Attached files
UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
———————
FORM 10-K
———————
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2019
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
———————
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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1345 Avenue of Americas, 15th Floor
New York, New York 10105
(Address of principal executive offices)
(347) 905 5663
(Registrant’s telephone number)
Securities registered pursuant to Section 12(b) of the Exchange
Act:
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Title of Each Class
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Trading Symbol(s)
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Name of Each Exchange on Which Registered
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Common
Stock, par value $0.001
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CBMG
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Nasdaq
Global Select Market
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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. ☑
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. ☑
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 ☑
Indicate
by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted 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 such
files). Yes ☑
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, a smaller reporting
company, or an emerging growth company. See definitions of
“large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.:
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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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Emerging
growth company
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☐
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If an
emerging growth company, indicate by check mark if the registrant
has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). ☑ 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
– $200,634,545 as of June 30, 2019.
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 24, 2020, there were 19,355,292 shares of common stock
outstanding.
Documents
Incorporated By Reference – Portions of the
Registrant’s definitive Proxy Statement for its 2020 Annual
Meeting of Stockholders are incorporated by reference into Part III
of this Form 10-K.
THE
INFORMATION REQUIRED BY PART III OF THIS ANNUAL REPORT ON FORM
10-K, TO THE EXTENT NOT SET FORTH HEREIN, IS INCORPORATED BY
REFERENCE FROM THE REGISTRANT’S DEFINITIVE PROXY STATEMENT
RELATING TO THE ANNUAL MEETING OF STOCKHOLDERS, WHICH DEFINITIVE
PROXY STATEMENT SHALL BE FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION WITHIN 120 DAYS AFTER THE END OF THE FISCAL YEAR TO
WHICH THIS ANNUAL REPORT ON FORM 10-K RELATES.
CELLULAR BIOMEDICINE GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED December 31, 2019
TABLE OF CONTENTS
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PART
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2
Cautionary Note Regarding Forward-Looking Statements and Risk
Factors
This Annual Report on Form 10-K (“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 and the Private Securities Litigation Reform Act
of 1995, 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 includes 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:
●
the success, cost
and timing of our product development activities and clinical
trials;
●
our ability and the
potential to successfully advance our technology platform to
improve the safety and effectiveness of our existing product
candidates;
●
the potential for
our identified research priorities to advance our cancer and
degenerative disease technologies;
●
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;
●
public health
crises, such as the coronavirus outbreak at the beginning of
2020;
●
the ability to
generate or license additional intellectual property relating to
our product candidates;
●
regulatory
developments in China, the United States and other foreign
countries;
●
the potential of
the technologies we are developing (each as defined
below);
●
fluctuations in the
exchange rate between the U.S. dollar and the Chinese Yuan;
and
●
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.
Note Regarding Third-Party Information
This Annual Report includes data that we obtained from industry
publications and third-party research, surveys and studies.
Industry publications and third-party research, surveys and studies
generally indicate that their information has been obtained from
sources believed to be reliable, although they do not guarantee the
accuracy or completeness of such information. This Annual Report
also includes data based on our own internal estimates and
research. Our internal estimates and research have not been
verified by any independent source, and, while we believe the
industry publications and third-party research, surveys and studies
are reliable, we have not independently verified such data. Such
third-party data and our internal estimates and research are
necessarily subject to a high degree of uncertainty and risk due to
a variety of factors, including those described in Item
1A—Risk Factors in this Annual Report. These and other
factors could cause results to differ materially from those
expressed in this Annual Report.
3
PART I
ITEM 1. BUSINESS.
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
We
are a clinical-stage biopharmaceutical company committed to using
our proprietary cell-based technologies to develop immunotherapies
for the treatment of cancer and stem cell therapies for the
treatment of degenerative diseases. We view ourselves as a leader
in cell therapy industry through our diverse, multi-target, broad
pipeline ranging from immuno-oncology, featuring CAR-T, TCR-T and
TIL to regenerative medicine. Our focus is to bring our potentially
best-in-class products to market while also aiming to reduce
manufacturing cycle time and aggregate cost while striving to
ensure quality products of cell therapies. We provide comprehensive
and integrated research and manufacturing services throughout the
discovery, development and manufacturing spectrum for cell-based
technologies. We have two major components to our global strategy.
First, we intend on developing our own internal pipeline, focusing
on immune cell therapy, regenerative medicine, as well as other
innovative biotechnology modalities that can leverage our
infrastructure, human capital and intellectual property. Second, we
plan to partner with leading companies to monetize our innovative
technologies in markets where we do not currently have a presence
and may also seek to bring their technologies to markets where we
have infrastructure.
Our
end-to-end platform enables discovery, development and
manufacturing of cell-based therapies from concept to commercial
manufacturing in a cost-efficient manner. The manufacturing and
delivery of T cell therapies involve complex, integrated processes,
comprised of isolating T-cells from patients, T cell enrichment,
activation, viral vector transduction, expansion, harvest and
fill-finish. Our in-house cell therapy manufacturing is comprised
of a semi-automated, fully closed system and can manufacture high
quality plasmids, and serum-free reagents as well as viral vectors
for our immuno-oncology cell therapy products. Because we are
vertically integrated, we are able to reduce the aggregate cost of
cell therapies. We plan to build out our manufacturing capacity to
scale for commercial supply at an economical cost. We hone our
manufacturing process in our good manufacturing practice (GMP)
facilities in China to achieve cycle time reduction, improve
quality assurance and control and increase efficiency and early
development to understand our therapies’ efficacy. Our other
objective on institutionalizing our manufacturing process is
portability and ease of tech transfer to other facilities and ease
of deployment in future locations.
Our
technologies include two major cell platforms:
A. Immune
cell therapy for treatment of a broad range of cancer
indications.
a. Hematological
Cancer
i.
Chimeric Antigen Receptor modified T-cells (CAR-T);
and
b.
Solid Tumors
i.
T-cells with genetically modified, tumor antigen-specific T-Cell
Receptors (TCRs); and
ii.
Next-generation neoantigen-reactive, bio-markers based Tumor
Infiltrating lymphocytes (TILs).
B. Regenerative
Medicines using human adipose-derived mesenchymal progenitor cells
(haMPC) for treatment of joint diseases.
a. Knee
Osteoarthritis (Autologous & Allogeneic); and
b. Other
degenerative and dermatologic diseases (assessing the
feasibility).
4
Our
initial target market is China, where we believe that our
cell-based therapies will be able to help patients with significant
unmet medical needs. For hematological cancer we have:
●
Finished
enrolling patients for the second cohort in a Phase I dose
escalation clinical study for our anti-B cell maturation
antigen(“anti-BCMA”) CAR-T therapy for the treatment of
multiple myeloma in China. Currently we are enrolling patients for
the third cohort in China. The Phase Ia clinical study will enroll
22 patients in several stratified cohorts and has been expanded
into multiple clinical sites. We have submitted our Investigational
New Drug (IND) dossier to the New Medical Products Administration
(NMPA) for approval for the Phase Ib study and are waiting for
feedback.
●
Initiated
first-in-human non-Hodgkin lymphoma clinical trials in China for
our CD19 and CD20 bi-specific CAR-T products.
●
Achieved
the first-in-human milestone and continued patient recruitment in
China for our Phase I investigator initiated clinical trial of
anti-CD20 CAR-T targeting anti-CD19 antibody or CAR-T treated,
relapsed diffuse large B-cell lymphoma (DLBCL) and small B-cell
lymphoma patients.
For
solid tumors:
●
The clinical trial of Alpha-fetoprotein
T-cell receptor (AFP-TCR-T) targeting hepatocellular carcinoma (HCC) has been
approved by Zhongshan Hospital in Shanghai and our first HCC
patient has been infused with our AFP TCR-T-cells in December 2019;
and
●
We
plan to launch non-small cell lung cancer (NSCLC) TIL clinical
trials in the U.S. in the first half of 2021.
If the data from certain of our China-based,
immuno-oncology clinical trials proves to be positive, we intend to
submit IND applications with the U.S. FDA in order to conduct clinical trials in the
United States.
On regenerative medicine development we have been
approved by the NMPA in China to initiate a Phase II clinical trial
of AlloJoin®,
our allogenic haMPC therapy for the treatment of knee
osteoarthritis, which is the first stem cell drug application
approved by the NMPA for a Phase II clinical trial in knee
osteoarthritis since the NMPA clarified its cell therapy
regulations in December 2017. We launched our Phase II AlloJoin®
clinical trial on September 12, 2019. Using data from our Phase IIb
clinical studies before the NMPA clarified its cell therapy
regulations, we have submitted our IND application with the NMPA
for our autologous knee osteoarthritis. We have also been approved
by the NMPA in China to initiate a Phase II clinical trial of
ReJoin®,
our autologous haMPC therapy for the treatment of knee
osteoarthritis.
In
addition to our own internal clinical pipelines, we have formed and
plan to continue to seek partnerships with other cell therapy
focused companies to expand their technology in the Chinese market.
Our comprehensive capabilities have attracted inbound inquiries
from global pharmaceutical companies seeking to improve the
efficiency of their drug development process and/or to co-develop
their therapeutic products by initially conducting investigator
initiated trials in China, and upon verification on
proof-of-concept (POC) to launch clinical trials in the U.S. and in
China. We believe that we are positioned to capture opportunities
from the rapid expansion of global pharmaceutical companies by
leveraging our focus on cell manufacturing process improvement,
which offers the benefits of improving product quality and creates
cost savings. Positioned at the forefront of science, we believe
our established clinical network in China will enable us to
collaborate with these global firms as they seek to enter the
Chinese market to develop in-house capabilities and infrastructure
and to improve efficiency throughout the drug development
process.
In September 2018, we executed a License and
Collaboration Agreement (hereinafter Novartis LCA) with Novartis AG
(Novartis) to manufacture and supply their U.S. FDA-approved CD19 CAR-T cell therapy product
Kymriah®
in China. Pursuant to the Novartis LCA
agreement, we also granted Novartis a worldwide license to certain
of our CAR-T intellectual property for the development, manufacture
and commercialization of CAR-T products. We are entitled to an
escalating single-digit percentage royalty of
Kymriah®’s
net sales in China. CBMG is responsible for the cost of
bi-directional technology transfers between the two companies. We
will receive collaboration payments equal to a single-digit
escalating percentage of net sales of Kymriah®
in China, subject to certain caps set
forth under the Novartis LCA, for sales in diffuse large B-cell
lymphoma and pediatric acute lymphoblastic leukemia indications and
up to a maximum amount to be agreed upon for sales in other
indications. We are also obligated to assist Novartis with the
development of Kymriah®
in China as Novartis may request and
are responsible for a certain percentage of the total development
cost for the development of Kymriah®
in China for indications other than
diffuse large B-cell lymphoma and pediatric acute lymphoblastic
leukemia indications. As of December 31, 2019, we have achieved
three major milestones on the technology transfer and collaboration
with Novartis on commercialization of Kymriah®,
specifically: process and analytical training, feasibility runs and
an export license for
feasibility/comparability.
On October 2, 2018, we executed a non-exclusive
license agreement with the U.S. National Cancer Institute
(“NCI”) for ten
tumor infiltrating lymphocytes patents, pursuant to which we
acquired rights to the worldwide development, manufacture and
commercialization of autologous, tumor-reactive lymphocyte adoptive
cell therapy products, isolated from tumor infiltrating lymphocytes
for the treatment of non-small cell lung, stomach, esophagus,
colorectal and head and neck cancer(s) in humans. We agreed to pay
certain license fees for such license, including (i) an initial
up-front cash payment; (ii) a de minimis non-refundable annual
royalty that may be credited against any earned royalties due from
net sales; (iii) a small single-digit percentage of net sales of
the licensed products, payable on a semi-annual basis, which may be
adjusted downward in the event that the Company must pay a license
fee to a third party; (iv) an additional small single-digit
sublicense fee on the fair market value of any consideration
received for granting a sublicense; and (v) a milestone payment
component tied to certain clinical and commercial developments. We
have a unilateral right to terminate the license agreement.
Th
e NCI has the right
to terminate the license agreement if CBMG (i) commits a material
breach; (ii) fails to use commercially reasonable effort in
developing the licensed products or processes; (iii) fails to
achieve certain performance benchmarks; (iv) willfully makes a
false statement; (v) is not keeping licensed products or processes
reasonably available to the public after commercial use; (vi)
cannot reasonably satisfy unmet health and safety needs; or (vii)
cannot meet certain requirements by federal regulations. The
license agreement will expire upon the expiration of the last to
expire of the patent rights licensed pursuant thereto. Other than
an initial upfront payment and a de minimis annual royalty payment,
the Company has not paid any additional royalty under the license
agreement as of December 31, 2019.
5
In
order to expedite fulfillment of patient treatment, we have been
actively developing technologies and products with strong
intellectual property protection. CBMG’s worldwide exclusive
license to the T Cell patent rights owned by Augusta University
provides an opportunity to expand the application of CBMG’s
cancer therapy-enabling technologies and to initiate clinical
trials with leading cancer hospitals. On February 14, 2019, Augusta
University granted us an exclusive, worldwide license with
sublicense rights to its patent rights to Human Alpha
Fetoprotein-Specific T Cell Receptor modified T-cells (AFP TCR-T).
In consideration for the license granted, the Company agreed to pay
the university a one-time, non-refundable, non-creditable license
fee within 30 days of execution of the license agreement and a
single-digit percent of running royalty on net sales of the
licensed products. The Company also agreed to (a) use its
commercially reasonable efforts to develop and conduct such
research, development and validation studies as necessary or
desirable to obtain all regulatory approvals to manufacture and
market the licensed products in at least one country in certain
major markets listed in the license agreement, and (b) upon receipt
of such approvals, to use commercially reasonable efforts to market
each licensed product in such country. The Company, at its sole
expense, has the obligation to fund the costs of all research,
development, preclinical and clinical trials, regulatory approval
and commercialization of the licensed products. The license
agreement will expire upon the termination of the Company’s
obligation to pay royalty pursuant to the terms thereof. Upon
expiration of the term, the license granted the Company will
survive the expiration of the license agreement, and convert to a
perpetual, fully paid up license. The Company may terminate the
agreement, in its sole discretion, upon 30 days’ prior
written notice to Augusta University and either party may terminate
the license agreement upon or after the breach of a material
provision of the agreement that is not cured within 45 days after
notice thereof by the non-breaching party. The Company has not paid
any royalty since there have not been any sales of licensed
products as of the date of this report.
Corporate History
Headquartered
in New York, the Company is a Delaware biopharmaceutical company
focused on developing treatment for cancer and joint diseases for
patients in China. The Company was formerly known as EastBridge
Investment Group Corporation, originally incorporated in the State
of Arizona on June 25, 2011, and reincorporated as Cellular
Biomedicine Group, Inc. in the State of Delaware on January 18,
2013. The Company started its regenerative medicine business in
China in 2009 and expanded to CAR-T therapies in 2014.
Recent Developments
On
January 8, 2019, we initiated patient recruitment for CAR088
(anti-BCMA CAR-T) in China.
On
January 17, 2019, our AlloJoin® Therapy for KOA
got approved for Phase II trial in China.
On June
17, 2019, we initiated a Phase I clinical trial of CAR066
(anti-CD20 CAR-T) targeting previously anti-CD19 CAR-T treated,
relapsed diffuse large B-cell lymphoma (DLBCL) and small B-cell
lymphoma patients in China, and dosed the first CD19 CAR-T relapsed
DLBCL patient.
On July
4, 2019, we submitted our autologous haMPC (ReJoin®) KOA Phase II
IND filing with the NMPA under the new regulation.
On July
4, 2019, CD20-CD19 bi-specific CAR-Ts showed
desired in vitro and in vivo anti-tumor
activity. We plan to introduce an improved CAR-T manufacturing
process with reduced manufacturing duration and better product
quality controls for the bi-specific CD20-CD19 CAR-Ts targeting
NHL, and the same development strategy is also utilized for our
BCMA manufacturing platform. Based on scientific evidence known to
the public, CD20-CD19 bi-specific CAR-Ts have
shown reactivity against both single positive (CD20+ or CD19+)
and double positive (CD20+CD19+) tumor targets.
On July
5, 2019, we filed a shelf registration statement on Form S-3 to
offer and sell from time to time, in one or more series, any of the
securities of the Company, for total gross proceeds up to
$200,000,000, which was declared effective by the Securities and
Exchange Commission on July 16, 2019.
On
August 27, 2019, we entered into a Facility Improvement and Process
Validation Agreement with Duke University. Pursuant to this
agreement, the Company paid for improvement of Duke’s GMP
facility, Duke University agreed to conduct and the Company agreed
to fund a tumor infiltrating lymphocytes clinical
trial.
On
September 12, 2019, we launched our allogenic haMPC
AlloJoin® KOA Phase II
clinical trial.
As of
September 30, 2019, CBMG had a total of 11 labs (suites) that were
certified as Biosafety Level-2 (BSL-2) meeting the local regulatory
requirements for the handling of biological materials.
On
October 2, 2019, we entered into a lease agreement to build a
22,000 square foot facility in Rockville, Maryland to expand
R&D and to support clinical development in the
U.S.
6
On
December 7, 2019 we announced early data from our ongoing
investigator initiated trial at an oral presentation titled
“Novel Anti-BCMA CAR-T for Relapsed or Refractory Multiple
Myeloma” at the 61st American Society of Hematology
“ASH” annual meeting in Orlando, FL.
On
December 23, 2019, we dosed our first
patient in our clinical trial of AFP-TCR-T
targeting HCC.
In the
next 12 months, we aim to accomplish the
following:
●
Bifurcate our
markets and launch clinical studies in the U.S. upon establishing
good POC from the clinical studies in China and transfer the
clinical assets from Shanghai to the U.S., including our quick
cycle-time, highly differentiated, proprietary manufacturing
process comprised of short cycle-time, semi-automation and closed
system;
●
Advance our
Rockville site’s research and development and manufacturing
to support our clinical development in the U.S.;
●
Assess the
feasibility of expanding our stem cell platform to include
dermatology;
●
Execute clinical
trial sponsorship with U.S.-based Principal Investigators (PI) to
develop our clinical assets in the U.S.;
●
Collaborate with
Duke University on TIL process development to improve cycle time
and institutionalized scalability;
●
Explore the
feasibility of establishing a new R&D and clinical
manufacturing site in China to adapt to our rapid business
expansion and explore the addition of Contract Development and
Manufacturing Organization (CDMO) business to support certain
specific market-oriented business strategies;
●
Evaluate our
strategy to further increase our enterprise value and expand our
capital market strategy;
●
Execute the
technology transfer and align the manufacturing processes with the
global CAR-T leader to support the development of the world’s
first CAR-T therapy in China;
●
Explore and
introduce a gene therapy technology platform, product development
and manufacturing for our current business to create synergy with
our cell therapy pipelines;
●
Bolster R&D
resources to fortify our intellectual property portfolio and
scientific development;
7
●
Evaluate and
implement a digital data tracking and storage technology system for
research and development, material management, GMP production and
integrated clinical data management;
●
Evaluate emerging
regenerative medicine technology platform for other indications and
review recent developments in the competitive
landscape;
●
Strengthen our
Quality Management System (QMS) centralized document control system
and electronic batch recording system for quality assurance, and
laboratory information management system (LMS) for quality
control;
●
Leverage our QMS
system and our strong scientific expertise in both the U.S. and
China;
●
Collaborate with
multinational pharmaceutical companies to co-develop cell therapy
products in China and possibly in the U.S.; and
●
Continue to
implement International Organization for Standardization (ISO)
27001 standard to fortify our information assets
security.
Key Anticipated 2020 Milestones
R&D
Milestones
●
Completing
construction of the Rockville R&D site to support our continued
effort for pipeline development
●
Continued effort to
support IIT and IND in China, and US IND for key CBMG clinical
assets
●
Continuing to
build a dynamic clinical pipeline for cell therapy, including new
assets for CAR-T and TCR-T, and allogeneic cell therapy
products
Manufacturing
Milestones
●
Completing
construction of the Rockville manufacturing site to support our
clinical development in the U.S.
●
Continuing to
assess the feasibility of expanding manufacturing capacity at new
site(s) in both the U.S. and China
Clinical
Milestones
●
Advancing haMPC
Phase II trials in China for both AlloJoin® and
ReJoin®
●
Continue enrollment
into I/O programs in China for CAR088, CAR188, CAR066, EXPO-039 and
AFP TCR-T
●
Advancing I/O
programs in the U.S. for TIL Therapy (TIL1)
Regulatory
Milestones
●
Filing an IND in
the U.S. for TIL Therapy CAR088 and EXPO-039
●
Seeking additional
INDs for other clinical programs in China
●
Expand clinical
research programs in the U.S.
Other
Milestones
●
Continuing
collaboration with current and new clinical sites and 3A hospitals
in China
●
Continuing
translation and clinical collaboration with Duke University on TIL
Therapy
●
Continuing
collaboration with current partners in manufacturing and process
development for next-generation cell therapies
●
Evaluating
co-development and/or strategic partnerships for both in-licensing
and out-licensing with high quality, multinational
partners
8
Our
operating expenses for year ended December 31, 2019 were in line
with management’s plans and expectations. We had an increase
in total operating expenses of approximately $10.6 million for the
year ended December 31, 2019, as compared to the year ended
December 31, 2018, which is primarily attributable to increased
R&D expenses and clinical developments in 2019.
9
Corporate Structure
Our
current corporate structure is illustrated in the following
diagram:
Currently we have
the following subsidiaries (including a controlled VIE
entity):
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.
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)
(“CBMG 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 Chinese translates to “Xi Biman Biological
Technology (Wuxi) Co. Ltd.” The 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
the WFOE, including research and development, technical support,
technical service, technology transfer in the biomedical technology
field, manufacturing of non-food, pharmaceutical polypeptides and
medical devices (in vitro diagnostic reagents) extracted by
biology; making
foreign investments with its own funds; and cosmetics, sanitary
products and biological agents wholesale and commission
agents.
Cellular Biomedicine Group Ltd.
(Shanghai) license number 310104000501869, is a PRC domestic
corporation, which we control and hold ownership rights in, through
the WFOE and the above-mentioned VIE agreements. This
entity’s legal name in Chinese 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. Chen Mingzhe
and Lu Junfeng, together, are the record holders of all of the
outstanding registered capital of CBMG Shanghai. Chen and Lu are
also directors of CBMG Shanghai constituting the entire management
of the same.
Beijing Agreen Biotechnology Co., Ltd.
is a PRC domestic corporation and wholly owned subsidiary of CBMG
Shanghai.
Wuxi Cellular Biopharmaceutical Group
Ltd., established on January 17, 2017, is a PRC domestic
corporation and wholly owned subsidiary of CBMG Shanghai.
Shanghai Cellular Biopharmaceutical Group
Ltd., established on January 18, 2017, is a PRC domestic
corporation and wholly owned subsidiary of CBMG
Shanghai.
10
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 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 Chen and 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.
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 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 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 attending
the shareholders’ 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 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; and (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; and (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 that Chen and Lu, as record
holders of the VIE’s registered capital, have no interest in
acting contrary to the VIE agreements. However, if 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.
For
further discussion of risks associated with the above, please see
Item 1A – Risk Factors under the subheading “Risks
Related to Our Structure.”
11
BIOPHARMACEUTICAL BUSINESS
The biopharmaceutical business was founded in 2009
by a team of seasoned Chinese-American executives, scientists and
doctors. In 2010, we established a facility designed and built to
comply with China’s GMP standards in Wuxi, China, and in
2012, we established a U.S. FDA
compliant manufacturing facility in Shanghai. In November 2017, we
opened our Zhangjiang facility in Shanghai, of which 40,000 square
feet, or 35% of the total facility, was designed and built to GMP
standards and dedicated to advanced cell manufacturing. Our focus
has been to serve the rapidly growing health care market initially
in China by marketing and commercializing immune cell and stem cell
therapeutics, related tools and products from our patent-protected
homegrown and acquired cell technology, as well as by utilizing
in-licensed and other acquired intellectual properties before
shifting our attention to serve the mature and highly competitive
health care market in the U.S. We continue to explore new
products and gene therapies that may require the investment of a
material amount of assets.
Our
current treatment focal points are cancer and KOA.
Cancer. We are focusing our clinical development
efforts on B-cell maturation antigen (BCMA)-specific, and CD20
CAR-T therapies, T-cells with genetically engineered T-cell
receptor (TCR-Ts) and tumor infiltrating lymphocytes (TILs)
technologies. As discussed above in Item 1 – Business, under
the subheading “Overview,” we entered into the Novartis
LCA in September of 2018. With the execution of the Novartis LCA,
we have prioritized our efforts on working with Novartis to bring
Kymriah®
to patients in China as soon as
practicable. In light of our collaboration with Novartis, we will
no longer pursue our own ALL and DLBCL biologics license
application submission with the NMPA.
On the research and development side, we seek to bring our CD22
CAR-T, CD20 CAR-T for CD19 CAR-T Relapsing NHL, CD19-CD20
bispecific CAR-T product, BCMA CAR-T for Multiple Myeloma (MM),
NKG2D CAR-T for acute myeloid leukemia (AML), AFP TCR-T for HCC and
neoantigen reactive TIL on solid tumors, respectively, in
first-in-human trial as soon as possible. We plan to continue
leveraging our cutting-edge Chemistry, Manufacturing and Control
(CMC) platform, as well as our Quality Management System and our
strong scientific expertise in the U.S and in China, to collaborate
with multinational pharmaceutical companies to co-develop cell
therapies in China.
KOA. In 2013, we completed a Phase I/IIa clinical
study, in China, for our 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. Since 2013, we have continued
clinical studies on ReJoin® and
our trial data has demonstrated positive results on the performance
of ReJoin®.
Our ReJoin® human
adipose-derived mesenchymal progenitor cell (haMPC) therapy for KOA
is an interventional therapy using our proprietary process, culture
and medium.
Our
process is distinguishable from sole Stromal Vascular Fraction
(SVF) therapy. The immunophenotype of our haMPCs exhibited a
homogenous population expressing multiple biomarkers such as CD73+,
CD90+, CD105+, HLA-DR-, 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.
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 three-month safety data from
the Allogenic KOA Phase I Trial in China. The interim analysis of
the trial has demonstrated a preliminary safety and tolerability
profile of AlloJoin® in
the three doses tested, and no serious adverse events (SAE) have
been observed. On March 16, 2018, we announced a positive 48-week
AlloJoin® Phase
I data in China, which demonstrated good safety and early efficacy
for the slowing of cartilage deterioration. China finalized its
cell therapy regulatory pathway in December 2017. Our
AlloJoin®
IND application to conduct a Phase II
clinical trial with the NMPA was been approved in January 2019 and
we launched our Phase II AlloJoin®
clinical trial on September 12, 2019. On September 27, 2019, we received the
ReJoin®
therapy application acceptance for
Phase II clinical trials by the NMPA.
We
established adult adipose-derived progenitor cell and
immuno-oncology cellular therapy platforms in treating specific
medical conditions and diseases. Our Quality Management Systems
(QMS) have been assessed and certified to meet the requirements of
ISO 9001: 2015, and a quality manual based on GMP guidelines has
been finalized. The facilities, utilities and equipment in both
Zhangjiang and Wuxi Sites have been calibrated and/or qualified and
in compliance with requirements of local health authorities. We
installed an Enterprise Quality Management System (EQMS) in April
2019 to facilitate the quality activities. A document management
system and Laboratory Information Management System (LIMS) will be
installed and qualified in early 2020.
Our
proprietary manufacturing processes and procedures include (i)
banking of allogenic cellular product and intermediate product;
(ii) manufacturing process of GMP-grade viral vectors; (iii)
manufacturing process of GMP-grade cellular product; and (iv)
analytical testing to ensure the safety, identity, purity and
potency of cellular products.
Recent Developments in Adoptive Immune Cell Therapy
(ACT)
The
immune system plays an essential role in cancer development and
growth. In the past decade, immune checkpoint blockade has
demonstrated a major breakthrough in cancer treatment and has
currently been approved for the treatment of multiple tumor types.
Adoptive immune cell therapy (ACT) with tumor-infiltrating
lymphocytes (TIL) or gene-modified T-cells expressing novel T cell
receptors (TCR) or chimeric antigen receptors (CAR) is another
strategy to modify the immune system to recognize tumor cells and
thus carry out an anti-tumor effector function.
The
TILs consist of tumor-resident T-cells which are isolated and
expanded ex vivo after surgical resection of the tumor. Thereafter,
the TILs are further expanded in a rapid expansion protocol (REP).
Before intravenous adoptive transfer into the patient, the patient
is treated with a lymphodepleting conditioning regimen. TCR gene
therapy and CAR gene therapy are ACT with genetically modified
peripheral blood T-cells. For both treatment modalities, peripheral
blood T-cells are isolated via leukapheresis. These T-cells are
then transduced by viral vectors to either express a specific TCR
or CAR. These treatments have shown promising results in various
tumor types.
12
CAR-Ts
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. This
approach is called adoptive cell transfer (ACT). ACT’s
building blocks are T cells, a type of immune cell collected
from the patient’s own blood. One of the well-established ACT
approaches is CAR-T cancer therapy. 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 until the number reaches dose level. 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. In 2013, NCI’s Pediatric Oncology Branch
commented that the CAR-T-cells are much more potent
than anything they can achieve with other immuno-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.
CAR-T
cell therapies, such as anti-CD19 CAR-T and anti-BCMA 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 limited treatment options prior to
CAR-T therapy. CAR-T has shown encouraging clinical efficacy
in many of these patients, and some of them have had durable
clinical response for years. However, some adverse effects, such as
cytokine release syndrome (CRS) and neurological toxicity, have
been observed in patients treated with CAR-T-cells. For example, in
July 2016, Juno Therapeutics, Inc. reported the death of
patients enrolled in the U.S. Phase II clinical trial of
JCAR015 (anti-CD19 CAR-T) for the treatment of relapsed or
refractory B cell acute lymphoblastic leukemia (B-ALL). The
U.S. FDA put the trial on hold and lifted the hold within
a week after Juno provided a satisfactory explanation and
solution. Juno attributed the cause of patient deaths to the
use of Fludarabine preconditioning and they switched to use
only cyclophosphamide pre-conditioning in subsequent
enrollment.
In
August 2017, the U.S. FDA approved Novartis’
Kymriah®
(tisagenlecleucel) a CD19-targeted CAR-T therapy, for the treatment
of patients up to 25 years old for relapsed or refractory (r/r)
acute lymphoblastic leukemia (ALL), the most common cancer in
children. Current treatments show a rate of 80% remission
using intensive chemotherapy. However, there are almost
no conventional treatments to help patients who have
relapsed or are refractory to traditional treatment.
Kymriah® has shown
results of complete and long lasting remission, and was the
first U.S. FDA-approved CAR-T therapy. In October 2017, the
U.S. FDA approved Kite Pharmaceuticals’ (Gilead) CAR-T
therapy for diffuse large B-cell lymphoma (DLBCL) the most
common type of NHL in adults. The initial results
of axicabtagene ciloleucel (Yescarta), the prognosis of
high-grade chemo refractory NHL, is dismal with a medium
survival time of a few weeks. Yescarta is a therapy
for patients who have not responded to or who have relapsed
after at least two other kinds of treatment.
In May
2018, the U.S. FDA approved Novartis’ Kymriah® for intravenous
infusion for its second indication—the treatment of adult
patients with relapsed or refractory (r/r) large B-cell lymphoma
after two or more lines of systemic therapy including diffuse large
B-cell lymphoma (DLBCL) not otherwise specified, high grade B-cell
lymphoma and DLBCL arising from follicular lymphoma.
Kymriah® is now the only
CAR-T cell therapy to receive U.S. FDA approval for two distinct
indications in non-Hodgkin lymphoma (NHL) and B-cell ALL. On
September 25, 2018, we entered into the Novartis LCA with Novartis
to manufacture and supply Kymriah® to Novartis in
China.
Besides
anti-CD19 CAR-T, anti-BCMA CAR-T has shown promising clinical
efficacy in treatment of multiple myeloma. For example, bb2121, a
CAR-T therapy targeting BCMA, has been developed by Bluebird bio,
Inc. and Celgene for previously treated patients with multiple
myeloma. Based on preliminary clinical data from the ongoing Phase
I study CRB-401, bb2121 has been granted Breakthrough Therapy
Designation by the U.S. FDA and PRIME eligibility by the European
Medicines Agency (EMA) in November 2017. We plan to initiate our
anti-BCMA CAR-T investigator initiated trial in the near
future.
Recent
progress in Universal Chimeric Antigen Receptor (UCAR) T-cells
showed benefits such as ease of use, availability and the drug
pricing challenge. Currently, most therapeutic UCAR products are
being developed with gene editing platforms such as CRISPR or
TALEN. For example, UCART19 is an allogeneic CAR T-cell product
candidate developed by Cellectis for treatment of CD19-expressing
hematological malignancies. UCART19 Phase I clinical trials started
in adult and pediatric patients in Europe in June 2016 and in the
U.S. in 2017. The use of UCAR may has the potential to overcome the
limitation of the current autologous approach by providing an
allogeneic, frozen, “off-the-shelf” T-cell product for
cancer treatment.
TILs
While
CAR-T cell therapy has proven successful in treatment of several
hematological malignancies, other cell therapy approaches,
including Tumor Infiltrating Lymphocytes (TIL) are being developed
to treat solid tumors. For example, Iovance Biotherapeutics is
focused on the development of autologous tumor-directed TILs for
treatments of patients with various solid tumor indications.
Iovance is conducting several Phase II clinical trials to
assess the efficacy and safety of autologous TIL for treatment of
patients with Metastatic Melanoma, Squamous Cell Carcinoma of the
Head and Neck, Non-Small Cell Lung Cancer (NSCLC) and Cervical
Cancer in the U.S. and Europe.
13
TCRs
Adaptimmune is
partnering with GlaxoSmithKline to develop TCR-T
therapy targeting the NY-ESO-1 peptide, which is present across
multiple cancer types. Their NY-ESO SPEAR T-cell has been used in
multiple Phase I/II clinical trials in patients with solid tumors
and haematological malignancies, including synovial sarcoma, myxoid
round cell liposarcoma, multiple myeloma, melanoma, NSCLC and
ovarian cancer. The initial data suggested positive clinical
responses and evidence of tumor reduction in patients. NY-ESO
SPEART T-cell has been granted breakthrough therapy designation by
the U.S. FDA and PRIME regulatory access in Europe.
Adaptimmune’s other TCR-T product, AFP SPEAR T-cell targeting
AFP peptide, is aimed at the treatment of patients with
hepatocellular carcinoma (HCC). AFP SPEAR T-cell is in a Phase I
study and enrolling HCC patients in the U.S.
CBMG’s Adoptive Immune Cell Therapy (ACT)
Programs
In
December 2017, the Chinese government issued trial guidelines
concerning the development and testing of cell therapy products in
China. Although these trial guidelines are not yet codified as
mandatory regulation, we believe they provide a measure of clarity
and a preliminary regulatory pathway for our cell therapy
operations in an uncertain regulatory environment. On April 18 and
April 21, 2018, the Center for Drug
Evaluation (CDE) posted on its website acceptance of the IND
application for CAR-T cancer therapies in treating patients with
NHL and adult ALL submitted by the Company’s wholly-owned
subsidiaries, CBMG Shanghai and Shanghai Cellular Biopharmaceutical
Group Ltd. On September 25, 2018 we entered into Novartis LCA to
manufacture and supply Kymriah® in China. As
part of the deal, Novartis took approximately a 9% equity stake in
CBMG, and CBMG is discontinuing development of its own anti-CD19
CAR-T cell therapy. This collaboration with Novartis reflects our
shared commitment to bringing the first marketed CAR-T cell
therapy, Kymriah®, a
transformative treatment option currently approved in the U.S., EU
and Canada for two difficult-to-treat cancers, to China, where the
number of patients in need remains the highest in the world.
Together with Novartis, we plan to bring the first CAR-T cell
therapy to patients in China as soon as possible. We continue to
develop CAR-T therapies other than CD 19 on our own and Novartis
has the first right of negotiation on these CAR-T developments. The
CBMG oncology pipeline includes CAR-T targeting CD20-, CD22- and
B-cell maturation antigen (BCMA), AFP TCR-T, which could
specifically eradicate AFP positive HCC tumors and TIL
technologies. Our current priority is to collaborate with Novartis
to bring Kymriah® to China. At
the same time, we remain committed to developing our existing
pipeline of immunotherapy candidates for hematologic and solid
tumor cancers to help deliver potential new treatment options for
patients in China. We are striving to build a competitive research
and development function, a translational medicine unit, along with
a well-established cellular manufacturing capability and ample
capacity, to support Kymriah® in China and
our development of multiple assets in multiple indications. We
believe that these efforts will allow us to boost the
Company’s Immuno-Oncology presence. We initiated a clinical
trial to evaluate anti-BCMA CAR-T therapy in Multiple Myeloma
(“MM”) and started first in-human studies for multiple
CAR-T and TCR-T programs in 2019.
Market for Immune Cell Therapies
Our immune cell therapies involve the genetic engineering of
T-cells to express either chimeric antigen receptors, or CARs, or T
cell receptors, or TCRs and TIL. These T-cells are designed to
recognize and attack cancer cells. Kymriah is a type of immune cell therapy that is made from
a patient’s own white blood cells and is a prescription
cancer treatment used in patients up to 25 years old who have acute
lymphoblastic leukemia that is either relapsing or is refractory.
It is also used in patients with non-Hodgkin lymphoma that has
relapsed or is refractory after having at least two other kinds of
treatment. On August 30, 2017, Kymriah was approved by the U.S. FDA
for the treatment of children and young adults with ALL. By October
18, 2017, the U.S. FDA granted
approval for Yescarta for treating patients with
relapsed/refractory diffuse large B-cell lymphoma (r/rDLBCL) and
other rare large B-cell lymphomas. On May 1, 2018, the
U.S.FDA approved Kymriah for a second
indication (diffuse large B-cell lymphoma). In August 2018, Kymriah
and Yescarta secured European Union approval for the treatment of
blood cancers, including B-cell acute lymphoblastic leukemia (ALL)
and relapsed or refractory diffuse large B-cell lymphoma (DLBCL).
Health Canada approved Kymriah as the first CAR-T therapy in Canada
and the Therapeutic Goods Administration (TGA) approved it as the
first CAR-T therapy in Australia.
In 2019, 1,762,450 new cancer cases and 606,880 cancer deaths are
projected to occur in the U.S. According to a 2018 International
Agency for Cancer publication, China, as the most populous country
in the world with an estimated population of nearly 1.42 billion,
is projected to have around 4.51 million cancer cases and 3.04
million cancer death by year 2020. A 2018 Global Cancer
Statistics Cancer Communications report states that compared (the
2018 Global Cancer Statistics Report) to the U.S. and UK, China has
a 30% and 40% higher cancer mortality among which 36.4% of the
cancer-related deaths were from the digestive tract cancers
(stomach, liver and esophagus cancer) and have relatively poorer
prognoses.
The
2018 Global Cancer Statistics Report also reported that in 2018,
lung cancer was the most diagnosed cancer type worldwide and in
China with 2,093,8761 and
733,3002
new cases respectively. HCC is the 4th most common cancer in
China and more than 50% of new HCC cases world-wide are in China.
About 466,000 new liver cancer cases each year and the mortality is
around 343,7003 annually in China.
Chen et al. In 2018, it was estimated about 510,000 new case of Non
Hopkins lymphoma (NHL) and 248,724 patients died from NHL
worldwide.4
Multiple
myeloma accounts for 1% of all cancers and approximately 10%
of all hematological malignancies.5 In 2016 there
were about 138,509 incident cases worldwide. The United States had
the most cases (about 24,407) and the most deaths (about 14,212),
China was the second in both measures which incident cases were
about 16,537 and deaths about 10,363. The global incidence of
multiple myeloma rose by 126% from 1990 to 2016. East Asia (China,
North Korea, and Taiwan) saw incident cases of multiple myeloma
jump by 262%, which was the largest increase among any of the 21
global regions.6
1 Chen et al. CA Cancer J Clin.
2016; 66:155-132
2 Bray F et al. CA Cancer J Clin.
2018: 68:394-424
3 Chen et al. CA Cancer J Clin.
2016; 66:155-132
4 Bray F et al. CA Cancer J Clin.
2018: 68:394-424
5 Moreau P et al., Annals of Oncol.
24 (Supplement 6): vi133–vi137, 2013)
6 Cowan AJ et al., JAMA
Oncol. 2018;4(9):1221-1227
14
Market for Stem Cell-Based Therapies
The U.S. forecast is that 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 resulting in an increase to $5.7
billion in 2020, with key growth areas being Spinal Fusion, Sports
Medicine and Osteoarthritis of the joints. 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 a paper
published by Dillon CF, Rasch EK, Gu Q et
al. entitled, “Prevalence of knee
osteoarthritis in the United States: Arthritis Data from the Third
National Health and Nutrition Examination Survey,” 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 rate is high (53%). The
costs of OA management has 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. According to an article published by the
Journal of the American Medical Association, approximately 505,000
hip replacements and 723,000 knee replacements were performed in
the United States in 2014, collectively costing more than $20
billion. 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 six months and a structure modification effect to slow
cartilage degradation by at least 12 months. Symptom relief is
generally measured by a composite questionnaire, the 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 the primary end point to demonstrate
symptom relief, and MRI to assess structure and regeneration
benefits as a secondary endpoint.
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. According to a nationwide population-based
longitudinal survey among the Chinese retired population,
approximately 8.1% of participants were found to suffer from
symptomatic knee OA. Currently no treatment exists that can
effectively preserve knee joint cartilage or slow the progression
of KOA.
According to Alternative and Integrative
Medicine, 53% of KOA patients
will degenerate to the point of disability. Conventional treatment
usually involves invasive surgery with painful recovery and
physical therapy and replacement surgeries are typically only
suggested and performed on patients in the late stage of
KOA.
Our Global Strategy
CBMG is a drug development company focusing on developing cell
therapies first in China, to take advantage of cost efficiencies,
leveraging the expeditious Investigator Initiated Trials
(“IIT”) process in China, publish and share our data in
major conferences and scientific journals and then address the
rest-of-the-world market after safety and efficacy of those
programs are established. Our goal is to develop safe and effective
cellular therapies for indications that represent a large unmet
need in China. 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 intend to invest and expand our clinical research capabilities
by building drug development and manufacturing infrastructure in
China and in the U.S., expanding our clinical research platform,
hiring new talent and enhancing our existing coverage. We believe
that few competitors in China are as well-equipped as we are in the
areas of clinical trial development, internationally compliant
manufacturing, quality assurance and control, as well as our
dedication to regulatory compliance and process
improvement.
The key issues with cell therapy as modality are drug
therapeutic index, institutionalized, scalable manufacturing and an
affordable price for the patients. We believe our manufacturing
platform is unique as we utilize a semiautomatic, fully closed
system, which is expected to lead to economies of scale.
Additionally, our focus on being a fully integrated cell therapy
company has enabled us to be one of only a few companies that are
able to manufacture clinical grade viral vectors in China to cater
to the increasing global demand for cell and gene
therapies.
In China, Good Clinical Practice (GCP) only requires
institutional review board (“IRB”) approval from the hospital and local NMPA approval
for Investigator Initiated Trial (IIT), which is more expeditious
than the traditional IND route. IITs can provide early evidence of
POC for novel drugs which are more time and cost efficient than the
traditional IND approach. IITs are also good ways to identify and
develop novel platforms. Currently, we have our own drug
development pipeline in CAR-T, AFP TCR-T, TIL and KOA. Our R&D
team continues to identify additional platform cell therapy
technologies to develop internally or acquire established
technologies.
In addition to the manufacturing of Novartis’
Kymriah® for
patients in China as contemplated by the Novartis LCA and the
Manufacture and Supply Agreement with Novartis, we are actively
developing and evaluating other therapies comprised of other CAR-T,
TCR-T and TIL therapies. We have also advanced our KOA
AlloJoin® Phase
II clinical trial and ReJoin® Phase
II clinical trial with the NMPA.
In addition to our drug development efforts, we are planning
on evaluating co-development, strategic partnerships and both
in-licensing and out-licensing opportunities with high quality,
multinational partners. Such partnerships will enable us to take
advantage of the technologies of our partners while leveraging our
quality control and manufacturing infrastructure to further expand
our pipelines.
15
Our proprietary and patent-protected manufacturing processes enable
us to produce, store and distribute ancillary media, viral vectors
and cellular product. Our clinical protocols include medical
assessment to qualify each patient for treatment, evaluation of
each patient before and after a specific therapy, cell infusion
methodologies including dosage, frequency and the use of adjunct
therapies, handling potential adverse effects and their proper
management. Applying our proprietary intellectual property, we plan
to customize specialize formulations to address complex diseases
and debilitating conditions.
Currently, we have a total of approximately 70,000 square feet of
manufacturing space in three locations, the majority of which is in
the new Shanghai facility. We operate our manufacturing facilities
under the design of the standard GMP conditions as well ISO
standards. We employ institutionalized and proprietary process and
quality management system to optimize reproducibility and to hone
our efficiency. Our Shanghai and Wuxi facilities are designed and
built to meet GMP standards. With our integrated Plasmid, Viral
Vectors platforms, our T-cells manufacturing capacities are highly
distinguishable from other companies in the cellular therapy
industry. We are currently assessing the feasibility of expanding
manufacturing spaces in new sites in both China and the
U.S.
Most importantly, our seasoned cell therapy team members have
decades of highly relevant experience in the U.S., China and the
European Union. We believe that these are the primary factors that
make CBMG a high-quality cell products manufacturer in
China. We have been implementing significant human resources
initiatives such as stock incentive programs, graduate school and
continuing education sponsorship and a robust health insurance plan
to attract and retain quality talent to support our rapid
growth.
Our Targeted Indications and Potential Therapies
The
chart below illustrates CBMG’s pipelines:
16
Immuno-oncology (I/o)
Our
CAR-T platform is built on lenti-virial vector and
second-generation CAR design, which is used by most of the current
trials and studies. We select the patient population for each asset
and indication to allow the optimal path forward for potential
regulatory approval. We integrate the state-of-the-art
translational medicine effort into each clinical study to aid in
dose selection, to investigate the mechanism of action and
POC, and to attempt to identify
the optimal targeting patient population. We plan to continue to
grow our translational medicine team and engage key opinion leaders
to support our development efforts.
We have
developed a serial of CAR-Ts to treat hematological malignancies
including CD20, CD22 and BCMA CAR-Ts, which have been proved to be
potent and effective in treating hematology tumors in the early
phase of clinical studies.
CD20 CAR
CD20 is
broadly overexpressed in a serial of B cell malignant tumors. In
the patients relapsed after CD19 CAR-T treatment, the expression of
CD20 on target tumor cells is relatively stable. It is proven to be
an optimal target for treating CD19 CAR-T relapsing patients. We
have developed a novel CD20 CAR-Ts clinical lead product, which
demonstrated strong anti-tumor activity in both in vitro assays and in vivo animal studies. We have filed a
patent application in China and have initiated a first in human
investigator initiated trial with CD19 CAR-T relapsed NHL
patients.
CD22 CAR
CD22 is
another surface marker highly expressed in B cell malignancies
especially in hairy cell leukemia. It also expresses in the
patients relapsed after CD19 CAR-T treatment. We have developed a
novel CD22 CARs clinical lead, which displayed effective anti-tumor
activity in in vitro
cytotoxicity assays. We plan to initiate an investigator initiated
trial with CD19 CAR-T relapsing ALL patients and hairy cell
leukemia.
BCMA CAR
BCMA is
a member of the TNF receptor superfamily, universally expressed in
multiple myeloma (MM) cells. It is not detectable in normal tissues
except plasma and mature B cells. It is a proven, effective and
safer target for treating refractory MM patients in several
clinical trials. We have developed unique BCMA CARs. Our BCMA CAR
clinical lead exhibits potent anti-tumor activity both in vitro and in vivo. We have filed a patent for
BCMA CAR in China and begun an investigator initiated trial in
refractory MM patients in January 2019.
NKG2D CAR
Early
studies on CAR-T therapy targeting NK cell signaling has shown
promising clinical benefits. We are developing novel second
generation CAR-Ts using NKG2D extracellular fragment as antigen
binding domain. These CARs can recognize target tumor cells
expressing NKG2D ligands. We plan to initiate a first in human
investigator initiated trial with R/R AML patients.
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 will continue our effort in developing
cell-based therapies to target both hematological cancers and solid
tumors.
AFP TCR
We
license the AFP-TCR technology from Augusta University. We are
continuing our evaluation on the efficacy and specificity of the
AFP TCRs to identity the most appropriate candidate for a first
time in human (FTIH) study. We plan to redirect Human T-cells with
the AFP TCRs and evaluate their anti-tumor activity on in vitro
cytokine release and cytotoxicity assays; and potential
on/off-target toxicity including allo-reactivity as well as
in vivo efficacy tests in
animal models.
17
TIL
Augmented by the
U.S. National Cancer Institute (“NCI”) technology
license, CBMG is developing neoantigen reactive TIL therapies to
treat immunogenic cancers. In the early stages of cancer,
lymphocytes infiltrate into the tumor, specifically recognizing the
tumor targets and mediating anti-tumor response. These cells are
known as TIL. TIL-based therapies have shown encouraging clinical
results in early development. For example, in Phase-2 clinical
studies in patients with metastatic melanoma performed by Dr.
Rosenberg at NCI, TIL therapy demonstrated robust efficacy in
patients with metastatic melanoma with objective response rates of
56% and complete response rates of 24%. We have started our
development with NSCLC, and plan to expand into other cancer
indications.
Knee Osteoarthritis (KOA)
We are
currently pursuing two primary therapies for the treatment of KOA:
ReJoin® therapy
and AlloJoin® 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 six-month
follow-up clinical data showed ReJoin® 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.
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.
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 multipotent 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 autologous 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 intraarticularly into the knee joint with
ultrasound guidance. For allogeneic KOA, we use donor haMPC
cells.
These
haMPC cells are capable of differentiating into bone, cartilage 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 autologous haMPC, offering a choice for those where factors
such as donor age and health are an issue.
The
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 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; (b) submit to the NMPA an IND package for
Allojoin™ to treat patients with donor haMPC cells; and (c)
file joint applications with Class AAA hospitals to use
ReJoin® to treat
patients with their own haMPC cells.
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.
18
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.
Based
on current estimates, we expect to generate collaboration payment
and revenues through our sale of Kymriah® products to
Novartis within the next two years. We plan to systematically
advance our own cell therapy pipeline and timely seek BLA
opportunities to commercialize our products within the next three
years although we cannot assure you that we will be successful at
all or within the foregoing timeframe.
Competition
Many companies operate in the cellular biopharmaceutical field. We
face competition based on several factors, including quality and
breadth of services, ability to protect our intellectual property
or other confidential information, timeliness of implementation,
maintenance of quality standards, depth of collaboration partner
relationships, price and geography. Currently there are several
approved stem cell therapies on the market including Canada’s
pediatric graft-versus-host disease and the European
Commission’s approval in March 2018 for the treatment of
complex perianal fistulas in adult Crohn’s disease. There are
several public and 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, with plans to
expand in the U.S. 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.
In terms of entry barriers, cellular biopharmaceutical business
generally requires high, upfront capital and other resources,
significant financial and time commitment in recruiting experienced
talents, a successful track record and solid reputation to build up
synergies with business partners and emphasis on cost efficiency.
Our core competitive edge is our strong capacity to cover the full
research and development process of the full life cycle of a
product, and to satisfy the increasing demand for timely
realization and localization in China of key products already
approved in foreign markets. We believe that we are able to
maintain our competitiveness by leveraging our established position
in the global research and development in the cellular
biopharmaceutical market and capitalizing on the opportunities
offered by the booming pharmaceutical market in China.
To meet the overall social, economic and healthcare
challenges in China, 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 stem cells and the plasticity of adult stem cells.
To the best of our knowledge, none of the companies in China are
utilizing our proposed international manufacturing protocol and our
unique technologies in conducting what we believe will be fully
compliant NMPA-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. In the biopharmaceutical specialty
segment, 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.,
the U.S. FDA) and other
regulatory approvals and begin commercial sales of their products
before us.
Our primary competitors in the field of cancer immune cell
therapies include pharmaceutical, biotechnology companies such as
Eureka Therapeutics, Inc., Iovance Biotherapeutics Inc., Juno
Therapeutics, Inc. (acquired by Celgene), Kite Pharma, Inc.
(acquired by Gilead), CARSgen, Sorrento Therapeutics, Inc. and
others. Among our competitors, the ones based in and operating in
Greater China are CARsgen, Hrain Biotechnology, Nanjing Legend
Biotechnology Galaxy Biomed, Persongen, Anke Biotechnology,
Shanghai Minju Biotechnology, Unicar Therapy (Cooperated with
Terumo BCT), Wuxi Biologics, Junshi Pharma, BeiGene, Immuno China
Biotech, Chongqing Precision Biotech, Innovative Cellular
Therapeutics and China Oncology Focus Limited. Other companies in
the cancer immune cell therapies space have made inroads in China
by partnering 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. In
January 2017, Shanghai Fosun Pharmaceutical created a joint venture
with Santa Monica-based Kite Pharma Inc. to develop, manufacture
and commercialize CAR-T and TCR products in China. The NMPA has
received IND applications for CD19 chimeric antigen receptor
T-cells cancer therapies from many companies and have granted the
initial phase of acceptance to several companies thus
far.
19
The osteoarthritis industry is highly competitive and subject to
rapid and significant technological change. The large size and
expanding scope of the pain market makes it an attractive
therapeutic area for biopharmaceutical businesses. Our potential
competitors include pharmaceutical, biotechnology, medical device
and specialty pharmaceutical companies. Several of these companies
have robust drug pipelines, readily available capital and
established research and development organizations. We believe our
success will be driven by our ability to develop and commercialize
treatment options that make a meaningful difference for patients
with KOA. Our primary competitors in the field of stem cell therapy
for osteoarthritis and other indications include Mesoblast Ltd.,
Caladrius Biosciences, Inc. and others. On September 12, 2019, we
launched allogenic haMPC KOA Phase II of the clinical trial across
six leading hospitals in China with a plan to recruit 108 patients.
We submitted our autologous adipose stem cell therapy
(ReJoin®)
KOA with IND filing with the CDE and the application was approved
by NMPA. Additionally, in the general area of cell-based therapies
for knee osteoarthritis ailments, we potentially compete with a
variety of companies, from big pharma to specialty medical products
or biotechnology companies. Some of these companies, such as
Abbvie, Merck KGaA, Sanofi, Teva, GlaxosmithKline, Baxter, Johnson
& Johnson, Sanumed, Medtronic and Miltenyi Biotech are
well-established and have substantial technical and financial
resources compared to ours. However, as cell-based products are
only just recently emerging as viable medical therapies, many of
our more direct competitors are smaller biotechnology and specialty
medical products companies comprised of Vericel Corporation,
Regeneus Ltd., Advanced Cell Technology, Inc., Nuo Therapeutics,
Inc., ISTO technologies, Inc., Ember Therapeutics, Athersys, Inc.,
Bioheart, Inc., Mesoblast, Pluristem, Inc., Medipost Co. Ltd. and
others. There are also several non-cell-based, small molecule and
peptide clinical trials targeting knee osteoarthritis, and several
other U.S. FDA-approved
treatments for knee pain.
Other companies have OA product candidates in advanced stages
of clinical development. These product candidates
include:
●
Anika Therapeutics,
Inc.’s Cingal®, which is a
mixture of Anika’s Monovisc combined with a low dose of a
commonly used immediate-release steroid. In February 2019, Anika
announced that, based on their discussions with the FDA, they will
need to conduct another Phase III clinical trial before they can
potentially obtain approval for Cingal in the U.S.
●
Kolon TissueGene,
Inc.’s Invossa™, which is a combination of human
allogeneic chondrocytes and TGF-b1 transfected
allogeneic chondrocytes. In November 2018, Kolon TissueGene
announced they enrolled the first patient in a pivotal U.S. Phase 3
trial. According to clinicaltrials.gov, the estimated primary
completion date for the trial is April 2021.
●
Ampio
Pharmaceuticals, Inc.’s Ampion™, which is a derivative
of human serum albumin, is described as having anti-inflammatory
properties, and is formulated for immediate-release. Ampio stated
that Ampion is in Phase 3 development but has not announced a
timeline for potentially submitting a Biologics License
Application, or BLA.
●
Centrexion
Therapeutics Corporation’s CNTX-4975, which is a
synthetic, ultra-pure injection of trans-capsaicin. In
December 2018, Centrexion announced completion of patient
enrollment in its Phase 3 VICTORY-1 trial. Topline results are
expected to be reported in the first quarter of 2020.
●
A number of
investigational nerve growth factor antibodies are in development.
Regeneron’s fasinumab and Pfizer and Eli Lilly’s
tanezumab are both in Phase 3 development. Initial results from
Phase 3 clinical trials for each were announced in 2018. In January
2019, Pfizer and Lilly announced results from a second Phase 3
study showing that the tanezumab 5 mg treatment arm met all three
co-primary endpoints at 24 weeks, however in the 2.5 mg treatment
arm, patients’ overall assessment of their OA was not
statistically different than placebo. Rapidly progressive OA was
seen in 2.1% of tanezumab-treated patients and was not observed in
the placebo arm.
●
Servier and
Galapagos NV’s S201086/GLPG1972, an ADAMTS-5 inhibitor, is
currently in Phase II clinical development.
●
Taiwan Liposome
Company’s TLC599, which is a liposomal formulation of
dexamethasone sodium phosphate. TLC599 is currently in Phase
II clinical development.
Certain CBMG 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 are we
aware of 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 do not believe that our chosen targeted disease
applications are in competition with the products and therapies
offered by traditional pharmaceutical or Traditional Chinese
Medicine companies.
We believe we have a strategic advantage over our competitors based
on our outstanding quality management system and robust and
efficient manufacturing capability, which we believe is possessed
by few, if any, 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 cellular 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 China market.
20
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 isolation, serum free-cell expansion, 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 isolation, expansion, freezing, preservation,
processing and use in treatment.
For our
haMPC therapy:
●
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.
●
Our
portfolio also includes adipose derived cellular medicine
formulations and their applications in the potential treatment of
degenerative diseases and autoimmune diseases, including
osteoarthritis, and rheumatoid arthritis, as well as potential
applications with age-related illnesses and
conditions.
●
Our
haMPC intellectual property portfolio:
o
provides coverage
of all steps in the production process;
o
enables achievement
of high yields of Stromal Vascular Fraction (SVF), i.e., stem cells
derived from adipose tissue extracted by liposuction;
o
makes adipose
tissue acquisition convenient and useful for purposes of cell
banking; and
o
employs
preservation techniques enabling long distance shipment of finished
cell medicine products.
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 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) Immunooncology patent
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 and 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. 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.
21
Patents
The
following is a brief list of our patents, patent applications and
work in process as of December 31, 2019:
|
|
China
Patents
|
U.S.
Patents
|
EU
Patents
|
Rest of the
World
|
Patent
Cooperation Treaty (PCT)
|
Total
|
|
|
|
|
|
|
|
|
|
Work in
Process
|
10
|
-
|
-
|
-
|
-
|
10
|
|
Patents Filed,
Pending
|
27
|
5
|
4
|
7
|
5
|
48
|
|
Granted
|
29
|
3
|
1
|
2
|
-
|
35
|
|
Total
|
66
|
8
|
5
|
9
|
5
|
93
|
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 scaling up and optimizing our manufacturing
capacity. Our facilities are operated by a manufacturing and
technology team with decades of relevant experience in China, the
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 GMP conditions as well the ISO
standards. 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 Shanghai and Wuxi, China meet international standards.
Specifically, our Shanghai cleanroom facility underwent rigorous
cleanroom certification since 2013.
The
quality management systems of CBMG Shanghai have been assessed and
certified as meeting the requirements of ISO 9001: 2015, including
(i) the cleanrooms in our new facility have been inspected and
certified to meet the requirements of ISO 14644 and in compliance
with China’s GMP requirements (2010 edition); and (ii)
the equipment, including critical ones like biological safety
cabinets in the new Shanghai facility has been calibrated
and qualified, and the biological safety cabinets were also
qualified. The quality management systems of CBMG Wuxi were
certified as meeting the requirements of ISO 9001: 2015, and the
facility and equipment in Wuxi Site were also
qualified.
With
our integrated GMP level plasmid, viral vectors and CAR-T cell
chemistry, manufacturing and controls processes, as well as planned
capacity expansion, we believe that we are highly distinguishable
with other companies in the cellular therapy industry.
In
January 2017, we leased a 113,038-square foot building located in
the “Pharma Valley” of Shanghai, the People’s
Republic of China. We are establishing 43,000 square foot
facilities there with 25 clean-rooms and equipped with 12
independent production lines to support clinical batch production
and commercial scale manufacturing. With the above expansion, the
Company could support up to thousands of patients with CAR-T
therapy and thousands of KOA patients with the stem cell therapy
per annum.
Employees
As of
December 31, 2019, the total enrollment of full-time employees of
the Company is 217. Among these 217 professionals, 136 have
postgraduate and PhD degrees and 71 have undergraduate degrees. In
other words, 95.4% of our employees have a germane educational
background. As a biotech company, 182 out of our 217 employees have
medical or biological scientific credentials and
qualifications.
22
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.
On
December 22, 2017, the tax reform bill was passed (Tax Cut and Jobs
Act (H.R.1)) and reduced the top corporate tax rate from 35% to 21%
effective from January 1, 2018. Pursuant to this new Act,
non-operating loss carry-back period is eliminated and the loss
carry-forward period was expanded from 20 years to an indefinite
period.
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%
from 2015. CBMG Shanghai re-applied and Shanghai SBM applied for
the certificate of “advanced and new technology
enterprise” in 2018. Both of them received approval on
November 27, 2018 with an effective period of three
years.
BIOPHARMACEUTICAL REGULATION
PRC Regulations
Our
cellular medicine business operates in a highly regulated
environment. In China, aside from provincial and local licensing
authorities, there are hospitals and their internal ethics and
utilization committees, and a system of IRBs which in many cases
have members appointed by provincial authorities. With respect to
cell therapies, however, the Chinese regulatory infrastructure is
less established. In December 2017,
the Chinese government issued trial guidelines concerning development and
testing of cell therapy
products, including stem cell treatments and immune cell therapies
such as CAR-T cell therapeutics. These trial guidelines are not
mandatory regulation but provide some general principles and basic
requirements for cell therapy products in the areas of
pharmaceutical research, non-clinical
research and clinical research. The cell therapy products provided
in the trial guideline refer to the human-sourced living cell
products which are used for human disease therapy, whose source,
operation and clinical trial process are in line with ethics and
whose research and registration application are in line with
regulations on pharmaceutical administration. The competent
authority of pharmaceutical administration is the NMPA. It is
further clarified by the NMPA that the non-registered clinical
trial data would be acceptable for drug registration on a case by
case basis, pending on the consistency of the samples used for the
clinical trial and the drug applied for registration, the
generation process of the clinical trial data, whether the data is
authentic, complete, accurate and traceable to the source and the
inspection outcome of the NMPA on the clinical trial. Moreover, an
applicant of the clinical trial of the said cell therapy products
can propose the phases of the clinical trial and the trial plan by
itself (generally the trial can be divided into early stage
clinical trial phase and confirmatory clinical trial phase),
instead of the application of the traditional phases I, II and III
of a clinical trial. However, it remains unclear if any of
our clinical trials will be offered U.S. FDA-like 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. standards 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 in an undeveloped industry. In addition, we
have begun to review the feasibility of performing synergistic
U.S. clinical studies.
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 and 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 U.S., 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.
23
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 do not 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 U.S. 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 U.S. 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.
AVAILABLE 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. We make
available free of charge on our website, www.cellbiomedgroup.com, our annual
report on Form 10-K, quarterly reports on Form 10-Q, current
reports on Form 8-K and amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as
soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
24
ITEM 1A.
RISK FACTORS
RISKS RELATED TO OUR COMPANY
Please
carefully consider the following discussion of significant factors,
events and uncertainties that make an investment in our securities
risky. The events and consequences discussed in these risk factors
could, in circumstances we may not be able to accurately predict,
recognize or control, have a material adverse effect on our
business, growth, reputation, prospects, financial condition,
operating results (including components of our financial results
such as sales and profits), cash flows, liquidity and stock price.
These risk factors do not identify all risks that we face; our
operations could also be affected by factors, events or
uncertainties that are not presently known to us or that we
currently do not consider to present significant risks to our
operations.
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, 2019. Our cash flow from operations has
not and may continue to 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.
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 product candidates;
●
Developing a
consistent and reliable process, while limiting contamination risks
regarding the application protocol;
●
Conditioning
patients with chemotherapy in conjunction with delivering immune
cell therapy treatment, which may increase the risk of adverse side
effects;
●
Obtaining
regulatory approval, as the NMPA, 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 cell therapy.
These
challenges present difficulties in developing and commercializing
products on a timely or profitable basis or at all.
25
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;
●
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.
Laws and the regulatory infrastructure governing cellular
biopharmaceuticals in China are relatively new and less established
in comparison to the U.S. and other countries; accordingly,
regulation can be less stable and predictable than desired, and
regulatory changes may disrupt our commercialization
process.
In
December 2017, the Chinese government issued trial guidelines
concerning development and testing of cell therapy products,
including stem cell treatments and immune cell therapies such as
CAR-T cell therapeutics. These trial guidelines are not mandatory
regulation but provide some general principles and basic
requirements for cell therapy products in the areas of
pharmaceutical research, non-clinical research and clinical
research. The cell therapy products provided in the trial guideline
refer to the human-sourced living cell products which are used for
human disease therapy, whose source, operation and clinical trial
process are in line with ethics and whose research and registration
application are in line with regulations on pharmaceutical
administration. The competent authority of pharmaceutical
administration is the NMPA. It is further clarified by the NMPA
that the non-registered clinical trial data would be acceptable for
drug registration on a case by case basis, pending on the
consistency of the samples used for the clinical trial and the drug
applied for registration, the generation process of the clinical
trial data, whether the data is authentic, complete, accurate and
traceable to the source and the inspection outcome of the NMPA on
the clinical trial. Moreover, an applicant of the clinical trial of
the said cell therapy products can propose the phases of the
clinical trial and the trial plan by itself (generally the trial
can be divided into early stage clinical trial phase and
confirmatory clinical trial phase) instead of the application of
the traditional phases I, II and III of a clinical trial. However,
it remains unclear if any of our clinical trials will be offered
U.S. FDA-like 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 PRC
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.
NMPA’s regulations can 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 NMPA 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 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
2003, the CFDA implemented new guidelines for the licensing of
pharmaceutical products. All existing manufacturers with licenses
were required to apply for the 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.
26
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
NMPA 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, AFP-TCR and TIL,
whether preclinical or clinical, 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 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.
We
cannot be sure that our T cell immunotherapy and 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 viral vector,
we are subject to many of the challenges and risks that gene
therapies face, including regulatory requirements governing gene
and cell therapy products have evolved 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 CAR-T, AFP TCR-T
and TIL 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 the POC
results of our cell therapy assets, and our ability to obtain
regulatory approval of and successfully commercialize these
products. All of these products are in the early stages of
development, and will require additional pre-clinical and clinical
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.
Developed products
that encounter safety or efficacy problems, developmental delays,
regulatory issues or other problems, could significantly harm our
development plans and business. 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.
27
Our CAR-T, AFP TCR-T and TIL product candidates are biologics and
the manufacture of our product candidates is complex and can lead
to difficulties in production, particularly with respect to process
development or scaling-out of our manufacturing capabilities. Such
difficulties would likely impact our ability to provide supply of
our product candidates for clinical trials or our products for
patients, if approved, resulting in delays or stoppages or in
inability to maintain a commercially viable cost
structure.
Our
immune cell CAR-T, AFP TCR-T and TIL 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.
Although we
continue to develop our own manufacturing facilities to support our
clinical and commercial manufacturing activities, we may, in any
event, never be successful in establishing our own manufacturing
facilities. 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 clinical
and commercial 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, AFP TCR-T, TIL or stem
cells 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 U.S. FDA, NMPA 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. Inappropriately conducted tests and
unreliable data could put patients at risk of serious harm and the
U.S. FDA, NMPA or other regulatory authorities could require
additional clinical trials or place significant restrictions on our
company until deficiencies are remedied. We are not always able 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 are not always able to establish or
maintain third-party relationships on a commercially reasonable
basis. 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 can 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.
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 in solid tumors. 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.
28
We are not always able to maintain our licenses, patents or other
intellectual property and 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 employees, consultants, outside scientific
collaborators, sponsored researchers, affiliates, other advisors
and potential investors. 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
compartmentalizing 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.
Failure to obtain or maintain patent protection for our products
and product candidates 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.
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 that are challenged by third parties and held to be
invalid, unenforceable or with a narrower or different scope of
coverage that what we currently believe, could effectively reduce
or eliminate 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.
29
Litigation and other proceedings relating to intellectual property
are expensive, time consuming and uncertain, and we are not always
successful in our efforts to protect against infringement by third
parties or defend ourselves against claims of infringement or
otherwise.
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 we can
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 of
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 have
in the past, and may in the future, need to initiate litigation or
other proceedings to protect our intellectual property. Third
parties have in the past, and may in the future, initiate
proceedings to challenge our intellectual property rights. For
instance, in April 2018, a company based in Hangzhou, China,
submitted a petition with the PRC Trademark Office to challenge our
ReJoin™ trademark on the basis of a lack of use. We collected
evidence and timely submitted a response to refute the claim and
the State Trademark Office accepted our response, overruling the
Hangzhou company’s application for revoking ReJoin™.
Although we are dedicated to protecting our intellectual property
in such proceedings and believe that we have resources to do so,
there is no assurance that we will successfully defend such notice
in each of these matters. 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 would likely
limit our ability to develop or market our products and services in
the future or adversely affect our revenues, which would have a
material adverse effect on our business, operating results and
financial condition.
We do 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.
Failure 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. Our efforts to protect these trade
secrets are comprised of the use of confidentiality and proprietary
information agreement, physically secured documentation 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 be insufficient to protect our
competitive position or may not exist. The inadvertent disclosure
of our trade secrets could also impair our competitive
position.
PRC intellectual property law requires us to compensate our
employees for the intellectual property that they may help to
develop under certain situations.
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 and
were granted patent protection. In the absence of any contractual
understanding, the Implementing Regulations of the Patent Law of
the PRC require a minimum compensation and bonus to such employees
as: (a) bonuses for (i) each invention patent, a one-time reward of
no less than 3,000 RMB, or (ii) each utility model or design
patent, a one-time reward of no less than 1,000 RMB, and (b)
compensation: (i) for each invention patent and utility model, at
least 2% of annual operating profits derived from the use of the
patent during its validity period (or a one-time compensation with
reference to the such ratio), (ii) for each design patent, at least
0.2% of annual operating profits derived from the use of the design
patent during its validity period (or a one-time compensation with
reference to such ratio) and (iii) of at least 10% of royalties
received from the licensing the patent to a third
party.
30
Although our bylaws
allow us to issue bonuses to our employees, we have not
contractually limited the amount of compensation that we may pay
them for being granted patents for their ideas, developments,
discoveries or inventions. As such, should any of our employees 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 may not necessarily lead to 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, NMPA, 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 have
in the past and may in the future 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:
●
survive and persist
in the desired location;
●
provide the
intended therapeutic benefit;
●
engraft or
integrate into existing tissue in the desired manner;
or
●
achieve therapeutic
benefits equal to, or better than, the standard of treatment at the
time of testing.
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.
31
Future clinical trial results can 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.
Failure of our clinical trials to demonstrate safety and efficacy
to the satisfaction of the relevant regulatory authorities,
including the PRC’s National Medicinal Product Administration
and the Ministry of Health, or failure to otherwise produce
positive results, subjects us to additional costs or delays in
completing the development and commercialization of such product
candidates.
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:
●
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;
●
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;
●
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;
●
third party
contractors may fail to comply with regulatory requirements or meet
their contractual obligations to us in a timely manner or at
all;
●
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;
●
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;
●
the cost of
clinical trials of our product candidates may be greater than
anticipated;
●
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;
●
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
●
our product
candidates may have undesirable side effects or other unexpected
characteristics, causing us or our investigators to halt or
terminate the trials.
We may
be unable to generate interest or meaningful revenue in
out-licensing our intellectual property.
32
The results of preclinical studies do not always 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 are not necessarily predictive of
the success of later clinical trials. New information regarding the
safety and efficacy of such product candidates can 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 NMPA 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 NMPA 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.
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:
●
the patient
eligibility criteria defined in the protocol;
●
the size of the
patient population required for analysis of the trial’s
primary endpoints;
●
the proximity of
patients to study sites;
●
the design of the
trial;
●
our ability to
recruit clinical trial investigators with the appropriate
competencies and experience;
●
our ability to
obtain and maintain patient consents; and
●
the risk that
patients enrolled in clinical trials will drop out of the trials
before completion.
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, nonclinical 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. Such claims may 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
insurance coverage relating to inventory, property plant and
equipment and office premises. The Company also purchased 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.
33
We currently have no CAR-T, TCR-T, TIL or KOA product marketing and
sales organization and have no experience in marketing such
products. Failure to establish product marketing and sales
capabilities or enter into agreements with third parties to market
and sell our product candidates may result in less product revenue
than expected.
We
currently have no CAR-T, TCR-T, TIL or KOA 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.
Coverage and reimbursement can 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 are 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 will not
necessarily 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. Obtaining approval
in one or more jurisdictions outside of China for our product
candidates will subject us 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:
●
the demand for our
product candidates, if we obtain regulatory approval;
●
our ability to set
a price that we believe is fair for our products;
●
our ability to
generate revenue and achieve or maintain
profitability;
●
the level of taxes
that we are required to pay; and
●
the availability of
capital.
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 sometimes 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.
34
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 our industry’s potential role in
climate change. Stringent government safety, environmental and
biohazardous 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 biohazardous materials or certain
categories of materials. The Company has completed the legal
procedure of construction completion acceptance of environmental
protection facilities for its new Zhangjiang facility for R&D
and clinical status in January 2019. Subsequently, the Company has
launched the Environment Impact Assessment (EIA) for its upcoming
production, and the government approval of the EIA report is
estimated to be obtained in February 2020. The Company has
terminated its lease in the Beijing facility and is updating 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 when they 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.
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 rely on our share-based compensation programs and other
competitive benefits to attract or retain key employees for our
business.
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.
35
There is a scarcity of experienced professionals in the field of
cell therapy and we face risks related to retaining key officers or
employees or hiring new key officers or employees needed to
implement our business strategy and develop our products. Failure
to retain or hire key officers or employees could prevent us from
growing our biopharmaceutical business or implementing our business
strategy, and may materially and adversely affect the
Company.
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 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.
Failure to successfully integrate our acquired businesses,
operations and assets in the expected time frame may adversely
affect the combined Company’s future results.
We
believe that our immuno-oncology acquisitions 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 are not always able
to effectively integrate the acquired technologies into our
organization, make the acquired technologies profitable, or succeed
in managing the acquired technologies. The process of integration
of acquired technologies subjects us to a number of risks,
including:
●
Failure to
successfully manage relationships with hospitals, patients and
suppliers;
●
Demands on
management related to the increase in complexity of the company
after the acquisition;
●
Diversion of
management and scientists’ attention;
●
Potential
difficulties integrating and harmonizing large scale multi-site
clinical trials;
●
Difficulties in the
assimilation and retention of employees;
●
Exposure to legal
claims for activities of the acquired technologies;
and
●
Incurrence of
additional expenses in connection with the integration
process.
If the
acquired technologies are 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, failure to successfully
integrate the acquired technologies, or delays in implementing
clinical trials using the acquired technologies, may result in the
anticipated benefits of the acquisition not being 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 face risks
related to 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:
●
identifying,
recruiting, integrating, maintaining and motivating additional
employees;
●
managing our
internal development efforts effectively, including the clinical
trials and NMPA review process for our product candidates, while
complying with our contractual obligations to contractors and other
third parties; and
●
improving our
operational, financial and management controls, reporting systems
and procedures.
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.
36
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 often form or seek strategic alliances or enter into licensing
arrangements but do not always realize the benefits of such
alliances or licensing arrangements.
We
often form or seek strategic alliances, create joint ventures or
collaborations or enter into licensing arrangements with third
parties, including but not limited to our collaboration with
Novartis, 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. These relationships often require us to incur nonrecurring
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 are
not always 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. When 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.
Among
other challenges in connection with our strategic alliances and
licensing transactions, our partnership with Novartis may not be
successful or profitable. We face risks from unfavorable
regulatory, technical or market developments. While our
manufacturing capabilities on CAR-T products set us apart from many
of our competitors, we have yet to commercialize any of our drug
candidates and have yet to generate any revenue from the sale of
our products, and there is no assurance that we will be able to
generate revenue or net profit from our Kymriah® sale to
Novartis. There is no assurance that we can successfully complete
the transfer of Kymriah® to our
manufacturing facility and receive regulatory approval to start
commercial production. We cannot be assured that after a drug
candidate is eventually made available for sale that it will gain
market acceptance from physicians, patients, third-party payers and
others in the medical community. Novartis has the right to
unilaterally terminate our agreement for any reason or no reason.
Market acceptance after the drug approval may cause us not be able
to generate sufficient revenue to recuperate our investment in the
partnership. Any unfavorable developments before or after
Kymriah® is
commercialized in China may have a material adverse effect on our
business. Any unfavorable regulatory, technical or market
development could render the partnership with Novartis
untenable.
We, our strategic partners and our customers conduct business in a
heavily regulated industry. Failure to comply with applicable
current and future laws and government regulations could adversely
affect 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.
37
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 be
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.
We plan
to continue to launch several new Immune Oncology clinical trials
and continue to advance our KOA clinical trials in China. We also
plan to conduct solid tumor clinical trials in the United States.
Successful trials will require significant additional investment
capital over a multiyear period in order to conduct subsequent
phases, gain approval for these therapies by the NMPA and the U.S.
FDA, and commercialize these therapies. Subsequent phases may be
larger and more expensive than the initial 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:
●
the scope,
progress, results, costs, timing and outcomes of our other cell
therapy product or therapy candidates;
●
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;
●
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
●
the costs of
maintaining, expanding and protecting our intellectual property
portfolio, including potential litigation costs and
liabilities.
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. Raising capital through the sale of
equity, or securities convertible into equity, 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.
38
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 ongoing 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 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.
The Company’s revenue may become subject to tightened
regulation that may affect the Company’s financial
condition.
Currently we are
not generating any meaningful revenue, which revenue is currently
primarily comprised of technical services relating to the
preparation of subset T-Cell and clonality assay platform
technology for treatment of cancers. Nonetheless our revenue may be
subject to the risk of progressive regulatory actions by the PRC
government. From time to time there may also be adverse publicity
relating to the practice of cell therapy 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.
39
Our business activities for fiscal 2020 are expected to
be adversely affected by the recent coronavirus outbreak in
China.
In
December 2019, a novel strain of coronavirus was reported to have
surfaced in Wuhan, China. The Wuhan coronavirus, or 2019-nCoV,
currently appears to be spreading at a fast rate, indicating its
highly contagious nature. The number of confirmed cases in China
has been steadily increasing, with the mortality rate around 2.1%.
The coronavirus also displayed longer incubation period and is
contagious before symptoms appear. In reaction towards the outbreak
of this new contagious disease, an increasing number of countries
imposed travel suspensions to/from China following the World Health
Organization’s “public health emergency of
international concern” (PHEIC) announcement on January 30,
2020. For the month after the outbreak of the coronavirus, domestic
business activities in China had been disrupted by a series of
emergency quarantine measures taken by the government.
Emergency
quarantine measures and travel restrictions cause business
disruptions across China, which we expect to seriously slow down
our business operation, which would harm our financial condition
and increase our costs and expenses. The evolution of quarantine
measures and travel restrictions will likely result in negative
consequences for our process development and clinical studies in
China. Our business operations, and those of our third-party
research institution collaborators, suppliers and other
contractors, are subject to the business interruptions arising from
these measures. Business disruptions across China would also
negatively affect the sources and availability of raw material,
which are essential to the operation of our business. Damage or
extended periods of interruption to our corporate, development,
research or manufacturing facilities due to this coronavirus
outbreak will likely cause us to cease or delay process development
or clinical studies of some or all of our pipeline drug candidates.
In addition, our business is subject to risks associated with the
global spread of the coronavirus as we operate in both China and
the U.S. Our process development of drug candidates involves
traveling of key personnel between China and the U.S. on a frequent
and regular basis, which has been disrupted due to travel
restrictions and cancellation of flights. Accordingly, our business
and financial results in the future will likely be adversely
affected due to significant adverse development of the coronavirus
globally.
The
extent to which the coronavirus negatively impacts our business
results is highly uncertain and cannot be accurately predicted. We
believe that the coronavirus outbreak and the measures taken to
control it may have a large negative impact on economic activities
in China. A majority part of our business operations is conducted
in China and we have strategic partnership with Chinese partners or
partners’ Chinese operations with regard to our supply chain,
clinical development and pipeline projects, which are all expected
to be negatively affected by the coronavirus outbreak. The
magnitude of this negative effect on the continuity of our business
operation and supply chains in China remains uncertain. These
uncertainties impede our ability to conduct our daily operations
and could materially and adversely affect our business, financial
condition and results of operations.
Our clinical development activities for fiscal 2020 are
expected to be adversely affected by the recent coronavirus
outbreak in China.
Our
investigator has initiated clinical trials on our drug candidates
that have been negatively affected by the emergency quarantine
measures adopted by the Chinese government, which include holiday
extension, travel restrictions and cancellation of major events
nationwide. Disruptions or restrictions on our ability to travel or
to conduct clinical trials, as well as temporary closures of our
facilities or the facilities of our clinical trials partners and
their contract manufacturers, would negatively impact our clinical
development activities in China. We have invested a significant
portion of our efforts and financial resources in the development
of clinical-stage drug candidates. We partially rely on our
third-party institution collaborators, such as hospitals for
conducting clinical trials of our drug candidates, which may be
affected by the emergency measures. The timely completion of our
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 trial until its conclusion. We may
experience difficulties in patient enrollment due to
government-imposed travel restrictions, limited access to public
venues and patients’ unwillingness to visit hospitals for
fear of attracting the coronavirus. Such difficulties would likely
slow enrollment significantly in, and completion of, our clinical
trials (which are mostly conducted on-site in hospitals), as well
as completion of pre-clinical studies.
The
duration of the business disruption, reduced patient enrollment and
related operational impact cannot be reasonably estimated at this
time but are expected to materially affect our clinical development
activities. A significant outbreak of contagious diseases in the
human population could result in a widespread health crisis that
could adversely affect the economy and financial markets of China
and may escalate globally, resulting in significant clinical trial
or regulatory delays, which may also increase our development costs
and could materially and adversely affect our clinical development
activities.
40
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.
Investors can face difficulty enforcing federal securities laws or
other legal rights because some of our assets are currently located
in the PRC.
A
portion of our assets are located in the PRC. As a result, it can
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.
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 risks we
face in connection with having operations in China that may
adversely affect our business and results of operations
include:
●
our inability to
enforce or obtain a remedy under any material
agreements;
●
PRC restrictions on
foreign investment that could impair our ability to conduct our
business or acquire or contract with other entities in the
future;
●
restrictions on
currency exchange that may limit our ability to use cash flow most
effectively or to repatriate our investment;
●
fluctuations in
currency values;
●
cultural, language
and managerial differences that may reduce our overall performance;
and
●
political
instability in China.
Cultural, language and managerial differences can 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.
41
We face risks related to enforcing our rights in China given
certain features of its legal and judicial system.
China’s legal
and judicial system can negatively impact foreign investors. The
legal system in China is evolving rapidly, and enforcement of laws
is inconsistent. Obtaining swift and equitable enforcement of laws
or enforcement of the judgment of one court by a court of another
jurisdiction is not always possible. 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 can
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 can be difficult to
effect within the United States. Also, some of our assets are
located outside the United States and a judgment obtained in the
United States against us is not always 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.
The inability to utilize our assets in China can result in
losses.
The
Company’s Shanghai and Wuxi laboratory facilities were
originally intended for stem cell research and development, but
have been equipped to provide comprehensive cell manufacturing,
collection, processing and storage capabilities to provide cells
for clinical trials. If the Company does determines not to renew
the lease due to limitations on its utility under the new
regulatory initiatives in China or otherwise, the Company will be
subject to certain expenses in connection with returning the
premises to the landlord.
Restrictions on currency exchange can 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 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, and Notice of the State Administration
of Foreign Exchange on Reforming and Regulating the Policies for
the Administration of Settlement of Foreign Exchange under Capital
Accounts promulgated on June 9, 2016, or the SAFE Notice 16,
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 can 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 can 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. We anticipate 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 can 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
would likely have a material adverse effect on our business,
financial condition and results of operations.
Future foreign investments in CBMG that are subject to review by
the Committee on Foreign Investment in the United States (CFIUS)
may prevent, delay, limit or otherwise adversely affect any
proposed investment.
The
Foreign Investment Risk Review Modernization Act (FIRRMA) enacted
in August 2018, significantly expanded the jurisdiction of CFIUS,
permitting CFIUS to review certain non-controlling investments by
foreign persons in U.S. businesses. In November 2018, the U.S.
Department of the Treasury initiated a pilot program to implement
this new authority. Under the pilot program, CFIUS requires that it
be given prior notice of and an opportunity to review certain
proposed non-controlling foreign investments in companies engaged
in biotechnology research and development that deal in
“critical technologies.” Depending upon the results of
its review, CFIUS could impose mitigation measures or block the
investment. The term “critical technologies,” includes
items subject to certain U.S. export controls and “emerging
and foundational technologies.” U.S. regulators have yet to
define “emerging and foundational technologies,” but
have indicated that this category may be defined to include certain
biotechnology.
42
To
date, CBMG has not identified any “critical
technologies” that would subject future foreign investment in
CBMG to CFIUS review. However, depending on the particulars of any
future investments, how the concept of “critical
technologies” is applied to CBMG’s existing business
and any future developments thereto, and any relevant regulatory
developments in the future, future foreign investment in CBMG could
be subject to CFIUS review, which could prevent, delay, limit or
otherwise adversely affect the contemplated financing, any of which
could have a material adverse effect on CBMG’s business,
financial condition and results of operations.
Trade controls and related legal risks can have a material adverse
effect on our business.
We
are subject to trade controls, including U.S. sanctions and export
controls, which impose certain restrictions on our international
operations. We are committed to conducting all of our operations
around the globe ethically and in compliance with applicable laws
and company policy, including these trade controls and, to date, we
have not identified any instances of noncompliance. However,
despite our compliance efforts, we cannot assure you that we will
effectively prevent any and all future noncompliance, particularly
given the uncertainties regarding the interpretation and
implementation of these trade controls in each jurisdiction in
which we have a presence.
New
and changing trade protections, regulatory requirements and
policies affecting trade and investment, trade disputes,
regulations governing imports or exports, economic sanctions and
enforcement activities present added and ever-changing risks for
our global business. However, it is not possible to predict what
types of new controls may be imposed or how existing controls will
be administered, and therefore we cannot predict the effect such
changes could have on our international operations. These changes
could adversely affect our business, and failure to react and adapt
and ultimately comply with any of the foregoing can lead to
sanctions, fines, penalties and other government-imposed mandates
that could have a material adverse effect on our business,
financial condition and results of operations.
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 will have on our business.
The pharmaceutical industry in China is highly regulated, and such
regulations are subject to change, which may affect approval and
commercialization of our drugs.
The
pharmaceutical industry in China is subject to comprehensive
government regulation and supervision, encompassing the approval,
registration, manufacturing, packaging, licensing and marketing of
new drugs. In recent years, The NMPA and other regulatory
authorities in China have implemented a series of new laws and
regulations regarding the pharmaceuticals industry, including
medical research and the stem cell industry, and we expect such
significant changes will continue. In addition, there are
uncertainties regarding the interpretation and enforcement of PRC
laws, rules and regulations. For example, under the trial
guidelines concerning development and testing of cell therapy
products issued in December 2017, there remain uncertainties
regarding the interpretation and application of PRC Laws on our
clinical studies and these factors could adversely affect the
timing of the clinical studies, the timing of receipt and reporting
of clinical data, the timing of Company-sponsored IND filings, and
our ability to conduct future planned clinical studies, and any of
the above could have a material adverse effect on our
business.
The NMPA’s recent reform of the drug and
approval system may face implementation challenges. On August 26,
2019, the Standing Committee of the PRC National People’s
Congress approved the new Drug Administration Law, which went into
effect on December 1, 2019. The new Drug Administration Law
incorporates many reform measures that have been introduced by
various administrative notices in the past few years, such as the
adoption of a nationwide MAH system, switch from an approval to a
simpler filing process for institutions conducting clinical trials
for new drugs, and the cancellation of the GMP and GSP
certification procedure (though the relevant GMP and GSP rules are
still applicable to the manufacturing and business activities.) The
Drug Administration Law is positioned as the foundational law in
the field of drug regulation and may also materially impact
commercialization of Kymriah® and
our pipeline drugs and increase our compliance costs. The full
impact of such reforms is uncertain and could prevent us from
commercializing our drug candidates in a timely
manner.
The
National Health Commission and other departments jointly issued the
Implementation Plan for Cancer Prevention and Control (2019-2022)
(the “Implementation Plan”) proposing to enhance the
cancer prevention and control. Supported by the development of
integration of the healthcare industry, education and research the
National Health Commission intends to promote cancer prevention and
treatment, covering a broad scope such as medical services, health
management, health insurance, pharmaceutical equipment,
rehabilitation nursing, etc. The Implementation Plan emphasized the
improvement of the availability of anticancer drugs, acceleration
on the registration and approval of new anticancer drugs the PRC
and abroad, the promotion of the synchronous market listing in the
PRC of new anticancer drugs already marketed abroad, and smooth the
temporary import channels of anticancer drugs urgently needed in
clinical trial medicine. Currently, it is not clear on the future
impact of the Implementation Plan on our business and
strategies.
43
While
we believe our strategies regarding pharmaceutical research,
development, manufacturing and commercialization in China are
aligned with the Chinese government’s policies, these
policies may in the future diverge, such as the new Drug
Administration Law, requiring a change in our strategies. Any such
change can result in increased compliance costs on our business or
cause delays in or prevent the successful research, development,
manufacturing or commercialization of our drug candidates or drugs
in China and reduce the current benefits we believe are available
to us from developing and manufacturing drugs in
China.
Our future capital needs are uncertain, which gives rise to a
substantial doubt about our ability to continue as a going concern.
Our ability to continue as a going concern is dependent on our
ability to raise additional capital or obtain loans from financial
institutions and our operations could be curtailed if we are unable
to obtain the required additional funding when needed. We are not
always able to do so when necessary, and/or the terms of any
financings will not necessarily be advantageous to us.
Our
financial statements for the period ended December 31, 2019 have
been prepared assuming we will continue to operate as a going
concern. However, there can be no assurance that we will have
the financial resources to satisfy our current liabilities and the
capital expenditure needs in the next 12 months, and
therefore, there is substantial doubt about our ability
to continue as a going concern. Our ability to continue as a going
concern is subject to our ability to obtain necessary funding from
outside sources, including obtaining additional funding from the
sale of our securities, grants or other forms of financing. Our
continued negative cash flow increases the difficulty in completing
such sales or securing alternative sources of funding, and there
can be no assurances that we will be able to obtain such funding on
favorable terms or at all. Our inability to obtain sufficient
financing from the sale of our securities or from alternative
sources may require us to reduce, defer or discontinue certain of
our research and development and operating activities or we may not
be able to continue as a going concern. Our financial statements do
not include any adjustments that might result from the outcome of
the uncertainty regarding our ability to continue as a going
concern. If we cannot continue as a going concern, our shareholders
may lose their entire investment in our ordinary shares. Future
reports from our independent registered public accounting firm may
also contain statements expressing doubt about our ability to
continue as a going concern.
Changes and new proposed rulemaking in China regarding foreign
investment can affect our operations in China.
Our
operations in China are subject to government regulations that
limit or prohibit direct foreign investment, which can 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.
China’s
legal framework surrounding foreign investment entered into a new
era after the new Foreign Investment Law goes into effect on
January 1, 2020. The Foreign Investment Law is positioned as the
foundational law in the field of foreign investment and will apply
uniformly across all foreign investment in China. It replaces the
Law of the People’s Republic of China on Wholly Foreign-Owned
Enterprises, the Law of the People’s Republic of China on
Sino-Foreign Equity Joint Ventures, and the Law of the
People’s Republic of China on Sino-Foreign Cooperative Joint
Ventures (the three previous foreign investment laws). It is
expected that the relevant authorities will take this opportunity
to systematically evaluate and revise the current foreign
investment system and rules in order to form a unified legal system
for foreign investment, which is comprised of:
●
Pre-establishment
national treatment and negative list system. Foreign investors and
their investments will be granted treatment no less favorable than
that granted to Chinese domestic investors and their investments at
the entrance stage of the investment. Foreign investors may not
invest in fields where a “negative list” prohibits
foreign investment, unless the investor meets certain conditions
stipulated in the list.
●
Foreign
investment information reporting system. Foreign investors or
foreign-invested enterprises must submit investment information to
the competent department of commerce through the enterprise
registration system and the enterprise credit information publicity
system.
●
Foreign
investment national security review system. This system is adopted
to determine whether a foreign investment may affect national
security. Subsequent legislation may clarify the scope, content,
procedure, time limit and legal consequences of the review
process.
The
Foreign Investment Law is expected to affect foreign investors with
regard to organizational structure and governance structure,
transfer of monetary funds and intellectual property protection and
technology transfer. If the relevant Chinese authorities find us or
any business combination to be in violation of the Foreign
Investment Law and its implementation rules, our current corporate
governance practices and business operations may be materially
affected and our compliance costs may increase
significantly.
44
Certain of our clinical studies are not registered with relevant
authorities.
Under
the trial guidelines concerning development and testing of cell
therapy products issued in December 2017, an applicant of the
clinical trial of the said cell therapy products can be divided
into early clinical trials and confirmatory clinical trials,
instead of the application of the traditional phases I, II and III
of a clinical trial. Certain of our clinical studies initiated or
sponsored or being initiated or being sponsored by our PRC
subsidiaries have not been duly registered or filed by our clinical
trial partners with, or have been issued the approval by, the NMPA
or the National Health Commission of the PRC, or the NHC, in
accordance with then-applicable PRC Law. All clinical studies on
trials conducted in China will be required to be approved,
registered or filed and conducted at hospitals accredited by the
NMPA or by the NHC after the relevant implementing regulations are
implemented within the allotted time and any failure of the
hospitals to register or file the clinical studies with the NMPA
may result in delays or interruptions to such clinical studies or
trials. There remain uncertainties regarding the interpretation and
application of PRC Laws on our clinical studies and these factors
can adversely affect the timing of the clinical studies, the timing
of receipt and reporting of clinical data, the timing of
Company-sponsored IND filings and our ability to conduct future
planned clinical studies, and any of the above could have a
material adverse effect on our business.
The uncertainties surrounding the current healthcare reform
measures in China can affect all material aspects of the research,
development, manufacturing and commercialization of pharmaceutical
products.
In
recent years, the regulatory framework in China regarding the
pharmaceutical industry has undergone significant changes, which we
expect will continue. While we believe our strategies regarding
pharmaceutical research, development, manufacturing and
commercialization in China are aligned with the Chinese
government’s policies, they may in the future diverge,
requiring a change in our strategies. Any such change can result in
increased compliance costs on our business or cause delays in or
prevent the successful research, development, manufacturing or
commercialization of our drug candidates or drugs in China and
reduce the current benefits we believe are available to us from
developing and manufacturing drugs in China.
We
expect that healthcare reform measures by the MOH and NMPA may
result in more rigorous coverage criteria and an additional
downward pressure on the development and manufacturing of drugs.
Legislative and regulatory proposals have been made to expand
approval requirements and restrict clinical trial activities for
pharmaceutical products. We cannot be sure whether additional
legislative changes will be enacted, or whether MOH and NMPA
regulations, guidance or interpretations will be changed, or what
the impact of such changes on the regulatory approvals of our drug
candidates, if any, may be. In particular, because these laws,
rules and regulations are relatively new and often give the
relevant regulator significant discretion in how to enforce them,
and because of the limited number of published decisions and the
nonbinding nature of such decisions, the interpretation and
enforcement of these laws, rules and regulations involve
uncertainties and can be inconsistent and unpredictable. For
example, we may need to amend clinical trial protocols submitted to
applicable regulatory authorities to reflect changes in regulatory
requirements and guidance. Resubmission may impact the costs,
timing or successful completion of a clinical trial. Amendments may
require us to resubmit clinical trial protocols to institutional
review boards or ethics committees for reexamination, which may
impact the costs, timing or successful completion of a clinical
trial. Any delays in completing our clinical trials will increase
our costs, slow down our drug candidate development and approval
process and jeopardize our ability to commence product sales and
generate related revenues for that candidate. Any of these
occurrences may harm our business, financial condition and
prospects significantly.
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.
45
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, Chen Mingzhe and
Lu Junfeng, have no interest in acting contrary to the VIE
agreements. However, if 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 nonpayment 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
subjects 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, payoffs, 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 are subject to severe penalties and other
consequences that may have a material adverse effect on our
business, financial condition and results of
operations.
Share compensation grants to persons who are PRC citizens may
require registeration with SAFE. We 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 have obtained the SAFE approvals
under Circular 7 for one PRC subsidiary. Failure to comply with
these regulations subjects us or our PRC employees who have been
granted stock options to fines and legal sanctions and we may no
longer be able 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.
The Labor Contract Law and its implementation regulations can
increase our operating expenses and 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 can 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, there can be no assurance 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 can 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. Severe
penalties or incur significant liabilities in connection with labor
disputes or investigations can adversely affect our business and
results of operations.
Relations between the United States and China impacts our stock
price and can lead to 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,
leading to future controversies between these two countries. Any
political or trade controversies between the U.S. and China can
adversely affect the market price of our common stock and our and
our clients’ ability to access U.S. capital
markets.
46
PRC regulations of loans to PRC entities and direct investment in
PRC entities by offshore holding companies can delay or prevent us
from using the proceeds of this offering to make loans or
additional capital contributions to our PRC
subsidiary.
We have
in the past and may in the future 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, is subject to a
quota based on the statutory formulas and there are two alternative
applicable quotas: the difference between the registered capital
and total investment of the PRC subsidiary; certain times of the
net asset value of PRC subsidiary (currently up to twice of the net
assets value) 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 are not always able to
obtain these government registrations or approvals on a timely
basis, if at all. Failure to receive such registrations or
approvals impacts 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. 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 face risks relating to restrictions on our ability to inject
capital into our PRC subsidiary and our PRC subsidiary’s
ability to distribute profits to us in connection with PRC resident
shareholders beneficial owners that 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.
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.
47
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 nonresident
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,
can 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 Cellular Biomedicine
Group Ltd. (HK), a wholly owned subsidiary of the Company
(“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.
A new
China taxation rule about the “beneficial owner” in a
tax agreement became effective on April 1, 2018 which superseded
Circular 601 and could affect the determination of whether a
resident of a contracting state is the “beneficial
owner” of an item of income under China’s tax treaties
and similar arrangements.
Restrictions on the remittance of RMB into and out of China and
governmental control of currency conversion can 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.
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 can be materially
and adversely affected if recent value added tax reforms in the PRC
become unfavorable to our PRC subsidiary or VIE.
Our PRC
subsidiary and the VIE have been subject to a value added tax, or
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. 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.
48
Failure to comply with PRC regulations regarding the registration
requirements for stock ownership plans or stock option plans
subjects 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. We have obtained the SAFE approvals
regarding our PRC resident employees participating in our share
incentive plans. If we or any our PRC resident option grantees fail
to follow the compliance with above 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 can have a material adverse
effect on the value of the 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
the third quarter.
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 can 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.
49
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.
On July
30, 2017, MOFCOM issued the Interim Measures on Filing
Administration of Establishment and Changes of Foreign-Invested
Enterprises (2017 Revision) which came into force as of July 30,
2017. It is stipulated in the Interim Measures that the
transformation of a non-foreign invested enterprise into a foreign
invested enterprise through M&A, merger by absorption, foreign
investor’s strategic investment into non-foreign invested
listed company, etc. would no longer be subject to MOFCOM approval,
but instead would only need to undergo the simplified filing
procedures with MOFCOM, in case the business of the target
enterprise does not fall into the foreign investment negative list.
But, if any business of the target enterprise falls into the
foreign investment negative list, the complex procedures for an
acquisition of the target enterprise by foreign investors would be
still applicable.
The heightened scrutiny over acquisition transactions by the PRC
tax authorities can 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 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 can 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 will
not necessarily be successful in defending these leases against
bona fide third parties.
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.
50
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.
On
November 18, 2016, the PCAOB issued its 2016 to 2020 Strategic Plan
on improving the quality of the audit for the protection and
benefits of investors, which revised the plan to update initiatives
relating to the PCAOB’s new standard-setting process,
planning for and adopting a permanent broker-dealer inspection
program, inspecting firms located in China, audit quality
indicators, monitoring and developing reports related to
independence and the business model of the firms and business
continuity. This may eventually improve PCAOB’s ability to
conduct inspections of independent registered public accounting
firms operating in China.
RISKS RELATED TO OUR COMMON STOCK
Failure to meet all applicable Nasdaq Global Market requirements
can lead to Nasdaq delisting our common stock, which 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
noncompliance 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
face significant material adverse consequences,
including:
●
a limited
availability of market quotations for our securities;
●
reduced liquidity
for our securities;
●
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;
●
a limited amount of
news and analyst coverage; and
●
a decreased ability
to issue additional securities or obtain additional financing in
the future.
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.
51
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 can 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.
We received a preliminary nonbinding proposal from a consortium led
by our Chief Executive Officer to acquire all of our outstanding
equity securities, and uncertainty regarding the potential
transaction and/or announcements related to the potential
transaction can impact our business, financial condition, results
of operations, and the market price of our common
stock.
On
November 11, 2019, the Company received a preliminary nonbinding
proposal letter from a consortium led by our Chief Executive
Officer, Mr. Bizuo (Tony) Liu, certain other senior management
members of the Company, Hillhouse Bio Holdings, L.P., TF Capital
Ranok Ltd., Dangdai International Group Co., Limited and Mission
Right Limited to acquire all outstanding shares of common stock
(each, a “Share,” collectively, the
“Shares”) of the Company (other than those Shares held
by members of the consortium that may be rolled over in connection
with the proposed transaction) for U.S.$19.50 per Share in cash in
a “going-private” transaction (the “Original
Proposed Transaction”). Upon receipt of the letter, the
Company’s Board of Directors (the “Board”) formed
a special committee (the “Special Committee”) comprised
of independent, disinterested directors to evaluate strategic
alternatives with the assistance of its advisors, including the
Original Proposed Transaction. The Special Committee consists of
four members of the Board, Alan Au, Edward Schafer, Terry A.
Belmont and Wen Tao (Steve) Liu, PhD, each of whom are independent,
with Alan Au serving as chairperson.
On
February 21, 2020, the Special Committee received a new preliminary
non-binding proposal letter from a consortium led by Liu, certain
other senior management members of the Company, Hillhouse Bio
Holdings, L.P., TF Capital Ranok Ltd., Dangdai International Group
Co., Limited, Mission Right Limited, Maplebrook Limited, Viktor
Pan, Zheng Zhou, OPEA SRL, Wealth Map Holdings Limited, Earls Mill
Limited (the “Consortium Members”) to acquire all
outstanding Shares of the Company (other than those Shares held by
members of the Consortium that may be rolled over in connection
with the proposed transaction) for U.S.$19.50 per Share in cash in
a “going-private” transaction (the “New Proposed
Transaction”). The Special Committee will consider the New
Proposed Transaction in connection with its evaluation of strategic
alternatives.
The
possibility of a “going-private” transaction, such as
the Original Proposed Transaction or the New Proposed Transaction,
or any other potential strategic alternative transaction, exposes
us and our operations to a number of risks and uncertainties,
including the potential failure to retain, attract or strengthen
our relationships with key personnel, current and potential
customers, suppliers, licensors and partners, which may cause them
to terminate, or not to renew or enter into, arrangements with us;
the potential incurrence of expenses associated with the retention
of legal, financial and other advisors regardless of whether any
transaction is consummated; distractions and disruptions in our
business; and exposure to potential litigation in connection with
this process and effecting any transaction, any of which could
adversely affect our share price, business, financial condition and
results of operations as well as the market price of our common
stock. Moreover, there can be no assurance that any definitive
offer in connection with the Original Proposed Transaction or the
New Proposed Transaction will be made or executed, or that the
Original Proposed Transaction, the New Proposed Transaction, or any
other alternative transaction, will be approved or consummated.
Announcements regarding developments relating to the Original
Proposed Transaction or the New Proposed Transaction can cause the
market price of our common stock to fluctuate
significantly.
52
ITEM 1B.
UNRESOLVED STAFF
COMMENTS
None.
ITEM 2.
PROPERTIES
Our
corporate headquarters are located at 1345 Avenue of Americas, 15th
Floor, New York, New York. 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. 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. We are establishing a 43,000 square foot facility
in Shanghai that will house 25 clean-rooms and equipped with
12 independent production lines to support clinical batch
production and commercial scale manufacturing.
We
currently pay rent for a total of $316,000 per month for an
aggregate of approximately 195,000 square feet of space to house
our administration, research and manufacturing facilities in
Maryland and in the cities of Wuxi and Shanghai in
China.
ITEM 3.
LEGAL
PROCEEDINGS
We are
currently not involved in any 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.
53
PART II
ITEM 5.
MARKET FOR REGISTRANT’S
COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES.
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 24, 2020, there were 20,410,791 shares and 19,355,292
shares of common stock of the Company issued and outstanding,
respectively and there were approximately 1,700 stockholders of
record of the Company’s common stock.
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.
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 “2009
Plan”) and designated 100,000 of its common stock for
issuance under the 2009 Plan to employees, directors or consultants
for the Company through either the issuance of shares or stock
option grants. Under the terms of the 2009 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.
As of December 31, 2019, there are 4,593 shares that have not been
issued under this plan.
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 2011 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 2011 Plan was approved by our stockholders on January 17, 2013. There are
2,231 shares available for issuance under this plan as of December
31, 2019.
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 90,011 shares
available for issuance under this plan as of December 31,
2019.
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 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
affected without receipt of consideration by the
Company.
54
Under
the 2013 Plan, the Board or its administrator has the authority:
(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; and (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 may
be granted to employees, directors and consultants. Incentive Stock
Options 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
1,200,000 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. In 2017, the Company’s Board of
Directors approved the Amended and Restated 2014 Incentive Stock
Option Plan (the “Restated 2014 Plan”), which amended
and restated the 2014 Plan to increase the number of shares
available for issuance by 1,000,000 shares. The Restated 2014 Plan
was approved by our stockholders on April 28, 2017. There are
167,048 shares available for issuance under this plan as of
December 31, 2019.
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 1,200,000
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 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 affected without
receipt of consideration by the Company.
Under
the 2014 Plan, the Board or its administrator has the authority:
(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; and (ix) to take such other action, not
inconsistent with the terms of the 2014 Plan, as the administrator
deems appropriate.
55
The
awards under the 2014 Plan other than Incentive Stock Options may
be granted to employees, directors and consultants. Incentive Stock
Options 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 2014 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.
2019 Stock Incentive Plan
On July 1, 2019, the Company’s Board of
Directors adopted the Cellular Biomedicine Group, Inc. 2019 Stock
Incentive Plan (the “2019 Plan”) covering 1,500,000
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 2019 Plan was approved by our stockholders on April
26, 2019. There are 1,418,370 shares available for issuance
under this plan as of December 31, 2019.
The
following summary describes the material features of the 2019 Plan.
The summary, however, does not purport to be a complete description
of all the provisions of the 2019 Plan. The following description
is qualified in its entirety by reference to the Plan.
Description of the 2019 Plan
The
purpose of the 2019 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 1,500,000
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 2019 Plan is made pursuant to the
terms and conditions provided for in 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 affected without
receipt of consideration by the Company.
Under
the 2019 Plan, the Board or its administrator has the authority:
(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 2019 Plan; (vii) to amend the terms of any
outstanding award granted under the 2019 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 2019 Plan and awards, including without
limitation, any notice of award or Award Agreement granted pursuant
to the 2019 Plan; and (ix) to take such other action, not
inconsistent with the terms of the 2019 Plan, as the administrator
deems appropriate.
The
awards under the 2019 Plan other than Incentive Stock Options may
be granted to employees, directors and consultants. Incentive Stock
Options 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 2019 Plan will be subject to the terms and conditions
established by the administrator. Under the terms of the 2019 Plan,
the exercise price of the options will not be less than the fair
market value (as determined under the 2019 Plan) of our common
stock at the time of grant. Options granted under the 2019 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 2019 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 2019 Plan may be amended, suspended or terminated by the
Board, or an administrator appointed by the Board, at any time and
for any reason.
56
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, 2019. The
graph and table assume that $100 was invested on the last day of
trading for the fiscal year 2014 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.
57
Dividends
We have
not in the past and do not anticipate paying cash dividends on our
common stock in the foreseeable future. The declaration, payment
and amount of future dividends, if any, 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.
Recent Sales of Unregistered Securities
None.
Issuer Purchases of Equity Securities
As previously disclosed on a Current Report on
Form 8-K filed on June 1, 2017, the Company authorized a share
repurchase program (the “2017 Share Repurchase Program”) pursuant to
which the Company may, from time to time, purchase shares of its
common stock for an aggregate purchase price not to exceed $10
million under which approximately $6.52 million in shares of common
stock were repurchased. On October 10, 2018, the Company commenced
a share repurchase program (the “2018 Share Repurchase Program”) pursuant to
which the Company may, from time to time, purchase shares of its
common stock for an aggregate purchase price not to exceed
approximately $8.48 million. We completed all of our repurchase
plans on March 31, 2019 for a grand total of 1,055,499 shares for a
total purchase price of $14.99 million. There were no shares
of common stock repurchased by the Company during the three months
period ended December 31, 2019.
|
Period
|
Total number of
shares purchased
|
Average price
paid per share
|
|
|
|
|
|
June 9, 2017 ~ June
30, 2017
|
170,169
|
$7.98
|
|
July 1, 2017 ~
September 30, 2017
|
114,156
|
$9.51
|
|
October 1, 2017 ~
December 31, 2017
|
142,469
|
$10.77
|
|
January 1, 2018 ~
March 31, 2018
|
37,462
|
$19.10
|
|
April 1, 2018 ~
June 30, 2018
|
96,512
|
$11.86
|
|
July 1, 2018 ~
September 30, 2018
|
-
|
$-
|
|
October 1, 2018 ~
December 31, 2018
|
440,731
|
$16.88
|
|
January 1, 2019 ~
March 31, 2019
|
54,000
|
$19.24
|
|
|
|
|
|
Total
|
1,055,499
|
$14.20
|
58
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.”
Our summary consolidated statement of operations and comprehensive
loss data for the fiscal years ended December 31, 2019, 2018 and
2017 and our summary consolidated balance sheet data as
of December 31, 2019 and 2018, 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, 2017, 2016 and 2015, and
summary consolidated statement of operations and comprehensive loss
data for the fiscal years ended December 31, 2016 and 2015, set
forth below are derived from our audited consolidated financial
statements which are not included herein.
Our
consolidated financial statements are prepared and presented in
accordance with accounting principles generally accepted in the
United States (“GAAP”).
|
|
For the Year
EndedDecember 31,
|
||||
|
|
2019
|
2018
|
2017
|
2016
|
2015
|
|
|
|
|
|
|
|
|
Summary
Consolidated statement of operations and comprehensive loss
data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales and
revenue
|
$339,920
|
$224,403
|
$336,817
|
$627,930
|
$2,505,423
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
Cost of
sales
|
62,378
|
135,761
|
162,218
|
860,417
|
1,880,331
|
|
General and
administrative
|
13,458,151
|
13,220,757
|
12,780,483
|
11,670,506
|
13,068,255
|
|
Selling and
marketing
|
141,597
|
308,830
|
360,766
|
425,040
|
709,151
|
|
Research and
development
|
37,669,978
|
24,150,480
|
14,609,917
|
11,475,587
|
7,573,228
|
|
Impairment of
non-current assets
|
-
|
2,914,320
|
-
|
4,611,714
|
123,428
|
|
Total
operating expenses
|
51,332,104
|
40,730,148
|
27,913,384
|
29,043,264
|
23,354,393
|
|
Operating
loss
|
(50,992,184)
|
(40,505,745)
|
(27,576,567)
|
(28,415,334)
|
(20,848,970)
|
|
|
|
|
|
|
|
|
Other
income:
|
|
|
|
|
|
|
Interest
income
|
809,785
|
392,328
|
133,621
|
78,943
|
42,220
|
|
Other
income
|
199,390
|
1,172,879
|
1,955,086
|
132,108
|
630,428
|
|
Total
other income
|
1,009,175
|
1,565,207
|
2,088,707
|
211,051
|
672,648
|
|
Loss before
taxes
|
(49,983,009)
|
(38,940,538)
|
(25,487,860)
|
(28,204,283)
|
(20,176,322)
|
|
|
|
|
|
|
|
|
Income taxes credit
(provision)
|
(1,045)
|
(4,954)
|
(2,450)
|
(4,093)
|
728,601
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$(49,984,054)
|
$(38,945,492)
|
$(25,490,310)
|
$(28,208,376)
|
$(19,447,721)
|
|
Other comprehensive
income (loss):
|
|
|
|
|
|
|
Cumulative
translation adjustment
|
8,242
|
(1,079,689)
|
967,189
|
(743,271)
|
(307,950)
|
|
Unrealized
gain (loss) on investments, net of tax
|
-
|
-
|
(240,000)
|
5,300,633
|
(1,376,540)
|
|
Reclassification
adjustments, net of tax, in connection with other-than-temporary
impairment of investments
|
-
|
-
|
-
|
(5,557,939)
|
-
|
|
Total other
comprehensive income (loss):
|
8,242
|
(1,079,689)
|
727,189
|
(1,000,577)
|
(1,684,490)
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
$(49,975,812)
|
$(40,025,181)
|
$(24,763,121)
|
$(29,208,953)
|
$(21,132,211)
|
|
|
|
|
|
|
|
|
Net loss per share
:
|
|
|
|
|
|
|
Basic
and diluted
|
$(2.63)
|
$(2.20)
|
$(1.78)
|
$(2.09)
|
$(1.70)
|
|
|
|
|
|
|
|
|
Weighted average
common shares outstanding:
|
|
|
|
|
|
|
Basic
and diluted
|
18,983,206
|
17,741,104
|
14,345,604
|
13,507,408
|
11,472,306
|
59
|
|
As ofDecember
31,
|
||||
|
|
2019
|
2018
|
2017
|
2016
|
2015
|
|
Summary
Consolidated balance sheet data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash
equivalents
|
$15,443,649
|
$52,812,880
|
$21,568,422
|
$39,252,432
|
$14,884,597
|
|
Current working
capital (1)
|
10,356,774
|
46,566,505
|
20,118,725
|
38,328,048
|
13,675,034
|
|
Total
assets
|
97,324,300
|
107,581,349
|
61,162,296
|
68,628,467
|
49,460,422
|
|
Other non-current
liabilities
|
17,933,743
|
14,321,751
|
183,649
|
370,477
|
76,229
|
|
Stockholders’
equity
|
55,717,691
|
85,218,392
|
57,302,526
|
65,893,954
|
46,364,936
|
(1)
Current working
capital is the difference between total current assets and total
current liabilities.
(2)
Current working
capital, total assets and other non-current liabilities do not
include the retrospective adjustments for adoption of ASU No.
2016-02 “Leases (Topic 842)” as of December 31,
2017, 2016 and 2015.
ITEM 7.
MANAGEMENT’S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.
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 -
Financial Statements and Supplemental Data 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.
Revenue Recognition
Revenues consist
mainly of cell banking services as well as cell therapy technology
services with customers. The Company evaluates the separate
performance obligation(s) under each contract, allocates the
transaction price to each performance obligation considering the
estimated stand-alone selling prices of the services and recognizes
revenue upon the satisfaction of such obligations over time or at a
point in time dependent on the satisfaction of one of the following
criteria: (1) the customer simultaneously receives and consumes the
economic benefits provided by the vendor’s performance; (2)
the vendor creates or enhances an asset controlled by the customer;
or (3) the vendor’s performance does not create an asset for
which the vendor has an alternative use, and the vendor has an
enforceable right to payment for performance completed to date.
Revenue from rendering of services is measured at the fair value of
the consideration received or receivable under the contract or
agreement. Revenue from cell therapy technology services is
recognized in profit or loss at the point when customers
simultaneously receive and consume the services. Revenue from cell
banking storage is recognized in profit or loss on a straight-line
basis over the storage period.
60
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. Property, plant and
equipment are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount may not be
recoverable. If the sum of the expected future undiscounted cash
flow is less than the carrying amount of the asset, a loss is
recognized for the difference between the fair value and carrying
value of the asset. Repair and maintenance costs are charged to
operating expense as incurred.
For the
years ended December 31, 2019, 2018 and 2017, depreciation expense
was $4,187,330, $3,360,517 and $1,195,705,
respectively.
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.
The
evaluation includes comparing the fair value of the reporting unit
to the carrying value, including goodwill. If the fair value
exceeds the carrying value, no impairment loss is recognized.
However, if the carrying value of the reporting unit exceeds its
fair value, the goodwill of the reporting unit may be impaired.
Impairment is measured by comparing the implied fair value of the
goodwill to its carrying value.
The
carrying amount of the goodwill at December 31, 2019 and 2018
represents the cost arising from the business combinations in
previous years and no impairment on goodwill was recognized for the
years ended December 31, 2019 and 2018 as the Company continues to
use the patents and knowhow acquired in the business combination in
the Company’s current immune therapy R&D activities and
there was no indication for impairment.
Government Grants
Government grants
are recognized in the balance sheet initially when there is
reasonable assurance that they will be received and that the
enterprise will comply with the conditions attached to them. When
the Company received the government grants but the conditions
attached to the grants have not been fulfilled, such government
grants are deferred and recorded as deferred income. The
classification of short-term or long-term liabilities is depended
on the management’s expectation of when the conditions
attached to the grant can be fulfilled. Grants that compensate the
Company for expenses incurred are recognized as other income in
statement of income on a systematic basis in the same periods in
which the expenses are incurred.
61
For the
years ended December 31, 2019, 2018 and 2017, the Company received
government grants of $824,782, $1,105,272 and $1,905,213,
respectively, for purposes of R&D and related capital
expenditure. Government subsidies recognized as other income in the
statement of income for the year ended December 31, 2019, 2018 and
2017 were $671,404, $1,119,827 and $2,077,486,
respectively.
Valuation of Long-lived Asset
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. In
that event, a loss is recognized based on the amount by which the
carrying value exceeds the fair market value of the long-lived
asset and intangible assets. Fair market value is determined
primarily using the anticipated cash flows discounted at a rate
commensurate with the risk involved. Losses on long-lived assets
and intangible assets to be disposed are determined in a similar
manner, except that fair market values are reduced for the cost to
dispose.
Income Taxes
Income
taxes are accounted for using the asset and liability method. Under
this method, deferred income tax assets and liabilities are
recognized for the future tax consequences attributable to
temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax
bases. Deferred income tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which these temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. A valuation allowance
would be provided for those deferred tax assets if it is more
likely than not that the related benefit will not be
realized.
A full
valuation allowance has been established against all net deferred
tax assets as of December 31, 2019 and 2018 based on estimates of
recoverability. While the Company has optimistic plans for its
business strategy, we determined that such a valuation allowance
was necessary given the current and expected near term losses and
the uncertainty with respect to the Company’s ability to
generate sufficient profits from its business model.
Share-Based Compensation
The
Company periodically uses stock-based awards, consisting of shares
of common stock and stock options, to compensate certain officers
and consultants. Shares are expensed on a straight-line basis over
the requisite service period based on the grant date fair value,
net of estimated forfeitures, if any. We currently use the Black-Scholes option-pricing
model to estimate the fair value of our stock-based payment awards.
This model requires the input of subjective assumptions, including
the fair value of the underlying common stock, the expected
volatility of the price of our common stock, risk-free interest
rates, the expected term of the option and the expected dividend
yield of our common stock. These estimates involve inherent
uncertainties and the application of management’s judgment.
If factors change and different assumptions are used, our
stock-based compensation expense could be materially different in
the future. These assumptions are estimated as
follows:
●
Fair
Value of Our Common Stock — Our common stock is valued by
reference to the publicly-traded price of our common
stock.
●
Expected
Volatility — Prior to the Eastbridge merger, we did not have
a history of market prices for our common stock and since the
merger, we do not have what we consider a sufficiently active and
readily traded market for our common stock to use historical market
prices for our common stock to estimate volatility. Accordingly, we
estimate the expected stock price volatility for our common stock
by taking the median historical stock price volatility for industry
peers based on daily price observations over a period equivalent to
the expected term of the stock option grants. Industry peers
consist of other public companies in the stem cell industry similar
in size, stage of life cycle and financial leverage. We intend to
continue to consistently apply this process using the same or
similar public companies until a sufficient amount of historical
information regarding the volatility of our own common stock share
price becomes available.
●
Risk-Free
Interest Rate — The risk-free interest rate assumption is
based on observed interest rates appropriate for the expected terms
of our awards. The risk-free interest rate assumption is based on
the yields of U.S. Treasury securities with maturities similar to
the expected term of the options for each option
group.
●
Expected
Term — The expected term represents the period that our
stock-based awards are expected to be outstanding. The expected
terms of the awards are based on a simplified method which defines
the life as the average of the contractual term of the options and
the weighted-average vesting period for all open
tranches.
●
Expected
Dividend Yield — We have never declared or paid any cash
dividends and do not presently plan to pay cash dividends in the
foreseeable future. Consequently, we used an expected dividend
yield of zero.
62
In
addition to the assumptions used in the Black-Scholes
option-pricing model, the amount of stock option expense we
recognize in our consolidated statements of operations includes an
estimate of stock option forfeitures. We estimate our forfeiture
rate based on an analysis of our actual forfeitures and will
continue to evaluate the appropriateness of the forfeiture rate
based on actual forfeiture experience, analysis of employee
turnover and other factors. Changes in the estimated forfeiture
rate can have a significant impact on our stock-based compensation
expense as the cumulative effect of adjusting the rate is
recognized in the period the forfeiture estimate is changed. If a
revised forfeiture rate is higher than the previously estimated
forfeiture rate, an adjustment is made that will result in a
decrease to the stock-based compensation expense recognized in the
consolidated financial statements. If a revised forfeiture rate is
lower than the previously estimated forfeiture rate, an adjustment
is made that will result in an increase to the stock-based
compensation expense recognized in our consolidated financial
statements.
Fair Value of Financial Instruments
Under
authoritative guidance from the Financial Accounting Standards Board
(“FASB”) 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. The carrying value of the Company's
borrowing from China Merchant Bank Shanghai Branch approximates
fair value as the borrowing bears interest rates that are similar
to existing market rates
Lease
We
determine if an arrangement is a lease at inception. Operating
leases are included in operating lease right-of-use
(“ROU”) assets, other current liabilities, and
operating lease liabilities in our consolidated balance
sheets.
ROU
assets represent our right to use an underlying asset for the lease
term and lease liabilities represent our obligation to make lease
payments arising from the lease. Operating lease ROU assets and
liabilities are recognized at commencement date based on the
present value of lease payments over the lease term. As most of our
leases do not provide an implicit rate, we use our incremental
borrowing rate based on the information available at commencement
date in determining the present value of lease payments. We use the
implicit rate when readily determinable. The operating lease ROU
asset also includes any lease payments made and excludes lease
incentives. Our lease terms may include options to extend or
terminate the lease when it is reasonably certain that we will
exercise that option. Lease expense for lease payments is
recognized on a straight-line basis over the lease
term.
Investments
Equity
investments, with or without readily determinable fair values, are
measured at fair value with changes in the fair value recognized
through other income (expense) net.
63
Recent Accounting Pronouncements
Accounting pronouncements adopted during the year ended December
31, 2019
In June 2018, the Financial Accounting Standards
Board (“FASB”)
issued ASU 2018-07, which
simplifies several aspects of the accounting for nonemployee
share-based payment transactions resulting from expanding the scope
of Topic 718, Compensation-Stock Compensation, to include
share-based payment transactions for acquiring goods and services
from non-employees. Some of the areas for simplification apply only
to nonpublic entities. The amendments specify that Topic 718
applies to all share-based payment transactions in which a grantor
acquires goods or services to be used or consumed in a
grantor’s own operations by issuing share-based payment
awards. The amendments also clarify that Topic 718 does not apply
to share-based payments used to effectively provide (1) financing
to the issuer or (2) awards granted in conjunction with selling
goods or services to customers as part of a contract accounted for
under Topic 606, Revenue from Contracts with Customers. The
amendments in this Update are effective for public business
entities for fiscal years beginning after December 15, 2018,
including interim periods within that fiscal year. Early adoption
is permitted. The adoption of the ASU 2018-07 did not have a material impact on the
Company’s consolidated financial
statements.
In February 2018, the FASB issued
ASU No. 2018-02, “Income
Statement—Reporting Comprehensive Income (Topic 220):
Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income” (“ASU 2018-02”) which provides
financial statement preparers with an option to reclassify stranded
tax effects within accumulated other comprehensive income to
retained earnings in each period in which the effect of the change
in the U.S. federal corporate income tax rate in the Tax Cuts and
Jobs Act (or portion thereof) is recorded. The amendments in
this ASU are effective for all
entities for fiscal years beginning after December 15, 2018, and
interim periods within those fiscal years. Early adoption of ASU
2018-02 is permitted, including adoption in any interim period for
the public business entities for reporting periods for which
financial statements have not yet been issued. The amendments in
this ASU should be applied
either in the period of adoption or retrospectively to each period
(or periods) in which the effect of the change in the U.S. federal
corporate income tax rate in the Tax Cuts and Jobs Act is
recognized. The adoption of the ASU 2018-02 did not have a material
impact on the Company’s consolidated financial
statements.
In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic
260); Distinguishing Liabilities from Equity (Topic 480);
Derivatives and Hedging (Topic 815): (Part I) Accounting for
Certain Financial Instruments with Down Round Features, (Part II)
Replacement of the Indefinite Deferral for Mandatorily Redeemable
Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Non-controlling Interests with a Scope
Exception” (“ASU
2017-11”) which addresses the complexity of accounting for
certain financial instruments with down round features. Down round
features are features of certain equity-linked instruments (or
embedded features) that result in the strike price being reduced on
the basis of the pricing of future equity offerings.
Current accounting guidance creates
cost and complexity for entities that issue financial instruments
(such as warrants and convertible instruments) with down round
features that require fair value measurement of the entire
instrument or conversion option. The amendments in Part I of
this ASU are effective for
public business entities for fiscal years, and interim periods
within those fiscal years, beginning after December 15, 2018. The
adoption of the ASU 2017-11 did not have a material impact on the
Company’s 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. The adoption impact of the ASU 2016-02 on the
Company’s consolidated financial statements is illustrated in
notes of the accompanying consolidated financial
statements.
64
Accounting pronouncements not yet effective
In August 2018, the FASB issued Accounting
Standards Update (“ASU”) No. 2018-13,
“Fair Value
Measurement (Topic 820)” which eliminates, adds and modifies certain
disclosure requirements for fair value measurements. The modified
standard eliminates the requirement to disclose changes in
unrealized gains and losses included in earnings for recurring
Level 3 fair value measurements and requires changes in unrealized
gains and losses be included in other comprehensive income for
recurring Level 3 fair value measurements of instruments. The
standard also requires the disclosure of the range and weighted
average used to develop significant unobservable inputs and how
weighted average is calculated for recurring and nonrecurring Level
3 fair value measurements. The amendment is effective for fiscal
years beginning after December 15, 2019 and interim periods within
that fiscal year with early adoption permitted. We do not expect
the standard to have a material impact on our consolidated
financial statements.
In January 2017, the FASB issued 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. Public business entity that is a U.S.
Securities and Exchange Commission 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 do not expect the standard to have a material impact 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 do not
expect the standard to have a material impact on our consolidated
financial statements.
65
Comparison of Year Ended December 31, 2019 to Years Ended December
31, 2018 and 2017
|
|
For the Year
Ended December 31,
|
||
|
|
2019
|
2018
|
2017
|
|
|
|
|
|
|
Net sales and
revenue
|
$339,920
|
$224,403
|
$336,817
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
Cost of sales
*
|
62,378
|
135,761
|
162,218
|
|
General and
administrative *
|
13,458,151
|
13,220,757
|
12,780,483
|
|
Selling and
marketing *
|
141,597
|
308,830
|
360,766
|
|
Research and
development *
|
37,669,978
|
24,150,480
|
14,609,917
|
|
Impairment of
non-current assets
|
-
|
2,914,320
|
-
|
|
Total
operating expenses
|
51,332,104
|
40,730,148
|
27,913,384
|
|
Operating
loss
|
(50,992,184)
|
(40,505,745)
|
(27,576,567)
|
|
|
|
|
|
|
Other
income
|
|
|
|
|
Interest
income
|
809,785
|
392,328
|
133,621
|
|
Other
income
|
199,390
|
1,172,879
|
1,955,086
|
|
Total
other income
|
1,009,175
|
1,565,207
|
2,088,707
|
|
Loss before
taxes
|
(49,983,009)
|
(38,940,538)
|
(25,487,860)
|
|
|
|
|
|
|
Income
taxes provision
|
(1,045)
|
(4,954)
|
(2,450)
|
|
Net
loss
|
$(49,984,054)
|
$(38,945,492)
|
$(25,490,310)
|
|
Other comprehensive
income (loss):
|
|
|
|
|
Cumulative
translation adjustment
|
8,242
|
(1,079,689)
|
967,189
|
|
Unrealized
loss on investments, net of tax
|
-
|
-
|
(240,000)
|
|
Total other
comprehensive income (loss):
|
8,242
|
(1,079,689)
|
727,189
|
|
|
|
|
|
|
Comprehensive
loss
|
$(49,975,812)
|
$(40,025,181)
|
$(24,763,121)
|
|
|
|
|
|
|
Net loss per
share:
|
|
|
|
|
Basic
and diluted
|
$(2.63)
|
$(2.20)
|
$(1.78)
|
|
|
|
|
|
|
Weighted average
common shares outstanding:
|
|
|
|
|
Basic
and diluted
|
18,983,206
|
17,741,104
|
14,345,604
|
*
These line items include the following amounts of non-cash,
stock-based compensation expense for the periods
indicated:
|
|
For the Year
Ended December 31,
|
||
|
|
2019
|
2018
|
2017
|
|
|
|
|
|
|
Cost of
sales
|
-
|
-
|
51,288
|
|
General and
administrative
|
1,885,653
|
2,307,191
|
2,935,798
|
|
Selling and
marketing
|
10,225
|
79,845
|
52,984
|
|
Research and
development
|
2,168,103
|
2,439,709
|
2,305,141
|
|
|
4,063,981
|
4,826,745
|
5,345,211
|
66
Segments
The
Company is engaged in the development of new treatments for
cancerous and degenerative diseases utilizing proprietary
cell-based technologies, which have been organized as one reporting
segment since they have similar nature and economic
characteristics. The Company’s principle operating decision
maker, the Chief Executive Officer, receives and reviews the
results of the operations for all major cell platforms as a whole
when making decisions about allocating resources and assessing
performance of the Company. In accordance with FASB ASC 280-10, the
Company is not required to report the segment
information.
Results of Operations:
Revenues
|
|
|
|
|
2019
versus 2018
|
2018
versus 2017
|
||
|
|
2019
|
2018
|
2017
|
Change
|
Percent
| ||