For the Transition Period from __________________   to _________________________

Commission File Number 001-33650

NEOSTEM, INC.

(Exact name of registrant as specified in its charter)

 

DELAWARE	22-2343568
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)
420 LEXINGTON AVE, SUITE 450 NEW YORK, NEW YORK	10170
(Address of principal executive offices)	(zip code)

PART I. FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

NEOSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Unaudited)

		June 30,				December 31,
		2011				2010
ASSETS
Current Assets
Cash and cash equivalents		$	4,850,411			$	15,612,391
Short term investments			546				512
Restricted cash			4,897,447				3,381,369
Accounts receivable trade, net of allowance for doubtful accounts of $356,353 and $210,977, respectively			7,351,964				5,871,474
Inventory			25,008,682				21,023,388
Prepaids and other current assets			1,252,463				993,711
Total current assets			43,361,513				46,882,845
Property, plant and equipment, net			50,285,625				36,998,241
Land use rights, net			4,850,156				4,807,834
Goodwill			37,216,041				27,002,044
Intangible assets, net			31,191,713				24,466,597
Other assets			3,427,356				2,867,188
		$	170,332,404			$	143,024,749
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable		$	9,267,301			$	14,286,929
Accrued liabilities			4,899,097				2,772,019
Bank loans			7,735,000				3,034,000
Notes payable			11,056,948				9,568,398
Mortgages payable - current			185,366				-
Income taxes payable			672,979				1,242,911
Deferred income taxes			780,594				232,075
Unearned revenues			4,169,549				1,708,280
Total current liabilities			38,766,834				32,844,612
Long-term Liabilities
Deferred income taxes			9,498,656				5,959,508
Deferred rent liability			19,730				45,489
Unearned revenues			250,386				282,518
Mortgages payable			3,534,871				-
Derivative liabilities			2,276,011				2,571,367
Amount due related parties			20,009,605				8,301,361
Total long-term liabilities			35,589,259				17,160,243
Commitments and Contingencies
Redeemable Securities
Convertible Redeemable Series E Preferred Stock; 10,582,011 shares designated, liquidation value $1.00 per share; issued and outstanding 9,014,306 and 10,582,011 shares, at June 30, 2011 and December 31, 2010, respectively			5,901,830				6,532,275
			5,901,830				6,532,275
EQUITY
Shareholders' Equity
Preferred stock; authorized, 20,000,000 shares Series B convertible redeemable preferred stock liquidation value, 1 share of common stock, $.01 par value; 825,000 shares designated; issued and outstanding, 10,000 shares at June 30, 2011 and December 31, 2010			100				100
Common stock, $.001 par value, authorized 500,000,000 shares; issued and outstanding, 82,247,287 and 64,221,130 shares, at June 30, 2011 and December 31, 2010, respectively			82,247				63,813
Additional paid-in capital			174,599,266				141,137,522
Accumulated deficit			(116,456,791	)			(95,320,620	)
Accumulated other comprehensive income			4,289,563				2,779,066
Total NeoStem, Inc. shareholders' equity			62,514,385				48,659,881
Noncontrolling interests			27,560,096				37,827,738
Total equity			90,074,481				86,487,619
		$	170,332,404			$	143,024,749

See accompanying notes to consolidated financial statements.

 

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NEOSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Revenues		$	18,460,723			$	19,407,523			$	38,101,836			$	35,240,702
Cost of revenues			13,517,717				12,911,800				27,812,353				23,763,418
Gross profit			4,943,006				6,495,723				10,289,483				11,477,284
Research and development			2,370,468				2,133,172				5,283,727				3,433,542
Selling, general, and administrative			12,590,999				7,865,477				23,015,993				14,154,965
Operating loss			(10,018,461	)			(3,502,926	)			(18,010,237	)			(6,111,223	)
Other income (expense):
Other income (expense), net			600,315				149,571				337,592				(14,502	)
Interest expense			(1,009,686	)			(6,198	)			(1,862,298	)			(14,717	)
			(409,371	)			143,373				(1,524,706	)			(29,219	)
Loss from operations before provision for income taxes and noncontrolling interests			(10,427,833	)			(3,359,553	)			(19,534,942	)			(6,140,442	)
Provision for income taxes			110,059				402,259				702,707				905,203
Net loss			(10,537,892	)			(3,761,812	)			(20,237,649	)			(7,045,645	)
Less - net income attributable to noncontrolling interests			67,875				1,611,501				541,108				2,940,154
Net loss attributable to NeoStem, Inc.			(10,605,767	)			(5,373,313	)			(20,778,757	)			(9,985,799	)
Preferred dividends			170,782				53,771				357,415				153,469
Net loss attributable to NeoStem, Inc. common shareholders		$	(10,776,549	)		$	(5,427,084	)		$	(21,136,172	)		$	(10,139,268	)
Basic and diluted loss per share		$	(0.13	)		$	(0.11	)		$	(0.27	)		$	(0.23	)
Weighted average common shares outstanding			80,567,011				48,771,930				77,117,905				44,419,456

See accompanying notes to consolidated financial statements.

 

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NEOSTEM, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

		For Six Months Ended June 30,
		2011				2010
Cash flows from operating activities:
Net loss		$	(20,237,649	)		$	(7,045,645	)
Adjustments to reconcile net loss to net cash used in operating activities:
Common stock, stock options and warrants  issued as payment for compensation, services rendered and interest expense			6,656,953				4,339,693
Depreciation and amortization			4,582,873				1,465,220
Loss on short term investments			-				34,717
Amortization of preferred stock discount and issuance cost			1,329,187				-
Changes in fair value of derivative liability			(295,356	)			-
Write off of acquired in process research and development			927,000				-
Loss on disposal of assets			396,635				-
Charitable contributions paid with common stock			607,363				-
Bad debt expense			(29,442	)			28,176
Deferred income taxes			(351,320	)			(121,244	)
Changes in operating assets and liabilities:
Prepaid expenses and other current assets			(26,887	)			(78,895	)
Accounts receivable			(882,410	)			(286,184	)
Inventory			(1,495,358	)			(3,331,720	)
Unearned revenues			134,202				(647,749	)
Other assets			97,248				(78,900	)
Accounts payable, accrued expenses and other current liabilities			(4,678,560	)			2,258,073
Net cash used in operating activities			(13,265,520	)			(3,464,458	)
Cash flows from investing activities:
Cash received in acquisition of PCT			227,942				-
Purchase of short term investments			(24	)			(2,430,388	)
Proceeds from short term investments			-				2,390,602
Change in restricted cash used as collateral for notes payable			(1,407,483	)			639,944
Acquisition of property and equipment			(5,237,141	)			(8,634,298	)
Net cash used in investing activities			(6,416,706	)			(8,034,140	)
Cash flows from financing activities:
Net proceeds from the exercise of warrants			-				2,493,750
Net proceeds from the exercise of options			7,100				140,100
Net proceeds from issuance of capital stock			5,907,723				13,565,504
Payment from related party			644,414				375,135
Repayment of mortgage loan			(64,366	)			-
Proceeds of bank loan			4,592,000				-
Proceeds from notes payable			10,950,616				11,046,833
Repayment of notes payable			(9,781,781	)			(9,988,213	)
Repayment of debt to related party			(3,406,043	)			-
Repayment of bank loan			-				(2,209,500	)
Payment of dividend			-				(222,922	)
Net cash provided by financing activities			8,849,663				15,200,687
Impact of changes of foreign exchange rates			70,582				97,318
Net (decrease)/increase  in cash and cash equivalents			(10,761,981	)			3,799,407
Cash and cash equivalents at beginning of year			15,612,391				7,159,369
Cash and cash equivalents at end of period		$	4,850,410			$	10,958,776
Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest		$	1,333,800			$	207,500
Taxes			1,634,500				999,800
Supplemental Schedule of non-cash investing activities
Acquisition of property and equipment			1,283,400				418,000
Capitalized interest			212,000				205,300
Supplemental schedule of non-cash financing activities
Common stock and warrants issued with the acquisition of PCT			17,866,200				-
Common stock issued pursuant to the redemption of Convertible Redeemable Series E 7% Preferred Stock			1,959,600				-
Common stock issued in payment of dividends for the Convertible Redeemable Series E 7% Preferred Stock			475,200				-
Financing costs for capital stock raises			-				463,400
Conversion of Convertible Redeemable Series C Preferred Stock			-				13,720,000
Dividend to Related Party reinvested as loan payable			11,726,000				-

 

See accompanying notes to consolidated financial statements.

 

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NEOSTEM, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Note 1  – The Company

NeoStem, Inc. (“NeoStem” or the “Company”) was incorporated under the laws of the State of Delaware in September 1980 under the name Fidelity Medical Services, Inc. The Company’s corporate headquarters are located at 420 Lexington Avenue, Suite 450, New York, NY 10170.  The Company’s telephone number is (212) 584-4180 and its website address is   www.neostem.com .

NeoStem is an international biopharmaceutical company operating in three reportable segments: (i) Cell Therapy – United States; (ii) Regenerative Medicine – China; and (iii) Pharmaceutical Manufacturing – China.

Through the Cell Therapy – United States segment, NeoStem is focused on the development of proprietary cellular therapies in oncology, immunology and regenerative medicine and becoming a single source for collection, storage, manufacturing, therapeutic development and transportation of cells for cell based medicine and regenerative science globally . Within this segment, the Company is a provider of adult stem cell collection, processing and storage services in the U.S., enabling healthy individuals to donate and store their stem cells for personal therapeutic use. Pre-donating cells at birth or at a younger age helps to ensure a supply of autologous stem cells should they be needed for future medical treatment.

The Company strengthened its expertise in cellular therapies, for its Cell Therapy – United States segment, with its January 19, 2011 acquisition of Progenitor Cell Therapy, LLC, a Delaware limited liability company (“PCT”), pursuant to which the Company acquired all of the membership interests of PCT, and PCT is now a wholly-owned subsidiary of NeoStem. PCT is engaged in a wide range of services in the cell therapy market for the treatment of human disease, including, but not limited to contract manufacturing, product and process development, regulatory consulting, product characterization and comparability, and storage, distribution, manufacturing and transportation of cell therapy products. PCT’s legacy business relationships also afford NeoStem introductions to innovative therapeutic programs. Through the PCT acquisition, NeoStem now owns approximately an 80% interest in Athelos, a company developing a T-cell based immunomodulatory therapeutic. Athelos expects to initiate Phase I studies in autoimmune disorders in 2012.  The Company views the PCT acquisition as fundamental to building a foundation in achieving its strategic mission of capturing the paradigm shift to cell therapy.  (See Note 4)

Through its Regenerative Medicine – China segment, in 2009, the Company began several China-based, Regenerative Medicine initiatives including: (i) creating a separate China-based cell therapy operation, (ii) constructing a stem cell research and development laboratory and processing facility in Beijing, (iii) establishing relationships with hospitals to provide cell-based therapies, and (iv) obtaining product licenses covering several adult stem cell therapeutics focused on regenerative medicine.

The Company acquired its Pharmaceutical Manufacturing – China segment on October 30, 2009, when China Biopharmaceuticals Holdings, Inc. (“CBH”) merged with and into CBH Acquisition LLC (“Merger Sub”), a wholly-owned subsidiary of NeoStem, with Merger Sub as the surviving entity (the “Erye Merger”). As a result of the Erye Merger, NeoStem acquired CBH’s 51% ownership interest in Suzhou Erye Pharmaceutical Company Ltd. (“Erye”), a Sino-foreign joint venture with limited liability organized under the laws of the People’s Republic of China. Erye was founded more than 50 years ago and represents an established, vertically-integrated pharmaceutical business. Historically, Erye has concentrated its efforts on the manufacturing and distribution of generic antibiotic products. In 2010, Erye began transferring its operations to its newly constructed manufacturing facility. The relocation is continuing as the new production lines are completed and receive cGMP certification through 2011. The relocation is significantly increasing Erye’s manufacturing capacity. As part of its plan to focus its business on capturing the paradigm shift to cell therapies following the January 2011 acquisition of PCT, the Company is pursuing strategic alternatives with respect to its interest in Erye.

 

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Note 2 – Summary of Significant Accounting Policies

 

Basis of Presentation: The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with generally accepted accounting principles generally accepted in the United States of America (“generally accepted accounting principles”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, the accompanying Consolidated Financial Statements of the Company and its subsidiaries, which are unaudited, include all normal and recurring adjustments considered necessary to present fairly the Company’s financial position as of June 30, 2011 and the results of its operations and its cash flows for the periods presented. Operating results for the three and six month periods ended June 30, 2011 are not necessarily indicative of the results that may be expected for the year ending December 31, 2011.

 

Principles of Consolidation:   The consolidated financial statements include the accounts of NeoStem, Inc. and its wholly owned and partially owned subsidiaries and affiliates as listed below:

 

Entity		Percentage of Ownership		Location
NeoStem, Inc.		Parent Company		United States of America
NeoStem Therapies, Inc.		100%		United States of America
Stem Cell Technologies, Inc.		100%		United States of America
NeoStem (China) Inc.		100%		People’s Republic of China
Qingdao Niao Bio-Technology Ltd.*		*		People’s Republic of China
Beijing Ruijiao Bio-Technology Ltd.*		*		People’s Republic of China
Tianjin Niou Bio-Technology Co., Ltd.*		*		People’s Republic of China
China Biopharmaceuticals Holdings, Inc. (CBH)		100%		United States of America
Suzhou Erye Pharmaceuticals Company Ltd.		51% owned by CBH		People’s Republic of China
Progenitor Cell Therapy, LLC (PCT)		100%		United States of America
NeoStem Family Storage, LLC		100% owned by PCT		United States of America
Athelos Corporation		80.1% owned by PCT		United States of America
PCT Allendale, LLC		100% owned by PCT		United States of America

* Because certain regulations in the People’s Republic of China (“PRC”) currently restrict or prohibit foreign entities from holding certain licenses and controlling certain businesses in China, the Company created a wholly foreign-owned entity, or WFOE, NeoStem (China), to implement its expansion initiatives in China. To comply with China’s foreign investment regulations with respect to stem cell-related activities, these business initiatives in China are conducted via Chinese domestic entities that are controlled by the WFOE through various contractual arrangements and under the principles of consolidation the Company consolidates 100% of their operations.

Use of Estimates:   The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements. Estimates also affect the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results could differ from those estimates.

Cash and Cash Equivalents:   Cash and cash equivalents include short-term, highly liquid investments with maturities of ninety days or less when purchased.

Concentration of Risks:   For the three and six months ended June 30, 2011, three major suppliers provided approximately 23.5% and 23.4%, respectively, of Erye’s purchases of raw materials.  As of June 30, 2011, the total accounts payable to the three major suppliers represented 12% of the total accounts payable balance.  For the three and six months ended June 30, 2010, two major suppliers provided approximately 23% of Erye’s purchases of raw materials with each supplier individually accounting for  13% and 10%, respectively. As of December 31, 2010, the total accounts payable to the two major suppliers was 17.9% of the total accounts payable.

Approximately 93% of Erye’s revenues are derived from products that use penicillin or cephalosporin as the key active ingredient. These products are manufactured on two of the eight production lines in Erye’s manufacturing facility. Any issues or incidents that might disrupt the manufacturing of products requiring penicillin or cephalosporin could have a material impact on the operating results of Erye. Any interruption or cessation in production could impact market sales.

Restricted Cash:   Restricted cash represents cash required to be deposited with banks in China as collateral for the balance of bank notes payable and are subject to withdrawal restrictions according to the agreement with the bank. The required deposit rate is approximately 30 – 50% of the notes payable balance. Such restricted cash associated with these notes payable is reflected within current assets. In addition, the Company has restricted cash associated with its Series E Preferred Stock, which is held in escrow and is not available to meet current cash requirements, and is therefore recorded in other assets, and restricted cash held as a security deposit in connection with PCT mortgages payable, which is also recorded in other assets.

Accounts Receivable:   Accounts receivable are carried at original invoice amount less an estimate made for doubtful accounts. The Company applies judgment in connection with establishing the allowance for doubtful accounts. Specifically, the Company analyzes the aging of accounts receivable balances, historical bad debts, customer concentration and credit-worthiness, current economic trends and changes in the Company’s customer payment terms. Significant changes in customer concentrations or payment terms, deterioration of customer credit-worthiness or weakening economic trends could have a significant impact on the collectability of the receivables and the Company’s operating results. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Management regularly reviews the aging of receivables and changes in payment trends by its customers, and records a reserve when it believes collection of amounts due are at risk.

Inventories:   Inventories are stated at the lower of cost or market using the first-in, first-out basis. The Company reviews its inventory periodically and will reduce inventory to its net realizable value depending on certain factors, such as product demand, remaining shelf life, future marketing plans, obsolescence and slow-moving inventories.  The Company includes in work in process the cost incurred on projects at PCT that have multiple deliverables and therefore cannot be recognized as revenue until the project is completed. The Company reviews these projects periodically to determine that the value of each project is stated at the lower of cost or market.

 

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Inventories consisted of the following (in thousands):

		June 30, 2011				December 31, 2010
Raw materials and supplies		$	2,686.6			$	8,043.8
Work in process			9,782.4				4,792.4
Finished goods			12,539.7				8,187.2
Total inventory		$	25,008.7			$	21,023.4

Property, Plant, and Equipment : The cost of property, plant and equipment is depreciated over the estimated useful lives of the related assets. Depreciation is computed on the straight-line method. Repairs and maintenance expenditures that do not extend original asset lives are charged to expense as incurred.

 

Property, plant, and equipment consisted of the following (in thousands):

	Useful Life		June 30, 2011				December 31, 2010
Building and improvements	25-30 years		$	17,986.5			$	6,091.9
Machinery and equipment	8-12 years			23,670.6				19,387.6
Lab equipment	5-7 years			1,883.3				716.2
Furniture and fixtures	5-12 years			681.3				392.5
Vehicles	8 years			321.8				273.9
Software	3-5 years			101.1				99.6
Leasehold improvements	2-3 years			2,854.4				2,109.8
Construction in progress				7,856.3				10,339.2
				55,355.3				39,410.7
Accumulated depreciation				(5,069.7	)			(2,412.5	)
			$	50,285.6			$	36,998.2

The Company’s results included depreciation expense of approximately $1,430,300  and $2,719,000 for the three and six months ended June 30, 2011, respectively, and $271,500  and $476,900 for the three and six months ended June 30, 2010, respectively.

Erye has substantially completed its new factory and has relocated substantially all operations to the new facility.  Construction in progress is related to this production facility which is being built in accordance with the PRC’s Good Manufacturing Practices (“GMP”) Standard. The Company expects that the construction will be completed in 2011; however, certain elements of the project have been completed and were put into service in 2010. At June 30, 2011 the estimated additional cost to complete construction will be approximately $0.3 million.  No depreciation is provided for construction-in-progress until such time as the assets are completed and placed into service. Interest incurred during the period of construction, if material, is capitalized. The Company capitalized $105,600 and $235,700 of interest expense for the three and six months ended June 30, 2011, respectively, and $629,100 and $765,200 for the three and six months ended June 30, 2010, respectively.

Land Use Rights:   According to Chinese law, the government owns all the land in China. Companies or individuals are authorized to possess and use the land only through land use rights granted by the Chinese government. Land use rights are being recognized ratably using the straight-line method over the lease term of 50 years.

Income Taxes:   The Company recognizes (a) the amount of taxes payable or refundable for the current year and (b) deferred tax liabilities and assets for the future tax consequences of events that have been recognized in the Company’s financial statements or tax returns. The Company continues to evaluate the accounting for uncertainty in tax positions. The guidance requires companies to recognize in their financial statements the impact of a tax position if the position is more likely than not of being sustained on audit. The position ascertained inherently requires judgment and estimates by management. As of June 30, 2011, management does not believe the Company has any material uncertain tax positions that would require it to measure and reflect the potential lack of sustainability of a position on audit in its financial statements. The Company will continue to evaluate its uncertain tax positions in future periods to determine if measurement and recognition in its financial statements is necessary. The Company does not believe there will be any material changes in its unrecognized tax positions over the next year.

The Company recognizes interest and penalties as a component of income tax expense. There were no interest and penalties recognized for the three and six months ended June 30, 2011 and 2010, respectively.

 

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The Company files income tax returns with the U.S. Federal government and various state and foreign jurisdictions. The statute of limitations has expired on all consolidated U.S. Federal corporate income tax returns filed through 2006, and the Internal Revenue Service is not currently examining any of the post-2006 returns filed by the Company.

Comprehensive Income (Loss):   The accumulated other comprehensive income (loss) balance at June 30, 2011 and December 31, 2010 in the amount of $4,289,600 and $2,779,100, respectively, is comprised entirely of foreign currency translation adjustments. Comprehensive loss for the three and six months ended June 30, 2011 and 2010 was as follows (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Net loss		$	(10,537.9	)		$	(3,761.8	)		$	(20,237.6	)		$	(7,045.6	)
Other comprehensive (loss)/income
Foreign currency translation			(7.2	)			154.5				1,510.5				167.7
Total other comprehensive (loss)/income			(7.2	)			154.5				1,510,5				167.7
Comprehensive (loss)			(10,545.1	)			(3,607.3	)			(18,727.1	)			(6,877.9	)
Comprehensive (loss)/income attributable to noncontrolling interests			64.4				1,687.2				1,281.3				3,022.3
Comprehensive loss attributable to NeoStem, Inc.		$	(10,609.5	)		$	(5,294.5	)		$	(20,008.4	)		$	(9,900.2	)

Goodwill and Other Intangible Assets:   Goodwill is the excess of purchase price over the fair value of identified net assets of businesses acquired. The Company’s intangible assets with an indefinite life are related to in process research and development at Erye, as the Company expects this research and development to provide the Company with substantial benefit for a period that extends beyond the foreseeable horizon. Amortized intangible assets consist of Erye’s customer list, manufacturing technology, standard operating procedures, tradename, lease rights and patents, as well as patents and rights associated primarily with the     VSEL TM   Technology. These intangible assets are amortized on a straight line basis over their respective useful lives.

The Company reviews goodwill and indefinite-lived intangible assets at least annually for possible impairment. Goodwill and indefinite-lived intangible assets are reviewed for possible impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying value. The Company tests its goodwill and indefinite-lived intangible assets for its Cell Therapy – United States, and its Pharmaceutical Manufacturing – China reporting units on October 31. The Company reviews the carrying value of goodwill and indefinite-lived intangible assets utilizing a discounted cash flow model, and, where appropriate, a market value approach is also utilized to supplement the discounted cash flow model. The Company makes assumptions regarding estimated future cash flows, discount rates, long-term growth rates and market values to determine each reporting unit’s estimated fair value. If these estimates or related assumptions change in the future, the Company may be required to record impairment charges.

Derivatives:   Derivative instruments, including derivative instruments embedded in other contracts, are recorded on the balance sheet as either an asset or liability measured at its fair value. Changes in the fair value of derivative instruments are recognized currently in results of operations unless specific hedge accounting criteria are met. The Company has not entered into hedging activities to date. As a result of certain financings (see Note 8), derivative instruments were created that are measured at fair value and marked to market at each reporting period. Changes in the derivative value are recorded as other income (expense) on the consolidated statements of operations.

Evaluation of Long-lived Assets:   The Company reviews long-lived assets and finite-lived intangibles assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset exceeds the fair value of the asset. If other events or changes in circumstances indicate that the carrying amount of an asset that the Company expects to hold and use may not be recoverable, the Company will estimate the undiscounted future cash flows expected to result from the use of the asset or its eventual disposition, and recognize an impairment loss. The impairment loss, if determined to be necessary, would be measured as the amount by which the carrying amount of the assets exceeds the fair value of the assets.

Share-Based Compensation:   The Company expenses all share-based payment awards to employees, directors, advisors and consultants, including grants of stock options, warrants, and restricted stock, over the requisite service period based on the grant date fair value of the awards. For awards with performance-based vesting criteria, the Company estimates the probability of achievement of the performance criteria and recognizes compensation expense related to those awards expected to vest. The Company determines the fair value of certain share-based awards using the Black-Scholes option-pricing model which uses both historical and current market data to estimate the fair value. This method incorporates various assumptions such as the risk-free interest rate, expected volatility, expected dividend yield and expected life of the options or warrants. The fair value of the Company’s restricted stock and restricted stock units is based on the closing market price of the Company’s common stock on the date of grant. See Note 9.

 

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Earnings Per Share:   Basic loss per share is based on the weighted effect of all common shares issued and outstanding, and is calculated by dividing net loss attributable to common shareholders by the weighted average shares outstanding during the period. Diluted loss per share, which is calculated by dividing net loss attributable to common shareholders by the weighted average number of common shares used in the basic earnings per share calculation plus the number of common shares that would be issued assuming conversion of all potentially dilutive securities outstanding, is not presented as such potentially dilutive securities are anti-dilutive in all periods presented. For the three and six months ended June 30, 2011 and 2010, the Company incurred net losses and therefore no common stock equivalents were utilized in the calculation of earnings per share. At June 30, 2011 and 2010, the Company excluded the following potentially dilutive securities:

		June 30,
		2011				2010
Stock Options			19,086,328				11,842,214
Warrants			25,007,979				18,027,028
Series E Preferred Stock, Common stock equivalents			4,599,136				-

Revenue Recognition: The Company recognizes revenue from pharmaceutical and pharmaceutical intermediary product sales when title has passed, the risks and rewards of ownership have been transferred to the customer, the fee is fixed and determinable, and the collection of the related receivable is reasonably assured which is at the time of delivery. The Company recognizes revenue for its cell development and manufacturing services based on the terms of individual contracts.  In certain cases, there are multiple elements that cannot be considered separate deliverables and therefore the Company recognizes revenue on a completed contract basis for these arrangements.  In other cases, the Company is paid for time and materials or for fixed monthly amounts and revenue is recognized when efforts are expended or contractual terms have been met.  The Company recognizes revenue related to the collection and cryopreservation of cord blood and autologous adult stem cells when the cryopreservation process is completed which is twenty four hours after cells have been collected. Revenue related to advance payments of storage fees is recognized ratably over the period covered by the advance payments. The Company earns revenue, in the form of license fees, from physicians seeking to establish autologous adult stem cell collection centers. These license fees are typically billed upon signing of the collection center agreement and qualification of the physician by the Company’s credentialing committee and at various times during the term of license agreements based on the terms of the specific agreement. These fees are recognized as revenue ratably over the appropriate period of time to which the revenue element relates. The Company also receives licensing fees from a licensee for use of its technology and knowledge to operate an adult stem cell banking operation in China, which licensing fees are recognized as revenues ratably over the appropriate period of time to which the revenue element relates. In addition, the Company earns royalties for the use of its name and scientific information in connection with its License and Referral Agreement with Ceregenex Corporation, which royalties are recognized as revenue when they are received.

Revenues for the three and six months ended June 30, 2011 and 2010 were comprised of the following (in thousands):

		Three Months Ended June 30,								Six Months Ended June 30,
		2011				2010				2011				2010
Revenues
Prescription drugs and intermediary pharmaceutical products		$	16,151.2			$	19,351.3			$	34,293.0			$	35,122.5
Stem cell related service revenues			1,723.3				56.2				2,737.8				118.2
Stem cell related services - reimbursed expenses			586.2				-				1,071.0				-
		$	18,460.7			$	19,407.5			$	38,101.8			$	35,240.7

Fair Value Measurements:   Fair value of financial assets and liabilities that are being measured and reported are defined as the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants in the principal market at the measurement date (exit price). The Company is required to classify fair value measurements in one of the following categories:

Level 1 inputs which are defined as quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 inputs which are defined as inputs other than quoted prices included within Level 1 that are observable for the assets or liabilities, either directly or indirectly.

Level 3 inputs are defined as unobservable inputs for the assets or liabilities. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.

 

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The Company determined the fair value of funds invested in short term investments, which are considered trading securities, to be level 1 inputs measured by quoted prices of the securities in active markets. The Company determined the fair value of funds invested in money market funds to be level 1. The Company determined the fair value of the embedded derivative liabilities and warrant derivative liabilities to be level 3 inputs. These inputs require material subjectivity because value is derived through the use of a lattice model that values the derivatives based on probability weighted discounted cash flows. The following table sets forth by level within the fair value hierarchy the Company’s financial assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2011, and December 31, 2010 (in thousands):

 

		June 30, 2011
		Fair Value Measurements Using Fair Value Hierarchy
		Level 1				Level 2				Level 3
Money market investments		$	2,500.5
Short term investments			1.5
Embedded derivative liabilities											1,933.7
Warrant derivative liabilities											342.3
		December 31, 2010
		Fair Value Measurements Using Fair Value Hierarchy
		Level 1				Level 2				Level 3
Money market investments		$	-			$	2,501.0			$	-
Short term investments			0.5				-				-
Embedded derivative liabilities			-				-				2,281.8
Warrant derivative liabilities			-				-				289.6

Subsequent to December 31, 2010 the Company reevaluated the characteristics of the money market savings account, currently recorded as other assets, and determined it is not tied to underlying securities and has been reclassified to level 1.

For those financial instruments with significant Level 3 inputs, the following table summarizes the activity for the three and six months ended June 30, 2011 by type of instrument (in thousands):

		For the Three Months Ended								For the Six Months Ended
		June 30, 2011								June 30, 2011
		Embedded								Embedded
		Derivatives				Warrants				Derivatives				Warrants
Beginning liability balance		$	2,466.8			$	367.3			$	2,281.8			$	289.6
Change in fair value recorded in earnings			(533.1	)			(25.0	)			(348.1	)			52.7
Ending liability balance		$	1,933.7			$	342.3			$	1,933.7			$	342.3

Some of the Company’s financial instruments are not measured at fair value on a recurring basis, but are recorded at amounts that approximate fair value due to their liquid or short-term nature, such as cash and cash equivalents, restricted cash, accounts receivable, accounts payable, notes payable, bank loans, and amount due related parties.

Foreign Currency Translation:   As the Company’s Chinese pharmaceutical business is a self-contained and integrated entity, and the Company’s Chinese stem cell business’ future cash flow is intended to be sufficient to service its additional financing requirements, the Chinese subsidiaries’ functional currency is the Renminbi (“RMB”), and the Company’s reporting currency is the US dollar. Results of foreign operations are translated at the average exchange rates during the period, and assets and liabilities are translated at the closing rate at the end of each reporting period. Cash flows are also translated at average exchange rates for the period, therefore, amounts reported on the consolidated statement of cash flows will not necessarily agree with changes in the corresponding balances on the consolidated balance sheet.

Translation adjustments resulting from this process are included in accumulated other comprehensive income (loss) and amounted to $4,289,600, and $2,779,100 as of June 30, 2011 and December 31, 2010, respectively.

Research and Development Costs:   Research and development (“R&D”) expenses include salaries, benefits, and other headcount related costs, clinical trial and related clinical manufacturing costs, contract and other outside service fees including sponsored research agreements, and facilities and overhead costs. The Company expenses the costs associated with research and development activities when incurred.

To further drive the Company’s cell therapy initiatives, the Company will continue targeting key governmental agencies, congressional committees and not-for-profit organizations to contribute funds for the Company’s research and development programs. The Company accounts for government grants as a deduction to the related expense in research and development operating expenses when earned.

 

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Statutory Reserves:   Pursuant to laws applicable to entities incorporated in the PRC, the PRC subsidiaries are prohibited from distributing their statutory capital and are required to appropriate from PRC GAAP profit after tax to other non-distributable reserve funds. These reserve funds include one or more of the following: (i) a general reserve, (ii) an enterprise expansion fund and (iii) a staff bonus and welfare fund. Subject to certain cumulative limits (i.e., 50% of the registered capital of the relevant company), the general reserve fund requires annual appropriation at 10% of after tax profit (as determined under accounting principles generally accepted in the PRC at each year-end); the appropriation to the other funds are at the discretion of the subsidiaries.

The general reserve is used to offset extraordinary losses. Subject to approval by the relevant authorities, a subsidiary may, upon a resolution passed by the shareholders, convert the general reserve into registered capital provided that the remaining general reserve after the conversion shall be at least 25% of the registered capital of the subsidiary before the capital increase as a result of the conversion. The staff welfare and bonus reserve is used for the collective welfare of the employees of the subsidiary. The enterprise expansion reserve is for the expansion of the subsidiary’s operations and can also be converted to registered capital upon a resolution passed by the shareholders subject to approval by the relevant authorities. These reserves represent appropriations of the retained earnings determined in accordance with Chinese law, and are not distributable as cash dividends to the parent company, NeoStem. Statutory reserves are $2,278,800 and $2,234,600 as of June 30, 2011 and December 31, 2010, respectively.

Relevant PRC statutory laws and regulations permit payment of dividends by the Company’s PRC subsidiaries only out of their accumulated earnings, if any, as determined in accordance with PRC accounting standards and regulations. As a result of these PRC laws and regulations, the Company’s PRC subsidiaries are restricted in their ability to transfer a portion of their net assets either in the form of dividends, loans or advances. The restricted amount was $182,700 at June 30, 2011 and $214,200 at December 31, 2010.

Note 3 – Recent Accounting Pronouncements

In January 2010, the FASB amended the existing disclosure guidance on fair value measurements, which was effective January 1, 2011, for disclosures about purchases, sales, issuances, and settlements in the roll forward of activity in Level 3 fair value measurements. Since the amended guidance requires only additional disclosures, the adoption of the provisions did not have a material impact on the consolidated financial statements.

In March 2010, the FASB issued guidance which allows the milestone method to be used as an acceptable revenue recognition methodology when an arrangement includes substantive milestones. The guidance provides a definition of substantive milestone and should be applied regardless of whether the arrangement includes single or multiple deliverables or units of accounting. The guidance is limited to the transactions involving milestones relating to research and development deliverables. The guidance includes enhanced disclosure requirements about each arrangement, individual milestones and related contingent consideration, information about substantive milestones and factors considered in the determination. The guidance is effective prospectively to milestones achieved in fiscal years, and interim periods within those years, after June 15, 2010. The adoption of this guidance did not have a material impact on the consolidated financial statements.

In April 2010, the FASB issued an update which addresses the accounting for stock options when denominating the exercise price of a share-based payment award in the currency of the market in which the underlying equity security trades. A share-based payment award with an exercise price denominated in the currency of market in which a substantial portion of the entity’s equity securities trades shall not be considered to contain a condition that is not a market, performance, or service condition. Therefore such an award shall not be classified as a liability if it otherwise qualifies for equity classification. The adoption of this guidance did not have a material impact on the consolidated financial statements.

In December 2010, the FASB issued an update which addresses when to perform Step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. The update modifies Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that impairment may exist. The qualitative factors are consistent with the existing guidance, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. This update is effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. The Company will evaluate the impact of adopting this pronouncement when it performs its goodwill impairment test.

In December 2010, the FASB issued an update which addresses the disclosure of supplementary pro forma information for business combinations. The update requires public entities to disclose pro forma information for business combinations that occurred in the current reporting period, including revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period. Amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. The Company has adopted this update and applied the disclosure requirements in connection with the PCT Merger (See Note 4).

 

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In May 2011, the FASB issued guidance which clarifies the application of existing fair value measurement and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The updated guidance is effective on a prospective basis for financial statements issued for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements.

In June 2011, the FASB issued guidance which eliminates the option to report other comprehensive income and its components in the statement of changes in shareholders' equity and requires an entity to present the total of comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement or in two separate but consecutive statements. This pronouncement is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance is not expected to have a material impact on the consolidated financial statements.

 

Note 4 – Acquisitions

On January 19, 2011 (the “Closing Date”), NBS Acquisition Company LLC (“Subco”), a newly formed wholly-owned subsidiary of NeoStem, merged (the “PCT Merger”) with and into Progenitor Cell Therapy, LLC, a Delaware limited liability company (“PCT”), with PCT as the surviving entity, in accordance with the terms of the Agreement and Plan of Merger, dated September 23, 2010 (the “PCT Merger Agreement”), among NeoStem, PCT and Subco.  As a result of the consummation of the PCT Merger, NeoStem acquired all of the membership interests of PCT, and PCT is now a wholly-owned subsidiary of NeoStem.  

Founded by Dr. Andrew L. Pecora and Robert A. Preti, Ph.D., PCT became an internationally recognized cell therapy services and development company.  They sought to create a business for “as needed” development and manufacturing services for the emerging cell therapy industry and to prepare for eventual commercialization.  With its cell therapy manufacturing facilities and team of professionals, PCT offers a platform that can facilitate the preclinical and clinical development and commercialization of cellular therapies for clients throughout the world.  PCT offers current Good Manufacturing Practices (cGMP)-compliant cell transportation, manufacturing, storage, and distribution services and supporting clinical trial design, product process development, logistics, regulatory and quality systems development services.  In addition, through its network of contacts throughout the cell therapy industry, PCT is able to identify early stage development opportunities in the cell therapy field and opportunistically develop these cell therapies through proof of concept where they can be further developed and ultimately commercialized through NeoStem’s developing commercial structure. Dr. Preti now serves as PCT's President and Dr. Pecora as part-time Chief Medical Officer of PCT.

PCT is engaged in a broad range of services in the cell therapy market for the treatment of human disease, including but not limited to contract manufacturing, product and process development, product and regulatory consulting, and product characterization and comparability.  PCT’s expertise in the cell therapy space, which includes therapeutic vaccines (oncology), various related cell therapeutics, cell diagnostics, and regenerative medicine, creates a platform upon which NeoStem intends to build a therapeutics strategy.  NeoStem’s goal is to develop internally, or through partnerships, allogeneic (cells from a third-party donor) or autologous (cells from oneself) cell therapeutics technologies that, in the aggregate, comprise the Cell Therapy – United States reportable segment.

In addition, PCT has assumed NeoStem’s adult stem cell business based on PCT’s strategic advantages in meeting cGMP regulatory requirements in an industry that is widely dispersed with a range of quality issues.  NeoStem believes that PCT, as a quality leader, is ideally positioned to become a leader in cell collection, processing and storage (cell banking) which is synergistic with NeoStem’s roots in this business.  In addition, PCT’s leadership in the transportation and distribution of cell therapy products is complementary to NeoStem’s strategic vision of working with the industry leader as the partner of choice.  These efforts are being bundled together into a new service with PCT’s cord blood banking business into a multigenerational stem cell collection and storage plan that the Company calls the “Family Plan”.

 

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Pursuant to the terms of the PCT Merger Agreement, all of the membership interests of PCT outstanding immediately prior to the effective time of the PCT Merger (the “Effective Time”) were converted into the right to receive, in the aggregate, (i) 10,600,000 shares of the common stock, par value $0.001 per share, of NeoStem (the “NeoStem Common Stock”) (reflecting certain final price adjustments agreed to at the closing) and (ii) warrants to purchase an aggregate 3,000,000 shares of NeoStem Common Stock as follows:

(i)

common stock purchase warrants to purchase one million (1,000,000) shares of NeoStem Common Stock, exercisable over a seven year period at an exercise price of $7.00 per share (the “$7.00 Warrants”), and which will vest only if a specified business milestone (described in the PCT Merger Agreement) is accomplished within three (3) years of the Closing Date of the PCT Merger; and

(ii)

common stock purchase warrants to purchase one million (1,000,000) shares of NeoStem Common Stock exercisable over a seven year term at an exercise price of $3.00 per share (the “$3.00 Warrants”); and

(iii)

common stock purchase warrants to purchase one million (1,000,000) shares of NeoStem Common Stock exercisable over a seven year period at an exercise price of $5.00 per share (the “$5.00 Warrants” and, collectively with the $7.00 Warrants and the $3.00 Warrants, the “Warrants”).

The Warrants are redeemable in certain circumstances.  Transfer of the shares issuable upon exercise of the Warrants is restricted until the one year anniversary of the Closing Date.

In accordance with the PCT Merger Agreement, NeoStem has deposited into an escrow account with the escrow agent (who is initially NeoStem’s transfer agent), 10,600,000 shares of NeoStem Common Stock for eventual distribution to the former members of PCT (subject to downward adjustment to satisfy any indemnification claims of NeoStem, all as described in the PCT Merger Agreement).  

The issuance of NeoStem securities in the PCT Merger was approved at a special meeting of shareholders of NeoStem held on January 18, 2011 (the “NeoStem Special Meeting”), on which date the PCT Merger was also approved at a special meeting of members of PCT.

The fair value of the net assets acquired in the PCT Merger was $8,186,200. The fair value of the equity issued as consideration by NeoStem was valued at $17,866,200 resulting in the recognition of goodwill in the amount of $9,680,000. The fair value of the equities issued by NeoStem included 10,600,000 shares of NeoStem Common stock valued at $15,900,000 and NeoStem warrants to purchase up to 3,000,000 shares valued at $1,966,200.  A portion of the consideration paid is contingent upon the accomplishment of a certain milestone for the $7.00 Warrant.  Such contingent consideration has been classified as equity and will not be subject to remeasurement.  The goodwill that has been created by this acquisition is reflective of values and opportunities of utilizing PCT’s cell collection, processing and storage (cell banking) resources and production capacities, as mentioned above. Due to the structure of the transaction, none of the Goodwill is expected to be tax deductible .

The preliminary fair value of assets acquired and liabilities assumed on January 19, 2011 is as follows:

 

Cash		$	227,900
Accounts Receivable			442,400
Inventory			2,032,800
Other Current Assets			166,200
Property, Plant & Equipment			11,858,400
Intangibles			8,100,000
Goodwill			9,680,000
Other Assets			654,100
Accounts Payable			1,370,900
Other Liabilities			540,500
Deferred Revenues			2,280,200
Amount Due Related Party			3,000,000
Deferred Tax Liability			4,319,600
Mortgages Payable			3,784,600

The total cost of the acquisition, which is still preliminary, has been allocated to the assets acquired and the liabilities assumed based upon their estimated fair values at the date of the acquisition.  This estimated purchase price allocation is subject to revision based on additional valuation work that is being conducted.  The final allocation is pending the receipt of this valuation work and the completion of the Company’s internal review, which is expected during fiscal 2011.

 

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For the period since the acquisition (January 19-June 30, 2011), NeoStem recorded $3,415,400 in revenues and a net loss of approximately $2,842,100 or $0.03 basic and diluted loss per share attributable to PCT.

The following supplemental table presents unaudited consolidated pro forma financial information as if the closing of the acquisition of PCT had occurred on January 1, 2010 (in thousands, except per share amounts):

 

		Six Months Ended June 30,								Three Months Ended June 30,								Six Months Ended June 30,
		2011				2011				2010				2010				2010				2010
		(As Reported)				(Proforma)				(As Reported)				(Proforma)				(As Reported)				(Proforma)
Revenues		$	38,101.8			$	38,484.2			$	19,407.5			$	20,882.8			$	35,240.7			$	39,512.0
Cost of revenues			27,812.3				28,136.9				12,911.8				14,028.2				23,763.4				26,850.4
Gross profit			10,289.5				10,347.3				6,495.7				6,854.6				11,477.3				12,661.6
Research and development			5,283.7				5,283.7				2,133.2				2,133.2				3,433.5				3,433.5
Selling, general, and administrative			23,016.0				23,405.2				7,865.5				9,999.5				14,155.0				17,234.5
Operating loss			(18,010.2	)			(18,341.6	)			(3,502.9	)			(5,278.1	)			(6,111.2	)			(8,006.4	)
Other income (expense), net			(1,524.7	)			(1,559.5	)			143.4				78.8				(29.2	)			(363.7	)
Loss from operations before provision for income taxes and noncontrolling interests			(19,534.9	)			(19,901.1	)			(3,359.6	)			(5,199.3	)			(6,140.4	)			(8,370.2	)
Provision for income taxes			702.7				683.3				402.3				310.5				905.2				721.7
Net loss			(20,237.6	)			(20,584.4	)			(3,761.8	)			(5,509.9	)			(7,045.6	)			(9,091.9	)
Less – net income attributable to noncontrolling interests			541.2				541.1				1,611.5				1,519.8				2,940.2				2,940.2
Preferred dividends			357.4				357.4				53.8				53.8				153.5				153.5
Net loss attributable to NeoStem, Inc. common shareholders		$	(21,136.2	)		$	(21,482.9	)		$	(5,427.1	)		$	(7,083.4	)		$	(10,139.3	)		$	(12,185.5	)
Basic and diluted loss per share		$	(0.27	)		$	(0.27	)		$	(0.11	)		$	(0.12	)		$	(0.23	)		$	(0.22	)
Weighted average common shares outstanding			77,117,905				78,172,049				48,771,930				59,371,930				44,419,456				55,019,456

 

The unaudited supplemental pro forma financial information should not be considered indicative of the results that would have occurred if the PCT Merger had been consummated on January 1, 2010, nor are they indicative of future results.

 

Athelos Corporation (“Athelos”) is a subsidiary of PCT pursuing the development of T regulatory cells (TRegs) as a therapeutic to treat disorders of the immune system.  Pursuant to a Stock Purchase and Assignment Agreement dated March 28, 2011, Athelos issued approximately 20% of its shares to Becton Dickinson and Company (“BD”) in exchange for its rights to certain intellectual property relating to TRegs which it owned pursuant to a patent license agreement between the University of Pennsylvania (“Penn”) and BD dated September 28, 2005 (the “Penn License”), and a license agreement between ExCell Therapeutics, LLC and BD dated September 16, 2005, as amended August 31, 2007 (the “Excel License”). Pursuant to the Penn License, BD had exclusive worldwide rights to the TReg patents listed in that agreement.  As assignee, Athelos will pay Penn a royalty on net sales of licensed products and milestones on initiation of clinical trial stages, license application filings and regulatory approvals.  In addition, Athelos will pay Penn an annual license maintenance fee and has committed to certain diligence expenditures to advance the technology.  Pursuant to the ExCell License, BD had exclusive worldwide rights to the patents referenced therein.  As assignee, Athelos will pay ExCell a royalty on net sales of licensed products and milestones on completion of clinical trial phases, as well as regulatory approval.  It is the express intent of all parties that the BD assignments to Athelos will be replaced with direct licenses between Athelos and Penn and between Athelos and USC.  Pursuant to the Stockholders’ Agreement dated March 28, 2011, Athelos, PCT and BD have agreed, that, among other things, BD will have certain anti-dilution protection for the first $5 million of new investment in Athelos and certain  board of directors’ observer rights.   BD has assigned to Athelos, and Athelos assumed, all rights, title, interest and obligations of BD under a consulting agreement dated as of September 16, 2005 between David Horwitz, M.D. and BD, to be paid retroactively beginning as of January 1, 2011, for services rendered in advancing the Athelos TReg research and development platform .   PCT has valued BD’s share of the contributed intellectual properties at $927,000 and characterized this acquired intangible asset as in-process research and development which has been recorded as expense within research and development expense for the six months ended June 30, 2011.

 

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Note 5 – Goodwill and Other Intangible Assets

The changes in the carrying amount of goodwill by reportable segment during six months ended June 30, 2011 were as follows (in thousands):

						Pharmaceutical
		Cell Therapy -				Manufacturing -
		United States				China				Total
Balance as of December 31, 2010
Goodwill		$	558.2			$	27,002.0			$	27,560.2
Accumulated impairment losses			(558.2	)			-				(558.2	)
			-				27,002.0				27,002.0
Acquisitions*			9,680.0				-				9,680.0
Foreign currency exchange rate changes			-				534.0				534.0
Balance as of June 30, 2011
Goodwill		$	9,680.0			$	27,536.0			$	37,216.0
*Goodwill associated with the PCT Merger

As of June 30, 2011 and December 31, 2010, the Company’s intangible assets and related accumulated amortization consisted of the following (in thousands):

 

			June 30, 2011												December 31, 2010
							Accumulated												Accumulated
	Useful Life		Gross				Amortization				Net				Gross				Amortization				Net
Customer list	10 Years		$	19,490.8			$	(3,077.8	)		$	16,413.0			$	17,740.0			$	(2,069.7	)		$	15,670.3
Manufacturing technology	10 Years			10,204.7				(983.9	)			9,220.8				4,220.6				(492.4	)			3,728.2
Tradename	10 Years			2,303.4				(225.4	)			2,078.0				983.9				(114.7	)			869.2
In process R&D	Indefinite			1,762.8				-				1,762.8				2,219.6				-				2,219.6
Standard operating procedures	10 Years			1,087.9				(181.3	)			906.6				1,066.8				(124.5	)			942.3
Lease rights	2 Years			833.4				(694.5	)			138.9				817.2				(476.7	)			340.5
VSEL patent rights	19 Years			669.0				(123.2	)			545.8				669.0				(105.6	)			563.4
Patents	8 Years			167.7				(41.9	)			125.8				164.3				(31.2	)			133.1
Total Intangible Assets			$	36,519.7			$	(5,328.0	)		$	31,191.7			$	27,881.4			$	(3,414.8	)		$	24,466.6