-T or other cell based
therapies to target solid tumors.
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. We believe the advantages in using adipose tissue (as
opposed to bone marrow or blood) are that it is 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, haMPCs are an attractive focus for medical research and
clinical development. Importantly, we believe both allogeneic and
autologously sourced haMPCs may be used in the treatment of
disease. Numerous studies have provided preclinical data that
support the safety and efficacy of allogeneic 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 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.
Immune Cell Therapy, Adoptive T cell
Adoptive T cell
therapy for cancer is a form of transfusion therapy consisting of
the infusion of various mature T cell subsets with the goal of
eliminating a tumor and preventing its recurrence. In
cases such as cancer, where the disease is unique to the
individual, the adoptive T cell therapy is a personalized
treatment.
We
believe that an increasing portion of healthcare spending both in
China and worldwide will be directed to immune cell therapies,
driven by an aging population, and the potential for immune cell
therapy treatments to become a safe, effective, and cost-effective
method for treating millions of cancer patients.
Cancer
is a major threat to public health and the solvency of health
systems worldwide. Current treatments for these diseases
cannot meet medical needs. We believe that immune cell therapy is a
new technology that has the potential to alleviate much of the
burden of these chronic and degenerative diseases in a
cost-effective manner.
22
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
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.
Our
strategy is, through the acquisition of AG and the technologies and
pre-clinical and clinical data of University of the South Florida
and PLAGH, to become an immune cell business leader in the China
cancer therapy market and specialty pharmaceutical market by
utilizing CBMG’s attractiveness as a NASDAQ listed company to
consolidate key China immune cell technology leaders with fortified
intellectual property and ramp up revenue with first mover’s
advantage in a safe and efficient manner. The Company
plans to accelerate cancer trials by using the knowledge and
experience gained from the Company’s ongoing KOA trials and
the recent, CAR-T and Tcm technologies. Immune
cell therapies have not been codified by any of the Chinese
regulatory agencies. On December 16, 2016, the CFDA issued
solicited feedback on its draft "Technical Guidelines for Research
and Evaluation of Cellular Products”, signaling near term
clarification and codification/of the cell therapy regulation. We
believe this will create substantial barrier-to-entry for newcomers
in China. However, it remains unclear if any of our clinical trials
will qualify for U.S.FDA-liked Fast Track designation as
maintenance therapy in subjects with advanced cancer who have
limited options following surgery and front-line platinum/taxane
chemotherapy to improve their progression-free survival. By
applying U.S. SOP and protocols and following authorized treatment
plans in China, we believe we are differentiated from our
competition as we believe we have first mover’s advantage and
a fortified barrier to entry. In addition, encouraged by
the recent CIRM grant of $2.29 million for our preclinical trial to
replicate and validate the manufacturing process and control system
at the cGMP facility located at Children’s Hospital Los
Angeles to support the filing of an IND with the FDA, we have begun
to review the feasibility of performing synergistic U.S. KOA
clinical trial.
Intellectual Property
We have
built our intellectual property portfolio with a view towards
protecting our freedom of operation in China within our specialties
in the cellular biopharmaceutical field. Our portfolio contains
patents, trade secrets, and know-how.
The
production of stem cells for therapeutic use requires the ability
to purify and isolate these cells to an extremely high level of
purity. Accordingly, our portfolio is geared toward protecting our
proprietary process of purification, cell processing and related
steps in stem cell production. The combination of our patents and
trade secrets protects various aspects of our cell line production
methods and methods of use, including methods of purification,
extraction, freezing, preservation, processing and use in
treatment.
For our
haMPC therapy:
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We
believe our intellectual property portfolio for haMPC is well-built
and abundant. It covers aspects of adipose stem cell medicine
production, including acquisition of human adipose tissue,
preservation, and storage, tissue, processing, stem cell
purification, expansion, and banking, formulation for
administration, and administration methods.
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Our
portfolio also includes adipose derived cellular medicine
formulations and their applications in the potential treatment of
degenerative diseases and autoimmune diseases, including
osteoarthritis, rheumatoid arthritis, as well as potential
applications to anti-aging.
|
|
●
|
Our
haMPC intellectual property portfolio:
|
|
°
|
provides
coverage of all steps in the production process;
|
|
°
|
enables
achievement of high yields of Stromal Vascular Fraction (SVF), i.e.
stem cells derived from adipose tissue extracted by
liposuction;
|
|
°
|
makes
adipose tissue acquisition convenient and useful for purposes of
cell banking; and
|
|
°
|
employs
preservation techniques enabling long distance shipment of finished
cell medicine products.
|
23
For our
CAR-T and Tcm cancer immune cell therapy:
|
●
|
Our
recent amalgamation of technologies from AG and PLAGH in the cancer
cell therapy is comprehensive and well-rounded. It
comprises of T cell clonality, Chimeric Antigen Receptor T cell
(CAR-T) therapy, its recombinant expression vector CD19, CD20, CD30
and Human Epidermal Growth Factor Receptor's (EGFR or HER1)
Immuno-Oncology patents applications, several preliminary clinical
studies of various CAR-T constructs targeting CD19-positive acute
lymphoblastic leukemia, CD20-positive lymphoma, CD30-positive
Hodgkin's lymphoma and EGFR-HER1-positive advanced lung cancer, and
Phase I/II clinical data of the aforementioned therapies and
manufacturing knowledge.
|
In
addition, our intellectual property portfolio covers various
aspects of other therapeutic categories including umbilical
cord-derived huMPC therapy, bone marrow-derived hbMPC
therapy.
Moreover, our
clinical trial protocols are proprietary, and we rely upon trade
secret laws for protection of these protocols.
We
intend to continue to vigorously pursue patent protection of the
technologies we develop, both in China and under the Patent
Cooperation Treaty (“PCT”). Additionally, we require
all of our employees to sign proprietary information and invention
agreements, and compartmentalize our trade secrets in order to
protect our confidential information.
Patents
The
following is a brief list of our patents as of December 31, 2016,
patent applications and work in process:
|
|
China
Patents
|
U.S.
Patents
|
EU
Patents
|
Other
International Patents
|
PCT
|
|
|
|
|
|
|
|
|
Work in
Process
|
6
|
-
|
-
|
-
|
-
|
|
Patents Filed,
Pending
|
21
|
1
|
1
|
2
|
5
|
|
Granted
|
23
|
2
|
1
|
-
|
-
|
|
Total
|
50
|
3
|
2
|
2
|
5
|
Generally, our
patents cover technology, methods, design and composition of and
relating to medical device kits used in collecting cell specimens,
cryopreservation of cells, purification, use of stem cells in a
range of potential therapies, adipose tissue extraction, cell
preservation and transportation, preparation of chimeric antigen
receptor, gene
detection and quality control.
Manufacturing
We
manufacture cells for our own research, testing and clinical
trials. We are planning to scale up and expand our manufacturing
capacity to treat 10,000 CAR-T and 10,000 KOA patients per year at
the end of 2017. Our facilities are operated by a manufacturing and
technology team with more than 30 years of relevant experience in
China, EU, and the U.S.
In any
precision setting, it is vital that all controlled environment
equipment meet certain design standards. We operate our
manufacturing facilities under good manufacturing practice ("GMP")
conditions in the ISO accredited laboratories standard. We employ
an institutionalized and proprietary process and quality management
system to optimize reproducibility and to hone our efficiency.
Three of our facilities designed and built to GMP in Beijing,
Shanghai and Wuxi, China meet international standards.
Specifically, our Shanghai cleanroom facility underwent rigorous
cleanroom certification since 2013. Our facility in Shanghai was
issued a Certificate of Compliance by ENV Services, Inc., an ISO
Inspection Service Provider, that (i) its rooms 17, 10 are
certified to ISO Class 7 per ISO14644 in accordance with cGMP. (ii)
its biological safety cabinets are certified per NSF/ANSI 49 and to
ISO Class 5. and (iii) its instrumentation calibration has been
certified to perform in accordance with ANS/NCSL Z5401 and document
in accordance with 10CFR21. The cleanrooms in Beijing are certified
to meet the standard of CNAS L1669 and our Wuxi facility has been
certified to meet the CNAS L0221 standard. With our integrated
Plasmid, Viral Vectors, and CAR-T cells Chemistry, Manufacturing,
and Controls process as well as planned capacity expansion, we
believe that are highly distinguishable with other companies in the
cellular medicine space.
24
In
January 2017, we leased a 10,501.6 square meter building located in
the “Pharma Valley” of Shanghai, the People’s
Republic of China. We plan to establish 4,000 square meters GMP
facilities there with 25 clean-rooms and equipped with 12
independent production lines to support clinical batch production
and commercial scale manufacturing. With above expansion, the
Company could support around 10,000 patients with CAR-T therapy and
10,000 KOA patients with the stem cell therapy per
annum.
We have
built cell preparation and inspection laboratories that enable
the following mode of human body immune cell in-vitro culture
service to be provided: make cell preparation for human body venous
blood samples, after completion of the cell preparation, deliver
the immune cell agents to the customer; and provide immune function
evaluation for the patients in Jilin and several other hospitals in
China.
Planned Capital Expenditures
We are
expanding our Wuxi facility and are planning to move to a new
Shanghai facility. We plan to continue to implement closed systems
and may equip additional facilities according to future demands. By
the end of 2017, the Company anticipates that the new Zhangjiang
facility in Shanghai, an expanded Wuxi facility, and Beijing GMP
facilities combined will have 70,000 square feet, and the Company
expects that it will be capable of supporting simultaneous clinical
trials for five different CAR-T and stem cell products, or the
ability to treat approximately 10,000 cancer patients and 10,000
stem cell patients per year.
Competition
Many
companies operate in the cellular biopharmaceutical
field. In 2010, the FDA approved the first cell therapy
for Dendreon Corporation to apply an autologous cellular
immunotherapy for the treatment of a certain type of prostate
cancer. In May 2012 the Canadian authorities approved the
first stem cell drug and granted Osiris Therapeutics’
manufactured stem cell product for use in the pediatric
graft-versus-host disease. To date there are over thirty
publicly listed and several private cellular biopharmaceutical
focused companies outside of China with varying phases of clinical
trials addressing a variety of diseases. We compete with
these companies in bringing cellular therapies to the
market. However, our focus is to develop a core business
in the China market. This difference in focus places us in a
different competitive environment from other western companies with
respect to fund raising, clinical trials, collaborative
partnerships, and the markets in which we
compete.
The PRC
central government has a focused strategy to enable China to
compete effectively in certain designated areas of biotechnology
and the health sciences. Because of the aging population in
China, China’s Ministry of Science and Technology
(“MOST”) has targeted stem cell development as high
priority field, and development in this field has been intense in
the agencies under MOST. For example, the 973 Program has
funded a number of stem cell research projects such as
differentiation of human embryonic germ cells and the plasticity of
adult stem cells. China has had a highly fragmented cellular
medicine landscape. Shenzhen Beike Biotechnology Co.
Ltd. (“Beike”) and Union Stem Cell & Gene
Engineering Co., Ltd. (“Union Stem Cell”) are two large
stem cell companies in China. To the best of our knowledge,
none of the Chinese companies are utilizing our proposed
international manufacturing protocol and our unique technologies in
conducting what we believe will be fully compliant CFDA-sanctioned
clinical trials to commercialize cell therapies in
China. Our management believes that it is difficult for
most of these Chinese companies to turn their results into
translational stem cell science or commercially successful
therapeutic products using internationally acceptable
standards.
We
compete globally with respect to the discovery and development of
new cell based therapies, and we also compete within China to bring
new therapies to market. The biotechnology industry,
namely in the areas of cell processing and manufacturing, clinical
development of cellular therapies and cell collection, processing
and storage, are characterized by rapidly evolving technology and
intense competition. Our competitors worldwide include
pharmaceutical, biopharmaceutical and biotechnology companies, as
well as numerous academic and research institutions and government
agencies engaged in drug discovery activities or funding, in the
U.S., Europe and Asia. Many of these companies are well-established
and possess technical, research and development, financial, and
sales and marketing resources significantly greater than ours. In
addition, many of our smaller potential competitors have formed
strategic collaborations, partnerships and other types of joint
ventures with larger, well established industry competitors that
afford these companies potential research and development and
commercialization advantages in the technology and therapeutic
areas currently being pursued by us. Academic
institutions, governmental agencies and other public and private
research organizations are also conducting and financing research
activities which may produce products directly competitive to those
being commercialized by us. Moreover, many of these competitors may
be able to obtain patent protection, obtain government (e.g. FDA)
and other regulatory approvals and begin commercial sales of their
products before us.
25
Our
primary competitors in the field of stem cell therapy for
osteoarthritis, and other indications include Beike, Cytori
Therapeutics Inc., Caladrius Biosciences, Inc. and
others. Among our competitors, to our knowledge, the
only ones based in and operating in Greater China are Beike, Lorem
Vascular, which has partnered with Cytori to commercialize
Cytori Cell Therapy for the cardiovascular, renal and diabetes
markets in China and Hong Kong, and OLife Bio, a
Medi-Post joint venture with JingYuan Bio in Taian, Shandong
Province, who plans to initiate clinical trial in China in
2016. Our primary competitors in the field of cancer
immune cell therapies include pharmaceutical, biotechnology
companies such as Northwest Biotherapeutics, Inc., Juno
Therapeutics, Inc., Kite Pharma, Inc., CARSgen, Sorrento
Therapeutics, Inc. and others. Among our competitors,
the ones based in and operating in Greater China are BeiGene,
Limited, CARsgen and China Oncology Focus Limited, which has
licensed Sorrento’s anti-PD-L1 monoclonal antibody for
Greater China. Other western big pharma and biotech companies in
the cancer immune cell therapies space are starting to make inroads
into China by partnering or seeking to partner with local
companies. For example, in April, 2016, Seattle- based Juno
Therapeutics, Inc. started a new company with WuXi AppTec in China
named JW Biotechnology (Shanghai) Co., Ltd. Its mission is to build
China's leading cell therapy company by leveraging Juno's chimeric
antigen receptor (CAR) and T cell receptor (TCR) technologies
together with WuXi AppTec's R&D and manufacturing platform and
local expertise to develop novel cell-based immunotherapies for
patients with hematologic and solidorgan cancers. Similarly, in
January 2017, Shanghai Fosun Pharmaceutical announced its plan to
create a joint venture with Santa Monica-based Kite Pharma Inc. to
develop, manufacture and commercialize axicabtagene ciloleucel in
China with the option to include additional products, including two
T cell receptor (TCR) product candidates from Kite. Axicabtagene
ciloleucel is Kite's lead product candidate and is an
investigational chimeric antigen receptor (CAR) T-cell therapy
under development for the treatment of B-cell lymphomas and
leukemias.
Additionally, in
the general area of cell-based therapies for osteoarthritis
ailments, we potentially compete with a variety of companies, most
of whom are specialty medical products or biotechnology companies.
Some of these, such as Baxter, Johnson & Johnson, Medtronic and
Miltenyi Biotec, are well-established and have substantial
technical and financial resources compared to
ours. However, as cell-based products are only just
emerging as viable medical therapies, many of our most direct
competitors are smaller biotechnology and specialty medical
products companies. These include Vericel Corporation, Regeneus
Ltd., Advanced Cell Technology, Inc., Cytomedix, Inc., Arteriocyte
Medical Systems, Inc., Athersys, Inc., Bioheart, Inc., Cytori
Therapeutics, Inc., Genzyme Corporation, Harvest Technologies
Corporation, Mesoblast, Osiris Therapeutics, Inc., Pluristem, Inc.
and others.
Some of
our competitors also work with adipose-derived stem
cells. To the best of our knowledge, none of these
companies are currently utilizing the same technologies as ours to
treat KOA, nor to our knowledge are any of these companies
conducting government-approved clinical trials in
China.
Some of
our targeted disease applications may compete with drugs from
traditional pharmaceutical or Traditional Chinese Medicine
companies. We believe that our chosen targeted disease
applications are not effectively in competition with the products
and therapies offered by traditional pharmaceutical or Traditional
Chinese Medicine companies.
26
We
believe we have a strategic advantage over our competitors based on
our ability to meet cGMP regulatory requirements, a capability
which we believe is possessed by few to none of our competitors in
China, in an industry in which meeting exacting standards and
achieving extremely high purity levels is crucial to
success. In addition, in comparison to the broader range
of cellar biopharmaceutical firms, we believe we have the
advantages of cost and expediency, and a first mover advantage with
respect to commercialization of cell therapy products and
treatments in the Greater China market.
Employees
As of
December 31, 2016, the total enrollment of full time employees of
CBMG is 109. Among these 109 professionals, 18 have PhD
degrees, 45 have postgraduate degrees and 37 have
undergraduate degrees. In other words, 92% of our
employees are well qualified professionals. As a biotech company,
79 out of our 109 employees have medical or biological scientific
credentials and qualifications.
Facilities
Our
corporate headquarters are located at 19925 Stevens Creek Blvd.,
Suite 100 in Cupertino, California. We currently pay rent for a
total of $77,000 per month for an aggregate of approximately 80,000
square feet of space to house our administration, research and
manufacturing facilities in Maryland and in the cities of, Wuxi,
Beijing and Shanghai in China. On January 1, 2017, CBMG Shanghai
entered into a 10-year lease agreement with Shanghai Chuangtong
Industrial Development Co., Ltd., pursuant to which the Company
leased a 10,501.6 square meter building located in the
“Pharma Valley” of Shanghai, the People’s
Republic of China for research and development, manufacturing and
office space purposes. Subject to a 5-month rent-free renovation
period, the monthly rent for the first two years is determined by
floor and ranges from 3.7 yuan to 4.3 yuan per square meter per
day, for an aggregate monthly rent for the entire Property of
approximately 1.3 million yuan ($187,064). The term of the Lease is
10 years, starting from January 1, 2017 and ending on December 31,
2026 (the “Original Term”). During the Original Term,
the monthly rent will increase by 6% every two years. As previously
disclosed in the Company’s Quarterly Report on Form 10-Q for
the quarter ended September 30, 2016 on November 8, 2016, the
Company paid the landlord a non-refundable deposit of 1.2 million
yuan ($179,700).
Certain Tax Matters
Following the
completion of our merger with EastBridge Investment Group
Corporation (Delaware) on February 6, 2013, CBMG and its controlled
subsidiaries (the “CBMG Entities”) became a Controlled
Foreign Corporation (CFC) under U.S. Internal Revenue Code Section
957. As a result, the CBMG Entities are subject to anti-deferral
provisions within the U.S. federal income tax system that were
designed to limit deferral of taxable earnings otherwise achieved
by putting profit in low taxed offshore entities. While the CBMG
Entities are subject to review under such provisions, the CBMG
Entities’ earnings are from an active business and should not
be deemed to be distributions made to its U.S. parent
company.
Pursuant to the
Corporate Income Tax Law of the PRC, all of the Company’s PRC
subsidiaries are liable to PRC CIT at a rate of 25% except for
Cellular Biomedicine Group Ltd. (Shanghai) (“CBMG
Shanghai”). According to Guoshuihan 2009 No. 203, if an
entity is certified as an “advanced and new technology
enterprise”, it is entitled to a preferential income tax rate
of 15%. CBMG Shanghai obtained the certificate of “advanced
and new technology enterprise” dated October 30, 2015 with an
effective period of three years and the provision for PRC corporate
income tax for CBMG Shanghai is calculated by applying the income
tax rate of 15% in 2016 (2015: 15%; 2014: 25%).
BIOPHARMACEUTICAL REGULATION
PRC Regulations
Our
cellular medicine business operates in a highly regulated
environment. In China, aside from provincial and local
licensing authorities, hospitals and their internal ethics and
utilization committees, and a system of institutional review boards
(“IRBs”) which in many cases have members appointed by
provincial authorities, Cell therapy regulations have not been
codified by any of the Chinese regulatory agencies. On December 16,
2016, the CFDA solicited feedback on its draft "Technical
Guidelines for Research and Evaluation of Cellular Products”,
signaling near term codification / clarification of the cell
therapy regulation. We believe this will create substantial
barrier-to-entry for newcomers in China. However, it remains
unclear if any of our clinical trials will be offered U.S.FDA-liked
Fast Track designation as maintenance therapy in subjects with
advanced cancer who have limited options following surgery and
front-line platinum/taxane chemotherapy to improve their
progression-free survival. By applying U.S. SOP and protocols and
following authorized treatment plans in China, we believe we are
differentiated from our competition as we believe we have first
mover’s advantage and a fortified barrier to
entry. In addition, we began to review
the feasibility of performing synergistic U.S. clinical
studies.
27
PRC Operating Licenses
Our
business operations in China are subject to customary regulation
and licensing requirements under regulatory agencies including the
local Administration for Industry and Commerce, General
Administration of Quality Supervision, Inspection and Quarantine,
and the State Administration of Taxation, for each of our business
locations. Additionally, our clean room facilities and the use of
reagents is also regulated by local branches of the Ministry of
Environmental Protection. We are in good standing with respect to
each of our business operating licenses.
U.S. Government Regulation
The
health care industry is one of the most highly regulated industries
in the United States. The federal government, individual state and
local governments, as well as private accreditation organizations,
oversee and monitor the activities of individuals and businesses
engaged in the development, manufacture and delivery of health care
products and services. Federal laws and regulations seek to protect
the health, safety, and welfare of the citizens of the United
States, as well as to prevent fraud and abuse associated with the
purchase of health care products and services with federal monies.
The relevant state and local laws and regulations similarly seek to
protect the health, safety, and welfare of the states’
citizens and prevent fraud and abuse. Accreditation organizations
help to establish and support industry standards and monitor new
developments.
HCT/P Regulations
Manufacturing
facilities that produce cellular therapies are subject to extensive
regulation by the U.S. FDA. In particular, U.S. FDA regulations set
forth requirements pertaining to establishments that manufacture
human cells, tissues, and cellular and tissue-based products
(“HCT/Ps”). Title 21, Code of Federal Regulations, Part
1271 (21 CFR Part 1271) provides for a unified registration and
listing system, donor-eligibility, current Good Tissue Practices
(“cGTP”), and other requirements that are intended to
prevent the introduction, transmission, and spread of communicable
diseases by HCT/Ps. While we currently have no plans to conduct
these activities within the United States, these regulations may be
relevant to us if in the future we become subject to them, or if
parallel rules are imposed on our operations in China.
We
currently collect, process, store and manufacture HCT/Ps, including
manufacturing cellular therapy products. We also collect, process,
and store HCT/Ps. Accordingly, we comply with cGTP and cGMP
guidelines that apply to biological products. Our management
believes that certain other requirements pertaining to biological
products, such as requirements pertaining to premarket approval, do
not currently apply to us because we are not currently
investigating, marketing or selling cellular therapy products in
the United States. If we change our business operations in the
future, the FDA requirements that apply to us may also
change.
Certain
state and local governments within the United States also regulate
cell-processing facilities by requiring them to obtain other
specific licenses. Certain states may also have enacted laws and
regulations, or may be considering laws and regulations, regarding
the use and marketing of stem cells or cell therapy products, such
as those derived from human embryos. While these laws and
regulations should not directly affect our business, they could
affect our future business. Presently we are not subject to any of
these state law requirements, because we do not conduct these
regulated activities within the United States.
Pharmaceutical and Biological Products
In the
United States, pharmaceutical and biological products, including
cellular therapies, are subject to extensive pre- and post-market
regulation by the FDA. The Federal Food, Drug, and Cosmetic Act
(“FD&C Act”), and other federal and state statutes
and regulations, govern, among other things, the research,
development, testing, manufacture, storage, recordkeeping,
approval, labeling, promotion and marketing, distribution,
post-approval monitoring and reporting, sampling, and import and
export of pharmaceutical products. Biological products are approved
for marketing under provisions of the Public Health Service Act, or
PHS Act. However, because most biological products also meet the
definition of “drugs” under the FD&C Act, they are
also subject to regulation under FD&C Act provisions. The PHS
Act requires the submission of a biologics license application
(“BLA”), rather than a New Drug Application ("NDA"),
for market authorization. However, the application process and
requirements for approval of BLAs are similar to those for NDAs,
and biologics are associated with similar approval risks and costs
as drugs. Presently we are not subject to any of these
requirements, because we do not conduct these regulated activities
within the United States. However, these regulations may
be relevant to us should we engage in these activities in the
United States in the future.
28
CONSULTING SERVICES BUSINESS
Cellular
Biomedicine Group, Inc., a Delaware corporation (formerly known as
EastBridge Investment Group Corporation), 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 shifted its business to providing
finance-related services in Asia, with a focus on
China. On February 5, 2013, the Company formed 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 assets and
liabilities related to its consulting services business, and all
related business and operations, to its newly formed subsidiary,
EastBridge Investment Corp.
On June
23, 2014, the Company announced the discontinuation of the
consulting segment as it no longer fits into management’s
long-term strategy and vision. The Company is focusing
its resources on becoming a biotechnology company bringing
therapies to improve the health of patients in
China.
Dispositions of Client Shares
Among
the shares received by EastBridge Sub as compensation for services,
as of December 31, 2015, the Company had sold 200,000 shares of
Wonder International Education and Investment Group
Corporation/Wenda Education on the open market. No shares were sold
during the year ended December 31, 2016.
WHERE YOU CAN FIND MORE INFORMATION
You are
advised to read this Form 10-K in conjunction with other reports
and documents that we file from time to time with the SEC. In
particular, please read our Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K that we file from time to time. You may
obtain copies of these reports directly from us or from the SEC at
the SEC's Public Reference Room at 100 F. Street, N.E. Washington,
D.C. 20549, and you may obtain information about obtaining access
to the Reference Room by calling the SEC at 1-800-SEC-0330. In
addition, the SEC maintains information for electronic filers at
its website http://www.sec.gov.
|
ITEM 1A. Risk
Factors
|
RISKS RELATED TO OUR COMPANY
We have a limited operating history and expect significant
operating losses for the next few years.
We are
a company with a limited operating history and have incurred
substantial losses and negative cash flow from operations through
the year ended December 31, 2016.1 Our cash flow from operations may not be
consistent from period to period, our biopharmaceutical business
has not yet generated substantial revenue, and we may continue to
incur losses and negative cash flow in future periods, particularly
within the next several years.
29
Our biopharmaceutical product development programs are based on
novel technologies and are inherently risky.
We are
subject to the risks of failure inherent in the development of
products based on new biomedical technologies. The novel nature of
these cell-based therapies creates significant challenges in regard
to product development and optimization, manufacturing, government
regulation, third party reimbursement, and market acceptance,
including the challenges of:
|
●
|
Educating
medical personnel regarding the application protocol;
|
|
●
|
Sourcing
clinical and commercial supplies for the materials used to
manufacture and process our Tcm product candidates;
|
|
●
|
Developing
a consistent and reliable process, while limiting contamination
risks regarding the application protocol;
|
|
●
|
Conditioning
patients with chemotherapy in conjunction with delivering Tcm
treatment, which may increase the risk of adverse side
effects;
|
|
●
|
Obtaining
regulatory approval, as the Chinese Food and Drug Administration,
or CFDA, and other regulatory authorities have limited experience
with commercial development of cell-based therapies, and therefore
the pathway to regulatory approval may be more complex and require
more time than we anticipate; and
|
|
●
|
Establishing
sales and marketing capabilities upon obtaining any regulatory
approval to gain market acceptance of a novel therapy.
|
These
challenges may prevent us from developing and commercializing
products on a timely or profitable basis or at all.
We face risks relating to the cell therapy industry, clinical
development and commercialization.
Cell
therapy is still a developing field and a significant global market
for our services has yet to emerge. Our cellular therapy candidates
are based on novel cell technologies that are inherently risky and
may not be understood or accepted by the marketplace. The current
market principally consists of providing manufacturing of cell and
tissue-based therapeutic products for clinical trials and
processing of stem cell products for therapeutic
programs.
The
degree of market acceptance of any future product candidates will
depend on a number of factors, including:
|
●
|
the
clinical safety and effectiveness of the product candidates, the
availability of alternative treatments and the perceived advantages
of the particular product candidates over alternative
treatments;
|
|
●
|
the
relative convenience and ease of administration of the product
candidates;
|
|
●
|
our
ability to separate the product candidates from the ethical
controversies and political barriers associated with stem cell
product candidates derived from human embryonic or fetal
tissue;
|
|
●
|
ethical
concerns that may arise regarding our commercial use of stem cells,
including adult stem cells, in the manufacture of the product
candidates;
|
|
●
|
the
frequency and severity of adverse events or other undesirable side
effects involving the product candidates or the products or product
candidates of others that are cell-based; and
|
|
●
|
the
cost of the products, the reimbursement policies of government and
third-party payors and our ability to obtain sufficient third-party
coverage or reimbursement.
|
30
Laws and the regulatory infrastructure governing cellular
biopharmaceutical in China are relatively new and less established
in comparison to the U.S. and other countries; accordingly
regulation may be less stable and predictable than desired, and
regulatory changes may disrupt our commercialization
process.
Cell
therapies regulation have not been codified by any of the Chinese
regulatory agencies. On December 16, 2016, CFDA issued solicitation
on feedback to its draft "Technical Guidelines for Research and
Evaluation of Cellular Products”, signaling near term
codification / clarification of the cell therapy regulation. It
remains unclear if any of our clinical trials will be offered
U.S.FDA-liked Fast Track designation as maintenance therapy in
subjects with advanced cancer who have limited options following
surgery and front-line platinum/taxane chemotherapy to improve
their progression-free survival. We do not know if our animal
studies documentation will be approved to support trials in humans.
We also do not know if our cell lines will be accepted by the
health authorities. These factors could adversely affect the timing
of the clinical trials, the timing of receipt and reporting of
clinical data, the timing of Company-sponsored IND filings, and our
ability to conduct future planned clinical trials, and any of the
above could have a material adverse effect on our
business.
CFDA’s regulations may limit our ability to develop, license,
manufacture and market our products and services.
Some or
all of our operations in China will be subject to oversight and
regulation by the CFDA and MOH. Government regulations, among other
things, cover the inspection of and controls over testing,
manufacturing, safety and environmental considerations, efficacy,
labeling, advertising, promotion, record keeping and sale and
distribution of pharmaceutical products. Such government
regulations may increase our costs and prevent or delay the
licensing, manufacturing and marketing of any of our products or
services. In the event we seek to license, manufacture, sell or
distribute new products or services, we likely will need approvals
from certain government agencies such as the future growth and
profitability of any operations in China would be contingent on
obtaining the requisite approvals. There can be no assurance that
we will obtain such approvals.
In
2004, the CFDA implemented new guidelines for the licensing of
pharmaceutical products. All existing manufacturers with licenses
were required to apply for the Good Manufacturing Practices
(“cGMP”) certifications. According to Good Manufacturing Practices for
Pharmaceutical Products (revised edition 2010) , or the New
GMP Rules promulgated by the Ministry of Health of the PRC on
January 17, 2011 which became effective on March 1, 2011, all the
newly constructed manufacturing facilities of drug manufacture
enterprises in China shall comply with the requirements of the New
GMP Rules, which are stricter than the original GMP
standards.
In
addition, delays, product recalls or failures to receive approval
may be encountered based upon additional government regulation,
legislative changes, administrative action or changes in
governmental policy and interpretation applicable to the Chinese
pharmaceutical industry. Our pharmaceutical activities also may
subject us to government regulations with respect to product prices
and other marketing and promotional related activities. Government
regulations may substantially increase our costs for developing,
licensing, manufacturing and marketing any products or services,
which could have a material adverse effect on our business,
operating results and financial condition.
The
CFDA and other regulatory authorities in China have implemented a
series of new punitive and stringent measures regarding the
pharmaceuticals industry to redress certain past misconducts in the
industry and certain deficiencies in public health reform policies.
Given the nature and extent of such new enforcement measures, the
aggressive manner in which such enforcement is being conducted and
the fact that newly-constituted local level branches are encouraged
to issue such punishments and fines, there is the possibility of
large scale and significant penalties being levied on
manufacturers. These new measures may include fines, restriction
and suspension of operations and marketing and other unspecified
penalties. This new regulatory environment has added significantly
to the risks of our businesses in China and may have a material
adverse effect on our business, operating results and financial
condition.
Our technology platforms, including our CAR-T, Tcm, whether
preclinical or clinical, and the cancer vaccine technologies are
new approaches to cancer treatment that present significant
challenges.
We have
concentrated our research and development efforts on T cell
immunotherapy technology, and our future success in cancer
treatment is dependent on the successful development of T cell
immunotherapies in general and our CAR and vaccine technologies and
product candidates in particular. Our approach to cancer treatment
aims to alter T cells ex
vivo through genetic modification using viruses designed to
reengineer the T cells to recognize specific proteins on the
surface or inside cancer cells. Because this is a new approach to
cancer immunotherapy and cancer treatment generally, developing and
commercializing our product candidates subjects us to many
challenges.
31
We
cannot be sure that our T cell immunotherapy and vaccine
technologies will yield satisfactory products that are safe and
effective, scalable, or profitable. Additionally, because our
technology involves the genetic modification of patient cells
ex vivo using a virus, we
are subject to many of the challenges and risks that gene therapies
face, including regulatory requirements governing gene and cell
therapy products have changed frequently.
Moreover, public
perception of therapy safety issues, including adoption of new
therapeutics or novel approaches to treatment, may adversely
influence the willingness of subjects to participate in clinical
trials, or if approved, of physicians to subscribe to the novel
treatment mechanics. Physicians, hospitals and third-party payers
often are slow to adopt new products, technologies and treatment
practices that require additional upfront costs and training.
Physicians may not be willing to undergo training to adopt this
novel and personalized therapy, may decide the therapy is too
complex to adopt without appropriate training and may choose not to
administer the therapy. Based on these and other factors, hospitals
and payers may decide that the benefits of this new therapy do not
or will not outweigh its costs.
Our near term ability to generate significant product revenue
is dependent on the success of one or more of our CD19, CD22, CD30
and HER1, as well as CD40GVAX product candidates, each of which are
at an early-stage of development and will require significant
additional clinical testing before we can seek regulatory approval
and begin commercial sales.
Our
near term ability to generate significant product revenue is
highly dependent on our ability to obtain regulatory approval of
and successfully commercialize one or more of our CD19, CD20, CD30
and HER1, as well as CD40GVAX product candidates. All of these
products are in the early stages of development, have been tested
in a relatively small number of patients, and will require
additional clinical and nonclinical development, regulatory review
and approval in each jurisdiction in which we intend to market the
products, substantial investment, access to sufficient commercial
manufacturing capacity, and significant marketing efforts before we
can generate any revenue from product sales. Before obtaining
marketing approval from regulatory authorities for the sale of our
product candidates, we must conduct extensive clinical studies to
demonstrate the safety, purity, and potency of the product
candidates in humans. We cannot be certain that any of our product
candidates will be successful in clinical studies and they may not
receive regulatory approval even if they are successful in clinical
studies.
If our
products, once developed, encounter safety or efficacy
problems, developmental delays, regulatory issues, or other
problems, our development plans and business could be significantly
harmed. Further, competitors who are developing products with
similar technology may experience problems with their products that
could identify problems that would potentially harm our
business.
Third parties have sponsored and conducted all clinical trials of
our CD19, CD20, CD30 and HER1, as well as the CD40GVAX vaccine
product candidates so far, and our ability to influence the design
and conduct of such trials has been limited. We plan to assume
control over future clinical and regulatory development of the
CD20, CD30 and HER1, and may do so for other product candidates,
which will entail additional expenses and may be subject to delay.
Any failure by a third party to meet its obligations with respect
to the clinical and regulatory development of our product
candidates may delay or impair our ability to obtain regulatory
approval for our products and result in liability for our
company.
On
November 29, 2016 we announced the approval and commencement of
patient enrollment in China for our CARD-1 (“CAR-T Against
DLBCL”) Phase I clinical trial utilizing our optimized
proprietary C-CAR011 construct of CD19 CAR-T therapy for the
treatment of patients with refractory DLBCL. On January 9, 2017 we
announced the approval and commencement of patient enrollment in
China for our CALL-1 (“CAR-T against Acute Lymphoblastic
Leukemia”) Phase I clinical trial utilizing our optimized
proprietary C-CAR011 construct of CD19 CAR-T therapy for the
treatment of patients with relapsed or refractory (r/r) CD19+
B-cell ALL. We do not know if our Phase I CARD-1 or CALL-1 results
will justify initiation of larger Phase II clinical
trials.
32
To
date, we have yet to sponsor any clinical trials relating to our
CD20, CD30, HER1 and CD40GVAX product candidates or other product
candidates. Instead, faculty members at our third-party research
institution collaborators, or those institutions themselves, have
sponsored all clinical trials relating to these product candidates,
in each case under their own IRB with the respective regulatory
agency. We plan to assume control of the overall clinical and
regulatory development of CD19, CD20, CD30 and HER1 for future
clinical trials and obtain sponsorship of the INDs or file new
Company-sponsored INDs in China and/or the United States. We will
evaluate options to conducting the U.S. CD40LGVAX Trial and to
continuing the related IND with the Federal Drug Administration
(“FDA”). Failure to obtain, or delays in
obtaining, sponsorship of INDs or in filing new Company-sponsored
INDs for these or any other product candidates we determine to
advance could negatively affect the timing of our potential future
clinical trials. Such an impact on timing could increase research
and development costs and could delay or prevent obtaining
regulatory approval for our most advanced product candidates,
either of which could have a material adverse effect on our
business.
Further, even in
the event that the IND sponsorship is obtained for existing and new
INDs, it is possible that the CFDA or other regulatory agencies
will not accept any of the trials as providing adequate support for
future clinical trials, whether controlled by us or third parties,
for any of one or more reasons, including the safety, purity, and
potency of the product candidate, the degree of product
characterization, elements of the design or execution of the
previous trials or safety concerns, or other trial results. We may
also be subject to liabilities arising from any treatment-related
injuries or adverse effects in patients enrolled in these previous
trials. As a result, we may be subject to unforeseen third-party
claims and delays in our potential future clinical trials. We may
also be required to repeat in whole or in part clinical trials
previously conducted by our third-party research institution
collaborators, which will be expensive and delay the submission and
licensure or other regulatory approvals with respect to any of our
product candidates. Any such delay or liability could have a
material adverse effect on our business.
Moreover, although
we plan to assume control of the overall clinical and regulatory
development of CD19, CD20, CD30 and HER1 going forward, we have so
far been dependent on contractual arrangements with our third-party
research institution collaborators and will continue to be until we
assume control. To the extent that we do not use our own scientific
team to conduct trials, we are and will be dependent contractual
arrangements with third-party research institution collaborators
for ongoing and planned trials for our product candidates.. Such
arrangements provide us certain information rights with respect to
the previous, planned, or ongoing trials, including access to and
the ability to use and reference the data, including for our own
regulatory filings, resulting from such trials. If our third-party
research institution collaborators breach these obligations, or if
the data prove to be inadequate compared to the first-hand
knowledge we might have gained had the completed trials been
Company-sponsored trials, then our ability to design and conduct
our planned corporate-sponsored clinical trials may be adversely
affected. Additionally, the regulatory agencies may disagree with
the sufficiency of our right to reference the preclinical,
manufacturing, or clinical data generated by these prior
investigator-sponsored trials, or our interpretation of
preclinical, manufacturing, or clinical data from these clinical
trials. If so, the regulatory agencies may require us to obtain and
submit additional preclinical, manufacturing, or clinical data
before we may begin our planned trials and/or may not accept such
additional data as adequate to begin our planned
trials.
Our CD19, CD20, CD30 and HER1, as well as the
CD40GVAX product candidates are
biologics and the manufacture of our product candidates is complex
and we may encounter difficulties in production, particularly with
respect to process development or scaling-out of our manufacturing
capabilities. If we or any of our third-party manufacturers
encounter such difficulties, our ability to provide supply of our
product candidates for clinical trials or our products for
patients, if approved, could be delayed or stopped, or we may be
unable to maintain a commercially viable cost
structure.
Our
immune cell CAR-T and vaccine product candidates are biologics and
the process of manufacturing our products is complex, highly-
regulated and subject to multiple risks. The manufacture of our
product candidates involves complex processes, including harvesting
T cells from patients, genetically modifying the T cells
ex vivo, multiplying the T
cells to obtain the desired dose, and ultimately infusing the T
cells back into a patient’s body. As a result of the
complexities, the cost to manufacture these biologics in general,
and our genetically modified cell product candidates in particular,
is generally higher than the adipose stem cell, and the
manufacturing process is less reliable and is more difficult to
reproduce. Our manufacturing process will be susceptible to product
loss or failure due to logistical issues associated with the
collection of white blood cells, or starting material, from the
patient, shipping such material to the manufacturing site, shipping
the final product back to the patient, and infusing the patient
with the product, manufacturing issues associated with the
differences in patient starting materials, interruptions in the
manufacturing process, contamination, equipment or reagent failure,
improper installation or operation of equipment, vendor or operator
error, inconsistency in cell growth, and variability in product
characteristics. Even minor deviations from normal manufacturing
processes could result in reduced production yields, product
defects, and other supply disruptions. If for any reason we lose a
patient’s starting material or later-developed product at any
point in the process, the manufacturing process for that patient
will need to be restarted and the resulting delay may adversely
affect that patient’s outcome. If microbial, viral, or other
contaminations are discovered in our product candidates or in the
manufacturing facilities in which our product candidates are made,
such manufacturing facilities may need to be closed for an extended
period of time to investigate and remedy the contamination. Because
our product candidates are manufactured for each particular
patient, we will be required to maintain a chain of identity with
respect to materials as they move from the patient to the
manufacturing facility, through the manufacturing process, and back
to the patient. Maintaining such a chain of identity is difficult
and complex, and failure to do so could result in adverse patient
outcomes, loss of product, or regulatory action including
withdrawal of our products from the market. Further, as product
candidates are developed through preclinical to late stage clinical
trials towards approval and commercialization, it is common that
various aspects of the development program, such as manufacturing
methods, are altered along the way in an effort to optimize
processes and results. Such changes carry the risk that they will
not achieve these intended objectives, and any of these changes
could cause our product candidates to perform differently and
affect the results of planned clinical trials or other future
clinical trials.
33
Although we do
intend to develop our own manufacturing facility, and we have
leased a facility in Beijing that we intend to build out to support
our clinical and commercial manufacturing activities, we may, in
any event, never be successful in developing our own manufacturing
facility. Currently, our CAR-T product candidates
are manufactured using non-scalable processes by our third-party
research institution collaborators that we do not intend to use for
more advanced clinical trials or
commercialization. Additionally, we currently rely on
outside vendors to manufacture the CD40GVAX supplies and process
our Vaccine-related product candidates. We have not yet
caused our product candidates to be manufactured or processed on a
commercial scale and may not be able to do so for any of our
product candidates. Although our manufacturing and processing
approach is based upon the current approach undertaken by our
third-party research institution collaborators, we do not have
experience in managing the vaccine manufacturing process, and our
process may be more difficult or expensive than the approaches
currently in use. We will make changes as we work to optimize the
manufacturing process, and we cannot be sure that even minor
changes in the process will not result in significantly different
CAR-T or vaccine that may not be as safe and effective as the
current products deployed by our third-party research institution
collaborators. As a result of these challenges, we may experience
delays in our clinical development and/or commercialization plans.
The manufacturing risks could delay or prevent the completion of
our clinical trials or the approval of any of our product
candidates by the FDA, CFDA or other regulatory authorities, result
in higher costs or adversely impact commercialization of our
product candidates. In addition, we will rely on third parties to
perform certain specification tests on our product candidates prior
to delivery to patients. If these tests are not appropriately done
and test data are not reliable, patients could be put at risk of
serious harm and the FDA, CFDA or other regulatory authorities
could require additional clinical trials or place significant
restrictions on our company until deficiencies are
remedied. We may ultimately be unable to reduce the cost
of goods for our product candidates to levels that will allow for
an attractive return on investment if and when those product
candidates are commercialized.
We rely heavily on third parties to conduct clinical trials on our
product candidates.
We
presently are party to, and expect that we will be required to
enter into, agreements with hospitals and other research partners
to perform clinical trials for us and to engage in sales, marketing
and distribution efforts for our products and product candidates we
may acquire in the future. We may be unable to establish or
maintain third-party relationships on a commercially reasonable
basis, if at all. In addition, these third parties may have similar
or more established relationships with our competitors or other
larger customers. Moreover, the loss for any reason of one or more
of these key partners could have a significant and adverse impact
on our business. If we are unable to obtain or retain third party
sales and marketing vendors on commercially acceptable terms, we
may not be able to commercialize our therapy products as planned
and we may experience delays in or suspension of our marketing
launch. Our dependence upon third parties may adversely affect our
ability to generate profits or acceptable profit margins and our
ability to develop and deliver such products on a timely and
competitive basis.
34
Outside scientists and their third-party research institutions on
whom we rely for research and development and early clinical
testing of our product candidates may have other commitments or
conflicts of interest, which could limit our access to their
expertise and harm our ability to leverage our technology
platform.
We
currently have limited internal research and development
capabilities and are currently conducting no independent clinical
trials with our, CD20, CD30, HER1 and CD40GVAX product candidates
or our other product candidates. We therefore rely at present on
our third-party research institution collaborators for both
capabilities.
The
outside scientists who conduct the clinical testing of our current
product candidates, and who conduct the research and development
upon which our product candidate pipeline depends, are not our
employees; rather they serve as either independent contractors or
the primary investigators under collaboration that we have with
their sponsoring academic or research institution. Such scientists
and collaborators may have other commitments that would limit their
availability to us. Although our scientific advisors generally
agree not to do competing work, if an actual or potential conflict
of interest between their work for us and their work for another
entity arises, we may lose their services. We are
currently evaluating the feasibility of conducting these trials
ourselves or commencing the trial in the United States or
elsewhere. These factors could adversely affect the timing of the
clinical trials, the timing of receipt and reporting of clinical
data, the timing of Company-sponsored IND filings, and our ability
to conduct future planned clinical trials. It is also possible that
some of our valuable proprietary knowledge may become publicly
known through these scientific advisors if they breach their
confidentiality agreements with us, which would cause competitive
harm to, and have a material adverse effect on our
business.
If we are unable to maintain our licenses, patents or other
intellectual property we could lose important protections that are
material to continuing our operations and our future
prospects.
We
operate in the highly technical field of development of
regenerative and immune cellular therapies. In addition to patents,
we rely in part on trademark, trade secret and protection to
protect our intellectual properties comprised of proprietary know
how, technology and processes. However, trade secrets are difficult
to protect. We have entered and expect to continue to enter into
confidentiality and intellectual property assignment agreements
with our most employees, consultants, outside scientific
collaborators, sponsored researchers, affiliates and other
advisors. These agreements generally require that the other party
keep confidential and not disclose to third parties all
confidential information developed by the party or made known to
the party by us. These agreements may also provide that inventions
conceived by the party in the course of rendering services to us
will be our exclusive property. However, these agreements may be
difficult to enforce, or can be breached and may not effectively
protect our intellectual property rights.
In addition to contractual measures, we try to
protect the confidential nature of our proprietary information by
compartmentalize our intellectual properties as well as using other
security measures. Such physical and technology measures may not
provide adequate protection for our proprietary information. For
example, our security measures may not prevent an employee or
consultant with authorized access from misappropriating our trade
secrets and providing them to a competitor, and the recourse we
have available against such misconduct may be inadequate to
adequately protect our interests. Enforcing a claim that a party
illegally disclosed or misappropriated a trade secret can be
difficult, expensive and time consuming, and the outcome is
unpredictable. In addition, courts outside the United States may be
less willing to protect trade secrets. Furthermore, others may
independently develop our proprietary information in a manner that
could prevent legal recourse by us. If any of our confidential or
proprietary information, including our trade secrets and know how,
were to be disclosed or misappropriated, or if a competitor
independently developed any such information, our competitive
position could be harmed.
We may be unable to obtain or maintain patent protection for our
products and product candidates, which could have a material
adverse effect on our business.
Our
commercial success will depend, in part, on obtaining and
maintaining patent protection for new technologies, product
candidates, products and processes and successfully defending such
patents against third party challenges. To that end, we file or
acquire patent applications, and have been issued patents that are
intended to cover certain methods and uses relating to stem cells
and cancer immune cell therapies.
35
The
patent positions of biotechnology companies can be highly uncertain
and involve complex legal, scientific and factual questions and
recent court decisions have introduced significant uncertainty
regarding the strength of patents in the industry. Moreover, the
legal systems of some countries do not favor the aggressive
enforcement of patents and may not protect our intellectual
property rights to the same extent as they would, for instance,
under the laws of the United States. Any of the issued patents we
own or license may be challenged by third parties and held to be
invalid, unenforceable or with a narrower or different scope of
coverage that what we currently believe, effectively reducing or
eliminating protection we believed we had against competitors with
similar products or technologies. If we ultimately engage in and
lose any such patent disputes, we could be subject to competition
and/or significant liabilities, we could be required to enter into
third party licenses or we could be required to cease using the
disputed technology or product. In addition, even if such licenses
are available, the terms of any license requested by a third party
could be unacceptable to us.
The
claims of any current or future patents that may issue or be
licensed to us may not contain claims that are sufficiently broad
to prevent others from utilizing the covered technologies and thus
may provide us with little commercial protection against competing
products. Consequently, our competitors may independently develop
competing products that do not infringe our patents or other
intellectual property. To the extent a competitor can develop
similar products using a different chemistry, our patents and
patent applications may not prevent others from directly competing
with us. Product development and approval timelines for certain
products and therapies in our industry can require a significant
amount of time (i.e. many years). As such, it is possible that any
patents that may cover an approved product or therapy may have
expired at the time of commercialization or only have a short
remaining period of exclusivity, thereby reducing the commercial
advantages of the patent. In such case, we would then rely solely
on other forms of exclusivity which may provide less protection to
our competitive position.
Litigation relating to intellectual property is expensive, time
consuming and uncertain, and we may be unsuccessful in our efforts
to protect against infringement by third parties or defend
ourselves against claims of infringement.
To
protect our intellectual property, we may initiate litigation or
other proceedings. In general, intellectual property litigation is
costly, time-consuming, diverts the attention of management and
technical personnel and could result in substantial uncertainty
regarding our future viability, even if we ultimately
prevail. Some of our competitors may be able to sustain
the costs of such litigation or other proceedings more effectively
than can we because of their substantially greater financial
resources. The loss or narrowing of our intellectual property
protection, the inability to secure or enforce our intellectual
property rights or a finding that we have infringed the
intellectual property rights of a third party could limit our
ability to develop or market our products and services in the
future or adversely affect our revenues. Furthermore, any public
announcements related to such litigation or regulatory proceedings
could adversely affect the price of our common stock. Third parties
may allege that the research, development and commercialization
activities we conduct infringe patents or other proprietary rights
owned by such parties. This may turn out to be the case even though
we have conducted a search and analysis of third-party patent
rights and have determined that certain aspects of our research and
development and proposed products activities apparently do not
infringe on any third-party Chinese patent rights. If we are found
to have infringed the patents of a third party, we may be required
to pay substantial damages; we also may be required to seek from
such party a license, which may not be available on acceptable
terms, if at all, to continue our activities. A judicial finding or
infringement or the failure to obtain necessary licenses could
prevent us from commercializing our products, which would have a
material adverse effect on our business, operating results and
financial condition.
We will not seek to protect our intellectual property rights in all
jurisdictions throughout the world and we may not be able to
adequately enforce our intellectual property rights even in the
jurisdictions where we seek protection.
Filing,
prosecuting and defending patents on our product candidates in all
countries and jurisdictions throughout the world would be
impracticable and cost prohibitive, and our intellectual property
rights in some countries could be less extensive than those in the
People’s Republic of China or the United States, assuming
that rights are obtained in these jurisdiction. In addition, the
laws of some foreign countries may not protect all of our
intellectual properties.
36
If we are unable to protect the confidentiality of trade secrets,
our competitive position could be impaired.
A
significant amount of our technology, particularly with respect to
our proprietary manufacturing processes, is unpatented and is held
in the form of trade secrets. We expend significant
efforts to protect these trade secrets, including the use of
confidentiality and proprietary information agreement, and
knowledge segmentation among our staff. Even so, improper use or
disclosure of our confidential information could occur and in such
cases adequate remedies may not exist. The inadvertent disclosure
of our trade secrets could impair our competitive
position.
PRC intellectual property law requires us to compensate our
employees for the intellectual property that they may help to
develop.
We have
entered and expect to continue to enter into confidentiality and
intellectual property assignment agreements with most of our
employees, consultants, outside scientific collaborators, sponsored
researchers, affiliates and other advisors. These agreements
generally require that the other party keep confidential and not
disclose to third parties all confidential information developed by
the party or made known to the party by us. These agreements may
also provide that inventions conceived by the party in the course
of rendering services to us will be our exclusive property.
However, these agreements may be difficult to enforce, or can be
breached and may not effectively protect our intellectual property
rights.
The PRC
laws codify a “reward/award” policy which entitles
employees to certain levels of compensation and bonus from their
service invention-creations for which their employers filed for
patent protection. In the absence of any contractual understanding,
the Implementing Rules of the
Patent Law require a minimum compensation and bonus to such
employees as below: bonus: (i) for each invention patent, a
one-time reward of no less than 3,000 RMB, or (ii) for each utility
model or design patent, a one-time reward of no less than 1,000
RMB, and compensation: (i) for each invention patent and utility
model, at least 2% of annual operating profits derived from the use
of the patent, (ii) for each design patent, at least 0.2% of annual
operating profits derived from the use of the design patent, and
(iii) at least 10% of royalties received from the licensing the
patent to a third party.
Although our bylaws
allow for us to issue bonuses to our employees, we have not
contractually limited the amount of compensation that we may pay
them for filing patents for their ideas, developments, discoveries
or inventions. As such, should any of our employees and consultants
who have not contractually agreed otherwise seek to enforce these
rights, we may be required to pay the statutorily mandated minimum
to our employees as required by this law. Our product candidates
are still in the clinical trial stage and as of the date of this
annual report, we have not derived any revenue from our
product-related patents. However, if and when we commercialize our
product candidates or therapies, or if we are required to pay our
employees any compensation for patents relating to our technical
services, such compensation could be substantial and may harm our
business prospects, financial condition and results of
operations.
Our technologies are at early stages of discovery and development,
and we may fail to develop any commercially acceptable or
profitable products.
We have
yet to develop any therapeutic products that have been approved for
marketing, and we do not expect to become profitable within the
next several years, but rather expect our biopharmaceutical
business to incur additional and increasing operating losses.
Before commercializing any therapeutic product in China, we may be
required to obtain regulatory approval from the MOH CFDA, local
regulatory authorities, and/or individual hospitals, and outside
China from equivalent foreign agencies after conducting extensive
preclinical studies and clinical trials that demonstrate that the
product candidate is safe and effective.
We may
elect to delay or discontinue studies or clinical trials based on
unfavorable results. Any product developed from, or based on, cell
technologies may fail to:
|
●
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survive
and persist in the desired location;
|
|
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provide
the intended therapeutic benefit;
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|
engraft
or integrate into existing tissue in the desired manner;
or
|
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●
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achieve
therapeutic benefits equal to, or better than, the standard of
treatment at the time of testing.
|
37
In
addition, our therapeutic products may cause undesirable side
effects. Results of preclinical research in animals may not be
indicative of future clinical results in humans.
Ultimately if
regulatory authorities do not approve our products or if we fail to
maintain regulatory compliance, we would be unable to commercialize
our products, and our business and results of operations would be
harmed. Even if we do succeed in developing products, we will face
many potential obstacles such as the need to develop or obtain
manufacturing, marketing and distribution capabilities.
Furthermore, because transplantation of cells is a new form of
therapy, the marketplace may not accept any products we may
develop.
Most potential applications of our technology are
pre-commercialization, which subjects us to development and
marketing risks.
We are
in a relatively early stage on the path to commercialization with
many of our products. Successful development and market acceptance
of our products is subject to developmental risks, including
failure to achieve innovative solutions to problems during
development, ineffectiveness, lack of safety, unreliability,
failure to receive necessary regulatory clearances or approvals,
approval by hospital ethics committees and other governing bodies,
high commercial cost, preclusion or obsolescence resulting from
third parties’ proprietary rights or superior or equivalent
products, competition, and general economic conditions affecting
purchasing patterns. There is no assurance that we or our partners
will successfully develop and commercialize our products, or that
our competitors will not develop competing products, treatments or
technologies that are less expensive or superior. Failure to
successfully develop and market our products would have a
substantial negative effect on our results of operations and
financial condition.
Market acceptance of new technology such as ours can be difficult
to obtain.
New and
emerging cell therapy and cell banking technologies may have
difficulty or encounter significant delays in obtaining market
acceptance in some or all countries around the world due to the
novelty of our cell therapy and cell banking technologies.
Therefore, the market adoption of our cell therapy and cell banking
technologies may be slow and lengthy with no assurances that the
technology will be successfully adopted. The lack of market
adoption or reduced or minimal market adoption of cell therapy and
cell banking technologies may have a significant impact on our
ability to successfully sell our future product(s) or therapies
within China or in other countries. Our strategy depends in part on
the adoption of the therapies we may develop by state-owned
hospital systems in China, and the allocation of resources to new
technologies and treatment methods is largely dependent upon ethics
committees and governing bodies within the hospitals. Even if our
clinical trials are successful, there can be no assurance that
hospitals in China will adopt our technology and therapies as
readily as we may anticipate.
Future clinical trial results may differ significantly from our
expectations.
While
we have proceeded incrementally with our clinical trials in an
effort to gauge the risks of proceeding with larger and more
expensive trials, we cannot guarantee that we will not experience
negative results with larger and much more expensive clinical
trials than we have conducted to date. Poor results in our clinical
trials could result in substantial delays in commercialization,
substantial negative effects on the perception of our products, and
substantial additional costs. These risks are increased by our
reliance on third parties in the performance of many of the
clinical trial functions, including the clinical investigators,
hospitals, and other third party service providers.
If clinical trials of our technology fail to demonstrate safety and
efficacy to the satisfaction of the relevant regulatory
authorities, including the PRC’s State Food and Drug
Administration and the Ministry of Health, or do not otherwise
produce positive results, we may incur additional costs or
experience delays in completing, or ultimately be unable to
complete, the development and commercialization of such product
candidates.
38
Currently, a
regulatory structure has not been established to standardize the
approval process for products or therapies based on the technology
that exists or that is being developed in our field. Therefore we
must conduct, at our own expense, extensive clinical trials to
demonstrate the safety and efficacy of the product candidates in
humans, and then archive our results until such time as a new
regulatory regime is put in place. If and when this new regulatory
regime is adopted it may be easier or more difficult to navigate
than CBMG may anticipate, with the following potential
barriers:
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regulators
or institutional review boards may not authorize us or our
investigators to commence clinical trials or conduct clinical
trials at a prospective trial site;
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clinical
trials of product candidates may produce negative or inconclusive
results, and we may decide, or regulators may require us, to
conduct additional clinical trials or abandon product development
programs that we expect to be pursuing;
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the
number of patients required for clinical trials of product
candidates may be larger than we anticipate, enrollment in these
clinical trials may be slower than we anticipate, or participants
may drop out of these clinical trials at a higher rate than we
anticipate;
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third
party contractors may fail to comply with regulatory requirements
or meet their contractual obligations to us in a timely manner or
at all;
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we
might have to suspend or terminate clinical trials of our product
candidates for various reasons, including a finding that the
participants are being exposed to unacceptable health
risks;
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regulators
or institutional review boards may require that we or our
investigators suspend or terminate clinical research for various
reasons, including noncompliance with regulatory
requirements;
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the
cost of clinical trials of our product candidates may be greater
than anticipated;
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we may
be subject to a more complex regulatory process, since cell-based
therapies are relatively new and regulatory agencies have less
experience with them as compared to traditional pharmaceutical
products;
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the
supply or quality of our product candidates or other materials
necessary to conduct clinical trials of these product candidates
may be insufficient or inadequate; and
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our
product candidates may have undesirable side effects or other
unexpected characteristics, causing us or our investigators to halt
or terminate the trials.
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We may
be unable to generate interest or meaningful revenue in out-license
our Intellectual Property.
The results of preclinical studies may not correlate with the
results of human clinical trials. In addition, early stage clinical
trial results do not ensure success in later stage clinical trials,
and interim trial results are not necessarily predictive of final
trial results.
To
date, we have not completed the development of any products through
regulatory approval. The results of preclinical studies in animals
may not be predictive of results in a clinical trial. Likewise, the
outcomes of early clinical trials may not be predictive of the
success of later clinical trials. New information regarding the
safety and efficacy of such product candidates may be less
favorable than the data observed to date. AG’s budding
technical service revenue in the Jilin Hospital should not be
relied upon as evidence that later or larger-scale clinical trials
will succeed. In addition, even if the trials are successfully
completed, we cannot guarantee that the CFDA will interpret the
results as we do, and more trials could be required before we
submit our product candidates for approval. To the extent that the
results of the trials are not satisfactory to the CFDA or other
foreign regulatory authorities for support of a marketing
application, approval of our product candidates may be
significantly delayed, or we may be required to expend significant
additional resources, which may not be available to us, to conduct
additional trials in support of potential approval of our product
candidates.
39
If we encounter difficulties enrolling patients in our clinical
trials, our clinical development activities could be delayed or
otherwise adversely affected.
We may
experience difficulties in patient enrollment in our clinical
trials for a variety of reasons. The timely completion of clinical
trials in accordance with their protocols depends, among other
things, on our ability to enroll a sufficient number of patients
who remain in the study until its conclusion. The enrollment of
patients depends on many factors, including:
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the
patient eligibility criteria defined in the protocol;
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the
size of the patient population required for analysis of the
trial’s primary endpoints;
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the
proximity of patients to study sites;
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the
design of the trial;
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our
ability to recruit clinical trial investigators with the
appropriate competencies and experience;
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our
ability to obtain and maintain patient consents; and
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the
risk that patients enrolled in clinical trials will drop out of the
trials before completion.
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In
addition, our clinical trials may compete with other clinical
trials for product candidates that are in the same therapeutic
areas as our product candidates, and this competition may reduce
the number and types of patients available to us, because some
patients who might have opted to enroll in our trials may instead
opt to enroll in a trial being conducted by one of our competitors.
Since the number of qualified clinical investigators is limited, we
expect to conduct some of our clinical trials at the same clinical
trial sites that some of our competitors use, which will reduce the
number of patients who are available for our clinical trials in
such clinical trial site. Moreover, because our product candidates
represent a departure from more commonly used methods for cancer
treatment, potential patients and their doctors may be inclined to
use conventional therapies, such as chemotherapy and or traditional
Chinese medicine, rather than enroll patients in any future
clinical trial.
Upon
commencing clinical trials, delays in patient enrollment may result
in increased costs or may affect the timing or outcome of the
planned clinical trials, which could prevent completion of these
trials and adversely affect our ability to advance the development
of our product candidates.
We are exposed to general
liability, non-clinical and clinical liability risks which could
place a substantial financial burden upon us, should lawsuits be
filed against us.
Our
business exposes us to potential liability risks that are inherent
in the testing, manufacturing and marketing of our therapies and
product candidates. We expect that such claims are likely to be
asserted against us at some point. In addition, the use in our
clinical trials of our therapies and products and the subsequent
sale of these therapies or product candidates by us or our
potential collaborators may cause us to bear a portion of or all
product liability risks. We currently have $3.4 million in
insurance coverage relating to inventory, property plant and
equipment and office premises. The Company also purchased in
insurance covering personal injury, medical expenses and several
clinical trials. However, any claim under such insurance
policies may be subject to certain exceptions, and may not be
honored fully, in part, in a timely manner, or at all, and may not
cover the full extent of liability we may actually face. Therefore,
a successful liability claim or series of claims brought against us
could have a material adverse effect on our business, financial
condition and results of operations.
We currently have no product marketing and sales organization and
have no experience in marketing such products. If we are unable to
establish product marketing and sales capabilities or enter into
agreements with third parties to market and sell our product
candidates, we may generate less product revenue than
expected.
We
currently have no product sales, marketing or distribution
capabilities and have no experience in marketing products. We
intend to develop an in-house product marketing organization and
sales force, which will require significant capital expenditures,
management resources and time. We will have to compete with other
pharmaceutical and biotechnology companies to recruit, hire, train
and retain marketing and sales personnel.
If we
are unable or decide not to establish internal sales, marketing and
distribution capabilities, we will pursue collaborative
arrangements regarding the sales and marketing of our products,
however, there can be no assurance that we will be able to
establish or maintain such collaborative arrangements, or if we are
able to do so, that they will have effective sales forces. Any
revenue we receive will depend upon the efforts of such third
parties, which may not be successful. We may have little or no
control over the marketing and sales efforts of such third parties
and our revenue from product sales may be lower than if we had
commercialized our product candidates ourselves. We also face
competition in our search for third parties to assist us with the
sales and marketing efforts of our product candidates. There can be
no assurance that we will be able to develop in-house sales and
distribution capabilities or establish or maintain relationships
with third-party collaborators to commercialize any product in
China or overseas.
40
Coverage and reimbursement may be limited or unavailable in certain
market segments for our product candidates, which could make it
difficult for us to sell our product candidates
profitably.
Successful sales of
our product candidates, if approved, depend on the availability of
adequate coverage and reimbursement from third-party payers. In
addition, because our product candidates represent new approaches
to the treatment of cancer, we cannot accurately estimate the
potential revenue from our product candidates.
Patients who are
provided medical treatment for their conditions generally rely on
third-party payers to reimburse all or part of the costs associated
with their treatment. Adequate coverage and reimbursement from
governmental healthcare programs and commercial payers is critical
to new product acceptance. In China, government authorities decide
which drugs and treatments they will cover and the amount of
reimbursement. Obtaining coverage and reimbursement approval of a
product from a government or other third-party payer is a
time-consuming and costly process that could require us to provide
to the payer supporting scientific, clinical and cost-effectiveness
data for the use of our products. Even if we obtain coverage for a
given product, the resulting reimbursement payment rates might not
be adequate for us to achieve or sustain profitability or may
require co-payments that patients find unacceptably high. Patients
are unlikely to use our product candidates unless coverage is
provided and reimbursement is adequate to cover a significant
portion of the cost of our product candidates. If we
obtain approval in one or more jurisdictions outside of China for
our product candidates, we will be subject to rules and regulations
in those jurisdictions. In some foreign countries, particularly
those in the EU, the pricing of biologics is subject to
governmental control. In these countries, pricing negotiations with
governmental authorities can take considerable time after obtaining
marketing approval of a product candidate. In addition, market
acceptance and sales of our product candidates will depend
significantly on the availability of adequate coverage and
reimbursement from third-party payers for our product candidates
and may be affected by existing and future health care reform
measures. The continuing efforts of the government,
insurance companies, managed care organizations and other payers of
healthcare services to contain or reduce costs of healthcare and/or
impose price controls may adversely affect:
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the
demand for our product candidates, if we obtain regulatory
approval;
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our
ability to set a price that we believe is fair for our
products;
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our
ability to generate revenue and achieve or maintain
profitability;
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the
level of taxes that we are required to pay; and
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the
availability of capital.
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Any reduction
in reimbursement from any government programs may result in a
similar reduction in payments from private payers, which may
adversely affect our future profitability.
Our product candidates may cause undesirable side effects or have
other properties that could interrupt our clinical development,
prevent or delay regulatory approval, and limit our commercial
value or result in significant negative consequences.
Undesirable
or unacceptable side effects caused by our product candidates could
cause us or regulatory authorities to delay, suspend or stop
clinical trials and could result in the delay or denial of
regulatory approval by the regulatory authorities. Results of our
trials could reveal unacceptable severe adverse effects or
unexpected characteristics.
There
have been reported patient deaths in Immune Cell therapies as a
result of factors comprised of cytokine release syndrome and
neurotoxicity. Immune Cell therapy treatment-related adverse side
effects could also affect patient recruitment or the ability of
enrolled subjects to complete the trial or result in potential
liability claims. In addition, these side effects may not be
recognized or properly managed by the treating medical staff, as
medical personnel do not normally encounter in the general patient
population toxicities resulting from personalized immune cell
therapy. We plan to conduct training for the medical personnel
using immune cell therapy to understand the adverse side effect
profile for our clinical trials and upon any commercialization of
any immune cell product candidates. Inability of the medical
personnel in recognizing or managing immune cell therapy’s
potential adverse side effects could result in patient deaths. Any
of these occurrences may harm our business, financial condition and
prospects significantly.
41
Our manufacturing facilities are subject to extensive government
regulation, and existing or future regulations may adversely affect
our current or future operations, increase our costs of operations,
or require us to make additional capital expenditures.
Environmental advocacy groups and regulatory
agencies in China have been focusing considerable attention on the
industries’ potential role in climate change. Stringent
government safety, environmental and bio-hazardous materials
disposal regulations at the city, provincial, and local level may
have substantial impact on our business and our third-party service
providers. A number of complex laws, rules, orders, and
interpretations govern environmental protection, health, safety,
land use, zoning, transportation, and related matters. The adoption
of laws and regulations to implement controls of bio-hazardous
material disposal and environmental compliance, including the
imposition of fees or taxes, could adversely affect the operations
with which we do business. Among other things, timeliness in
navigating the compliance of these regulations may restrict our
operations, our third-party service providers’ operations and
adversely affect our financial condition, results of operations,
and cash flows by imposing conditions including, but not limited to
new permits requirement, limitations or bans on disposal or
transportation of certain bio-hazardous materials or certain
categories of materials. The Company is in the process of applying
for (i) environmental
protection compliance for its new facility in Beijing and (ii)
update of the environmental protection permits for its Shanghai
facility.
Technological and medical developments or improvements in
conventional therapies could render the use of cell therapy and our
services and planned products obsolete.
Advances in other
treatment methods or in disease prevention techniques could
significantly reduce or entirely eliminate the need for our cell
therapy services, planned products and therapeutic efforts. There
is no assurance that cell therapies will achieve the degree of
success envisioned by us in the treatment of disease. Nor is there
any assurance that new technological improvements or techniques
will not render obsolete the processes currently used by us, the
need for our services or our planned products. Additionally,
technological or medical developments may materially alter the
commercial viability of our technology or services, and require us
to incur significant costs to replace or modify equipment in which
we have a substantial investment. We are focused on novel cell
therapies, and if this field is substantially unsuccessful, this
could jeopardize our success or future results. The occurrence of
any of these factors may have a material adverse effect on our
business, operating results and financial condition.
We face significant competition from other Chinese biotechnology
and pharmaceutical companies, and our operating results will suffer
if we fail to compete effectively.
There
is intense competition and rapid innovation in the Chinese cell
therapy industry, and in the cancer immunotherapy space in
particular. Our competitors may be able to develop other herbal
medicine, compounds or drugs that are able to achieve similar or
better results. Our potential competitors are comprised of
traditional Chinese medicine companies, major multinational
pharmaceutical companies, established and new biotechnology
companies, specialty pharmaceutical companies, state-owned
enterprises, universities and other research institutions. Many of
our competitors have substantially greater scientific, financial,
technical and other resources, such as larger research and
development staff and experienced marketing and manufacturing
organizations and well-established sales forces. Smaller or
early-stage companies may also prove to be significant competitors,
particularly through collaborative arrangements with large,
established companies or are well funded by venture capitals.
Mergers and acquisitions in the biotechnology and pharmaceutical
industries may result in even more resources being concentrated in
our competitors. Competition may increase further as a result of
advances in the commercial applicability of technologies and
greater availability of capital for investment in these industries.
Our competitors, either alone or with collaborative partners, may
succeed in developing, acquiring or licensing on an exclusive basis
drug or biologic products that are more effective, safer, more
easily commercialized or less costly than our product candidates or
may develop proprietary technologies or secure patent protection
that we may need for the development of our technologies and
products. We believe the key competitive factors that will affect
the development and commercial success of our product candidates
are efficacy, safety, tolerability, reliability, and convenience of
use, price and reimbursement.
42
Even if
we obtain regulatory approval of our product candidates, the
availability and price of our competitors’ products could
limit the demand and the price we are able to charge for our
product candidates. We may not be able to implement our business
plan if the acceptance of our product candidates is inhibited by
price competition or the reluctance of doctors to switch from
existing methods of treatment to our product candidates, or if
doctors switch to other new drug or biologic products or choose to
reserve our product candidates for use in limited
circumstances.
We may be unable to attract or retain key employees for our
business if our share-based or other compensation programs cease to
be viewed as competitive and valuable benefits.
To be
competitive, we must attract, retain, and motivate executives and
other key employees. Hiring and retaining qualified executives,
scientists, technical staff, and professional staff are critical to
our business, and competition for experienced employees can be
intense. To help attract, retain, and motivate key employees, we
use share-based and other performance-based incentive awards such
as stock options, restricted stock units (RSUs) and cash bonuses.
If our share-based or other compensation programs cease to be
viewed as competitive and valuable benefits, our ability to
attract, retain, and motivate key employees could be weakened,
which could harm our results of operations.
There is a scarcity of experienced professionals in the field of
cell therapy and we may not be able to retain key officers or
employees or hire new key officers or employees needed to implement
our business strategy and develop our products. If we are unable to
retain or hire key officers or employees, we may be unable to grow
our biopharmaceutical business or implement our business strategy,
and the Company may be materially and adversely
affected.
Given
the specialized nature of cell therapy and the fact that it is a
young field, there is an inherent scarcity of experienced personnel
in the field. The Company is substantially dependent on the skills
and efforts of current senior management, as well as recently
acquired AG management and personnel, for their management,
operations and the implementation of their business strategy. As a
result of the difficulty in locating qualified new management, the
loss or incapacity of existing members of management or
unavailability of qualified management or as replacements for
management who resign or are terminated could adversely affect the
Company’s operations. The future success of the Company also
depends upon our ability to attract and retain additional qualified
personnel (including medical, scientific, technical, commercial,
business and administrative personnel) necessary to support our
anticipated growth, develop our business, perform our contractual
obligations to third parties and maintain appropriate licensure, on
acceptable terms. There can be no assurance that we will be
successful in attracting or retaining personnel required by us to
continue to grow our operations. The loss of a key employee, the
failure of a key employee to perform in his or her current position
or our inability to attract and retain skilled employees, as
needed, could result in our inability to grow our biopharmaceutical
business or implement our business strategy, or may have a material
adverse effect on our business, financial condition and operating
results.
We may fail to successfully integrate our acquired businesses,
operations and assets in the expected time frame, which may
adversely affect the combined company’s future
results.
We
believe that our acquisitions, including our CAR-T, Tcm and GVAX
technologies, will result in certain benefits, including certain
manufacturing, sales and distribution and operational
efficiencies. However, to realize these anticipated benefits,
our existing business and the acquired technologies must be
successfully combined. We may be unable to effectively
integrate the acquired technologies into our organization, make the
acquired technologies profitable, and may not succeed in managing
the acquired technologies. The process of integration of an
acquired technologies may subject us to a number of risks,
including:
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Failure
to successfully manage relationships with hospitals, patients and
suppliers;
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Demands
on management related to the increase in complexity of the company
after the acquisition;
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Diversion
of management and scientists’ attention;
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Potential
difficulties integrating and harmonizing large scale multi-site
clinical trials;
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Difficulties
in the assimilation and retention of employees;
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Exposure
to legal claims for activities of the acquired technologies;
and
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Incurrence
of additional expenses in connection with the integration
process.
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43
If the
acquired technologies is not successfully integrated into our
company, our business, financial condition and results of
operations could be materially adversely affected, as well as our
professional reputation. Furthermore, if we are unable to
successfully integrate the acquired technologies, or if there are
delays in implementing clinical trials using the acquired
technologies, the anticipated benefits of the acquisition may not
be realized fully or at all or may take longer to realize than
expected. Successful integration of the acquired technologies
will depend on our ability to manage large scale cancer clinical
trials and to realize opportunities in monetizing these
technologies.
We will need to grow the size of our organization, and we may
experience difficulties in managing this growth.
As our
development and commercialization plans and strategies develop, and
as we continue to expand operation as a public company, we expect
to grow our personnel needs in the managerial, operational, sales,
marketing, financial and other departments. Future growth would
impose significant added responsibilities on members of management,
including:
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identifying,
recruiting, integrating, maintaining and motivating additional
employees;
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managing
our internal development efforts effectively, including the
clinical trials and CFDA review process for our product candidates,
while complying with our contractual obligations to contractors and
other third parties; and
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improving
our operational, financial and management controls, reporting
systems and procedures.
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Our
future financial performance and our ability to commercialize our
product candidates will depend, in part, on our ability to
effectively manage any future growth, and our management may also
have to divert a disproportionate amount of its attention away from
day-to-day activities in order to devote a substantial amount of
time to managing these growth activities.
We
currently rely, and for the foreseeable future will continue to
rely, in substantial part on certain independent organizations such
as contract research organizations and hospitals to provide certain
services comprised of regulatory approval and clinical management.
There can be no assurance that the services of independent
organizations will continue to be available to us on a timely basis
when needed, or that we can find qualified replacements. In
addition, if we are unable to effectively manage our outsourced
activities or if the quality or accuracy of the services provided
by the independent organizations is compromised for any reason, our
clinical trials may be extended, delayed or terminated, and we may
not be able to obtain regulatory approval of our product candidates
or otherwise advance our business. If we are not able to
effectively expand our organization by hiring new employees, we may
not be able to successfully implement the tasks necessary to
further develop and commercialize our product candidates and,
accordingly, may not achieve our research, development and
commercialization goals.
We may form or seek strategic alliances or enter into licensing
arrangements in the future, and we may not realize the benefits of
such alliances or licensing arrangements.
We may form
or seek strategic alliances, create joint ventures or
collaborations or enter into licensing arrangements with third
parties that we believe will complement or augment our development
and commercialization efforts with respect to our product
candidates and any future product candidates that we may develop.
Any of these relationships may require us to incur non-recurring
and other charges, increase our near and long-term expenditures,
issue securities that dilute our existing stockholders or disrupt
our management and business. In addition, we face significant
competition in seeking appropriate strategic partners and the
negotiation process is time-consuming and complex. Moreover, we may
not be successful in our efforts to establish a strategic
partnership or other alternative arrangements for our product
candidates because they may be deemed to be at too early of a stage
of development for collaborative effort and third parties may not
view our product candidates as having the requisite potential to
demonstrate safety and efficacy. If we license products or
businesses, we may not be able to realize the benefit of such
transactions if we are unable to successfully integrate them with
our existing operations and company culture. We cannot be certain
that, following a strategic transaction or license, we will achieve
the revenue or specific net income that justifies such transaction.
Any delays in entering into new strategic partnership agreements
related to our product candidates could delay the development and
commercialization of our product candidates in certain geographies
for certain indications, which would harm our business prospects,
financial condition and results of operations.
44
We, our strategic partners and our customers conduct business in a
heavily regulated industry. If we or one or more of our strategic
partners or customers fail to comply with applicable current and
future laws and government regulations, our business and financial
results could be adversely affected.
The
healthcare industry is one of the most highly regulated industries.
Federal governments, individual state and local governments and
private accreditation organizations may oversee and monitor all the
activities of individuals and businesses engaged in the delivery of
health care products and services. Therefore, current laws, rules
and regulations could directly or indirectly negatively affect our
ability and the ability of our strategic partners and customers to
operate each of their businesses.
In addition,
as we expand into other parts of the world, we will need to comply
with the applicable laws and regulations in such foreign
jurisdictions. We have not yet thoroughly explored the requirements
or feasibility of such compliance. It is possible that we may not
be permitted to expand our business into one or more foreign
jurisdictions.
Although we intend
to conduct our business in compliance with applicable laws and
regulations, the laws and regulations affecting our business and
relationships are complex, and many aspects of such relationships
have not been the subject of judicial or regulatory interpretation.
Furthermore, the cell therapy industry is the topic of significant
government interest, and thus the laws and regulations applicable
to us and our strategic partners and customers and to their
business are subject to frequent change and/or reinterpretation and
there can be no assurance that the laws and regulations applicable
to us and our strategic partners and customers will not be amended
or interpreted in a manner that adversely affects our business,
financial condition, or operating results.
We anticipate that we will need substantial additional financing in
the future to continue our operations; if we are unable to raise
additional capital, as and when needed, or on acceptable terms, we
may be forced to delay, reduce or eliminate one or more of our
product or therapy development programs, cell therapy initiatives
or commercialization efforts and our business will
harmed.
Our
current operating plan will require significant levels of
additional capital to fund, among other things, the continued
development of our cell therapy product or therapy candidates and
the operation, and expansion of our manufacturing operations to our
clinical development activities.
In the
second quarter of 2014, we completed patient enrollment for the
Phase IIb clinical trial of ReJoin® for KOA. We
published the Phase IIb 48 week data in January 2016. In
January 2015, we initiated patient recruitment to support a study
of ReJoin® human adipose derived mesenchymal progenitor cell
(haMPC) therapy for Cartilage Damage (CD) resulting from
osteoarthritis (OA) or sports injury. We have also
launched pre-clinical study on COPD in October 2014.
If
these trials are successful, we will require significant additional
investment capital over a multi-year period in order to conduct
subsequent phases, gain approval for these therapies by the MOH and
CFDA, and to commercialize these therapies, if ever. Subsequent
phases may be larger and more expensive than the Phase I trials. In
order to raise the necessary capital, we will need to raise
additional money in the capital markets, enter into collaboration
agreements with third parties or undertake some combination of
these strategies. If we are unsuccessful in these efforts, we may
have no choice but to delay or abandon the trials.
The
amount and timing of our future capital requirements also will
likely depend on many other factors, including:
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the
scope, progress, results, costs, timing and outcomes of our other
cell therapy product or therapy candidates;
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our
ability to enter into, or continue, any collaboration agreements
with third parties for our product or therapy candidates and the
timing and terms of any such agreements;
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the
timing of and the costs involved in obtaining regulatory approvals
for our product or therapy candidates, a process which could be
particularly lengthy or complex given the lack of precedent for
cell therapy products in China; and
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the
costs of maintaining, expanding and protecting our intellectual
property portfolio, including potential litigation costs and
liabilities.
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45
To fund
clinical studies and support our future operations, we would likely
seek to raise capital through a variety of different public and/or
private financings vehicles. This could include, but not be limited
to, the use of loans or issuances of debt or equity securities in
public or private financings. If we raise capital
through the sale of equity, or securities convertible into equity,
it would result in dilution to our then existing
stockholders. Servicing the interest and principal
repayment obligations under debt facilities could divert funds that
would otherwise be available to support clinical or
commercialization activities. In certain cases, we also
may seek funding through collaborative arrangements, that would
likely require us to relinquish certain rights to our technology or
product or therapy candidates and share in the future revenues
associated with the partnered product or therapy.
Ultimately, we may
be unable to raise capital or enter into collaborative
relationships on terms that are acceptable to us, if at all. Our
inability to obtain necessary capital or financing to fund our
future operating needs could adversely affect our business, results
of operations and financial condition.
Failure to achieve and maintain effective internal controls in
accordance with Section 404 of the Sarbanes-Oxley Act could have a
material adverse effect on our business and operating
results.
It may
be time consuming, difficult and costly for us to develop and
implement the additional internal controls, processes and reporting
procedures required by the Sarbanes-Oxley Act. We may need to hire
additional financial reporting, internal auditing and other finance
staff in order to develop and implement appropriate additional
internal controls, processes and reporting procedures.
If we
fail to comply in a timely manner with the requirements of Section
404 of the Sarbanes-Oxley Act regarding internal controls over
financial reporting or to remedy any material weaknesses in our
internal controls that we may identify, such failure could result
in material misstatements in our financial statements, cause
investors to lose confidence in our reported financial information
and have a negative effect on the trading price of our common
stock.
In
connection with our on-going assessment of the effectiveness of our
internal control over financial reporting, we may discover
“material weaknesses” in our internal controls as
defined in standards established by the Public Company Accounting
Oversight Board (“PCAOB”). A material weakness is a
significant deficiency, or combination of significant deficiencies,
that results in more than a remote likelihood that a material
misstatement of the annual or interim financial statements will not
be prevented or detected. The PCAOB defines “significant
deficiency” as a deficiency that results in more than a
remote likelihood that a misstatement of the financial statements
that is more than inconsequential will not be prevented or
detected.
During
the year ended December 31, 2015, we believe we have made
improvements in our internal control and have remediated the
deficiencies identified in 2014. In the event that
future material weaknesses are identified, we will attempt to
employ qualified personnel and adopt and implement policies and
procedures to address any material weaknesses we identify. However,
the process of designing and implementing effective internal
controls is a continuous effort that requires us to anticipate and
react to changes in our business and the economic and regulatory
environments and to expend significant resources to maintain a
system of internal controls that is adequate to satisfy our
reporting obligations as a public company.
Any
failure to complete our assessment of our internal control over
financial reporting, to remediate any material weaknesses that we
may identify or to implement new or improved controls, or
difficulties encountered in their implementation, could harm our
operating results, cause us to fail to meet our reporting
obligations or result in material misstatements in our financial
statements. Any such failure could also adversely affect the
results of the periodic management evaluations of our internal
controls and, in the case of a failure to remediate any material
weaknesses that we may identify, would adversely affect the annual
management reports regarding the effectiveness of our internal
control over financial reporting that are required under Section
404 of the Sarbanes-Oxley Act. Inadequate internal controls could
also cause investors to lose confidence in our reported financial
information, which could have a negative effect on the trading
price of our common stock.
46
Our profitability may be adversely affected by the risks in
obtaining a return on some or all of our investment in portfolio
stock, which comprise 1% of our assets.
A
substantial portion of our assets are comprised of securities we
received as compensation for services through our legacy consulting
business, by which we acquired certain shares of stock in the
companies we advised. These shares are not traded on any
national exchange or marketplace and therefore are highly illiquid,
and it is uncertain if an active market for such securities will
ever develop. Additionally, some of these companies have or may in
the future fail to comply with their obligations under the
Securities Act or the Exchange Act, which may affect our ability to
sell such securities to satisfy our working capital needs and other
liquidity requirements. Even assuming we can sell the
securities, there is no assurance that we will be able to sell such
shares at a value that will recover our investment. There is no
assurance that an alternative exit strategy will be readily
available to realize the fair value of such securities. As a
result, we may lose some or all of our investment. In the fiscal
year ended December 31, 2016, we reviewed our investment portfolio
and determined that, due to the failure of certain portfolio
companies to comply with their periodic reporting obligations under
Section 13 or Section 15(d) of the Exchange Act, such investments
have been impaired. Accordingly, we have recorded an other than
temporary impairment charge of approximately $4.6 million for these
investments that were deemed permanent in impairment of investments
in 2016. Future fluctuations in the value and liquidity of these
securities could result in additional realized loss.
The Company’s technical services revenue may become subject
to tightened regulation that may affect the Company’s
financial condition.
Currently we are not generating any meaningful
technical services revenue comprised of preparation of subset T
Cell and clonality assay platform technology for treatment of
cancers. Nonetheless our revenue is subject to the risk of
progressive regulatory actions by the PRC government in the area of
immunotherapy. As China has not yet codified any specific
regulations to govern the development and application of immune
cell therapies, the outcome of any potential Chinese regulatory
action is difficult to assess or quantify. From time to time there may also be adverse
publicity relating to the practice of immunotherapy treatments in
China, which due to the sensitive and experimental nature of the
treatment, may trigger further governmental scrutiny. Any
progressive regulatory action in China arising out of such scrutiny
may adversely affect the Company’s financial condition or
cash flows.
RISKS RELATED TO OUR STRUCTURE
Our operations are subject to risks associated with emerging
markets.
The
Chinese economy is not well established and is only recently
emerging and growing as a significant market for consumer goods and
services. Accordingly, there is no assurance that the market will
continue to grow. Perceived risks associated with investing in
China, or a general disruption in the development of China’s
markets could materially and adversely affect the business,
operating results and financial condition of the
Company.
A substantial portion of our assets are currently located in the
PRC, and investors may not be able to enforce federal securities
laws or their other legal rights.
A
substantial portion of our assets are located in the PRC. As a
result, it may be difficult for investors in the U.S. to enforce
their legal rights, to effect service of process upon certain of
our directors or officers or to enforce judgments of U.S. courts
predicated upon civil liabilities and criminal penalties against
any of our directors and officers located outside of the
U.S.
The PRC government has the ability to exercise significant
influence and control over our operations in China.
In
recent years, the PRC government has implemented measures for
economic reform, the reduction of state ownership of productive
assets and the establishment of corporate governance practices in
business enterprises. However, many productive assets in China are
still owned by the PRC government. In addition, the government
continues to play a significant role in regulating industrial
development by imposing business regulations. It also exercises
significant control over the country’s economic growth
through the allocation of resources, controlling payment of foreign
currency-denominated obligations, setting monetary policy and
providing preferential treatment to particular industries or
companies.
47
There
can be no assurance that China’s economic, political or legal
systems will not develop in a way that becomes detrimental to our
business, results of operations and financial condition. Our
activities may be materially and adversely affected by changes in
China’s economic and social conditions and by changes in the
policies of the government, such as measures to control inflation,
changes in the rates or method of taxation and the imposition of
additional restrictions on currency conversion.
Additional factors
that we may experience in connection with having operations in
China that may adversely affect our business and results of
operations include:
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our
inability to enforce or obtain a remedy under any material
agreements;
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PRC
restrictions on foreign investment that could impair our ability to
conduct our business or acquire or contract with other entities in
the future;
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restrictions
on currency exchange that may limit our ability to use cash flow
most effectively or to repatriate our investment;
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fluctuations
in currency values;
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cultural,
language and managerial differences that may reduce our overall
performance; and
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political
instability in China.
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Cultural, language and managerial differences may adversely affect
our overall performance.
We have
experienced difficulties in assimilating cultural, language and
managerial differences with our subsidiaries in China. Personnel
issues have developed in consolidating management teams from
different cultural backgrounds. In addition, language translation
issues from time to time have caused miscommunications. These
factors make the management of our operations in China more
difficult. Difficulties in coordinating the efforts of our
U.S.-based management team with our China-based management team may
cause our business, operating results and financial condition to be
materially and adversely affected.
We may not be able to enforce our rights in China given certain
features of its legal and judicial system.
China’s legal
and judicial system may negatively impact foreign investors. The
legal system in China is evolving rapidly, and enforcement of laws
is inconsistent. It may be impossible to obtain swift and equitable
enforcement of laws or enforcement of the judgment of one court by
a court of another jurisdiction. China’s legal system is
based on civil law or written statutes and a decision by one judge
does not set a legal precedent that must be followed by judges in
other cases. In addition, the interpretation of Chinese laws may
vary to reflect domestic political changes.
Since a
significant portion of our operations are presently based in China,
service of process on our business and officers may be difficult to
effect within the United States. Also, some of our assets are
located outside the United States and any judgment obtained in the
United States against us may not be enforceable outside the United
States.
There
are substantial uncertainties regarding the interpretation and
application to our business of PRC laws and regulations, since many
of the rules and regulations that companies face in China are not
made public. The effectiveness of newly enacted laws, regulations
or amendments may be delayed, resulting in detrimental reliance by
foreign investors. New laws and regulations that apply to future
businesses may be applied retroactively to existing businesses. We
cannot predict what effect the interpretations of existing or new
PRC laws or regulations may have on our
business.
48
Our operations in China are subject to government regulation that
limit or prohibit direct foreign investment, which may limit our
ability to control operations based in China.
The PRC
government has imposed regulations in various industries, including
medical research and the stem cell industry, that limit foreign
investors’ equity ownership or prohibit foreign investments
altogether in companies that operate in such industries. We are
currently structured as a U.S. corporation (Delaware) with
subsidiaries and controlled entities in China. As a result of these
regulations and the manner in which they may be applied or
enforced, our ability to control our existing operations based in
China may be limited or restricted.
If the
relevant Chinese authorities find us or any business combination to
be in violation of any laws or regulations, they would have broad
discretion in dealing with such violation, including, without
limitation: (i) levying fines; (ii) revoking our business and other
licenses; (iii) requiring that we restructure our ownership or
operations; and (iv) requiring that we discontinue any portion or
all of our business.
We may suffer losses if we cannot utilize our assets in
China.
The
Company’s Shanghai and Wuxi laboratory facilities were
originally intended for stem cell research and development, but has
been equipped to provide comprehensive cell manufacturing,
collection, processing and storage capabilities to provide cells
for clinical trials. If the Company does not determine to renew the
lease due to limitations on its utility under the new regulatory
initiatives in China or otherwise, the Company may incur certain
expenses in connection with returning the premises to the landlord.
Management believes it will be able to renew all leases without
difficulty.
Restrictions on currency exchange may limit our ability to utilize
our cash flow effectively.
Our
interests in China will be subject to China’s rules and
regulations on currency conversion. In particular, the initial
capitalization and operating expenses of the VIE (CBMG Shanghai)
are funded by our WFOE, Cellular Biomedicine Group Ltd. (Wuxi). In
China, the State Administration for Foreign Exchange (the
“SAFE”), regulates the conversion of the Chinese
Renminbi into foreign currencies and the conversion of foreign
currencies into Chinese Renminbi. Foreign investment enterprises
are allowed to open foreign currency accounts including a
“basic account” and “capital account.”
However, conversion of currency in the “capital
account,” including capital items such as direct investments,
loans, and securities, require approval of the SAFE
even though according
to the Notice of the State
Administration of Foreign Exchange on Reforming the Administration
of the Settlement of Foreign Exchange Capital of Foreign-invested
Enterprise promulgated on April 8, 2015, or the SAFE Notice
19, foreign-invested enterprises are able to settle foreign
exchange capital at their discretion, Chinese banks restricts
foreign currency conversion for fear of “hot money”
going into China and may continue to limit our ability to channel
funds to the VIE entities for their operation. There can be no
assurance that the PRC regulatory authorities will not impose
further restrictions on the convertibility of the Chinese currency.
Future restrictions on currency exchanges may limit our ability to
use our cash flow for the distribution of dividends to our
stockholders or to fund operations we may have outside of China,
which could materially adversely affect our business and operating
results.
Fluctuations in the value of the Renminbi relative to the U.S.
dollar could affect our operating results.
We
prepare our financial statements in U.S. dollars, while our
underlying businesses operate in two currencies, U.S. dollars and
Chinese Renminbi. It is anticipated that our Chinese operations
will conduct their operations primarily in Renminbi and our U.S.
operations will conduct their operations in dollars. At the present
time, we do not expect to have significant cross currency
transactions that will be at risk to foreign currency exchange
rates. Nevertheless, the conversion of financial information using
a functional currency of Renminbi will be subject to risks related
to foreign currency exchange rate fluctuations. The value of
Renminbi against the U.S. dollar and other currencies may fluctuate
and is affected by, among other things, changes in China’s
political and economic conditions and supply and demand in local
markets. As we have significant operations in China, and will rely
principally on revenues earned in China, any significant
revaluation of the Renminbi could materially and adversely affect
our financial results. For example, to the extent that we need to
convert U.S. dollars we receive from an offering of our securities
into Renminbi for our operations, appreciation of the Renminbi
against the U.S. dollar could have a material adverse effect on our
business, financial condition and results of
operations.
49
Some of the laws and regulations governing our business in China
are vague and subject to risks of interpretation.
Some of
the PRC laws and regulations governing our business operations in
China are vague and their official interpretation and enforcement
may involve substantial uncertainty. These include, but are not
limited to, laws and regulations governing our business and the
enforcement and performance of our contractual arrangements in the
event of the imposition of statutory liens, death, bankruptcy and
criminal proceedings. Despite their uncertainty, we will be
required to comply.
New
laws and regulations that affect existing and proposed businesses
may be applied retroactively. Accordingly, the effectiveness of
newly enacted laws, regulations or amendments may not be clear. We
cannot predict what effect the interpretation of existing or new
PRC laws or regulations may have on our business.
The PRC government does not permit direct foreign investment in
stem cell research and development businesses. Accordingly, we
operate these businesses through local companies with which we have
contractual relationships but in which we do not have direct equity
ownership.
PRC
regulations prevent foreign companies from directly engaging in
stem cell-related research, development and commercial applications
in China. Therefore, to perform these activities, we conduct much
of our biopharmaceutical business operations in China through a
domestic variable interest entity, or VIE, a Chinese domestic
company controlled by the Chinese employees of the Company. Our
contractual arrangements may not be as effective in providing
control over these entities as direct ownership. For example, the
VIE could fail to take actions required for our business or fail to
conduct business in the manner we desire despite their contractual
obligation to do so. These companies are able to transact business
with parties not affiliated with us. If these companies fail to
perform under their agreements with us, we may have to rely on
legal remedies under PRC law, which may not be effective. In
addition, we cannot be certain that the individual equity owners of
the VIE would always act in our best interests, especially if they
have no other relationship with us.
Although other
foreign companies have used VIE structures similar to ours and such
arrangements are not uncommon in connection with business
operations of foreign companies in China in industry sectors in
which foreign direct investments are limited or prohibited,
recently there has been greater scrutiny by the business community
of the VIE structure and, additionally, the application of a VIE
structure to control companies in a sector in which foreign direct
investment is specifically prohibited carries increased
risks.
In
addition, the Ministry of Commerce (“MOFCOM”),
promulgated the Rules of Ministry
of Commerce on Implementation of Security Review System of Mergers
and Acquisitions of Domestic Enterprises by Foreign
Investors in August 2011, or the MOFCOM Security Review
Rules, to implement the Notice of
the General Office of the State Council on Establishing the
Security Review System for Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors promulgated on February 3,
2011, or Circular No. 6. The MOFCOM Security Review Rules came into
effect on September 1, 2011 and replaced the Interim Provisions of the Ministry of Commerce
on Matters Relating to the Implementation of the Security Review
System for Mergers and Acquisitions of Domestic Enterprises by
Foreign Investors promulgated by MOFCOM in March 2011.
According to these circulars and rules, a security review is
required for mergers and acquisitions by foreign investors having
“national defense and
security” concerns and mergers and acquisitions by
which foreign investors may acquire the “de facto control” of
domestic enterprises having “national security”
concerns. In addition, when deciding whether a specific merger or
acquisition of a domestic enterprise by foreign investors is
subject to the security review, the MOFCOM will look into the
substance and actual impact of the transaction. The MOFCOM Security
Review Rules further prohibit foreign investors from bypassing the
security review requirement by structuring transactions through
proxies, trusts, indirect investments, leases, loans, control
through contractual arrangements or offshore transactions. There is
no explicit provision or official interpretation stating that our
business falls into the scope subject to the security review, and
there is no requirement for foreign investors in those mergers and
acquisitions transactions already completed prior to the
promulgation of Circular No. 6 to submit such transactions to
MOFCOM for security review. The enactment of the MOFCOM National
Security Review Rules specifically prohibits circumvention of the
rules through VIE arrangement in the area of foreign investment in
business of national security concern. Although we believe that our
business, judging from its scale, should not cause any concern for
national security review at its current state, there is no
assurance that MOFCOM would not apply the same concept of
anti-circumvention in the future to foreign investment in
prohibited areas through VIE structure, the same way that our
investment in China was structured.
50
Our relationship with our controlled VIE entity, CBMG Shanghai,
through the VIE agreements, is subject to various operational and
legal risks.
Management
believes the holders of the VIE’s registered capital, Messrs.
Chen Mingzhe and Lu Junfeng, have no interest in acting contrary to
the VIE agreements. However, if Messrs. Chen or Lu as
shareholders of the VIE entity were to reduce or eliminate their
ownership of the registered capital of the VIE entity, their
interests may diverge from that of CBMG and they may seek to act in
a manner contrary to the VIE agreements (for example by controlling
the VIE entity in such a way that is inconsistent with the
directives of CBMG management and the board; or causing non-payment
by the VIE entity of services fees). If such
circumstances were to occur the WFOE would have to assert control
rights through the powers of attorney, pledges and other VIE
agreements, which would require legal action through the PRC
judicial system. We believe based on the advice of local
counsel that the VIE agreements are valid and in compliance with
PRC laws presently in effect. However, there is a risk that the
enforcement of these agreements may involve more extensive
procedures and costs to enforce, in comparison to direct equity
ownership of the VIE entity. Notwithstanding the foregoing, if the
applicable PRC laws were to change or are interpreted by
authorities in the future in a manner which challenges or renders
the VIE agreements ineffective, the WFOE’s ability to control
and obtain all benefits (economic or otherwise) of ownership of the
VIE entity could be impaired or eliminated. In the
event of such future changes or new interpretations of PRC law, in
an effort to substantially preserve our rights, we may have to
either amend our VIE agreements or enter into alternative
arrangements which comply with PRC laws as interpreted and then in
effect.
Failure to comply with the U.S. Foreign Corrupt Practices Act could
subject us to penalties and other adverse
consequences.
We are
subject to the U.S. Foreign Corrupt Practices Act, which generally
prohibits U.S. companies from engaging in bribery or other
prohibited payments to foreign officials for the purpose of
obtaining or retaining business. Foreign companies, including some
that may compete with us, are not subject to these prohibitions.
Corruption, extortion, bribery, pay-offs, theft and other
fraudulent practices occur from time-to-time in the PRC. There can
be no assurance, however, that our employees or other agents will
not engage in such conduct for which we might be held responsible.
If our employees or other agents are found to have engaged in such
practices, we could suffer severe penalties and other consequences
that may have a material adverse effect on our business, financial
condition and results of operations.
If we make share compensation grants to persons who are PRC
citizens, they may be required to register with SAFE. We may also
face regulatory uncertainties that could restrict our ability to
adopt share compensation plans for our directors and employees and
other parties under PRC laws.
On
April 6, 2007, SAFE issued the “Operating Procedures for
Administration of Domestic Individuals Participating in the
Employee Stock Ownership Plan or Stock Option Plan of An Overseas
Listed Company, also known as Circular 78. On February 15, 2012, SAFE
promulgated the Circular on Relevant Issues Concerning Foreign
Exchange Administration for Domestic Individuals Participating in
an Employees Share Incentive Plan of an Overseas-Listed Company,
often known as Circular 7. Circular 7 has superseded Circular 78.
Under Circular 7, PRC resident individuals who participate in a
share incentive plan of an overseas listed company are required to
register with SAFE and complete certain other procedures. All such
participants need to retain a PRC agent through PRC subsidiary to
handle issues like foreign exchange registration, account opening,
funds transfer and remittance. Circular 7 further requires that an
offshore agent should also be designated to handle matters in
connection with the exercise or sale of share awards and proceeds
transferring for the share incentive plan participants. We believe
that the registration and approval requirements contemplated in
Circular 7 will be burdensome and time consuming. If we or our PRC
employees who have been granted stock options fail to comply with
these regulations, we or our PRC employees who have been granted
stock options may be subject to fines and legal sanctions and will
be unable to grant share compensation to our PRC employees. In that
case, our ability to compensate our employees and directors through
share compensation would be hindered and our business operations
may be adversely affected.
51
The labor contract law and its implementation regulations may
increase our operating expenses and may materially and adversely
affect our business, financial condition and results of
operations.
Substantial
uncertainty of the PRC Labor Contract Law, or Labor Contract Law,
and the Implementation Regulation for the PRC Labor Contract Law,
or Implementation Regulation, remains as to their potential impact
on our business, financial condition and results of operations. The
implementation of the Labor Contract Law and the Implementation
Regulation may increase our operating expenses, in particular our
human resources costs and our administrative expenses. In addition,
as the interpretation and implementation of these regulations are
still evolving, we cannot assure you that our employment practices
will at all times be deemed to be in full compliance with the law.
In the event that we decide to significantly modify our employment
or labor policy or practice, or reduce the number of our sales
professionals, the Labor Contract Law and the Implementation
Regulation may limit our ability to effectuate the modifications or
changes in the manner that we believe to be most cost-efficient or
otherwise desirable, which could materially and adversely affect
our business, financial condition and results of operations. If we
are subject to severe penalties or incur significant liabilities in
connection with labor disputes or investigations, our business and
results of operations may be adversely affected.
If relations between the United States and China worsen, our stock
price may decrease and we may have difficulty accessing the U.S.
capital markets.
At
various times during recent years, the United States and China have
had disagreements over trade, economic and other policy issues.
Controversies may arise in the future between these two countries.
Any political or trade controversies between the United States and
China could adversely affect the market price of our common stock
and our and our clients' ability to access U.S. capital
markets.
PRC regulations of loans to PRC entities and direct investment in
PRC entities by offshore holding companies may delay or prevent us
from using the proceeds of this offering to make loans or
additional capital contributions to our PRC
subsidiary.
We may
transfer funds to our PRC subsidiary or finance our PRC subsidiary
by means of shareholder loans or capital contributions. Any loans
from us to our PRC subsidiary, which is a foreign-invested
enterprise, cannot exceed statutory limits based on the difference
between the registered capital and the investment amount of such
subsidiary, and shall be registered with the State Administration
of Foreign Exchange, or SAFE, or its local counterparts. Any
capital contributions we make to our PRC subsidiary shall be
approved by or registered with (as the case may be) the Ministry of
Commerce or its local counterparts. We may not be able to obtain
these government registrations or approvals on a timely basis, if
at all. If we fail to receive such registrations or approvals, our
ability to provide loans or capital contributions to our PRC
subsidiary in a timely manner may be negatively affected, which
could materially and adversely affect our liquidity and our ability
to fund and expand our business.
In
addition, registered capital of a foreign-invested company settled
in RMB converted from foreign currencies may only be used within
the business scope approved by the applicable governmental
authority. Foreign-invested companies may not change how they use
such capital without SAFE’s approval, and may not in any case
use such capital to repay RMB loans if proceeds of such loans have
not been utilized. Violations of these regulations may result in
severe penalties. Also, the Circular on Issues concerning
Strengthening the Administration of Foreign Exchange Business,
which was promulgated by SAFE in 2010, requires banks and local
counterparts of SAFE to examine closely the authenticity of the
settlement of net proceeds from offshore offerings and whether the
net proceeds are settled in the manner described in offering
documents. These regulations may significantly limit our ability to
transfer the net proceeds from offshore offering and subsequent
offerings or financings to our PRC subsidiary, which may adversely
affect our liquidity and our ability to fund and expand our
business in China.
We may be subject to penalties, including restriction on our
ability to inject capital into our PRC subsidiary and our PRC
subsidiary’s ability to distribute profits to us, if our PRC
resident shareholders beneficial owners fail to comply with
relevant PRC foreign exchange rules.
The
Notice on Relevant Issues Concerning Foreign Exchange
Administration for PRC Residents to Engage in Financing and Inbound
Investment via Offshore Special Purpose Vehicles, often known as
Circular 75, was issued by SAFE in 2005. Circular 75 requires PRC
residents to register with the local SAFE branch in connection with
their establishment or control of any offshore special purpose
vehicle for the purpose of overseas equity financing involving a
roundtrip investment whereby the offshore special purpose vehicle
acquires or controls onshore assets or equity interests held by the
PRC residents. On July 4, 2014, SAFE issued the Notice on Relevant
Issues Concerning Foreign Exchange Administration for PRC Residents
to Engage in Outbound Investment and Financing and Inbound
Investment via Special Purpose Vehicles, or Circular 37, which has
superseded Circular 75. Under Circular 37 and other relevant
foreign exchange regulations, PRC residents who make, or have made,
prior to the implementation of these foreign exchange regulations,
direct or indirect investments in offshore companies are required
to register those investments with SAFE. In addition, any PRC
resident who is a direct or indirect shareholder of an offshore
company is also required to file or update the registration with
SAFE, with respect to that offshore company for any material change
involving its round-trip investment, capital variation, such as an
increase or decrease in capital, transfer or swap of shares,
merger, division, long-term equity or debt investment or the
creation of any security interest. If any PRC shareholder fails to
make the required registration or update the registration, the PRC
subsidiary of that offshore company may be prohibited from
distributing its profits and the proceeds from any reduction in
capital, share transfer or liquidation to that offshore company,
and that offshore company may also be prohibited from injecting
additional capital into its PRC subsidiary. Moreover, failure to
comply with the foreign exchange registration requirements
described above could result in liability under PRC laws for
evasion of applicable foreign exchange restrictions.
52
We cannot
provide any assurance that all of our shareholders and beneficial
owners who are PRC residents have fully complied or will obtain or
update any applicable registrations or have fully complied or will
fully comply with other requirements required by Circular 37 or
other related rules in a timely manner. The failure or inability of
our shareholders resident in China to comply with the registration
requirements set forth therein may subject them to fines and legal
sanctions and may also limit our ability to contribute additional
capital into our PRC subsidiaries, limit our PRC
subsidiaries’ ability to distribute profits and other
proceeds to our
company or otherwise adversely affect our
business.
We and/or our Hong Kong subsidiary may be classified as a
“PRC resident enterprise” for PRC enterprise income tax
purposes. Such classification would likely result in unfavorable
tax consequences to us and our non-PRC shareholders and have a
material adverse effect on our results of operations and the value
of your investment.
The
Enterprise Income Tax Law provides that an enterprise established
outside China whose “de facto management body” is
located in China is considered a “PRC resident
enterprise” and will generally be subject to the uniform 25%
enterprise income tax on its global income. Under the
implementation rules of the Enterprise Income Tax Law, “de
facto management body” is defined as the organizational body
which effectively manages and controls the production and business
operation, personnel, accounting, properties and other aspects of
operations of an enterprise.”
Pursuant to the
Notice Regarding the Determination of Chinese-Controlled Offshore
Incorporated Enterprises as PRC Tax Resident Enterprises on the
Basis of De Facto Management Bodies, issued by the State
Administration of Taxation in 2009, a foreign enterprise controlled
by PRC enterprises or PRC enterprise groups is considered a PRC
resident enterprise if all of the following conditions are met:
(i) the senior management and core management departments in
charge of daily operations are located mainly within the PRC;
(ii) financial and human resources decisions are subject to
determination or approval by persons or bodies in the PRC;
(iii) major assets, accounting books, company seals and
minutes and files of board and shareholders’ meetings are
located or kept within the PRC; and (iv) at least half of the
enterprise’s directors with voting rights or senior
management reside within the PRC. Although the notice states that
these standards only apply to offshore enterprises that are
controlled by PRC enterprises or PRC enterprise groups, such
standards may reflect the general view of the State Administration
of Taxation in determining the tax residence of foreign
enterprises.
We
believe that neither our company nor our Hong Kong subsidiary is a
PRC resident enterprise because neither our company nor our Hong
Kong subsidiary meets all of the conditions enumerated. For
example, board and shareholders’ resolutions of our company
and our Hong Kong subsidiary are adopted in Hong Kong and the
minutes and related files are kept in Hong Kong. However, if the
PRC tax authorities were to disagree with our position, our company
and/or our Hong Kong subsidiary may be subject to PRC enterprise
income tax reporting obligations and to a 25% enterprise income tax
on our global taxable income, except for our income from dividends
received from our PRC subsidiary, which may be exempt from PRC tax.
If we and/or our Hong Kong subsidiary are treated as a PRC resident
enterprise, the 25% enterprise income tax may adversely affect our
ability to satisfy any of our cash needs.
53
In
addition, if we were to be classified as a PRC “resident
enterprise” for PRC enterprise income tax purpose, dividends
we pay to our non-PRC enterprise shareholders and gains derived by
our non-PRC shareholders from the sale of our shares and ADSs may
be become subject to a 10% PRC withholding tax. In addition, future
guidance may extend the withholding tax to dividends we pay to our
non-PRC individual shareholders and gains derived by such
shareholders from transferring our shares and ADSs. In addition to
the uncertainty in how the new “resident enterprise”
classification could apply, it is also possible that the rules may
change in the future, possibly with retroactive effect. If PRC
income tax were imposed on gains realized through the transfer of
our ADSs or ordinary shares or on dividends paid to our
non-resident shareholders, the value of your investment in our ADSs
or ordinary shares may be materially and adversely
affected.
Any limitation on the ability of our PRC subsidiary to make
payments to us, or the tax implications of making payments to us,
could have a material adverse effect on our ability to conduct our
business or our financial condition.
We are
a holding company, and we rely principally on dividends and other
distributions from our PRC subsidiary for our cash needs, including
the funds necessary to pay dividends to our shareholders or service
any debt we may incur. Current PRC regulations permit our PRC
subsidiary to pay dividends only out of its accumulated profits, if
any, determined in accordance with PRC accounting standards and
regulations. In addition, our PRC subsidiary is required to set
aside at least 10% of its after tax profits each year, if any, to
fund certain statutory reserve funds until the aggregate amount of
such reserve funds reaches 50% of its registered capital. Apart
from these reserves, our PRC subsidiary may allocate a
discretionary portion of its after-tax profits to staff welfare and
bonus funds at its discretion. These reserves and funds are not
distributable as cash dividends. Furthermore, if our PRC subsidiary
incurs debt, the debt instruments may restrict its ability to pay
dividends or make other payments to us. We cannot assure you that
our PRC subsidiary will generate sufficient earnings and cash flows
in the near future to pay dividends or otherwise distribute
sufficient funds to enable us to meet our obligations, pay interest
and expenses or declare dividends.
Distributions made
by PRC companies to their offshore parents are generally subject to
a 10% withholding tax under the Enterprise Income Tax Law. Pursuant
to the Enterprise Income Tax Law and the Arrangement between the
Mainland of China and the Hong Kong Special Administrative Region
for the Avoidance of Double Taxation and the Prevention of Fiscal
Evasion with respect to Taxes on Income, the withholding tax rate
on dividends paid by our PRC subsidiary to our Hong Kong subsidiary
would generally be reduced to 5%, provided that our Hong Kong
subsidiary is the beneficial owner of the PRC sourced income. Our
PRC subsidiary has not obtained approval for a withholding tax rate
of 5% from the local tax authority and does not plan to obtain such
approval in the near future as we have not achieved
profitability. However, the Notice on How to Understand and
Determine the Beneficial Owners in a Tax Agreement, also known as
Circular 601, promulgated by the State Administration of Taxation
in 2009, provides guidance for determining whether a resident of a
contracting state is the “beneficial owner” of an item
of income under China’s tax treaties and similar
arrangements. According to Circular 601, a beneficial owner
generally must be engaged in substantive business activities. An
agent or conduit company will not be regarded as a beneficial owner
and, therefore, will not qualify for treaty benefits. For this
purpose, a conduit company is a company that is set up for the
purpose of avoiding or reducing taxes or transferring or
accumulating profits. Although our PRC subsidiary is wholly owned
by our Hong Kong subsidiary, we will not be able to enjoy the 5%
withholding tax rate with respect to any dividends or distributions
made by our PRC subsidiary to its parent company in Hong Kong if
our Hong Kong subsidiary is regarded as a “conduit
company.”
In
addition, if CBMG HK were deemed to be a PRC resident enterprise,
then any dividends payable by CBMG HK to CBMG Delaware Corporation
may become subject to PRC dividend withholding
tax.
Restrictions on the remittance of RMB into and out of China and
governmental control of currency conversion may limit our ability
to pay dividends and other obligations, and affect the value of
your investment.
The PRC
government imposes controls on the convertibility of the RMB into
foreign currencies and the remittance of currency out of China. We
receive substantially all of our revenues in RMB and substantially
all of our cash inflows and outflows are denominated in RMB. Under
our current corporate structure, our revenues are primarily derived
from dividend payments from our subsidiary in China after it
receives payments from the VIE under various service and other
contractual arrangements. We may convert a portion of our revenues
into other currencies to meet our foreign currency obligations,
such as payments of dividends declared in respect of our ordinary
shares, if any. Shortages in the availability of foreign currency
may restrict the ability of our PRC subsidiary to remit sufficient
foreign currency to pay dividends or other payments to us, or
otherwise satisfy its foreign currency denominated
obligations.
54
Under
existing PRC foreign exchange regulations, payments of current
account items, including profit distributions, interest payments
and trade and service-related foreign exchange transactions, can be
made in foreign currencies without prior SAFE approval as long as
certain routine procedural requirements are fulfilled. Therefore,
our PRC subsidiary is allowed to pay dividends in foreign
currencies to us without prior SAFE approval by following certain
routine procedural requirements. However, approval from or
registration with competent government authorities is required
where the RMB is to be converted into foreign currency and remitted
out of China to pay capital expenses such as the repayment of loans
denominated in foreign currencies. The PRC government may at its
discretion restrict access to foreign currencies for current
account transactions in the future. If the foreign exchange control
system prevents us from obtaining sufficient foreign currencies to
satisfy our foreign currency demands, we may not be able to pay
dividends in foreign currencies to our shareholders, including the
U.S. shareholders.
Our financial condition and results of operations could be
materially and adversely affected if recent value added tax reforms
in the PRC become unfavorable to our PRC subsidiary or
VIE.
In
2012, China introduced a value added tax, or VAT, to replace the
previous 5% business tax. Our PRC subsidiary and the VIE have been
subject to VAT at a base rate of 6% since September 1, 2012.
The VIE’s subsidiary has been subject to VAT at a base rate
of 6% since July 1, 2013. The rules related to VAT are still
evolving and the timing of the promulgation of the final tax rules
or related interpretation is uncertain. Our financial condition and
results of operations could be materially and adversely affected if
the interpretation and enforcement of these tax rules become
materially unfavorable to our PRC subsidiary and
VIE.
Failure to comply with PRC regulations regarding the registration
requirements for stock ownership plans or stock option plans may
subject PRC plan participants or us to fines and other legal or
administrative sanctions.
Under
SAFE regulations, PRC residents who participate in an employee
stock ownership plan or stock option plan in an overseas publicly
listed company are required to register with SAFE or its local
branch and complete certain other procedures. Participants of a
stock incentive plan who are PRC residents must retain a qualified
PRC agent, which could be a PRC subsidiary of such overseas
publicly listed company, to conduct the SAFE registration and other
procedures with respect to the stock incentive plan on behalf of
these participants. Such participants must also retain an overseas
entrusted institution to handle matters in connection with their
exercise or sale of stock options. In addition, the PRC agent is
required to amend the SAFE registration with respect to the stock
incentive plan if there is any material change to the stock
incentive plan, the PRC agent or the overseas entrusted institution
or other material changes.
We and
our PRC resident employees who participate in our share incentive
plans are subject to these regulations as our company is publicly
listed in the United States. The Company and our PRC resident
option grantees have yet to complete compliance with these
regulations. We or our PRC resident option grantees may be subject
to fines and other legal or administrative
sanctions.
Fluctuation in the value of the RMB may have a material adverse
effect on the value of your investment.
The
value of the RMB against the U.S. dollar and other currencies is
affected by changes in China’s political and economic
conditions and China’s foreign exchange policies, among other
things. On July 21, 2005, the PRC government changed its
decades-old policy of pegging the value of the RMB to the U.S.
dollar, and the RMB appreciated more than 20% against the U.S.
dollar over the following three years. Between July 2008 and June
2010, this appreciation halted and the exchange rate between the
RMB and the U.S. dollar remained within a narrow band. The PRC
government has allowed the RMB to appreciate slowly against the
U.S. dollar again, and it has appreciated more than 10% since June
2010. It is difficult to predict how market forces or PRC or U.S.
government policy may impact the exchange rate between the RMB and
the U.S. dollar in the future. In addition, there remains
significant international pressure on the PRC government to adopt a
substantial liberalization of its currency policy, which could
result in further appreciation in the value of the RMB against the
U.S. dollar. In 2015, due to the slow-down of China economic growth
rate and environment, RMB depreciated against the U.S. dollar from
third quarter. Recently, the RMB depreciated over 6% in the
past 12 months.
55
Our
revenues and costs are mostly denominated in RMB, and a significant
portion of our financial assets are also denominated in RMB,
whereas our reporting currency is the U.S. dollar. Any significant
depreciation of the RMB may materially and adversely affect our
revenues, earnings and financial position as reported in U.S.
dollars. To the extent that we need to convert U.S. dollars we
received from this offering into RMB for our operations,
appreciation of the RMB against the U.S. dollar would have an
adverse effect on the RMB amount we would receive from the
conversion. Conversely, if we decide to convert our RMB into U.S.
dollars for the purpose of making payments for dividends on our
ordinary shares or for other business purposes, appreciation of the
U.S. dollar against the RMB would have a negative effect on the
U.S. dollar amount available to us.
PRC laws and regulations establish more complex procedures for some
acquisitions of Chinese companies by foreign investors, which could
make it more difficult for us to pursue growth through acquisitions
in China.
A
number of PRC laws and regulations, including the Regulations on
Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors adopted by six PRC regulatory agencies in 2006, or the
M&A Rules, the Anti-monopoly Law, and the Rules of
Ministry of Commerce on Implementation of Security Review System of
Mergers and Acquisitions of Domestic Enterprises by Foreign
Investors promulgated by the Ministry of Commerce in August
2011, or the Security Review Rules, have established procedures and
requirements that are expected to make merger and acquisition
activities in China by foreign investors more time consuming and
complex. These include requirements in some instances that the
Ministry of Commerce be notified in advance of any change of
control transaction in which a foreign investor takes control of a
PRC domestic enterprise, or that the approval from the Ministry of
Commerce be obtained in circumstances where overseas companies
established or controlled by PRC enterprises or residents acquire
affiliated domestic companies. PRC laws and regulations also
require certain merger and acquisition transactions to be subject
to merger control review or security review.
The
Security Review Rules were formulated to implement the Notice of
the General Office of the State Council on Establishing the
Security Review System for Mergers and Acquisitions of Domestic
Enterprises by Foreign Investors, also known as Circular 6,
which was promulgated in 2011. Under these rules, a security review
is required for mergers and acquisitions by foreign investors
having “national defense and security” concerns and
mergers and acquisitions by which foreign investors may acquire the
“de facto control” of domestic enterprises have
“national security” concerns. In addition, when
deciding whether a specific merger or acquisition of a domestic
enterprise by foreign investors is subject to the security review,
the Ministry of Commerce will look into the substance and actual
impact of the transaction. The Security Review Rules further
prohibits foreign investors from bypassing the security review
requirement by structuring transactions through proxies, trusts,
indirect investments, leases, loans, control through contractual
arrangements or offshore transactions.
There
is no requirement for foreign investors in those mergers and
acquisitions transactions already completed prior to the
promulgation of Circular 6 to submit such transactions to the
Ministry of Commerce for security review. As we have already
obtained the “de facto control” over our affiliated PRC
entities prior to the effectiveness of these rules, we do not
believe we are required to submit our existing contractual
arrangements to the Ministry of Commerce for security
review.
However, as these
rules are relatively new and there is a lack of clear statutory
interpretation on the implementation of the same, there is no
assurance that the Ministry of Commerce will not apply these
national security review-related rules to the acquisition of equity
interest in our PRC subsidiary. If we are found to be in violation
of the Security Review Rules and other PRC laws and regulations
with respect to the merger and acquisition activities in China, or
fail to obtain any of the required approvals, the relevant
regulatory authorities would have broad discretion in dealing with
such violation, including levying fines, confiscating our income,
revoking our PRC subsidiary’s business or operating licenses,
requiring us to restructure or unwind the relevant ownership
structure or operations. Any of these actions could cause
significant disruption to our business operations and may
materially and adversely affect our business, financial condition
and results of operations. Further, if the business of any target
company that we plan to acquire falls into the ambit of security
review, we may not be able to successfully acquire such company
either by equity or asset acquisition, capital contribution or
through any contractual arrangement. We may grow our business in
part by acquiring other companies operating in our industry.
Complying with the requirements of the relevant regulations to
complete such transactions could be time consuming, and any
required approval processes, including approval from the Ministry
of Commerce, may delay or inhibit our ability to complete such
transactions, which could affect our ability to expand our business
or maintain our market share.
56
The heightened scrutiny over acquisition transactions by the PRC
tax authorities may have a negative impact on our business
operations, our acquisition or restructuring strategy or the value
of your investment in us.
Pursuant to the
Notice on Strengthening Administration of Enterprise Income Tax for
Share Transfers by Non-PRC Resident Enterprises, or Circular 698,
issued by the State Administration of Taxation in
December 2009 with retroactive effect from January 1,
2008, where a non-PRC resident enterprise transfers the equity
interests of a PRC resident enterprise indirectly by disposition of
the equity interests of an overseas non-public holding company, or
an Indirect Transfer, and such overseas holding company is located
in a tax jurisdiction that: (i) has an effective tax rate of
less than 12.5% or (ii) does not impose income tax on
foreign income of its residents, the non-PRC resident
enterprise, being the transferor, must report to the competent tax
authority of the PRC resident enterprise this Indirect Transfer and
may be subject to PRC enterprise income tax of up to 10% of the
gains derived from the Indirect Transfer in certain
circumstances.
To
clarify the issues related to Circular 698, the State
Administration of Taxation released the Announcement of the State
Administration of Taxation on Several Issues Relating to the
Administration of Income Tax on Non-resident Enterprises in 2011,
known as Notice 24, and the Announcement on Issues Related to
Applications of Special Tax Treatment for Equity Transfer by
Non-resident Enterprises in 2013.
On
February 3, 2015, the State Administration of Taxation issued the
Announcement on Several Issues Concerning the Enterprise Income Tax
on Indirect Property Transfers by Non-PRC Resident Enterprises, or
Notice 7. Notice 7 introduces a new tax regime that is
significantly different from that under Circular 698. It superseded
the previous tax rules in relation to the offshore indirect equity
transfer, including those under Circular 698 as described above. It
extends the tax jurisdiction of State Administration of Taxation to
capture not only the Indirect Transfer but also the transactions
involving indirect transfer of (i) real properties in China and
(ii) assets of an “establishment or place” situated in
China, by a non-PRC resident enterprise through a disposition of
equity interests in an overseas holding company.
However, Notice 7
also brings uncertainties to the parties of the offshore indirect
transfers as the transferee and the transferor have to make
self-assessment on whether the transactions should be subject to
the corporate income tax and file or withhold the corporate income
tax accordingly. In addition, the PRC tax authorities have
discretion under Notice 7 to adjust the taxable capital gains based
on the difference between the fair value of the transferred equity
interests and the investment cost. We may pursue acquisitions in
the future that may involve complex corporate structures. If we are
considered as a non-PRC resident enterprise under the EIT Law and
if the PRC tax authorities make adjustments to the taxable income
of the transactions under Notice 7, our income tax expenses
associated with such potential acquisitions will be increased,
which may have an adverse effect on our financial condition and
results of operations.
We face certain risks relating to the real properties that we
lease.
We
primarily lease office and manufacturing space from third parties
for our operations in China. Any defects in lessors’ title to
the leased properties may disrupt our use of our offices, which may
in turn adversely affect our business operations. For example,
certain buildings and the underlying land are not allowed to be
used for industrial or commercial purposes without relevant
authorities’ approval, and the lease of such buildings to
companies like us may subject the lessor to pay premium fees to the
PRC government. We cannot assure you that the lessor has obtained
all or any of approvals from the relevant governmental authorities.
In addition, some of our lessors have not provided us with
documentation evidencing their title to the relevant leased
properties. We cannot assure you that title to these properties we
currently lease will not be challenged. In addition, we have not
registered any of our lease agreements with relevant PRC
governmental authorities as required by PRC law, and although
failure to do so does not in itself invalidate the leases, we may
not be able to defend these leases against bona fide third
parties.
57
As of
the date of this filing, we are not aware of any actions, claims or
investigations being contemplated by government authorities with
respect to the defects in our leased real properties or any
challenges by third parties to our use of these properties.
However, if third parties who purport to be property owners or
beneficiaries of the mortgaged properties challenge our right to
use the leased properties, we may not be able to protect our
leasehold interest and may be ordered to vacate the affected
premises, which could in turn materially and adversely affect our
business and operating results.
Our significant deposits in certain banks in China may be at risk
if these banks go bankrupt or otherwise do not have the liquidity
to pay us during our deposit period.
As of
December 31, 2016, we had approximately $39 million in cash and
bank deposits, such as time deposits, with large domestic banks in
China. Our remaining cash, cash equivalents and short-term
investments were held by financial institutions in the United
States and Hong Kong. The terms of these deposits are, in general,
up to twelve months. Historically, deposits in Chinese banks were
viewed as secure due to the state policy on protecting
depositors’ interests. However, the new Bankruptcy Law that
came into effect in 2007 contains an article expressly stating that
the State Council may promulgate implementation measures for the
bankruptcy of Chinese banks based on the Bankruptcy Law, so the law
contemplates the possibility that a Chinese bank may go bankrupt.
In addition, foreign banks have been gradually permitted to operate
in China since China’s accession to the World Trade
Organization and have become strong competitors of Chinese banks in
many respects, which may have increased the risk of bankruptcy or
illiquidity for Chinese banks, including those in which we have
deposits. In the event of bankruptcy or illiquidity of any one of
the banks which holds our deposits, we are unlikely to claim our
deposits back in full since we are unlikely to be classified as a
secured creditor based on PRC laws.
Our auditor, like other independent registered public accounting
firms operating in China, is not permitted to be subject to
inspection by Public Company Accounting Oversight Board, and
consequently investors may be deprived of the benefits of such
inspection.
Our
auditor, the independent registered public accounting firm that
issued the audit reports included elsewhere in this report, as an
auditor of companies that are traded publicly in the United States
and a firm registered with the Public Company Accounting Oversight
Board (United States), or PCAOB, is required by the laws of the
United States to undergo regular inspections by the PCAOB to assess
its compliance with the laws of the United States and applicable
professional standards. Our auditor is located in China and the
PCAOB is currently unable to conduct inspections on auditors in
China without the approval of the PRC authorities. Therefore, our
auditor, like other independent registered public accounting firms
operating in China, is currently not inspected by the
PCAOB.
In May
2013, the PCAOB announced that it has entered into a Memorandum of
Understanding (“MOU”) on Enforcement Cooperation with
the China Securities Regulatory Commission (the “CSRC”)
and the Ministry of Finance (the “MOF”). The MOU
establishes a cooperative framework between the parties for the
production and exchange of audit documents relevant to
investigations in both countries’ respective
jurisdictions. More specifically, it provides a mechanism for
the parties to request and receive from each other assistance in
obtaining documents and information in furtherance of their
investigative duties. In addition to developing enforcement
MOU, the PCAOB has been engaged in continuing discussions with the
CSRC and MOF to permit joint inspections in China of audit firms
that are registered with the PCAOB and audit Chinese companies that
trade on U.S. exchanges.
Inspections of
other firms that the PCAOB has conducted outside of China have
identified deficiencies in those firms’ audit procedures and
quality control procedures, and such deficiencies may be addressed
as part of the inspection process to improve future audit quality.
The inability of the PCAOB to conduct inspections of independent
registered public accounting firms operating in China makes it more
difficult to evaluate the effectiveness of our auditor’s
audit procedures or quality control procedures, and to the extent
that such inspections might have facilitated improvements in our
auditor’s audit procedures and quality control procedures,
investors may be deprived of such benefits.
58
RISKS RELATED TO OUR COMMON STOCK
If we fail to meet all applicable Nasdaq Global Market requirements
and Nasdaq determines to delist our common stock, the delisting
could adversely affect the market liquidity of our common stock,
impair the value of your investment, adversely affect our ability
to raise needed funds and subject us to additional trading
restrictions and regulations.
Our
common stock trades on the Nasdaq Global Market. If we fail to
satisfy the continued listing requirements of The NASDAQ Global
Market, such as the corporate governance requirements or the
minimum closing bid price requirement, The NASDAQ Stock Market (or
NASDAQ) may take steps to de-list our common stock. Such a
de-listing would likely have a negative effect on the price of our
common stock and would impair your ability to sell or purchase our
common stock when you wish to do so. In the event of a de-listing,
we would take actions to restore our compliance with NASDAQ's
listing requirements, but we can provide no assurance that any such
action taken by us would allow our common stock to become listed
again, stabilize the market price or improve the liquidity of our
common stock, prevent our common stock from dropping below the
NASDAQ minimum bid price requirement or prevent future
non-compliance with NASDAQ's listing requirements.
If we
fail to meet all applicable Nasdaq requirements and Nasdaq delists
our securities from trading on its exchange, we expect our
securities could be quoted on the Over-The-Counter Bulletin Board
("OTCBB") or the "pink sheets." If this were to occur, we could
face significant material adverse consequences,
including:
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a
limited availability of market quotations for our
securities;
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reduced
liquidity for our securities;
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a
determination that our common stock is "penny stock" which will
require brokers trading in our common stock to adhere to more
stringent rules and possibly result in a reduced level of trading
activity in the secondary trading market for our
securities;
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a
limited amount of news and analyst coverage; and
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a
decreased ability to issue additional securities or obtain
additional financing in the future.
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Furthermore,
The National Securities Markets Improvement Act of 1996 ("NSMIA"),
which is a federal statute, prevents or preempts the states from
regulating the sale of certain securities, which are referred to as
"covered securities." Because our common stock is listed on Nasdaq,
they are covered securities for the purpose of NSMIA. If our
securities were no longer listed on Nasdaq and therefore not
"covered securities", we would be subject to regulation in each
state in which we offer our securities.
We do not intend to pay cash
dividends.
We do
not anticipate paying cash dividends on our common stock in the
foreseeable future. We may not have sufficient funds to legally pay
dividends. Even if funds are legally available to pay dividends, we
may nevertheless decide in our sole discretion not to pay
dividends. The declaration, payment and amount of any future
dividends will be made at the discretion of the board of directors,
and will depend upon, among other things, the results of our
operations, cash flows and financial condition, operating and
capital requirements, and other factors our board of directors may
consider relevant. There is no assurance that we will pay any
dividends in the future, and, if dividends are declared, there is
no assurance with respect to the amount of any such
dividend.
Our operating history and lack of profits could lead to wide
fluctuations in our share price. The market price for our common
shares is particularly volatile given our status as a relatively
unknown company with a small and thinly traded public
float.
The
market for our common shares is characterized by significant price
volatility when compared to seasoned issuers, and we expect that
our share price will continue to be more volatile than a seasoned
issuer for the indefinite future. The volatility in our share price
is attributable to a number of factors. First, as noted above, our
common shares are sporadically and thinly traded. As a consequence
of this lack of liquidity, the trading of relatively small
quantities of shares by our stockholders may disproportionately
influence the price of those shares in either direction. The price
for our shares could, for example, decline precipitously in the
event that a large number of our common shares are sold on the
market without commensurate demand, as compared to a seasoned
issuer which could better absorb those sales without adverse impact
on its share price. Secondly, we are a speculative or "risky"
investment due to our limited operating history and lack of profits
to date. As a consequence of this enhanced risk, more risk-adverse
investors may, under the fear of losing all or most of their
investment in the event of negative news or lack of progress, be
more inclined to sell their shares on the market more quickly and
at greater discounts than would be the case with the stock of a
seasoned issuer. Many of these factors are beyond our control and
may decrease the market price of our common shares, regardless of
our operating performance. We cannot make any predictions or
projections as to what the prevailing market price for our common
shares will be at any time, including as to whether our common
shares will sustain their current market prices, or as to what
effect that the sale of shares or the availability of common shares
for sale at any time will have on the prevailing market
price.
59
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ITEM 2. PROPERTIES
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Our
corporate headquarters are located at 19925 Stevens Creek Blvd.,
Suite 100 in Cupertino, California. We currently pay rent for a
total of $77,000 per month for an aggregate of approximately 80,000
square feet of space to house our administration, research and
manufacturing facilities in Maryland and in the cities of, Wuxi,
Beijing and Shanghai in China. On January 1, 2017, CBMG
Shanghai entered into a 10-year lease agreement with Shanghai
Chuangtong Industrial Development Co., Ltd., pursuant to which the
Company leased a 10,501.6 square meter building located in the
“Pharma Valley” of Shanghai, the People’s
Republic of China for research and development, manufacturing and
office space purposes. Subject to a 5-month rent-free renovation
period, the monthly rent for the first two years is determined by
floor and ranges from 3.7 yuan to 4.3 yuan per square meter per
day, for an aggregate monthly rent for the entire Property of
approximately 1.3 million yuan ($187,064). The term of the Lease is
10 years, starting from January 1, 2017 and ending on December 31,
2026 (the “Original Term”). During the Original Term,
the monthly rent will increase by 6% every two years.
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ITEM 3. LEGAL
PROCEEDINGS
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On April 21, 2015, a putative class action complaint was filed
against the Company in the U.S. District Court for the Northern
District of California captioned Bonnano v. Cellular Biomedicine
Group, Inc., 3:15-cv-01795-WHO (N.D. Ca.). The complaint also named
Wei Cao, the Company’s Chief Executive Officer, and Tony Liu,
the Company’s Chief Financial Officer, as defendants. The
complaint alleged that during the class period, June 18, 2014,
through April 7, 2015, the Company made material misrepresentations
in its periodic reports filed with the SEC. The complaint alleged a
cause of action under Section 10(b) of the Securities Exchange Act
of 1934 (the “1934 Act”) against all defendants and
under Section 20(a) of the 1934 Act against the individual
defendants. The complaint did not state the amount of the damages
sought.
On June
3, 2015, defendants were served. On June 29, 2015, the Court
ordered, as stipulated by the parties, that defendants are not
required to respond to the initial complaint in this action until
such time as a lead plaintiff and lead counsel have been appointed
and a consolidated complaint has been filed. The
deadline for filing motions for the appointment of lead plaintiff
and selection of lead counsel was June 22, 2015. On that
date, one motion was filed by the Rosen Law Firm on behalf of
putative plaintiff Michelle Jackson. On August 3, 2015,
having received no opposition, the Court appointed Jackson as lead
plaintiff and the Rosen Law Firm as class counsel. As
stipulated among the parties, Jackson filed an amended class action
complaint on September 17, 2015.
The
amended complaint names ten additional individuals and entities as
defendants (“additional defendants”), none of whom are
affiliated with the Company, and asserts an additional claim under
Section 10(b) and Rule 10b-5(a) and (c) thereunder that the Company
purportedly engaged in a scheme with the additional defendants to
promote its securities. The amended complaint does not assert any
claims against Mr. Liu.
On
January 19, 2016, the Company filed a motion to dismiss, which was
granted on May 20, 2016, with leave to amend. On June 6,
2016, Plaintiffs filed a Second Amended Complaint, and on June 30,
2016, the Company filed a motion to dismiss. On September 2,
2016, the Court dismissed the Second Amended Complaint with
prejudice and entered judgment against Plaintiffs. On
September 16, 2016, Plaintiffs filed a Notice of Appeal to the U.S.
Court of Appeals for the Ninth Circuit. On December 23, 2016,
on Plaintiffs’ voluntary motion, the Ninth Circuit entered an
order dismissing the appeal.
60
As a
result of the dismissal of the appeal, all proceedings in the case
against the Company and its officers are concluded. We are
currently not involved in any other litigation that we believe
could have a materially adverse effect on our financial condition
or results of operations.
ITEM 4. MINE SAFETY
DISCLOSURES
Not
applicable.
PART II
Our
common stock is quoted on the Nasdaq Global Market under the symbol
"CBMG." Our stock was formerly quoted under the symbol
“EBIG.”
As of
February 28, 2017, there were 14,281,380 shares of common stock of
the Company outstanding and there were approximately 1,700
stockholders of record of the Company's common stock.
The
following table sets forth for the periods indicated the high and
low bid quotations for the Company's common stock. These quotations
represent inter-dealer quotations, without adjustment for retail
markup, markdown or commission and may not represent actual
transactions.
|
|
High
|
Low
|
|
Fiscal Year 2016
|
|
|
|
First
Quarter (January – March 2016)
|
$22.10
|
$10.44
|
|
Second
Quarter (April – June 2016)
|
$20.98
|
$11.07
|
|
Third
Quarter (July – September 2016)
|
$15.68
|
$11.85
|
|
Fourth
Quarter (October – December 2016)
|
$15.45
|
$11.00
|
|
|
|
|
|
Fiscal Year 2015
|
|
|
|
First
Quarter (January – March 2015)
|
$49.00
|
$12.93
|
|
Second
Quarter (April – June 2015)
|
$41.73
|
$21.41
|
|
Third
Quarter (July – September 2015)
|
$38.74
|
$16.00
|
|
Fourth
Quarter (October – December 2015)
|
$25.20
|
$15.90
|
Effective January
18, 2013, the Company completed its reincorporation from the State
of Arizona to the State of Delaware (the
“Reincorporation”). In connection with the
Reincorporation, shares of the former Arizona entity were exchanged
into shares of the Delaware entity at a ratio of 100 Arizona shares
for each 1 Delaware share, resulting in the same effect as a 1:100
reverse stock split. The Reincorporation became effective on
January 31, 2013. Please refer to the Current Report on Form 8-K,
filed by the Company on January 25, 2013. All values have been
retroactively adjusted.
Dividends
We did
not declare any cash dividends for the years ended December 31,
2016, 2015 and 2014. Our Board of Directors does not intend to
declare any dividends in the near future. The declaration, payment
and amount of any future dividends will be made at the discretion
of the Board of Directors, and will depend upon, among other
things, the results of our operations, cash flows and financial
condition, operating and capital requirements, and other factors as
the Board of Directors considers relevant. There is no assurance
that future dividends will be paid, and if dividends are paid,
there is no assurance with respect to the amount of any such
dividend.
61
Equity Compensation Plans
2009 Stock Option Plan
During
the first quarter of 2009, the Company's Board of Directors
approved and adopted the 2009 Stock Option Plan (the "Plan") and
designated 100,000 of its common stock for issuance under the Plan
to employees, directors or consultants for the Company through
either the issuance of shares or stock option grants. Under the
terms of the Plan, stock option grants 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. There are 4,593 shares available
for issuance under this plan as of December 31, 2016.
2011 Incentive Stock Option Plan (as amended)
During
the last quarter of 2011, the Company's Board of Directors approved
and adopted the 2011 Incentive Plan (the "2011 Plan") and
designated 300,000 of its no par common stock for issuance under
the 2011 Plan to employees, directors or consultants for the
Company through either the issuance of shares or stock option
grants. Under the terms of the 2011 Plan, stock option grants were
authorized to be made with exercise prices not less than 100% of
the fair market value of the shares of common stock on the grant
date. On November 30, 2012, the Company’s Board of Directors
approved the Amended and Restated 2011 Incentive Stock Option Plan
(the “Restated Plan”), which amended and restated the
2011 Plan to provide for the issuance of up to 780,000 (increasing
up to 1% per year) shares of common stock. The Restated Plan was
approved by our stockholders on
January 17, 2013. There are 81,522 shares available for issuance
under this plan as of December 31, 2016.
2013 Stock Incentive Plan
On August 29, 2013, the Company’s Board of
Directors adopted the Cellular Biomedicine Group, Inc. 2013 Stock
Incentive Plan (the “2013 Plan”)
to attract and retain the best available personnel, to provide
additional incentive to Employees, Directors and Consultants and to
promote the success of the Company’s business. The 2013 Plan
was approved by our stockholders on December 9, 2013. There
are 75,869 shares available for issuance under this plan as of
December 31, 2016.
The
following summary describes the material features of the 2013
Plan. The summary, however, does not purport to be a
complete description of all the provisions of the 2013 Plan. The
following description is qualified in its entirety by reference to
the Plan.
Description of the 2013 Plan
The
purpose of the 2013 Plan is to attract and retain the best
available personnel, to provide additional incentive to employees,
directors and consultants and to promote the success of the
Company’s business. The Company has reserved up to
one million (1,000,000) of the authorized but unissued or
reacquired shares of common stock of the Company. The
Board or its appointed administrator has the power and authority to
grant awards and act as administrator thereunder to establish the
grant terms, including the grant price, vesting period and exercise
date.
Each sale or award of shares under the 2013 Plan
is made pursuant to the terms and conditions provided for in an
award agreement (an “Award
Agreement”) entered into
by the Company and the individual recipient. The
number of shares covered by each outstanding Award Agreement shall
be proportionately adjusted for (a) any increase or decrease in the
number of issued shares of common stock resulting from a stock
split, reverse stock split, stock dividend, combination or
reclassification of the common stock, or similar transaction
affecting the common stock or (b) any other increase or decrease in
the number of issued shares of common stock effected without
receipt of consideration by the Company.
62
Under
the 2013 Plan, the Board or its administrator have the
authority to: (i) to select the employees, directors and
consultants to whom awards may be granted from time to time
hereunder; (ii) to determine whether and to what extent awards
are granted; (iii) to determine the number of shares or the
amount of other consideration to be covered by each award granted;
(iv) to approve forms of Award Agreements for use under the
2013 Plan; (v) to determine the terms and conditions of any
award granted; (vi) to establish additional terms, conditions,
rules or procedures to accommodate the rules or laws of applicable
foreign jurisdictions and to afford grantees favorable treatment
under such rules or laws; provided, however, that no award shall be
granted under any such additional terms, conditions, rules or
procedures with terms or conditions which are inconsistent with the
provisions of the 2013 Plan; (vii) to amend the terms of any
outstanding award granted under the 2013 Plan, provided that any
amendment that would adversely affect the grantee’s rights
under an outstanding award shall not be made without the
grantee’s written consent; (viii) to construe and
interpret the terms of the 2013 Plan and awards, including without
limitation, any notice of award or Award Agreement, granted
pursuant to the 2013 Plan; (ix) to take such other action, not
inconsistent with the terms of the 2013 Plan, as the administrator
deems appropriate.
The
awards under the 2013 Plan other than Incentive Stock Options
(“ISOs”) may be granted to employees, directors and
consultants. ISOs may be granted only to Employees of
the Company, a parent or a subsidiary. An employee,
director or consultant who has been granted an award may, if
otherwise eligible, be granted additional awards. Awards
may be granted to such employees, directors or consultants who are
residing in foreign jurisdictions as the administrator may
determine from time to time. Options granted under the 2013 Plan
will be subject to the terms and conditions established by the
administrator. Under the terms of the 2013 Plan, the
exercise price of the options will not be less than the fair market
value (as determined under the 2013 Plan) of our common stock at
the time of grant. Options granted under the 2013 Plan will be
subject to such terms, including the exercise price and the
conditions and timing of exercise, as may be determined by the
administrator and specified in the applicable award agreement. The
maximum term of an option granted under the 2013 Plan will be ten
years from the date of grant. Payment in respect of the exercise of
an option may be made in cash, by certified or official bank check,
by money order or with shares, pursuant to a
“cashless” or “net issue” exercise, by
a combination thereof, or by such other method as the administrator
may determine to be appropriate and has been included in the terms
of the option.
The 2013 Plan may be amended, suspended or terminated by the Board,
or an administrator appointed by the Board, at any time and for any
reason.
2014 Stock Incentive Plan
On September 22, 2014, the Company’s Board
of Directors adopted the Cellular Biomedicine Group, Inc. 2014
Stock Incentive Plan (the “2014 Plan”)
covering 1.2 million shares to attract and retain the best
available personnel, to provide additional incentive to Employees,
Directors and Consultants and to promote the success of the
Company’s business. The 2014 Plan was approved by our
stockholders on November 7, 2014. There are 384,979 shares
available for issuance under this plan as of December 31,
2016.
The
following summary describes the material features of the 2014
Plan. The summary, however, does not purport to be a
complete description of all the provisions of the 2014 Plan. The
following description is qualified in its entirety by reference to
the Plan.
Description of the 2014 Plan
The
purpose of the 2014 Plan is to attract and retain the best
available personnel, to provide additional incentive to employees,
directors and consultants and to promote the success of the
Company’s business. The Company has reserved up to
1.2 million (1,200,000) of the authorized but unissued or
reacquired shares of common stock of the Company. The
Board or its appointed administrator has the power and authority to
grant awards and act as administrator thereunder to establish the
grant terms, including the grant price, vesting period and exercise
date.
Each sale or award of shares under the 2014 Plan
is made pursuant to the terms and conditions provided for in an
award agreement (an “Award
Agreement”) entered into
by the Company and the individual recipient. The
number of shares covered by each outstanding Award Agreement shall
be proportionately adjusted for (a) any increase or decrease in the
number of issued shares of common stock resulting from a stock
split, reverse stock split, stock dividend, combination or
reclassification of the common stock, or similar transaction
affecting the common stock or (b) any other increase or decrease in
the number of issued shares of common stock effected without
receipt of consideration by the Company.
63
Under
the 2014 Plan, the Board or its administrator have the
authority to: (i) to select the employees, directors and
consultants to whom awards may be granted from time to time
hereunder; (ii) to determine whether and to what extent awards
are granted; (iii) to determine the number of shares or the
amount of other consideration to be covered by each award granted;
(iv) to approve forms of Award Agreements for use under the
2014 Plan; (v) to determine the terms and conditions of any
award granted; (vi) to establish additional terms, conditions,
rules or procedures to accommodate the rules or laws of applicable
foreign jurisdictions and to afford grantees favorable treatment
under such rules or laws; provided, however, that no award shall be
granted under any such additional terms, conditions, rules or
procedures with terms or conditions which are inconsistent with the
provisions of the 2014 Plan; (vii) to amend the terms of any
outstanding award granted under the 2014 Plan, provided that any
amendment that would adversely affect the grantee’s rights
under an outstanding award shall not be made without the
grantee’s written consent; (viii) to construe and
interpret the terms of the 2014 Plan and awards, including without
limitation, any notice of award or Award Agreement, granted
pursuant to the 2014 Plan; (ix) to take such other action, not
inconsistent with the terms of the 2014 Plan, as the administrator
deems appropriate.
The
awards under the 2014 Plan other than Incentive Stock Options
(“ISOs”) may be granted to employees, directors and
consultants. ISOs may be granted only to Employees of
the Company, a parent or a subsidiary. An employee,
director or consultant who has been granted an award may, if
otherwise eligible, be granted additional awards. Awards
may be granted to such employees, directors or consultants who are
residing in foreign jurisdictions as the administrator may
determine from time to time. Options granted under the 2014 Plan
will be subject to the terms and conditions established by the
administrator. Under the terms of the 2014 Plan, the
exercise price of the options will not be less than the fair market
value (as determined under the 2013 Plan) of our common stock at
the time of grant. Options granted under the 2014 Plan will be
subject to such terms, including the exercise price and the
conditions and timing of exercise, as may be determined by the
administrator and specified in the applicable award agreement. The
maximum term of an option granted under the 2014 Plan will be ten
years from the date of grant. Payment in respect of the exercise of
an option may be made in cash, by certified or official bank check,
by money order or with shares, pursuant to a
“cashless” or “net issue” exercise, by
a combination thereof, or by such other method as the administrator
may determine to be appropriate and has been included in the terms
of the option.
The
2014 Plan may be amended, suspended or terminated by the Board, or
an administrator appointed by the Board, at any time and for any
reason.
All Equity Compensation Plans
The
following table presents securities authorized for issuance under
the Company’s equity compensation plans, as of December 31,
2016:
|
Plan Catagory
|
Number of securities to
be issued upon exercise of outstanding options, warrants and rights
(#)
|
Weighted-average exercise
price of outstanding options, warrants and rights
($)
|
Number of securities
|
|
Equity compensation plans approved by
stockholders
|
1,766,571
|
$12.36
|
542,370
|
|
Equity compensation plans not approved by
stockholders
|
-
|
-
|
-
|
|
Total
|
1,766,571
|
$12.36
|
542,370
|
Stock Performance Graph
The
line graph that follows compares the cumulative total stockholder
return on our shares of common stock with the cumulative total
return of the Nasdaq Healthcare Index (^IXHC)* and the Russell 3000
Index (RUA)* Index for the five years ended December 31 2016. The
graph and table assume that $100 was invested on the last day of
trading for the fiscal year 2011 in each of our shares of common
stock, the Nasdaq Healthcare Index, and the Russell 3000 Index, and
that no dividends were paid. Cumulative total stockholder returns
for our shares of common stock, Nasdaq Healthcare Index, and the
Russell 3000 Index are based on our fiscal year, which is the same
as the calendar year.
64
Transfer Agent
The
Company’s transfer agent and Registrar for the common stock
is Corporate Stock Transfer, Inc. located in Denver,
Colorado.
Recent Sales of Unregistered Securities
All
unregistered sales and issuances of equity securities for the year
ended December 31, 2016 were previously disclosed in a Form
8-K or Form 10-Q filed with the SEC.
65
|
ITEM 6. SELECTED FINANCIAL
DATA
|
The following
tables set forth certain of our selected consolidated financial
data as of the dates and for the years indicated. Historical
results are not necessarily indicative of the results to be
expected for any future period.
The
following selected consolidated financial information was derived
from our fiscal year end consolidated financial statements. The
following information should be read in conjunction with those
statements and Item 7, “Management’s Discussion and
Analysis of Financial Condition and Results of Operations.”
and Form 8-K/A filed on December 6, 2013. Our summary consolidated
statement of operations and comprehensive loss data for the fiscal
years ended December 31, 2014, 2015 and 2016 and our summary
consolidated balance sheet data as of December 31, 2015 and
2016, as set forth below, are derived from, and are qualified in
their entirety by reference to, our audited consolidated financial
statements, including the notes thereto, which are included in this
Annual Report. The summary balance sheet data as of December
31, 2013 and summary consolidated statement of operations and
comprehensive loss data for the fiscal years ended December 31,
2013, set forth below are derived from our audited consolidated
financial statements which are not included herein. Our summary
unaudited consolidated statement of operations and comprehensive
loss data for the fiscal years ended December 31, 2012 and our
summary consolidated balance sheet data as of December 31,
2012, as set forth below, are derived from Form 8-K/A filed on
December 6, 2013.
Our
consolidated financial statements are prepared and presented in
accordance with accounting principles generally accepted in the
United States, or U.S. GAAP.
66
|
|
For the Year
Ended
December 31, |
||||
|
|
2016
|
2015
|
2014
|
2013
|
2012
|
|
Summary Consolidated statement of operations and
comprehensive loss data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales and
revenue
|
$627,930
|
$2,505,423
|
$564,377
|
$204,914
|
$273,620
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
Cost of
sales
|
860,417
|
1,880,331
|
242,215
|
296,212
|
194,264
|
|
General and
administrative
|
11,670,506
|
13,068,255
|
7,875,413
|
9,162,172
|
3,455,444
|
|
Selling and
marketing
|
425,040
|
709,151
|
314,894
|
58,275
|
471,420
|
|
Research and
development
|
11,475,587
|
7,573,228
|
3,146,499
|
2,041,872
|
3,214,289
|
|
Impairment of
investments
|
4,611,714
|
123,428
|
1,427,840
|
-
|
|
|
Total operating expenses
|
29,043,264
|
23,354,393
|
13,006,861
|
11,558,531
|
7,335,417
|
|
Operating
loss
|
(28,415,334)
|
(20,848,970)
|
(12,442,484)
|
(11,353,617)
|
(7,061,797)
|
|
|
|
|
|
|
|
|
Other income
(expense):
|
|
|
|
|
|
|
Interest
income
|
78,943
|
42,220
|
15,043
|
1,294
|
1,788
|
|
Other income
(expense)
|
132,108
|
630,428
|
71,982
|
(6,196)
|
28,492
|
|
Total
other income (expense)
|
211,051
|
672,648
|
87,025
|
(4,902)
|
30,280
|
|
Loss from continuing
operations before taxes
|
(28,204,283)
|
(20,176,322)
|
(12,355,459)
|
(11,358,519)
|
(7,031,517)
|
|
|
|
|
|
|
|
|
Income taxes credit
(provision)
|
(4,093)
|
728,601
|
-
|
-
|
-
|
|
Loss from continuing
operations
|
(28,208,376)
|
(19,447,721)
|
(12,355,459)
|
(11,358,519)
|
(7,031,517)
|
|
|
|
|
|
|
|
|
Loss on discontinued
operations, net of taxes
|
-
|
-
|
(3,119,152)
|
(2,438,514)
|
-
|
|
Net loss
|
$(28,208,376)
|
$(19,447,721)
|
$(15,474,611)
|
$(13,797,033)
|
$(7,031,517)
|
|
Other comprehensive
income (loss):
|
|
|
|
|
|
|
Cumulative translation
adjustment
|
(743,271)
|
(307,950)
|
15,254
|
78,650
|
13,705
|
|
Unrealized
gain (loss) on investments, net of tax
|
5,300,633
|
(1,376,540)
|
1,611,045
|
(198,200)
|
-
|
|
Reclassification adjustments, net of tax, in connection with
other-than-temporary impairment of investments
|
(5,557,939)
|
-
|
-
|
-
|
-
|
|
Total other
comprehensive income (loss):
|
(1,000,577)
|
(1,684,490)
|
1,626,299
|
(119,550)
|
13,705
|
|
Comprehensive
loss
|
$(29,208,953)
|
$(21,132,211)
|
$(13,848,312)
|
$(13,916,583)
|
$(7,017,812)
|
|
|
|
|
|
|
|
|
Net loss per share
:
|
|
|
|
|
|
|
Basic
|
$(2.09)
|
$(1.70)
|
$(1.79)
|
$(2.38)
|
$(2.24)
|
|
Diluted
|
$(2.09)
|
$(1.70)
|
$(1.79)
|
$(2.38)
|
$(2.24)
|
|
|
|
|
|
|
|
|
Weighted average common
shares outstanding:
|
|
|
|
|
|
|
Basic
|
13,507,408
|
11,472,306
|
8,627,094
|
5,792,888
|
3,134,833
|
|
Diluted
|
13,507,408
|
11,472,306
|
8,627,094
|
5,792,888
|
3,134,833
|
67
|
|
As of
December 31, |
||||
|
|
2016
|
2015
|
2014
|
2013
|
2012
|
|
Summary Consolidated balance sheet
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$39,252,432
|
$14,884,597
|
$14,770,584
|
$7,175,215
|
$4,144,896
|
|
Current working capital
(2)
|
38,328,048
|
13,675,034
|
12,019,143
|
5,373,355
|
3,754,386
|
|
Total
assets
|
68,628,467
|
49,460,422
|
43,685,102
|
17,596,726
|
6,751,627
|
|
Other non-current
liabilities
|
370,477
|
76,229
|
452,689
|
-
|
-
|
|
Stockholders’
equity
|
65,893,954
|
46,364,936
|
39,156,091
|
15,395,073
|
6,156,394
|
(1)
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. 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”). In connection with the
Merger, effective March 5, 2013, the Company (formerly named
“EastBridge Investment Group Corporation”) changed its
name to “Cellular Biomedicine Group, Inc.” CBMG BVI was
the accounting acquirer and resulted in a reverse merger. The
consolidated balance sheet data as of December 31, 2012 and the
consolidated statement of operation and comprehensive income data
for the year then ended represents the historical financial data of
the acquirer - CBMG BVI. CBMG BVI was liquidated on November 25,
2016.
(2)
Current working
capital is the difference between total current assets and total
current liabilities.
68
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
As
of February 6, 2013, in connection with the Merger, Cellular
Biomedicine Group, Ltd. became 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
following is management's discussion and analysis of certain
significant factors that have affected our financial position and
operating results during the periods included in the accompanying
consolidated financial statements, as well as information relating
to the plans of our current management. This report includes
forward-looking statements. Generally, the words "believes,"
"anticipates," "may," "will," "should," "expect," "intend,"
"estimate," "continue," and similar expressions or the negative
thereof or comparable terminology are intended to identify
forward-looking statements. Such statements are subject to certain
risks and uncertainties, including the matters set forth in this
report or other reports or documents we file with the Securities
and Exchange Commission from time to time, which could cause actual
results or outcomes to differ materially from those projected.
Undue reliance should not be placed on these forward-looking
statements which speak only as of the date hereof. We undertake no
obligation to update these forward-looking statements.
The
following discussion and analysis should be read in conjunction
with our consolidated financial statements and the related notes
thereto and other financial information included in Item 8 of this
Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
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.
Cash and Cash Equivalents
The
Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. As of
December 31, 2016 and 2015, 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 sales as of December 31, 2016 and 2015. Accounts
receivable are carried at their estimated collectible
amounts.
The
Company follows the allowance method of recognizing uncollectible
accounts receivable. The Company recognizes bad debt expense based
on specifically identified customers and invoices that are
anticipated to be uncollectable. At December 31, 2016, allowance of
$10,163 was provided for debtors of certain customers as those
debts are unrecoverable from customers. No allowance was provided
as of December 31, 2015 as the Company was receiving continuous
payments and there was no indication of debts unrecoverable from
customers.
69
Inventory
Inventories consist
of raw materials, work-in-process, semi-finished goods and finished
goods. Inventories are initially recognized at cost and
subsequently at the lower of cost and net realizable value under
first-in first-out method. 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
ranging from three to ten years 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. We assess the recoverability of the asset by
comparing the projected undiscounted net cash flows associated with
the related assets over the estimated remaining life against the
respective carrying value.
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 impairment may have occurred. As of
December 31, 2016, the goodwill is $7,678,789, which all derived
from the acquisition of Agreen.
As
stipulated in ASC 350-20-35-3A, an entity may assess qualitative
factors to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount,
including goodwill. During the year ended December 31, 2016, the
Company ceased its cooperation with the Jihua Hospital (its largest
customer) and several agents and was not actively pursuing the
fragmented technical services opportunities since the second
quarter of 2016. Since then, net sales and revenue significantly
decreased accordingly. It considered as triggering event indicating
the goodwill impairment test was required at the balance sheet
date. The Company therefore proceeded with “Step 1”
goodwill impairment test based on ASC 350-20-35-4 thru 35-8A. The
first step of the goodwill impairment test, used to identify
potential impairment, compares the fair value of a reporting unit
with its carrying amount, including goodwill. The Company is now
prioritizing cancer therapeutic, and focusing the clinical efforts
on developing CAR-T technologies, Vaccine, Tcm, and TCR clonality
technologies, all long-lived assets (including goodwill) are
considered as an asset group under the same reporting unit for the
Company’s research and development activities purpose. The
Company’s market capitalization as at the balance sheet date
would fairly reflect the fair value of the Company’s research
and development efforts so as to provide an indication of whether
the goodwill is subject to the impairment loss. Our market
capitalization exceeds the carrying amount of net assets (including
goodwill) of the Company. We considered first step of goodwill
impairment test passed and no second step of goodwill impairment
test shall be performed to measure the amount of impairment loss.
No impairment loss of goodwill is considered to be required as of
December 31, 2016.
Other
intangibles mainly consists of knowhow, technologies, patent,
licenses acquired and purchased software. The Company reviews the
carrying value of long-lived assets to be held and used, including
other intangible assets subject to amortization, when events and
circumstances warrants such a review. The carrying value of a
long-lived asset is considered impaired when the anticipated
undiscounted cash flow from such asset is separately identifiable
and is less than its carrying value. No impairment is considered to
be required as of December 31, 2016.
The
Company is an expanding company with a short operating history,
accordingly, the Company faces some potential events and
uncertainties encountered by companies in the earlier stages of
development and expansion, such as: (1) continuing market
acceptance for our product extensions and our services; (2)
changing competitive conditions, technological advances or customer
preferences that could harm sales of our products or services; (3)
maintaining effective control of our costs and expenses. If the
Company is not able to meet the challenge of building our
businesses and managing our growth, the likely result would be
slowed growth, lower margins, additional operational costs and
lower income, and a risk of impairment charge of intangibles in
future filings.
70
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
carrying amounts of other financial instruments, including cash,
accounts receivable, accounts payable and accrued liabilities,
income tax payable and related party payable approximate fair value
due to their short maturities.
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 based on quoted market prices 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.
71
Stock-Based Compensation
We
periodically use stock-based awards, consisting of shares of common
stock or stock options, to compensate officers, employees,
directors 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.
Revenue Recognition
The
Company utilizes the guidance set forth in the ASC 605, regarding
the recognition, presentation and disclosure of revenue in its
financial statements.
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
Income
taxes are accounted for using the asset and liability method as
prescribed by ASC 740 “Income Taxes”. 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.
While
we have optimistic plans for our business strategy, we determined
that a full valuation allowance was necessary against all net
deferred tax assets as of December 31, 2016 and 2015, given the
current and expected near term losses and the uncertainty with
respect to our ability to generate sufficient profits from our
business model.
Recent Accounting Pronouncements
Recent
accounting pronouncements that the Company has adopted or may be
required to adopt in the future are summarized below.
In
January 2017, the FASB issued Accounting Standards Update
(“ASU”) No. 2017-04, “Intangibles—Goodwill
and Other (Topic 350): Simplifying the Test for Goodwill
Impairment” (“ASU 2017-04”), which removes Step 2
from the goodwill impairment test. An entity will apply a one-step
quantitative test and record the amount of goodwill impairment as
the excess of a reporting unit's carrying amount over its fair
value, not to exceed the total amount of goodwill allocated to the
reporting unit. The new guidance does not amend the optional
qualitative assessment of goodwill impairment. A publicly reporting
company that is an SEC filer should adopt the amendments in this
ASU for its annual or any interim goodwill impairment test in
fiscal years beginning after December 15, 2019. Early adoption is
permitted for interim or annual goodwill impairment tests performed
on testing dates after January 1, 2017. We are currently evaluating
the impact of the adoption of ASU 2017-04 on our consolidated
financial statements.
In
November 2016, the FASB issued ASU No. 2016-18, “Statement of
Cash Flows (Topic 230): Restricted Cash” (“ASU
2016-18”), which requires that a statement of cash flows
explain the change during the period in the total of cash, cash
equivalents, and amounts generally described as restricted cash or
restricted cash equivalents. Therefore, amounts generally described
as restricted cash and restricted cash equivalents should be
included with cash and cash equivalents when reconciling the
beginning-of-period and end-of-period total amounts shown on the
statement of cash flows. The amendments in this ASU do not provide
a definition of restricted cash or restricted cash equivalents. The
amendments in this ASU are effective for public business entities
for fiscal years beginning after December 15, 2017, and interim
periods within those fiscal years. Early adoption is permitted,
including adoption in an interim period. We are currently
evaluating the impact of the adoption of ASU 2016-18 on our
consolidated financial statements.
72
In
August 2016, the FASB issued ASU No. 2016-15, “Statement of
Cash Flows (Topic 230): Classification of Certain Cash Receipts and
Cash Payments” (“ASU 2016-15”), which addresses
the following eight specific cash flow issues: debt prepayment or
debt extinguishment costs; settlement of zero-coupon debt
instruments or other debt instruments with coupon interest rates
that are insignificant in relation to the effective interest rate
of the borrowing; contingent consideration payments made after a
business combination; proceeds from the settlement of insurance
claims; proceeds from the settlement of corporate-owned life
insurance policies (including bank-owned life insurance policies;
distributions received from equity method investees; beneficial
interests in securitization transactions; and separately
identifiable cash flows and application of the predominance
principle. The amendments in this ASU are effective for public
business entities for fiscal years beginning after December 15,
2017, and interim periods within those fiscal years. Early adoption
is permitted, including adoption in an interim period. We are
currently evaluating the impact of the adoption of ASU 2016-15 on
our consolidated financial statements.
In
June 2016, the FASB issued ASU No. 2016-13, “Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments” (“ASU 2016-13”).
Financial Instruments—Credit Losses (Topic 326) amends
guideline on reporting credit losses for assets held at amortized
cost basis and available-for-sale debt securities. For assets held
at amortized cost basis, Topic 326 eliminates the probable initial
recognition threshold in current GAAP and, instead, requires an
entity to reflect its current estimate of all expected credit
losses. The allowance for credit losses is a valuation account that
is deducted from the amortized cost basis of the financial assets
to present the net amount expected to be collected. For
available-for-sale debt securities, credit losses should be
measured in a manner similar to current GAAP, however Topic 326
will require that credit losses be presented as an allowance rather
than as a write-down. ASU 2016-13 affects entities holding
financial assets and net investment in leases that are not
accounted for at fair value through net income. The amendments
affect loans, debt securities, trade receivables, net investments
in leases, off balance sheet credit exposures, reinsurance
receivables, and any other financial assets not excluded from the
scope that have the contractual right to receive cash. The
amendments in this ASU will be effective for fiscal years beginning
after December 15, 2019, including interim periods within those
fiscal years. We are currently evaluating the impact of the
adoption of ASU 2016-13 on our consolidated financial
statements.
In
April 2016, the FASB issued ASU No. 2016-09,
“Compensation—Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting”
(“ASU 2016-09”), which simplifies several aspects of
the accounting for employee share-based payment transactions. The
areas for simplification in ASU 2016-09 include the income tax
consequences, classification of awards as either equity or
liabilities, and classification on the statement of cash flows. The
amendments in this ASU will be effective for annual periods
beginning after December 15, 2016 and interim periods within those
annual periods. Early adoption is permitted. We are currently
evaluating the impact of the adoption of ASU 2016-09 on our
consolidated financial statements.
In
February 2016, the FASB issued ASU No. 2016-02, “Leases
(Topic 842)” (“ASU 2016-02”). The amendments in
this update create Topic 842, Leases, and supersede the leases
requirements in Topic 840, Leases. Topic 842 specifies the
accounting for leases. The objective of Topic 842 is to establish
the principles that lessees and lessors shall apply to report
useful information to users of financial statements about the
amount, timing, and uncertainty of cash flows arising from a lease.
The main difference between Topic 842 and Topic 840 is the
recognition of lease assets and lease liabilities for those leases
classified as operating leases under Topic 840. Topic 842 retains a
distinction between finance leases and operating leases. The
classification criteria for distinguishing between finance leases
and operating leases are substantially similar to the
classification criteria for distinguishing between capital leases
and operating leases in the previous leases guidance. The result of
retaining a distinction between finance leases and operating leases
is that under the lessee accounting model in Topic 842, the effect
of leases in the statement of comprehensive income and the
statement of cash flows is largely unchanged from previous GAAP.
The amendments in ASU 2016-02 are effective for fiscal years
beginning after December 15, 2018, including interim periods within
those fiscal years for public business entities. Early application
of the amendments in ASU 2016-02 is permitted. We are currently in
the process of evaluating the impact of the adoption of ASU 2016-02
on our consolidated financial statements.
73
In
January 2016, the FASB issued ASU No. 2016-01, “Financial
Instruments – Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities”
(“ASU 2016-01”). The amendments in this update require
all equity investments to be measured at fair value with changes in
the fair value recognized through net income (other than those
accounted for under equity method of accounting or those that
result in consolidation of the investee). The amendments in this
update also require an entity to present separately in other
comprehensive income the portion of the total change in the fair
value of a liability resulting from a change in the
instrument-specific credit risk when the entity has elected to
measure the liability at fair value in accordance with the fair
value option for financial instruments. In addition the amendments
in this update eliminate the requirement for to disclose the
method(s) and significant assumptions used to estimate the fair
value that is required to be disclosed for financial instruments
measured at amortized cost on the balance sheet for public
entities. For public business entities, the amendments in ASU
2016-01 are effective for fiscal years beginning after December 15,
2017, including interim periods within those fiscal years. Except
for the early application guidance discussed in ASU 2016-01, early
adoption of the amendments in this update is not permitted. We do
not expect the adoption of ASU 2016-01 to have a material impact on
our consolidated financial statements.
In
November 2015, the FASB issued ASU No. 2015-17, “Income Taxes
(Topic 740): Balance Sheet Classification of Deferred Taxes”
(“ASU 2015-17”). Topic 740, Income Taxes, requires an
entity to separate deferred income tax liabilities and assets into
current and noncurrent amounts in a classified statement of
financial position. Deferred tax liabilities and assets are
classified as current or noncurrent based on the classification of
the related asset or liability for financial reporting. Deferred
tax liabilities and assets that are not related to an asset or
liability for financial reporting are classified according to the
expected reversal date of the temporary difference. To simplify the
presentation of deferred income taxes, the amendments in ASU
2015-17 require that deferred income tax liabilities and assets be
classified as noncurrent in a classified statement of financial
position. For public business entities, the amendments in this
update are effective for financial statements issued for annual
periods beginning after December 15, 2016, and interim periods
within those annual periods. We do not expect the adoption of ASU
2015-17 to have a material impact on our consolidated financial
statements.
In
July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic
330): Simplifying the Measurement of Inventory” (“ASU
2015-11”). The amendments in this update require an entity to
measure inventory within the scope of ASU 2015-11 (the amendments
in ASU 2015-11 do not apply to inventory that is measured using
last-in, first-out or the retail inventory method. The amendments
apply to all other inventory, which includes inventory that is
measured using first-in, first-out or average cost) at the lower of
cost and net realizable value. Net realizable value is the
estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal, and
transportation. Subsequent measurement is uncharged for inventory
measured using last-in, first-out or the retail inventory method.
The amendments in ASU 2015-11 more closely align the measurement of
inventory in U.S. GAAP with the measurement of inventory in
International Financial Reporting Standards (“IFRS”).
ASU 2015-11 is effective for public business entities for fiscal
years beginning after December 15, 2016, including interim periods
within those fiscal years. The amendments in ASU 2015-11 should be
applied prospectively with earlier application permitted as of the
beginning of an interim or annual reporting period. We do not
expect the adoption of ASU No. 2015-11 to have a material impact on
our consolidated financial statements.
In
May 2014, the FASB issued ASU No. 2014-09, “Revenue from
Contracts with Customers (Topic 606)” (“ASU
2014-09”). ASU 2014-09 supersedes the revenue recognition
requirements in “Revenue Recognition (Topic 605)”, and
requires entities to recognize revenue when it transfers promised
goods or services to customers in an amount that reflects the
consideration to which the entity expects to be entitled to in
exchange for those goods or services. The FASB issued ASU No.
2015-14, “Revenue from Contracts with Customers (Topic 606):
Deferral of the Effective Date” (“ASU 2015-14”)
in August 2015. The amendments in ASU 2015-14 defer the effective
date of ASU 2014-09. Public business entities, certain
not-for-profit entities, and certain employee benefit plans should
apply the guidance in ASU 2014-09 to annual reporting periods
beginning after December 15, 2017, including interim reporting
periods within that reporting period. Earlier adoption is permitted
only as of annual reporting periods beginning after December 15,
2016, including interim reporting periods within that reporting
period. Further to ASU 2014-09 and ASU 2015-14, the FASB issued ASU
No. 2016-08, “Revenue from Contracts with Customers (Topic
606): Principal versus Agent Considerations (Reporting Revenue
Gross versus Net)” (“ASU 2016-08”) in March 2016,
ASU No. 2016-10, “Revenue from Contracts with Customers
(Topic 606): Identifying Performance Obligations and
Licensing” (“ASU 2016-10”) in April 2016, ASU No.
2016-12, “Revenue from Contracts with Customers (Topic 606):
Narrow-Scope Improvements and Practical Expedients”
(“ASU 2016-12”), and ASU No. 2016-20, “Technical
Corrections and Improvements to Topic 606, Revenue from Contracts
with Customers” (“ASU 2016-20”), respectively.
The amendments in ASU 2016-08 clarify the implementation guidance
on principal versus agent considerations, including indicators to
assist an entity in determining whether it controls a specified
good or service before it is transferred to the customers. ASU
2016-10 clarifies guideline related to identifying performance
obligations and licensing implementation guidance contained in the
new revenue recognition standard. The updates in ASU 2016-10
include targeted improvements based on input the FASB received from
the Transition Resource Group for Revenue Recognition and other
stakeholders. It seeks to proactively address areas in which
diversity in practice potentially could arise, as well as to reduce
the cost and complexity of applying certain aspects of the guidance
both at implementation and on an ongoing basis. ASU 2016-12
addresses narrow-scope improvements to the guidance on
collectability, non-cash consideration, and completed contracts at
transition. Additionally, the amendments in this ASU provide a
practical expedient for contract modifications at transition and an
accounting policy election related to the presentation of sales
taxes and other similar taxes collected from customers. The
amendments in ASU 2016-20 represents changes to make minor
corrections or minor improvements to the Codification that are not
expected to have a significant effect on current accounting
practice or create a significant administrative cost to most
entities. The effective date and transition requirements for ASU
2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 are the same as
ASU 2014-09. We are currently in the process of evaluating the
impact of the adoption of ASU 2014-09, ASU 2016-08, ASU 2016-10,
ASU 2016-12 and ASU 2016-20 on our consolidated financial
statements.
74
Comparison of Year Ended December 31, 2016 to Years Ended December
31, 2015 and 2014
Although
the descriptions in the results of operations below reflect our
operating results as set forth in our Consolidated Statement of
Operations filed herewith, we are presenting consolidated pro forma
information below to reflect the impacts of the business
combination as if the transaction had occurred at the beginning of
the earliest period presented.
|
|
Year Ended December 31,
2016
|
Year Ended December 31,
2015
|
Year Ended
December 31,
2014
|
||
|
|
|
|
|
Agreen
|
|
|
|
CBMG
As stated
|
CBMG
As stated
|
CBMG
As stated
|
Pro forma
Adjustment
|
Pro forma
Consolidated
|
|
Net sales and revenue
|
$627,930
|
$2,505,423
|
$564,377
|
$1,198,414
|
$1,762,791
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
Cost of sales *
|
860,417
|
1,880,331
|
242,215
|
880,797
|
1,123,012
|
|
General and administrative *
|
11,670,506
|
13,068,255
|
7,875,413
|
245,911
|
8,121,324
|
|
Selling and marketing *
|
425,040
|
709,151
|
314,894
|
6,351
|
321,245
|
|
Research and development *
|
11,475,587
|
7,573,228
|
3,146,499
|
113,635
|
3,260,134
|
|
Impairment of investments
|
4,611,714
|
123,428
|
1,427,840
|
-
|
1,427,840
|
|
Total
operating expenses
|
29,043,264
|
23,354,393
|
13,006,861
|
1,246,694
|
14,253,555
|
|
Operating loss
|
(28,415,334)
|
(20,848,970)
|
(12,442,484)
|
(48,280)
|
(12,490,764)
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
|
|
|
|
Interest income
|
78,943
|
42,220
|
15,043
|
318
|
15,361
|
|
Other income (expense)
|
132,108
|
630,428
|
71,982
|
(147)
|
71,835
|
|
Total other
income (expense)
|
211,051
|
672,648
|
87,025
|
171
|
87,196
|
|
Loss from continuing operations before
taxes
|
(28,204,283)
|
(20,176,322)
|
(12,355,459)
|
(48,109)
|
(12,403,568)
|
|
|
|
|
|
|
|
|
Income taxes credit
(provision)
|
(4,093)
|
728,601
|
-
|
-
|
-
|
|
Loss from Continuing operations
|
(28,208,376)
|
(19,447,721)
|
(12,355,459)
|
(48,109)
|
(12,403,568)
|
|
|
|
|
|
|
|
|
Loss on discontinued operations, net of
taxes
|
-
|
-
|
(3,119,152)
|
-
|
(3,119,152)
|
|
|
|
|
|
|
|
|
Net loss
|
$(28,208,376)
|
$(19,447,721)
|
$(15,474,611)
|
$(48,109)
|
$(15,522,720)
|
|
Other comprehensive income (loss):
|
|
|
|
|
|
|
Cumulative translation adjustment
|
(743,271)
|
(307,950)
|
15,254
|
963
|
16,217
|
|
Unrealized gain (loss) on
investments, net of tax
|
5,300,633
|
(1,376,540)
|
1,611,045
|
-
|
1,611,045
|
|
Reclassification
adjustments, net of tax, in connection with other-than-temporary
impairment of investments
|
(5,557,939)
|
-
|
-
|
-
|
-
|
|
Total other comprehensive income
(loss):
|
(1,000,577)
|
(1,684,490)
|
1,626,299
|
963
|
1,627,262
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
$(29,208,953)
|
$(21,132,211)
|
$(13,848,312)
|
$(47,146)
|
$(13,895,458)
|
|
|
|
|
|
|
|
|
Loss per share for continuing
operations:
|
|
|
|
|
|
|
Basic
|
$(2.09)
|
$(1.70)
|
$(1.43)
|
$(0.09)
|
$(1.35)
|
|
Diluted
|
$(2.09)
|
$(1.70)
|
$(1.43)
|
$(0.09)
|
$(1.35)
|
|
|
|
|
|
|
|
|
Loss per share for discontinued
operations:
|
|
|
|
|
|
|
Basic
|
$-
|
$-
|
$(0.36)
|
$-
|
$(0.34)
|
|
Diluted
|
$-
|
$-
|
$(0.36)
|
$-
|
$(0.34)
|
|
|
|
|
|
|
|
|
Net loss per share:
|
|
|
|
|
|
|
Basic
|
$(2.09)
|
$(1.70)
|
$(1.79)
|
$(0.09)
|
$(1.69)
|
|
Diluted
|
$(2.09)
|
$(1.70)
|
$(1.79)
|
$(0.09)
|
$(1.69)
|
|
|
|
|
|
|
|
|
Weighted average common shares
outstanding:
|
|
|
|
|
|
|
Basic
|
13,507,408 | ||||