Blueprint
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☑
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the quarterly period ended September 30, 2016
OR
☐
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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Commission File Number 001-36498
CELLULAR BIOMEDICINE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware
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86-1032927
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State of Incorporation
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IRS Employer Identification No.
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19925 Stevens Creek Blvd., Suite 100
Cupertino, California 95014
(Address of principal
executive offices)
(408) 973-7884
(Registrant’s telephone number)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period than the
registrant was required to submit and post such files).
Yes ☑ No ☐
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer,” and
“large accelerated filer” and “smaller reporting
company” in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer
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☐
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Accelerated filer
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☑
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Non-accelerated filer
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☐
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Smaller reporting company
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☐
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Indicate by check mark whether the registrant is a
shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
As
of November 2, 2016, there were 14,251,246 shares of common
stock, par value $.001 per share issued and
outstanding.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
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Item 1.
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Condensed
Consolidated Financial Statements (unaudited)
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3
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Condensed
Consolidated Balance Sheets (unaudited)
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3
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Condensed
Consolidated Statements of Operations and Comprehensive Loss
(unaudited)
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4
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Condensed
Consolidated Statements of Cash Flows (unaudited)
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5
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Condensed Notes to
Consolidated Financial Statements (unaudited)
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6
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Item 2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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20
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Item 3.
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Quantitative and
Qualitative Disclosures About Market Risk
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45
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Item 4.
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Controls and
Procedures
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46
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PART II OTHER INFORMATION
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Item 1.
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Legal
Proceedings
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47
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Item 1A.
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Risk
Factors
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47
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Item 2.
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Unregistered Sales
of Equity Securities and Use of Proceeds
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48
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Item 3.
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Defaults Upon
Senior Securities
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49
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Item 4.
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Mine
Safety Disclosures
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49
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Item 5.
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Other
Information
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49
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Item 6.
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Exhibits
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50
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SIGNATURES
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51
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PART I – FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
(Unaudited)
CELLULAR
BIOMEDICINE GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
AS OF SEPTEMBER 30, 2016 AND DECEMBER 31, 2015
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Assets
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Cash
and cash equivalents
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$44,115,886
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$14,884,597
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Accounts
receivable, less allowance for doubtful amounts of
$10,707
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and
$nil as of September 30, 2016 and December 31, 2015,
respectively
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53,477
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630,332
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Other
receivables
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264,802
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271,344
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Inventory
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253,173
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390,886
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Prepaid
expenses
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661,144
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367,050
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Taxes
recoverable
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-
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150,082
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Total
current assets
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45,348,482
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16,694,291
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Investments
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509,424
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5,379,407
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Property,
plant and equipment, net
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3,119,174
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2,768,900
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Goodwill
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7,678,789
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7,678,789
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Intangibles,
net
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14,570,556
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15,949,100
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Long-term
prepaid expenses and other assets
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1,507,686
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989,935
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Total
assets (1)
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$72,734,111
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$49,460,422
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Liabilities and Stockholders' Equity
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Liabilities:
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Accounts
payable
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$220,205
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$260,886
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Accrued
expenses
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663,880
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845,087
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Taxes
payable
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30,000
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-
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Other
current liabilities
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1,015,076
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1,913,284
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Total
current liabilities
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1,929,161
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3,019,257
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Other
non-current liabilities
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10,482
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76,229
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Total
liabilities (1)
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1,939,643
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3,095,486
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Commitments
and Contingencies (note 12)
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Stockholders'
equity:
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Preferred
stock, par value $.001, 50,000,000 shares authorized;
none issued and outstanding as of September
30, 2016 and December 31, 2015, respectively
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-
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-
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Common
stock, par value $.001, 300,000,000 shares authorized;
14,240,610
and 11,711,645 issued and outstanding as
of September 30, 2016 and December 31, 2015,
respectively
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14,241
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11,711
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Additional
paid in capital
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150,874,763
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103,807,651
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Accumulated
deficit
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(79,406,926)
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(57,338,311)
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Accumulated
other comprehensive income (loss)
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(687,610)
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(116,115)
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Total
stockholders' equity
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70,794,468
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46,364,936
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Total
liabilities and stockholders' equity
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$72,734,111
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$49,460,422
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_______________
(1)
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The Company’s consolidated assets as of September 30, 2016
and December 31, 2015 included $7,913,229 and $6,115,073,
respectively, of assets of variable interest entities, or VIEs,
that can only be used to settle obligations of the VIEs. Each of
the following amounts represents the balances as of September 30,
2016 and December 31, 2015, respectively. These assets include cash
and cash equivalents of $2,967,559 and $1,821,883; accounts
receivable of $nil and $337,345; other receivables of $145,789 and
$136,621; inventory of $71,668 and $180,973; prepaid expenses of
$567,996 and $250,123; property, plant and equipment, net, of
$1,751,355 and $1,145,924; intangibles of $1,696,912 and
$1,892,551; and long-term prepaid expenses and other assets of
$711,950 and $349,653. The Company’s consolidated liabilities
as of September 30, 2016 and December 31, 2015 included $938,247
and $1,478,160, respectively, of liabilities of the VIEs whose
creditors have no recourse to the Company. These liabilities
include accounts payable of $100,437 and $38,004; other payables of
$443,988 and $914,817; payroll accrual of $383,340 and $464,510;
and other non-current liabilities of $10,482 and $60,829. See
further description in Note 3, Variable Interest
Entities.
|
The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CELLULAR BIOMEDICINE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE
LOSS
(UNAUDITED)
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 2016 AND
2015
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For the Three Months Ended
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For the Nine Months Ended
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Net
sales and revenue
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$10,012
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$624,907
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$570,102
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$1,885,256
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Operating
expenses:
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Cost
of sales
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9,128
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443,416
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835,908
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1,335,707
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General
and administrative
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2,790,305
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3,467,184
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8,638,877
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9,915,956
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Selling
and marketing
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124,143
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190,152
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342,377
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500,393
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Research
and development
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2,897,736
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2,190,240
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8,268,953
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4,968,352
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Impairment
of investments
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4,611,714
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-
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4,611,714
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123,428
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Total
operating expenses
|
10,433,026
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6,290,992
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22,697,829
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16,843,836
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Operating
loss
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(10,423,014)
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(5,666,085)
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(22,127,727)
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(14,958,580)
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Other
income (expense):
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Interest
income
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22,338
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8,386
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57,678
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29,417
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Other
income (expense)
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(17,314)
|
492,101
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6,652
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502,921
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Total
other income, net
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5,024
|
500,487
|
64,330
|
532,338
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Loss
before taxes
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(10,417,990)
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(5,165,598)
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(22,063,397)
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(14,426,242)
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Income
taxes credit (provision)
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(243,230)
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23,400
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(5,218)
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(29,602)
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Net
loss
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$(10,661,220)
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$(5,142,198)
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$(22,068,615)
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$(14,455,844)
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Other
comprehensive income (loss):
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Cumulative
translation adjustment
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(58,824)
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(225,198)
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(314,189)
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(163,353)
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Unrealized
gain (loss) on investments, net of tax
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-
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(1,520,000)
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5,300,633
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6,543,460
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Reclassification
adjustments, net of tax, in connection with other-than-temporary
impairment of investments
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(5,557,939)
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-
|
(5,557,939)
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-
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Total
other comprehensive income (loss):
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(5,616,763)
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(1,745,198)
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(571,495)
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6,380,107
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|
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Comprehensive
gain (loss)
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$(16,277,983)
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$(6,887,396)
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$(22,640,110)
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$(8,075,737)
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Net
loss per share :
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Basic
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$(0.75)
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$(0.44)
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$(1.67)
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$(1.27)
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Diluted
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$(0.75)
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$(0.44)
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$(1.67)
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$(1.27)
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Weighted
average common shares outstanding:
|
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Basic
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14,128,465
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11,622,756
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13,253,290
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11,399,958
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Diluted
|
14,128,465
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11,622,756
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13,253,290
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11,399,958
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The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
CELLULAR BIOMEDICINE GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
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For the Nine Months Ended
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CASH
FLOWS FROM OPERATING ACTIVITIES:
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Net
loss
|
$(22,068,615)
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$(14,455,844)
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Adjustments
to reconcile net loss to net cash
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|
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used
in operating activities:
|
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Depreciation
and amortization
|
2,034,411
|
1,537,323
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Loss
on disposal of assets
|
1,034
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-
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Stock
based compensation expense
|
3,944,125
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5,672,955
|
Decrease
in fair value of accrued expenses for the acquisition of intangible
assets
|
-
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(413,559)
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Other
than temporary impairment on investments
|
4,611,714
|
123,428
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Realized
losses from sale of investments
|
-
|
5,178
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Inventory
provision
|
110,145
|
-
|
Allowance
for doubtful account
|
10,707
|
-
|
Changes
in operating assets and liabilities:
|
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|
Accounts
receivable
|
548,268
|
(275,317)
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Other
receivables
|
1,275
|
(176,301)
|
Inventory
|
33,398
|
(49,828)
|
Prepaid
expenses
|
(307,924)
|
108,055
|
Taxes
recoverable
|
150,082
|
-
|
Other
current assets
|
-
|
110,347
|
Long-term
prepaid expenses and other assets
|
(376,214)
|
(156,704)
|
Accounts
payable
|
(33,281)
|
(280,548)
|
Accrued
expenses
|
(167,615)
|
183,105
|
Advances
payable to related party
|
-
|
(30,216)
|
Other
current liabilities
|
(528,430)
|
(63,426)
|
Taxes
payable
|
30,000
|
(198,488)
|
Other
non-current liabilities
|
(65,449)
|
(212,371)
|
Net
cash used in operating activities
|
(12,072,369)
|
(8,572,211)
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
Proceed
from sale of investments, net of issuance cost paid
|
-
|
1,480
|
Purchases
of intangibles
|
(11,160)
|
(4,577,740)
|
Purchases
of assets
|
(1,642,179)
|
(918,289)
|
Net
cash used in investing activities
|
(1,653,339)
|
(5,494,549)
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
Net
proceeds from the issuance of common stock
|
42,437,374
|
18,964,849
|
Proceeds
from exercise of stock options
|
685,712
|
478,798
|
Net
cash provided by financing activities
|
43,123,086
|
19,443,647
|
|
|
|
EFFECT
OF EXCHANGE RATE CHANGES ON CASH
|
(166,089)
|
(41,094)
|
|
|
|
INCREASE
IN CASH AND CASH EQUIVALENTS
|
29,231,289
|
5,335,793
|
CASH
AND CASH EQUIVALENTS, BEGINNING OF PERIOD
|
14,884,597
|
14,770,584
|
CASH
AND CASH EQUIVALENTS, END OF PERIOD
|
$44,115,886
|
$20,106,377
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
|
|
|
Cash
paid for income taxes
|
$6,705
|
$99,668
|
|
|
|
Non-cash
investing activities
|
|
|
Acquisition
of intangible assets through issuance of the Company's
stock
|
$-
|
$1,096,399
|
|
|
|
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
CELLULAR BIOMEDICINE GROUP, INC.
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2016 AND 2015
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
NOTE 1 – DESCRIPTION OF BUSINESS
As
used in this quarterly 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 and
variable interest entities.
Overview
Cellular
Biomedicine Group, Inc. is a biomedicine company, principally
engaged in the development of new treatments for cancerous and
degenerative diseases utilizing proprietary cell-based
technologies. Our technology includes two major platforms: (i)
Immune Cell therapy for treatment of a broad range of cancers using
: Chimeric Antigen Receptor T cell (CAR-T), cancer vaccine, and T
Central Memory Cell (Tcm) technology, and (ii) human
adipose-derived mesenchymal progenitor cells (haMPC) for treatment
of joint and autoimmune diseases, with primary research and
manufacturing facilities in China.
We are focused on developing and marketing safe
and effective cell-based therapies based on our cellular platforms,
to treat serious diseases such as cancer, orthopedic diseases,
various inflammatory diseases and metabolic diseases. We have
developed proprietary practical knowledge in the use of cell-based
therapeutics that we believe could be used to help a great number
of people suffering from cancer and other serious chronic diseases.
We are conducting clinical studies in China for stem cell based
therapies to treat knee osteoarthritis (“KOA”). We have
completed Phase IIb autologous haMPC KOA clinical study and
published its promising results. Led by Shanghai Renji Hospital,
one of the largest teaching hospitals in China, we launched Phase I
clinical trial of an off-the-shelf allogeneic haMPC
(AlloJoinTM)
therapy for KOA. We have completed patient recruitment and
treatment for Phase I clinical studies of KOA on August 5, 2016. We
also initiated multiple dose preclinical studies in a Chronic
Obstructive Pulmonary Disease ("COPD") animal model, and plan to
initiate manufacturing of (AlloJoinTM)
product for KOA preclinical and clinical studies in the United
States.
Our primary target market is Greater China. We
believe that the results of our research, the acquired knowhow and
clinical study results will help to cure or
alleviate illness and suffering of the patient. We expect to
carry out the clinical studies leading to eventual CFDA approval
through IND filings and authorized treatment centers throughout Greater
China.
With
the acquisition of the University of South Florida’s license
on the next generation GVAX vaccine (CD40LGVAX) and its related
standard operational procedures (SOPs), we have expanded our
immuno-oncology portfolio significantly. We plan to use the
knowledge we obtained from the previous phase l clinical study
conducted in the U.S. by Moffitt center to support an investigator
sponsored trial to evaluate the potential synergistic effect of the
combination of CD40LGVAX with anti-PD1 checkpoint inhibitor, to
treat a selected segment of late stage non-small cell lung cancer
(NSCLC) adenocarcinoma patients. We may also seek approval to
conduct clinical trials with leading non-U.S. medical centers or
seek partnership for CD40LGVAX sub-license
opportunities.
With
our recent build-up of multiple cancer therapeutic technologies, we
have prioritized our clinical efforts on launching multiple trials
for CAR-Ts in several indications and not actively pursuing the
fragmented technical services opportunities. We are striving to
build a highly competitive research and development function, a
translational medicine team, along with a well established cellular
manufacturing capability for clinical grade materials, to support
the development of multiple assets in several cancer indications.
These efforts will allow us to boost the Company's Immuno-Oncology
presence, and pave the way for future partnerships.
Corporate History
Cellular
Biomedicine Group, Inc. was incorporated in the State of Delaware
and its corporate headquarters to 19925 Stevens Creek Blvd., Suite
100 in Cupertino, California. The Company is focusing its resources
on becoming a biotechnology company bringing therapies to improve
the health of patients in China.
On
September 26, 2014, the Company completed its acquisition of
Beijing Agreen Biotechnology Co. Ltd. ("AG") and the U.S. patent
held by AG’s founder. AG is a biotech company with operations
in China, engaged in the development of treatments for cancerous
diseases utilizing proprietary cell technologies, which include
without limitation, preparation of subset T Cell and clonality
assay platform technology for treatment of a broad range of
cancers.
NOTE 2 – BASIS OF PRESENTATION AND SIGNIFICANT
ACCOUNTING POLICIES
The
accompanying unaudited Condensed Consolidated Financial Statements
have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S.
GAAP”) for interim financial information and the rules and
regulations of the Securities and Exchange Commission
(“SEC”) for reporting on Form 10-Q. Accordingly, they
do not include all the information and footnotes required by U.S.
GAAP for complete financial statements herein. The unaudited
Condensed Consolidated Financial Statements herein should be read
in conjunction with the historical consolidated financial
statements of the Company for the years ended December 31, 2015
included in our Annual Report on Form 10-K for the year ended
December 31, 2015. Operating results for the three and nine months
ended September 30, 2016 are not necessarily indicative of the
results that may be expected for the year ending December 31,
2016.
Principles of Consolidation
Our
unaudited condensed consolidated financial statements reflect all
adjustments, which are, in the opinion of management, necessary for
a fair presentation of our financial position and results of
operations. Such adjustments are of a normal recurring nature,
unless otherwise noted. The balance sheet as of September 30, 2016
and the results of operations for the three and nine months ended
September 30, 2016 are not necessarily indicative of the results to
be expected for any future period.
Our
unaudited condensed consolidated financial statements are prepared
in accordance with U.S. GAAP. These accounting principles require
us to make certain estimates, judgments and assumptions that affect
the reported amounts if assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. We believe that the estimates, judgments and
assumptions are reasonable, based on information available at the
time they are made. Actual results could differ materially from
those estimates.
Recent Accounting Pronouncements
Recent
accounting pronouncements that the Company has adopted or may be
required to adopt in the future are summarized below.
In
August 2016, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) No. 2016-15, “Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash
Payments” (“ASU 2016-15”), which addresses the
following eight specific cash flow issues: debt prepayment or debt
extinguishment costs; settlement of zero-coupon debt instruments or
other debt instruments with coupon interest rates that are
insignificant in relation to the effective interest rate of the
borrowing; contingent consideration payments made after a business
combination; proceeds from the settlement of insurance claims;
proceeds from the settlement of corporate-owned life insurance
policies (including bank-owned life insurance policies;
distributions received from equity method investees; beneficial
interests in securitization transactions; and separately
identifiable cash flows and application of the predominance
principle. The amendments in this ASU are effective for public
business entities for fiscal years beginning after December 15,
2017, and interim periods within those fiscal years. Early adoption
is permitted, including adoption in an interim period. We are
currently evaluating the impact of the adoption of ASU 2016-15 on
our consolidated financial statements.
In
June 2016, the FASB issued ASU No. 2016-13, “Financial
Instruments—Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments” (“ASU 2016-13”).
Financial Instruments—Credit Losses (Topic 326) amends
guideline on reporting credit losses for assets held at amortized
cost basis and available-for-sale debt securities. For assets held
at amortized cost basis, Topic 326 eliminates the probable initial
recognition threshold in current GAAP and, instead, requires an
entity to reflect its current estimate of all expected credit
losses. The allowance for credit losses is a valuation account that
is deducted from the amortized cost basis of the financial assets
to present the net amount expected to be collected. For
available-for-sale debt securities, credit losses should be
measured in a manner similar to current GAAP, however Topic 326
will require that credit losses be presented as an allowance rather
than as a write-down. ASU 2016-13 affects entities holding
financial assets and net investment in leases that are not
accounted for at fair value through net income. The amendments
affect loans, debt securities, trade receivables, net investments
in leases, off balance sheet credit exposures, reinsurance
receivables, and any other financial assets not excluded from the
scope that have the contractual right to receive cash. The
amendments in this ASU will be effective for fiscal years beginning
after December 15, 2019, including interim periods within those
fiscal years. We are currently evaluating the impact of the
adoption of ASU 2016-13 on our consolidated financial
statements.
In
April 2016, the FASB issued ASU No. 2016-09,
“Compensation—Stock Compensation (Topic 718):
Improvements to Employee Share-Based Payment Accounting”
(“ASU 2016-09”), which simplifies several aspects of
the accounting for employee share-based payment transactions. The
areas for simplification in ASU 2016-09 include the income tax
consequences, classification of awards as either equity or
liabilities, and classification on the statement of cash flows. The
amendments in this ASU will be effective for annual periods
beginning after December 15, 2016 and interim periods within those
annual periods. Early adoption is permitted. We are currently
evaluating the impact of the adoption of ASU 2016-09 on our
consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
“Leases (Topic 842)” (“ASU 2016-02”). The
amendments in this update create Topic 842, Leases, and supersede the leases requirements in Topic
840, Leases. Topic 842 specifies the accounting for leases.
The objective of Topic 842 is to establish the principles that
lessees and lessors shall apply to report useful information to
users of financial statements about the amount, timing, and
uncertainty of cash flows arising from a lease. The main difference
between Topic 842 and Topic 840 is the recognition of lease assets
and lease liabilities for those leases classified as operating
leases under Topic 840. Topic 842 retains a distinction between
finance leases and operating leases. The classification criteria
for distinguishing between finance leases and operating leases are
substantially similar to the classification criteria for
distinguishing between capital leases and operating leases in the
previous leases guidance. The result of retaining a distinction
between finance leases and operating leases is that under the
lessee accounting model in Topic 842, the effect of leases in the
statement of comprehensive income and the statement of cash flows
is largely unchanged from previous GAAP. The amendments in ASU
2016-02 are effective for fiscal years beginning after December 15,
2018, including interim periods within those fiscal years for
public business entities. Early application of the amendments in
ASU 2016-02 is permitted. We are currently in the process of
evaluating the impact of the adoption of ASU 2016-02 on our
consolidated financial statements.
In
January 2016, the FASB issued ASU No. 2016-01, “Financial
Instruments – Overall (Subtopic 825-10): Recognition and
Measurement of Financial Assets and Financial Liabilities”
(“ASU 2016-01”). The amendments in this update require
all equity investments to be measured at fair value with changes in
the fair value recognized through net income (other than those
accounted for under equity method of accounting or those that
result in consolidation of the investee). The amendments in this
update also require an entity to present separately in other
comprehensive income the portion of the total change in the fair
value of a liability resulting from a change in the
instrument-specific credit risk when the entity has elected to
measure the liability at fair value in accordance with the fair
value option for financial instruments. In addition the amendments
in this update eliminate the requirement for to disclose the
method(s) and significant assumptions used to estimate the fair
value that is required to be disclosed for financial instruments
measured at amortized cost on the balance sheet for public
entities. For public business entities, the amendments in ASU
2016-01 are effective for fiscal years beginning after December 15,
2017, including interim periods within those fiscal years. Except
for the early application guidance discussed in ASU 2016-01, early
adoption of the amendments in this update is not permitted. We do
not expect the adoption of ASU 2016-01 to have a material impact on
our consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17,
“Income Taxes (Topic 740): Balance Sheet Classification of
Deferred Taxes” (“ASU 2015-17”). Topic
740, Income
Taxes, requires an entity to
separate deferred income tax liabilities and assets into current
and noncurrent amounts in a classified statement of financial
position. Deferred tax liabilities and assets are classified as
current or noncurrent based on the classification of the related
asset or liability for financial reporting. Deferred tax
liabilities and assets that are not related to an asset or
liability for financial reporting are classified according to the
expected reversal date of the temporary difference. To simplify the
presentation of deferred income taxes, the amendments in ASU
2015-17 require that deferred income tax liabilities and assets be
classified as noncurrent in a classified statement of financial
position. For public business entities, the amendments in this
update are effective for financial statements issued for annual
periods beginning after December 15, 2016, and interim periods
within those annual periods. We do not expect the adoption of ASU
2015-17 to have a material impact on our consolidated financial
statements.
In
July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic
330): Simplifying the Measurement of Inventory” (“ASU
2015-11”). The amendments in this update require an entity to
measure inventory within the scope of ASU 2015-11 (the amendments
in ASU 2015-11 do not apply to inventory that is measured using
last-in, first-out or the retail inventory method. The amendments
apply to all other inventory, which includes inventory that is
measured using first-in, first-out or average cost) at the lower of
cost and net realizable value. Net realizable value is the
estimated selling prices in the ordinary course of business, less
reasonably predictable costs of completion, disposal, and
transportation. Subsequent measurement is uncharged for inventory
measured using last-in, first-out or the retail inventory method.
The amendments in ASU 2015-11 more closely align the measurement of
inventory in U.S. GAAP with the measurement of inventory in
International Financial Reporting Standards (“IFRS”).
ASU 2015-11 is effective for public business entities for fiscal
years beginning after December 15, 2016, including interim periods
within those fiscal years. The amendments in ASU 2015-11 should be
applied prospectively with earlier application permitted as of the
beginning of an interim or annual reporting period. We do not
expect the adoption of ASU No. 2015-11 to have a material impact on
our consolidated financial statements.
In May 2014, the FASB
issued ASU No. 2014-09, “Revenue from Contracts with
Customers (Topic 606)” (“ASU 2014-09”). ASU
2014-09 supersedes the revenue recognition requirements in
“Revenue Recognition (Topic 605)”, and requires
entities to recognize revenue when it transfers promised goods or
services to customers in an amount that reflects the consideration
to which the entity expects to be entitled to in exchange for those
goods or services. The FASB issued ASU No. 2015-14, “Revenue
from Contracts with Customers (Topic 606): Deferral of the
Effective Date” (“ASU 2015-14”) in August 2015.
The amendments in ASU 2015-14 defer the effective date of ASU
2014-09. Public business entities, certain not-for-profit entities,
and certain employee benefit plans should apply the guidance in ASU
2014-09 to annual reporting periods beginning after December 15,
2017, including interim reporting periods within that reporting
period. Earlier adoption is permitted only as of annual reporting
periods beginning after December 15, 2016, including interim
reporting periods within that reporting period. Further to ASU
2014-09 and ASU 2015-14, the FASB issued ASU No. 2016-08,
“Revenue from Contracts with Customers (Topic 606): Principal
versus Agent Considerations (Reporting Revenue Gross versus
Net)” (“ASU
2016-08”) in March 2016,
ASU No. 2016-10, “Revenue from
Contracts with Customers (Topic 606): Identifying Performance
Obligations and Licensing” (“ASU 2016-10”) in
April 2016, and ASU No. 2016-12, “Revenue from Contracts with
Customers (Topic 606): Narrow-Scope Improvements and Practical
Expedients” (“ASU 2016-12”), respectively. The
amendments in ASU 2016-08 clarify the implementation guidance on
principal versus agent considerations, including indicators to
assist an entity in determining whether it controls a specified
good or service before it is transferred to the customers. ASU
2016-10 clarifies guideline related to identifying performance
obligations and licensing implementation guidance contained in the
new revenue recognition standard. The updates in ASU 2016-10
include targeted improvements based on input the FASB received from
the Transition Resource Group for Revenue Recognition and other
stakeholders. It seeks to proactively address areas in which
diversity in practice potentially could arise, as well as to reduce
the cost and complexity of applying certain aspects of the guidance
both at implementation and on an ongoing basis. ASU 2016-12
addresses narrow-scope improvements to the guidance on
collectability, non-cash consideration, and completed contracts at
transition. Additionally, the amendments in this ASU provide a
practical expedient for contract modifications at transition and an
accounting policy election related to the presentation of sales
taxes and other similar taxes collected from customers. The
effective date and transition requirements for ASU 2016-08, ASU
2016-10 and ASU 2016-12 are the same as ASU 2014-09.
We are
currently in the process of evaluating the impact of the adoption
of ASU 2014-09, ASU 2016-08, ASU 2016-10 and ASU 2016-12 on our
consolidated financial statements.
NOTE 3 – VARIABLE INTEREST ENTITIES
VIEs
are those entities in which a company, through contractual
arrangements, bears the risk of, and enjoys the rewards normally
associated with ownership of the entity, and therefore the Company
is the primary beneficiary of the entity. Cellular Biomedicine
Group Ltd (Shanghai) (“CBMG Shanghai”) and its
subsidiaries are variable interest entities (VIEs), through which
the Company conducts stem cell research and clinical trials in
China. The shareholders of record for CBMG Shanghai were Cao Wei
and Chen Mingzhe, who together owned 100% of the equity interests
in CBMG Shanghai. On October 26, 2016, Cao Wei, Chen Mingzhe and Lu
Junfeng entered into an equity transfer agreement and a
supplementary agreement (“Equity Transfer Agreement”),
according to which Cao Wei ceded his equity interests in CBMG
Shanghai to Chen Mingzhe and Lu Junfeng, each now owns a 50% equity
interest in CBMG Shanghai. The Equity Transfer Agreement became
effective on October 26, 2016 and CBMG Shanghai is in the process
of applying for the record of the above equity transfer. The
initial capitalization and operating expenses of CBMG Shanghai are
funded by our wholly foreign-owned enterprise (“WFOE”),
Cellular Biomedicine Group Ltd. (Wuxi) (“CBMG Wuxi”).
The registered capital of CBMG Shanghai is ten million RMB and was
incorporated on October 19, 2011.
In
February 2012, CBMG Wuxi provided financing to CBMG Shanghai in the
amount of $1,587,075 for working capital purposes. In conjunction
with the provided financing, exclusive option agreements were
executed granting CBMG Wuxi the irrevocable and exclusive right to
convert the unpaid portion of the provided financing into equity
interest of CBMG Shanghai at CBMG Wuxi’s sole and absolute
discretion (“First Exclusive Option Agreement”). CBMG
Wuxi and CBMG Shanghai additionally executed a business cooperation
agreement whereby CBMG Wuxi is to provide CBMG Shanghai with
technical and business support, consulting services, and other
commercial services. The previous shareholders of CBMG Shanghai
pledged their equity interest in CBMG Shanghai as collateral in the
event CBMG Shanghai does not perform its obligations under the
business cooperation agreement. Upon execution of the Equity
Transfer Agreement, the First Exclusive Option Agreement and
previous VIE pledge agreement were terminated and a new set of
exclusive option agreement and VIE pledge agreement were
executed.
The
Company has determined it is the primary beneficiary of CBMG
Shanghai by reference to the power and benefits criterion under ASC
810, Consolidation. This determination was reached after
considering the financing provided by CBMG Wuxi to CBMG Shanghai is
convertible into equity interest of CBMG Shanghai and the business
cooperation agreement grants the Company and its officers the power
to manage and make decisions that affect the operation of CBMG
Shanghai.
There
are substantial uncertainties regarding the interpretation,
application and enforcement of PRC laws and regulations, including
but not limited to the laws and regulations governing our business
or the enforcement and performance of our contractual arrangements.
See our Annual Reports on Form 10-K for the years ended December
31, 2015 and 2014. The Company has not provided any guarantees
related to CBMG Shanghai and no creditors of CBMG Shanghai have
recourse to the general credit of the Company.
As
the primary beneficiary of CBMG Shanghai, the Company consolidates
in its financial statements the financial position, results of
operations, and cash flows of CBMG Shanghai, and all intercompany
balances and transactions between the Company and CBMG Shanghai are
eliminated in the condensed consolidated financial
statements.
The
Company has aggregated the financial information of CBMG Shanghai
and its subsidiaries in the table below. The aggregate carrying
value of assets and liabilities of CBMG Shanghai and its
subsidiaries (after elimination of intercompany transactions and
balances) in the Company’s condensed consolidated balance
sheets as of September 30, 2016 and December 31, 2015 are as
follows:
|
|
|
|
|
|
Assets
|
|
|
Cash
|
$2,967,559
|
$1,821,883
|
Accounts
receivable
|
-
|
337,345
|
Other
receivables
|
145,789
|
136,621
|
Inventory
|
71,668
|
180,973
|
Prepaid
expenses
|
567,996
|
250,123
|
Total
current assets
|
3,753,012
|
2,726,945
|
|
|
|
Property,
plant and equipment, net
|
1,751,355
|
1,145,924
|
Intangibles
|
1,696,912
|
1,892,551
|
Long-term
prepaid expenses and other assets
|
711,950
|
349,653
|
Total
assets
|
$7,913,229
|
$6,115,073
|
|
|
|
Liabilities
|
|
|
Accounts
payable
|
$100,437
|
$38,004
|
Other
payables
|
443,988
|
914,817
|
Payroll
accrual
|
383,340
|
464,510
|
Total
current liabilities
|
$927,765
|
$1,417,331
|
|
|
|
Other
non-current liabilities
|
10,482
|
60,829
|
Total
liabilities
|
$938,247
|
$1,478,160
|
NOTE 4 – INVENTORY
As
of September 30, 2016 and December 31, 2015, inventory, net of
provision, consisted of the following:
|
|
|
Raw
materials
|
$241,483
|
$357,896
|
Semi-finished
goods
|
11,690
|
15,346
|
Finished
goods
|
-
|
17,644
|
|
$253,173
|
$390,886
|
Provision
for inventories is as below:
|
Three months ended September 30,
|
Nine months ended September 30,
|
|
|
|
|
|
Balance
at the beginning of the period
|
$229,767
|
$-
|
$123,848
|
$-
|
Addition
|
-
|
-
|
110,145
|
-
|
Exchange
difference
|
(1,603)
|
-
|
(5,829)
|
-
|
Balance
at the end of the period
|
$228,164
|
$-
|
$228,164
|
$-
|
NOTE 5 – PROPERTY, PLANT AND EQUIPMENT
As
of September 30, 2016 and December 31, 2015, property, plant and
equipment, carried at cost, consisted of the
following:
|
|
|
|
|
|
Office
equipment
|
$83,409
|
$24,526
|
Manufacturing
equipment
|
3,333,153
|
2,680,805
|
Computer
equipment
|
173,293
|
150,698
|
Leasehold
improvements
|
1,952,387
|
1,417,997
|
Construction
work in process
|
21,778
|
680,740
|
|
5,564,020
|
4,954,766
|
Less:
accumulated depreciation
|
(2,444,846)
|
(2,185,866)
|
|
$3,119,174
|
$2,768,900
|
|
|
|
For the three and nine months ended September 30, 2016,
depreciation expense was $228,366 and $669,064, respectively, as
compared to $124,992 and $423,901 for the three and nine months
ended September 30, 2015, respectively.
NOTE 6 – INVESTMENTS
The
Company’s investments represent the investment in equity
securities listed in Over-The-Counter (“OTC”) markets
of the United States of America:
September 30, 2016
|
|
Gross Unrealized Gains/(losses)
|
Gross Unrealized Losses more than 12 months
|
Gross Unrealized Losses less than 12 months
|
|
Equity
position in Alpha Lujo, Inc.
|
$251,388
|
$-
|
$-
|
$(221,964)
|
$29,424
|
Equity
position in Arem Pacific Corporation
|
480,000
|
|
-
|
-
|
480,000
|
Total
|
$731,388
|
$-
|
$-
|
$(221,964)
|
$509,424
|
|
|
|
|
|
|
December 31, 2015
|
|
Gross Unrealized Gains/(losses)
|
Gross Unrealized Losses more than 12 months
|
Gross Unrealized Losses less than 12 months
|
|
Equity
position in Alpha Lujo, Inc.
|
$251,388
|
$-
|
$-
|
$(133,694)
|
$117,694
|
Equity
position in Arem Pacific Corporation
|
5,030,000
|
170,000
|
-
|
-
|
5,200,000
|
Equity
position in Wonder International Education & Investment Group
Corporation
|
61,713
|
-
|
-
|
-
|
61,713
|
Total
|
$5,343,101
|
$170,000
|
$-
|
$(133,694)
|
$5,379,407
|
There
were no net proceeds from sale of investments for the three months
ended September 30, 2016 and 2015. Net proceeds from sale of
investments for the nine months ended September 30, 2016 and 2015
was $ nil and $1,480, respectively.
There
was no net realized losses from sale of investments for the three
months ended September 30, 2016 and 2015. Net realized losses from
sale of investments for the nine months ended September 30, 2016
and 2015 was $ nil and $5,178, respectively.
The
unrealized holding gain (loss) for the investments, net of tax that
were recognized in other comprehensive income for the three and
nine months ended September 30, 2016 was $nil and $5,300,633,
respectively, as compared to $(1,520,000) and $6,543,460 for the
three and nine months ended September 30, 2015, respectively.
Reclassification adjustment of $5,557,939 in connection with
other-than-temporary impairment of investments was recorded in
other comprehensive income for the three and nine months ended
September 30, 2016. No adjustment was recorded in other
comprehensive income for the three and nine months ended September
30, 2015.
The
Company tracks each investment with an unrealized loss and evaluate
them on an individual basis for other-than-temporary impairments,
including obtaining corroborating opinions from third party
sources, performing trend analysis and reviewing management’s
future plans. When investments have declines determined
by management to be other-than-temporary the Company recognizes
write downs through earnings. Other-than-temporary impairment of
investments for the three months ended September 30, 2016 and 2015
was $4,611,714 and $nil, respectively. Other-than-temporary
impairment of investments for the nine months ended September 30,
2016 and 2015 was $4,611,714 and $123,428,
respectively.
NOTE 7 – FAIR VALUE ACCOUNTING
The
Company has adopted ASC Topic 820, Fair Value Measurement and
Disclosure, which defines fair value, establishes a framework for
measuring fair value in GAAP, and expands disclosures about fair
value measurements. It does not require any new fair value
measurements, but provides guidance on how to measure fair value by
providing a fair value hierarchy used to classify the source of the
information. It establishes a three-level valuation hierarchy of
valuation techniques based on observable and unobservable inputs,
which may be used to measure fair value and include the
following:
Level 1 – Quoted prices in active markets for identical
assets or liabilities.
Level 2 – Inputs other than Level 1 that are observable,
either directly or indirectly, such as quoted prices for similar
assets or liabilities; quoted prices in markets that are not
active; or other inputs that are observable or can be corroborated
by observable market data for substantially the full term of the
assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or
no market activity and that are significant to the fair value of
the assets or liabilities.
Classification
within the hierarchy is determined based on the lowest level of
input that is significant to the fair value
measurement.
The
carrying value of financial items of the Company including cash and
cash equivalents, accounts receivable, other receivables, accounts
payable and accrued liabilities, approximate their fair values due
to their short-term nature and are classified within Level 1 of the
fair value hierarchy. The Company’s investments are
classified within Level 2 of the fair value hierarchy because of
the limited trading of the three stocks traded in OTC
market.
Assets
measured at fair value within Level 2 on a recurring basis as of
September 30, 2016 and December 31, 2015 are summarized as
follows:
|
|
|
Fair Value Measurements at Reporting Date Using:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
Equity
position in Alpha Lujo, Inc.
|
$29,424
|
$-
|
$29,424
|
$-
|
Equity
position in Arem Pacific Corporation
|
480,000
|
-
|
480,000
|
-
|
|
|
|
|
|
|
$509,424
|
$-
|
$509,424
|
$-
|
|
|
|
Fair Vaue Measurements at Reporting Date Using:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
Equity
position in Alpha Lujo, Inc.
|
$117,694
|
$-
|
$117,694
|
$-
|
Equity
position in Arem Pacific Corporation
|
5,200,000
|
-
|
5,200,000
|
-
|
Equity
position in Wonder International Education & Investment Group
Corporation
|
61,713
|
-
|
61,713
|
-
|
|
$5,379,407
|
$-
|
$5,379,407
|
$-
|
No
shares were acquired in the nine months ended September 30, 2016
and 2015.
As
of September 30, 2016 and December 31, 2015, the Company holds
8,000,000 shares in Arem Pacific Corporation, 2,942,350 shares in
Alpha Lujo, Inc. and 2,057,131 shares in Wonder International
Education and Investment Group Corporation,
respectively. All available-for-sale investments held by
the Company at September 30, 2016 and December 31, 2015 have been
valued based on Level 2 inputs due to the limited trading of all
three of these companies.
NOTE 8 – INTANGIBLE ASSETS
Intangible
assets that are subject to amortization are reviewed for potential
impairment whenever events or circumstances indicate that carrying
amounts may not be recoverable. Assets not subject to amortization
are tested for impairment at least annually. The Company evaluates
the continuing value of the intangibles at each balance sheet date
and records write-downs if the continuing value has become
impaired. Impairment is determined to exist if the anticipated
undiscounted future cash flow attributable to the asset is less
than its carrying value. The asset is then reduced to the net
present value of the anticipated future cash flow.
As
of September 30, 2016 and December 31, 2015, intangible assets, net
consisted of the following:
Patents
& knowhow & license
|
|
|
|
September
30, 2016
|
|
Cost
basis
|
$17,632,235
|
$17,686,700
|
Less:
accumulated amortization
|
(3,110,178)
|
(1,790,045)
|
|
$14,522,057
|
$15,896,655
|
|
|
|
Software
|
|
|
|
September
30, 2016
|
|
Cost
basis
|
$98,855
|
$90,951
|
Less:
accumulated amortization
|
(50,356)
|
(38,506)
|
|
$48,499
|
$52,445
|
|
|
|
|
|
|
Total
intangibles, net
|
$14,570,556
|
$15,949,100
|
All
software is provided by a third party vendor, is not
internally developed, and has an estimated useful life of five
years. Patents and knowhow are amortized using an estimated useful
life of three to ten years. Amortization expense for the three and
nine months ended September 30, 2016 was $456,878 and $1,365,317,
respectively, and amortization expense for the three and nine
months ended September 30, 2015 was $483,800 and $1,113,422,
respectively.
Estimated
amortization expense for each of the ensuing years is as follows
for the years ending September 30:
Years
ending September 30,
|
|
2017
|
$1,782,559
|
2018
|
1,774,640
|
2019
|
1,772,461
|
2020
|
1,770,134
|
2021
and thereafter
|
7,470,762
|
|
$14,570,556
|
NOTE 9 – LEASES
The
Company leases facilities under non-cancellable operating lease
agreements. These facilities are located in the United
States, Hong Kong and China. The Company recognizes
rental expense on a straight-line basis over the life of the lease
period. Rent expense under operating leases for the
three and nine months ended September 30, 2016 was approximately
$219,051 and $794,734, respectively, as compared to $255,667 and
$758,889 for the three and nine months ended September 30, 2015,
respectively.
As
of September 30, 2016, the Company has the following future minimum
lease payments due under the foregoing lease
agreements:
Years
ending September 30,
|
|
2017
|
$603,119
|
2018
|
481,607
|
2019
|
477,081
|
2020
|
353,342
|
2021
and thereafter
|
596,244
|
|
|
|
$2,511,393
|
NOTE 10 – RELATED PARTY TRANSACTIONS
The
Company advanced petty cash to officers for business travel
purpose. As of September 30, 2016 and December 31, 2015,
other receivables due from officers for business travel purpose was
$ nil and $19,214, respectively.
NOTE 11 – EQUITY
ASC Topic 505 Equity paragraph 505-50-30-6 establishes that
share-based payment transactions with nonemployees shall be
measured at the fair value of the consideration received or the
fair value of the equity instruments issued, whichever is more
reliably measurable.
In
March 2015, the Company closed a financing transaction pursuant to
which it sold 515,786 shares of the Company’s common stock to
selected investors at $38 per share, for total gross proceeds of
approximately $19,600,000. The shares were sold pursuant to
separate subscription agreements between the Company and each
investor. The Company incurred a finder fee of $979,992, equal to
5% of the gross proceeds from the investors that were introduced by
such finders, which was recorded as reduction in
equity.
On
June 26, 2015, the Company completed its acquisition of the certain
license rights to technology and know-how from Blackbird
BioFinance, LLC (“Blackbird”) and entered into an
assignment and assumption agreement to acquire all of
Blackbird’s right, title and interest in and to the exclusive
worldwide license to a CD40LGVAX vaccine from the University of
South Florida. According to the asset purchase agreement,
$1,050,500 in restricted common stock (based on the 20-day
volume-weighted average price of the Company’s stock on the
closing date) will be delivered to Blackbird at closing, thus
28,120 shares of Company common stock were issued as part of the
consideration of this transaction. In addition, 18,747 shares of
Company common stock (equal to $700,000 based on the 20-day
volume-weighted average price of the Company’s stock on the
closing date) would be delivered to Blackbird on the 6 month
anniversary of the closing date upon satisfaction of certain
conditions according to the agreements. Above shares were issued in
November 2015.
On
February 4, 2016, the Company conducted an initial closing of a
financing transaction (the “Financing”), pursuant to
which it sold an aggregate of 263,158 shares of the Company’s
common stock, par value $0.001 per share to Wuhan Dangdai Science
& Technology Industries Group Inc. (the “Investor”)
at $19.00 per share, for total gross proceeds of approximately
$5,000,000. The Investor agreed to purchase, in one or more
subsequent closings, up to an additional 2,006,842 shares on or
before April 15, 2016, for a potential aggregate additional raise
of $38,130,000. The Company had received the proceeds of $5,000,000
on February 4, 2016.
On
April 15, 2016, the Company completed the second and final closing
of the Financing with the Investor, pursuant to which the Company
sold to the Investor 2,006,842 shares of the Company’s Common
Stock, for approximately $38,130,000 in gross proceeds. The
aggregate gross proceeds from both closings in the Financing
totaled approximately $43,130,000. In the aggregate, 2,270,000
shares of Common Stock were issued in the Financing.
In
connection with the above Financing, the Company agreed to pay a
finder’s fee equal to 5% of the gross proceeds comprised of
(i) $657,628 from the gross proceeds of the Financing and (ii)
78,888 restricted shares of Common Stock based on the per share
purchase price in the Financing of $19 per share. On April 28,
2016, 78,888 shares of common stock were issued to the finder,
which was recorded against the equity.
During
the three and nine months ended September 30, 2016, the Company
expensed $1,357,799 and $3,407,615 associated with unvested option
awards and $174,065 and $536,510 associated with restricted common
stock issuances, respectively. During the three and nine months
ended September 30, 2015, the Company expensed $1,920,063 and
$5,437,427 associated with unvested options awards and $134,842 and
$235,528 associated with restricted common stock issuances,
respectively.
During
the three and nine months ended September 30, 2016, options for
130,882 and 159,617 underlying shares were exercised on a cash
basis, 130,882 and 159,617 shares of the Company’s common
stock were issued accordingly. During the three and nine months
ended September 30, 2015, options for 45,645 and 121,168 underlying
shares were exercised on a cash basis, 45,645 and 121,168 shares of
the Company’s common stock were issued
accordingly.
During
the three and nine months ended September 30, 2016, 10,500 and
20,460 shares of the Company's restricted common stock were issued
respectively. During the three and nine months ended September 30,
2015, 547 and 1,448 shares of the Company’s restricted common
stock were issued respectively.
NOTE 12 – COMMITMENTS AND CONTINGENCIES
Service Agreement with Wen Tao
(Steve) Liu
On
February 7, 2016 the Company entered into a two-year consulting
agreement with Wen Tao (Steve) Liu, a director of the Company,
pursuant to which Wen Tao Liu would advise the Company on strategic
opportunities and China hospital resource management as directed by
the CEO, maintain the Company’s Cupertino office and provide
other consulting services etc. Compensation related to the
consulting services are disclosed in Exhibit 99.1 of the quarterly
report on Form 10-Q for the three-month ending March 31,
2016.
Capital commitments
As
of September 30, 2016, the capital commitments of the Company are
summarized as follows:
|
|
|
|
Contracts
for acquisition of plant and equipment being or to be
executed
|
$1,714,536
|
Legal proceedings
On
April 21, 2015, a putative class action complaint was filed against
the Company in the U.S. District Court for the Northern District of
California captioned Bonnano v. Cellular Biomedicine Group, Inc.,
3:15-cv-01795-WHO (N.D. Ca.). The complaint also named Wei Cao, the
Company’s Chief Executive Officer, and Tony Liu, the
Company’s Chief Financial Officer, as defendants. The
complaint alleged that during the class period, June 18, 2014,
through April 7, 2015, the Company made material misrepresentations
in its periodic reports filed with the SEC. The complaint alleged a
cause of action under Section 10(b) of the Securities Exchange Act
of 1934 (the “1934 Act”) against all defendants and
under Section 20(a) of the 1934 Act against the individual
defendants. The complaint did not state the amount of the damages
sought.
On
June 3, 2015, defendants were served. On June 29, 2015, the
Court ordered, as stipulated by the parties, that defendants are
not required to respond to the initial complaint in this action
until such time as a lead plaintiff and lead counsel have been
appointed and a consolidated complaint has been filed. The deadline
for filing motions for the appointment of lead plaintiff and
selection of lead counsel was June 22, 2015. On that date, one
motion was filed by the Rosen Law Firm on behalf of putative
plaintiff Michelle Jackson. On August 3, 2015, having received no
opposition, the Court appointed Jackson as lead plaintiff and the
Rosen Law Firm as class counsel. As stipulated among the parties,
Jackson filed an amended class action complaint on September 17,
2015.
The
amended complaint names ten additional individuals and entities as
defendants (“additional defendants”), none of whom are
affiliated with the Company, and asserts an additional claim under
Section 10(b) and Rule 10b-5(a) and (c) thereunder that the Company
purportedly engaged in a scheme with the additional defendants to
promote its securities. The amended complaint does not assert any
claims against Mr. Liu.
On
January 19, 2016, the Company filed a motion to dismiss, which was
argued on April 20, 2016. On May 20, 2016, the Court granted the
motion to dismiss with leave to amend. On June 6, 2016, Plaintiffs
filed a Second Amended Complaint, and on June 30, 2016, the Company
filed a motion to dismiss. Oral argument on the motion was held on
August 17, 2016. On September 2, 2016, the Court dismissed the
Second Amended Complaint with prejudice and entered judgment
against Plaintiffs. On September 16, 2016, Plaintiffs filed a
Notice of Appeal to the U.S. Court of Appeals for the Ninth
Circuit. Plaintiffs must file their opening brief on December 27,
2016, to proceed with the appeal.
The
Company believes the suit is without merit and filled with patently
false information, and will vigorously defend the Company in the
matter. At this stage of the proceedings, it is not possible to
evaluate the likelihood of an unfavorable outcome or to estimate
the range of potential loss.
Other
than legal proceedings disclosed in this section, 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.
NOTE 13 – STOCK BASED COMPENSATION
Our
stock-based compensation arrangements include grants of stock
options and restricted stock awards under the Stock Option Plan
(the “2009 Plan”,“2011 Plan”, “2013
Plan” and the “2014 Plan”), and certain awards
granted outside of these plans. The compensation cost that has been
charged against income related to stock options for the three and
nine months ended September 30, 2016 was $1,357,799 and $3,407,615,
respectively, and for the three and nine months ended September 30,
2015 was $1,920,063 and $5,437,427, respectively. The compensation
cost that has been charged against income related to restricted
stock awards for the three and nine months ended September 30, 2016
was $174,065 and $536,510, respectively, and for the three and nine
months ended September 30, 2015 was $134,842 and $235,528,
respectively.
As
of September 30, 2016, there was $7,096,277 of unrecognized
compensation cost related to an aggregate of 660,531 of non-vested
stock option awards and $1,225,683 related to an aggregate of
58,756 of non-vested restricted stock awards. These
costs are expected to be recognized over a weighted-average period
of 1.49 years for the stock options awards and 1.43 years for the
restricted stock awards.
During
the three months ended September 30, 2016, the Company issued
options under the 2013 Plan and 2014 Plan of an aggregate of 23,300
shares of the Company’s common stock to officers, directors,
employees and advisors. The grant date fair value of these options
was $235,786 using Black-Scholes option valuation models with the
following assumptions: grant date stock price $12.13 to $16,
volatility 88.44% to 88.75%, expected life 6.0 years, and risk-free
rate of 1.07% to 1.35%. The Company is expensing these options on a
straight-line basis over the requisite service period.
During
the nine months ended September 30, 2016, the Company issued
options under the 2013 Plan and 2014 Plan of an aggregate of
257,043 shares of the Company’s common stock to officers,
directors, employees and advisors. The grant date fair value of
these options was $3,278,447 using Black-Scholes option valuation
models with the following assumptions: grant date stock price
$12.13 to $40.00, volatility 88.44% to 90.03%, expected life 6.0
years, and risk-free rate of 1.07% to 1.65%. The Company is
expensing these options on a straight-line basis over the requisite
service period.
During
the three months ended September 30, 2015, the Company issued
options under the 2013 Plan and 2014 Plan of an aggregate of 64,500
shares of the Company’s common stock to officers, directors
and employees. The grant date fair value of these options was
$1,147,295 using Black-Scholes option valuation models with the
following assumptions: grant date stock price $21.67 to $38.4,
volatility 88.53% to 89.07%, expected life 6.0 years, and risk-free
rate of 1.57% to 1.92%. The Company is expensing these options on a
straight-line basis over the requisite service period.
During
the nine months ended September 30, 2015, the Company issued an
aggregate of 698,779 options under the 2013 Plan and 2014 Plan to
officers, directors and employees. The grant date fair value of
these options was $13,319,639 using Black-Scholes option valuation
models with the following assumptions: exercise price equal to the
grant date stock price of $5.00to $38.4, volatility 88.53% to
99.27%, expected life 6.0 years, and risk-free rate of 1.39% to
1.92%. The Company is expensing these options on a straight-line
basis over the requisite service period.
The
following table summarizes stock option activity as of September
30, 2016 and December 31, 2015 and for the nine months ended
September 30, 2016:
|
|
Weighted- Average Exercise Price
|
Weighted- Average Remaining Contractual Term (in
years)
|
Aggregate Intrinsic Value
|
|
|
|
|
|
Outstanding
at December 31, 2015
|
1,952,648
|
$12.42
|
7.8
|
$17,701,962
|
Grants
|
257,043
|
19.65
|
|
|
Forfeitures
|
(424,340)
|
19.90
|
|
|
Exercises
|
(159,617)
|
4.31
|
|
|
Outstanding
at September 30, 2016
|
1,625,734
|
$12.41
|
7.5
|
$3,396,438
|
|
|
|
|
|
Vested
and exercisable at September 30, 2016
|
965,203
|
$8.42
|
7.0
|
$5,869,205
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
$3.00 - $4.95
|
186,430
|
186,430
|
|
|
$5.00 - $9.19
|
615,972
|
532,331
|
|
|
$12.91+
|
823,332
|
246,442
|
|
|
|
1,625,734
|
965,203
|
|
The aggregate intrinsic value for
stock options outstanding is defined as the positive difference
between the fair market value of our common stock and the exercise
price of the stock options.
Cash
received from option exercises under all share-based payment
arrangements for the nine months ended September 30, 2016 and 2015
was $685,712 and $478,798.
NOTE 14 – NET LOSS PER SHARE
Basic
and diluted net loss per common share is computed on the basis of
our weighted average number of common shares outstanding, as
determined by using the calculations outlined below:
|
For the
Three Months Ended
|
For the
Nine Months Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
$(10,661,220)
|
$(5,142,198)
|
$(22,068,615)
|
$(14,455,844)
|
|
|
|
|
|
Weighted
average shares of common stock
|
14,128,465
|
11,622,756
|
13,253,290
|
11,399,958
|
Dilutive
effect of stock options
|
-
|
-
|
-
|
-
|
Restricted
stock vested not issued
|
-
|
-
|
-
|
-
|
Common
stock and common stock equivalents
|
14,128,465
|
11,622,756
|
13,253,290
|
11,399,958
|
|
|
|
|
|
Net
loss per basic share
|
$(0.75)
|
$(0.44)
|
$(1.67)
|
$(1.27)
|
Net
loss per diluted share
|
$(0.75)
|
$(0.44)
|
$(1.67)
|
$(1.27)
|
For
the three and nine months ended September 30, 2016 and 2015, the
effect of conversion and exercise of the Company’s
outstanding options are excluded from the calculations of dilutive
net loss per share as their effects would have been anti-dilutive
since the Company had generated loss for the three and nine months
ended September 30, 2016 and 2015.
NOTE 15 – INCOME TAXES
Income
taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carry-forwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect of a change in tax rates on
deferred tax assets and liabilities is recognized in income in the
period during which such rates are enacted.
The
Company considers all available evidence to determine whether it is
more likely than not that some portion or all of the deferred tax
assets will be realized. The ultimate realization of deferred tax
assets is dependent upon the generation of future taxable income
during the periods in which those temporary differences become
realizable. Management considers the scheduled reversal of deferred
tax liabilities (including the impact of available carryback and
carry-forward periods), and projected taxable income in assessing
the realizability of deferred tax assets. In making such judgments,
significant weight is given to evidence that can be objectively
verified. Based on all available evidence, in particular our
three-year historical cumulative losses, recent operating losses
and U.S. pre-tax loss for the three and nine months ended September
30, 2016, we recorded a valuation allowance against our U.S. net
deferred tax assets. In order to fully realize the U.S. deferred
tax assets, we will need to generate sufficient taxable income in
future periods before the expiration of the deferred tax assets
governed by the tax code.
In
each period since inception, the Company has recorded a valuation
allowance for the full amount of net deferred tax assets, as the
realization of deferred tax assets is uncertain. As a result, the
Company has not recorded any federal or state income tax benefit in
the consolidated statements of operations and comprehensive income
(loss).
As
of September 30, 2016, the Company had net operating loss
carryforwards of $9.98 million for U.S. federal purposes, $9.55
million for U.S. state purposes, and $6.4 million for Chinese
income tax purposes, such losses will begin to expire in 2034,
2034, and 2021 for U.S. federal, U.S. state and Chinese income tax
purposes, respectively. Deferred income tax expense is a result of
recognizing tax benefit of current period loss due to other
comprehensive income recorded this quarter. The
Company's effective tax rate differs from statutory rates of 35%
for U.S. federal income tax purposes, 15% to 25% for Chinese income
tax purpose and 16.5% for Hong Kong income tax purposes due to the
effects of the valuation allowance and certain permanent
differences as it pertains to book-tax differences in the value of
client shares received for services.
Pursuant
to the Corporate Income Tax Law of the PRC, all of the
Company’s PRC subsidiaries are liable to PRC Corporate Income
Taxes (“CIT”) at a rate of 25% except for Cellular
Biomedicine Group Ltd. (Shanghai) (“CBMG Shanghai”).
According to Guoshuihan 2009 No. 203, if an entity is certified as
an “advanced and new technology enterprise”, it is
entitled to a preferential income tax rate of 15%. CBMG Shanghai
obtained the certificate of “advanced and new technology
enterprise” dated October 30, 2015 with an effective period
of three years and the provision for PRC corporate income tax for
CBMG Shanghai is calculated by applying the income tax rate of 15%
in calendar year 2015.
NOTE 16 – COLLABORATION AGREEMENT
Part of AG’s business includes a
collaboration agreement to establish and operate a biologic
treatment center in the Jilin province of China. Under
the terms of the Collaboration Agreement dated December 10, 2012
and its supplementary agreement dated July 19, 2014 (the
“Collaboration Agreement”), AG’s collaborative
partner (the “Partner”) funded the development of the
center and provides certain ongoing services. In
exchange, the Partner receives preferred repayment of all funds
that were invested in the development, 60% of the net profits until
all of the invested funds are repaid, and 40% of the net profits
thereafter, and the rights to the physical assets at the conclusion
of the agreement. We accounted for this transaction in
accordance with ASC 808 Collaborative
Arrangements and have
reflected all assets and liabilities of the treatment
center. With our recent build-up of multiple cancer
therapeutic technologies, we have prioritized our clinical efforts
on developing CAR-T technologies, Vaccine, Tcm and TCR clonality
technologies, and not actively pursuing the fragmented technical
services opportunities
In
June 2016, the Company and the Partner agreed to terminate the
Collaboration Agreement and in July 2016 entered into a cooperation
termination agreement (the “Termination Agreement”)
with the Partner. In August 2016, in accordance with the
Termination Agreement, the Company paid $0.3 million (RMB2 million
equivalent) to settle all the liabilities with the Partner and
retain the ownership of all the assets under the Collaboration
Agreement.
NOTE 17 – SEGMENT INFORMATION
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 result
of the operation 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.
NOTE 18 – SUBSEQUENT EVENTS
The
Company entered into a tenancy deposit agreement on September 26,
2016 with Shanghai Chuangtong Industrial Development Co., Ltd., for
a lease of a 10,500 square meters four-stories building located in
the “Pharma Valley” in Shanghai, P. R. China
(“Zhangjiang Lease”). The building is under
construction and the lease contract shall be executed within one
week after obtaining the construction completion filing. The
proposed ten-year lease is to commence no later than March 30,
2017. On October 11, 2016 the Company paid a non-refundable deposit
of $179,700 (RMB 1.2 million equivalent).
On
October 26, 2016, Cao Wei, Chen Mingzhe and Lu Junfeng entered into
the Equity Transfer Agreement, according to which Cao Wei ceded his
equity interests in CBMG Shanghai to Chen Mingzhe and Lu Junfeng,
each now owns a 50% equity interest in CBMG Shanghai. On October
26, 2016, CBMG Wuxi, CBMG Shanghai, Cao Wei and Chen Mingzhe
entered into a termination agreement, pursuant to which, the First
Exclusive Option Agreement and previous VIE pledge agreement were
terminated; on the same day, a new set of exclusive option
agreement and VIE pledge agreement were executed by and among CBMG
Wuxi, CBMG Shanghai, Chen Mingzhe and Lu Junfeng. The above
termination agreement and the new set of exclusive option agreement
and VIE pledge agreement became effective on October 26,
2016.
The
Company applied for the release of the equity pledge under the
previous VIE pledge agreement on October 18, 2016 and obtained the
approval for such release on October 26, 2016. CBMG Shanghai is in
the process of applying for the record of the above equity transfer
and the pledge of the equity interests under the new VIE
pledge agreement.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis summarizes the significant
factors affecting our results of operations, financial condition
and liquidity position for the three months and nine months ended
September 30, 2016 and 2015, and should be read in conjunction with
our unaudited condensed consolidated financial statements and
related notes included elsewhere in this filing.
This report contains forward-looking statements. These statements
relate to future events or to our future financial performance and
involve known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements to
be materially different from any future results, performance or
achievements expressed or implied by the forward-looking
statements.
Factors that might affect our forward-looking statements include,
among other things:
●
overall economic and business
conditions;
●
the
demand for our products and services;
●
competitive
factors in the industries in which we compete;
●
the
results of our pending and future litigation;
●
the
emergence of new technologies which compete with our product and
service offerings;
●
our
cash position and cash burn rate;
●
other
capital market conditions, including availability of funding
sources;
●
the
strength of our intellectual property portfolio; and
●
changes
in government regulations in China, the United States and
other countries related to our industries.
In some cases, you can identify forward-looking statements by terms
such as “may”, “will”,
“should”, “could”, “would”,
“expects”, “plans”,
“anticipates”, “believes”,
“estimates”, “projects”,
“predicts”, “potential” and similar
expressions. These statements reflect our current views with
respect to future events and are based on assumptions and are
subject to risks and uncertainties. Given these uncertainties, you
should not place undue reliance on these forward-looking
statements. We discuss many of these risks in greater detail under
the heading “Risk Factors” included in other reports we
file with the Securities and Exchange Commission. Also, these
forward-looking statements represent our estimates and assumptions
only as of the date of the document containing the applicable
statement.
Unless required by law, we undertake no obligation to update or
revise any forward-looking statements to reflect new information or
future events or developments. Thus, you should not assume that our
silence over time means that actual events are bearing out as
expressed or implied in such forward-looking
statements.
OVERVIEW
For purposes of this periodic report, “CBMG BVI” refers
to Cellular Biomedicine Group Ltd., a British Virgin Islands
corporation, which is now a wholly-owned subsidiary of the
registrant, together with its business, operations, subsidiaries
and controlled entities). The “Company”,
“CBMG”, “we”, “us”,
“our” and similar terms refer to Cellular Biomedicine
Group, Inc. (a Delaware corporation) as a combined entity including
each of its subsidiaries and controlled companies, unless the
context otherwise requires.
Recent Developments
In January 2015, we initiated patient
recruitment in a phase II clinical study, in China, of
ReJoin ® (human
adipose derived mesenchymal progenitor cell or “haMPC”)
in Cartilage Damaged (“CD”) patients resulting from
osteoarthritis (“OA”) or sports injury, in further
support of KOA indication. The study is based on the same
technology that has shown significant efficacy in the treatment
of Knee Osteoarthritis
(“KOA”), but
requires two arthroscopic examinations and the use of magnetic
resonance imaging (“MRI”) to further demonstrate the
regenerative efficacy of ReJoin ®.
Upon further review of the protocol and the difficulty of getting
patients back for the second arthroscopic look, we have determined
to terminate the study. We continue to conduct studies of KOA haMPC
therapy.
On February 4, 2015, the Company announced its agreement related to
the acquisition of Chinese PLA General Hospital's ("PLAGH",
Beijing, also known as "301 Hospital") Chimeric Antigen Receptor T
cell (“CAR-T”) therapy, its recombinant expression
vector CD19, CD20, CD30 and Human Epidermal Growth Factor
Receptor's (EGFR or HER1) Immuno-Oncology patents applications, and
Phase I clinical data of the aforementioned therapies and
manufacturing knowledge. The 301 Hospital team has
conducted several preliminary clinical studies of various CAR-T
constructs targeting CD19-positive acute lymphocytic leukemia,
CD20-positive advanced B-cell Non-Hodgkin’s lymphoma,
CD30-positive Hodgkin's lymphoma and EGFR-HER1-positive advanced
lung cancer, cholangiocarcinoma, pancreatic cancer, and renal cell
carcinoma. Pursuant to the terms of the Transfer
Agreement, PLAGH agreed to transfer to the Company all of its
rights, titles and interests in and to certain technologies
currently owned by PLAGH (including, without limitation, four
technologies and their pending patent applications) that relate to
genetic engineering of chimeric antigen receptor (CAR)-modified T
cells and its applications (collectively, the
“Technology”). In addition, PLAGH is
responsible for obtaining governmental approval for the clinical
trial related to the Technology. On July 29, 2016, China Patent
Office granted our patent application on genetically engineered
anti-CD20 Chimeric Antigen Receptor-positive NKT cells, its
production and application.
We announced interim
Phase IIb trial results for our ReJoin ®
haMPC therapy for KOA on March 25, 2015, which confirmed that the
primary and secondary endpoints of ReJoin ® therapy
groups have all improved significantly compared to their baseline.
We released complete and positive phase IIb data set at 48-week
follow-up in January 2016, which concluded the company’s
phase IIb trial with autologous stem cells for
KOA.
On March 25, 2015, the Company announced results of the Phase I
clinical studies on CAR-CD19 (CBM-C19.1) and CAR-CD20 (CBM-C20.1).
The Phase I trial data showed an optimistic response rate under
controllable toxicities. In comparison with leading clinical
research reports on CAR-CD19 therapies by peers, we believe that
the efficacy profile of both CBM-C19.1 and CBM-C20.1 therapies are
distinguished for the following reasons:
I.
The patient selection criteria of this study are highly selective.
The participants enrolled in the studies were advanced, relapsed,
and refractory to other standard-of-care therapies. This selection
criterion is highly distinguishable from other studies, which
avoided higher risk patients. Most of these high severity patients
would not have been eligible for other entities’ studies
because of extramedullary involvement or because the presence of
bulky tumors were deemed too risky for their trials.
II.
The treatment program design of this study is very
stringent.
a.
Our higher risk patients did not receive conditioning chemotherapy,
which is known as a beneficial facilitator of adoptive T cell
therapies.
b.
Moreover, our higher
risk patients did not receive subsequent Hematopoietic Stem Cell
transplantation (HSCT), which is also known as a beneficial
facilitator of adoptive T cell therapies.
On May 27, 2015, the Company announced the appointment of Richard
L. Wang, Ph.D., MBA, PMP as Chief Operating Officer. Dr. Wang, a
seasoned and accomplished scientist and industry professional,
brings operational, project management, and R&D governance
experience from multinational pharmaceutical companies, to support
the Company’s research of osteoarthritis and oncology
therapeutics. Dr. Wang oversees the Company’s research
collaborations, technology transfers, drug development clinical
trials, regulatory affairs, production, and oversight of the
Company’s multicenter operations.
At the 10th Annual
World Stem Cells & Regenerative Medicine Congress in London, UK
on May 21, 2015, the Company announced results of the Phase I
clinical studies of CD30-directed CAR-T therapy on
CD30-positive Stage III and IV
Hodgkin's lymphoma patients. The results of this trial demonstrated
that five out of seven patients responded to the treatment, and the
therapy was demonstrated in this trial to be safe, feasible and
efficacious.
On June 26, 2015, the Company completed the acquisition of
Blackbird BioFinance, LLC (“Blackbird”)’s license
from University of South Florida (“USF”) on the next
generation cancer immunotherapy vaccine CD40LGVAX, its related
technologies and technical knowledge. Of the total consideration to
be delivered to Blackbird for the purchased assets, $2,500,000 was
delivered in cash and 28,120 shares of Company common stock (the
"Closing Shares"), representing $1,050,000 of the purchase
consideration (based on the 20-day volume-weighted average price of
the Company’s stock on the closing date), was issued and
delivered to Blackbird. Another 18,747 shares (the “Holdback
Shares”), representing $700,000 of the purchase consideration
(based on the 20-day volume-weighted average price of the
Company’s stock on the closing date), was issued and
delivered to Blackbird in November 2015. Based on the terms of the
license, we believe the Company will pay potentially more than $25
million in future milestones and royalty payments.
We
believe this technological addition may address meaningful and
sizable unmet medical needs. Based on the latest data available
from NCCN Clinical Practice Guidelines in Oncology Non-Small Cell
Lung Cancer (“NSCLC”) (Version 4. 2014), an estimated
224,210 people in the United States were diagnosed with lung cancer
in 2014, with an estimated 159,260 deaths occurring because of the
disease. In China, 728,552 individuals were diagnosed with lung
cancer in 2012, and 592,410 individuals in China died of lung
cancer in 2012 (source: Chinese Cancer Registry Annual Report 2012
& GMCD40L Study Synopsis).
Despite
the advances of targeted therapies and recent breakthroughs with
immune checkpoint inhibitors, such as anti-PD1 or PDL1 monoclonal
antibody treatments, there are still significant unmet medical
needs in NSCLC, and the disease remains largely incurable. We
believe the CD40LGVAX vaccine, in combination with an anti-PD1
monoclonal antibody, may provide synergistic and improved clinical
benefits in both PDL1 positive and negative patients. We previously
anticipated a phase I/II clinical trial for the CD40LGVAX vaccine
combined with PD-1 antibody to commence in the second half of 2015.
We are currently evaluating both U.S. and non-U.S. options for
furthering clinical trials for the CD40LGVAX vaccine following
Moffitt Cancer Center’s notification to us that it will not
be continuing its sponsorship of the U.S. CD40LGVAX Trial. In the
third quarter of 2015, we reviewed and modified the design of
CD40LGVAX trial by expanding the number of patient recruitment,
changing from single site to multi-sites trial and adding
stratification to the trial.
On June 26, 2015, the Russell Investments Group reconstituted its
comprehensive set of U.S. indexes, the Company was selected to be
included in the broad-market Russell 3000® Index. The Russell
3000® Index encompasses the 3,000 largest U.S.-traded stocks
by objective, market-capitalization rankings and style attributes.
This weighted index by market capitalization was constructed to
provide a comprehensive barometer of the broad market and it now
represents approximately 98% of the investable U.S. equity market.
Membership in this index, which remains in place for one year,
means automatic inclusion in the small-cap Russell 2000® Index
as well as the appropriate growth and value style indexes. Russell
indexes are widely used by investment managers and institutional
investors for index funds and as benchmarks for active investment
strategies.
In July 2015, the
Company has received two new
certifications from the China Food and Drug Administration (the
“CFDA”) for its proprietary cell and tissue
preservation media kits. These certified kits enable long-term
preservation and long distance shipment of cells and tissue,
without freezing them down, from and to the point of care for ready
applications by physicians. The latest certifications further
strengthen our Vertically Integrated Cell Manufacturing System
(VICMS) to centralize the processing and supplying of autologous
cell therapies, and reinforce our potential to be a world-class
biotechnology company, serving large unmet medical
needs.
On
August 26, 2015 the Company filed new patents - “Preparation
of HER1 chimeric antigen receptor and NKT cells and
application” for China patent and PCT and “Preparation
of CD19 chimeric antigen receptor and NKT cells and
application” for China patent.
On September 26, 2015, the Company presented at
the 2015 European Cancer Congress’ (“ECCO”)
annual meeting held in Vienna, Austria results from the first 11
NSCLC patients in the trial outlined in the abstract,
entitled Chimeric Antigen
Receptor-Modified T-Cells for the Immunotherapy of Patients with
HER-1 Expressing Advanced Relapsed/Refractory Non-Small Cell Lung
Cancer.
On September 28, 2015, the Company
announced
results of the Phase I clinical studies of CAR-T EGFR-HER1
(“CBM-EGFR.1”) for the treatment of patients with EGFR
expressing advanced relapsed/refractory solid tumors. Based on the
results from 24 patients treated with CBM-EGFR.1 (17 patients with
non-small cell lung cancer, 5 patients with cholangiocarcinoma, 1
patient with pancreatic cancer and 1 patient with renal cell
carcinoma (“RCC”)), the early results showed that
CBM-EGFR.1 immunotherapy was safe, well tolerated, and had positive
signal of clinical activity in several indications. The data was
selected for a late-breaking oral presentation entitled
EGFR-Targeted
Chimeric Antigen Receptor-Modified T Cells Immunotherapy for
Patients With EGFR-Expressing Advanced or Relapsed/Refractory Solid
Tumors at the 5th World
Congress on Cancer Therapy in Atlanta, Georgia. Highlight of Phase
I/II clinical trial for CBMG CAR-T products in multiple advanced,
refractory/relapsing solid tumors is as follow:
●
First
known report of positive safety and signal of clinical activity of
EGFR CAR-T in multiple solid tumor indications,
●
Most
NSCLC patients treated with CBM-EGFR.1 failed EGFR-TKI therapy
prior to CBM-EGFR.1 treatment,
●
Overall
disease control rate (DCR) is 79% (19 of 24). 100% DCR in
cholangiocarcinoma (5/5), 71% DCR in NSCLC (12/17),
●
Objective
response rate (ORR) of 25% in combined indications: 2 complete
response (CR) and 1 partial response (PR) in cholangiocarcinoma, 2
PR in NSCLC and 1 PR in pancreatic cancer.
The September 2015
reports on CBM-EGFR.1 therapy for late stage solid tumors have
demonstrated our ability to innovate, advance boundaries between
basic research and translational medicine and streamline the
production of CAR-T and clinical treatment. With the talent
addition of our COO and CSO, and the maturing of working
relationship with PLAGH cancer immune cell therapy resources, we
plan to evaluate and prioritize our cancer clinical trial
indications for commercialization using safe and most effective
therapy or combination therapies. The Company believes that, when
integrated with CBMG's state-of-the-art infrastructure and clinical
platform, the aforementioned acquired AG, 301 Hospital and USF
technologies will improve our cancer immune cell therapies clinical
pathway and pave the way for collaboration with renowned
institutions. We plan to initiate certain cancer clinical trials
upon receiving acceptance of the clinical trial designs with
principal investigators and obtaining the requisite
approvals.
On November 9, 2015, the Company announced the opening of its new
state-of-the-art facility in the PKUCare Industrial Park, Changping
District, Beijing, China. Eight hundred square meters of the 1,400
square meter site has been equipped with four independent
production lines to support clinical batch production and
commercial scale manufacturing. Designed and built to GMP
standards, the facility has been certified by the Beijing Institute
for Drug Control, accredited bodies of the China National
Accreditation Service (CNAS) and
China Metrology Accreditation (CMA). With this expansion
into Beijing, the Company now operates three facilities in China
that currently houses twelve independent production lines with the
capacity to host more than 200,000 individual cell sources. With
our integrated Plasmid, Viral Vectors, and CAR-T cells
Chemistry, Manufacturing, and Controls (“CMC”)
process as well as planned capacity expansion, we are highly
distinguishable with other companies in the cellular medicine
space.
In January 2016, we launched a Phase I clinical trial of an
off-the-shelf allogeneic haMPC AlloJoin™ therapy for KOA (the
“Allogenic KOA Phase I Trial”)
to evaluate the safety and efficacy of AlloJoin™, an
off-the-shelf allogeneic adipose derived progenitor cell (haMPC)
therapy for the treatment of KOA.
On August 5, 2016 we completed patient treatment for the Allogenic
KOA Phase I Trial. Patients will be monitored over the next 12
months for safety, as well as efficacy signs.
On
March 23, 2016, the Company filed a Form S-3 Registration Statement
(the “S-3 Registration Statement”) with the SEC, which
was declared effective on June 17, 2016. The S-3 Registration
Statement contains three prospectuses:
●
Offering
Prospectus. A base prospectus which covers the offering, issuance
and sale by us of up to $150,000,000 of our common stock, preferred
stock, debt securities, warrants, rights and/or units;
●
Resale Prospectus.
A prospectus to be used for the resale by the selling stockholders
of up to 3,824,395 shares of the Common Stock; and
●
Sales Agreement
Prospectus. A sales agreement prospectus covering the offering,
issuance and sale by the registrant of up to a maximum aggregate
offering price of $50,000,000 of the Common Stock that may be
issued and sold under a sales agreement with Cantor Fitzgerald
& Co.
In
the next 12 months, we aim to accomplish the following, though
there can be no assurances that we will be able to accomplish any
of these goals:
●
Confirm
the safety and tolerability profile in an investigator sponsored
phase I trial of CBM-CD19 in refractory aggressive DLBCL,and to
prepare for a follow up multi-center phase IIb trial;
●
Initiate a phase I-IIb trial to evaluate the safety and efficacy of
CBM-CD19 in CD19+ refractory/relapsing adult B-ALL
patients;
●
Submit to the CFDA of IND package for CBM-CD19 in CD19+ B-cell
malignancies;
●
Initiate an investigator sponsored phase I trial of CBM-CD20 in CLL
patients;
●
Seek opportunities to file new CAR-T and other patents in China and
potentially the rest of the world;
●
Continue to seek advanced technologies and partnerships to bolster
our CAR-T China market position;
●
Bolster R&D resources to fortify our intellectual properties
portfolio and scientific development. Continue to develop a
competitive Immuno-oncology pipeline for
CBMG;
●
Complete the
Allogeneic KOA Phase I Trial in
China;
●
Complete CMC and other required preclinical study data package to
prepare for Allogeneic KOA IND filing in the United
States;
●
Evaluate feasibility of initiating clinical study to support the
New Drug Application (NDA) for an allogeneic haMPC Knee
Osteoarthritis therapy (“Allo KOA”) study in the United
States;
●
Complete preclinical efficacy evaluation to decide development path
for COPD indication;
●
Continue to seek advanced technologies to bolster our CAR-T China
market position;
●
Bolster R&D resources to fortify our intellectual properties
portfolio and scientific
development;
●
Improve liquidity and fortify our balance sheet by courting
institutional investors;
●
Evaluate new regenerative medicine technology platform for other
indications;
●
Explore new CAR-T international collaboration and /or partnership;
and
●
Expand our cell manufacturing capacity and
capabilities.
For
the nine months ended September 30, 2016 and 2015, we generated
$570,102 and $1,885,256 in revenue, respectively, from our
technology consulting service. With our recent build-up of multiple
cancer therapeutic technologies, we have prioritized our clinical
efforts on developing CAR-T technologies, Vaccine, Tcm and TCR
clonality technologies, and not actively pursuing the fragmented
technical services opportunities. We expect our biomedicine
business to generate revenues primarily from immune therapy and the
development of therapies for the treatment of KOA in the next four
to six years.
We
incurred an increase in total operating expenses of
approximately $5.9 million for the nine months ended September 30,
2016, as compared to the nine months ended September 30, 2015,
which is primarily attributable to increased input into
expenditures for R&D projects and non-temporary impairment of
investments.
Corporate History
Please refer to Note 1 of our unaudited condensed consolidated
financial statements for our corporate history.
BIOMEDICINE BUSINESS
Our biomedicine business was founded in 2009 as a newly formed
specialty biomedicine company by a team of seasoned
Chinese-American executives, scientists and doctors. In 2010, we
established a facility designed and built to GMP standards in Wuxi,
and in 2012 we established a U.S. Food and Drug Administration
(“FDA”) GMP standard protocol-compliant manufacturing
facility in Shanghai. In October 2015, we opened a facility
designed and built to GMP standards in Beijing. Our focus has been
to serve the rapidly growing health care market in China by
marketing and commercializing stem cell and immune cell
therapeutics, related tools and products from our patent-protected
homegrown and acquired cell technology, as well as by utilizing
exclusively in-licensed and other acquired intellectual
properties.
Our current treatment focal points are cancer and other
degenerative diseases such as KOA.
Cancer. In
the cancer field, with the recent build-up of multiple cancer
therapeutic technologies, we have prioritized our clinical efforts
on CAR-T, technologies, Vaccine, Tcm and TCR clonality
technologies, and not actively pursuing the fragmented technical
services opportunities. We are integrating CBMG's state-of-the art
infrastructure and clinical platform with the technologies platform
to boost the Company's immuno-oncology presence and pave the way
for future partnerships. We plan to initiate certain cancer
clinical trials in China upon receiving acceptance of the clinical
trial designs with the principal investigator and obtaining the
requisite regulatory approval. We announced results from our Phase
I trial for certain of CAR-T cancer immunotherapy programs on March
25, May 21, and late September 2015. The Phase I trial data
for the CD19, CD20 and CD30 and EGFR HER 1 constructs showed a
positive response rate under controllable
toxicities.
KOA. In 2013, we completed a Phase I/IIa clinical
study, in China, for our Knee Osteoarthritis (“KOA”)
therapy named ReJoin®. The trial
tested the safety and efficacy of intra-articular injections of
autologous haMPCs in order to reduce inflammation and repair
damaged joint cartilage. The 6-month follow-up clinical data showed
ReJoin® therapy to be
both safe and effective.
In Q2 of 2014, we completed patient enrollment for the Phase IIb
clinical trial of ReJoin® for KOA. The
multi-center study enrolled 53 patients to participate in a
randomized, single blind trial. We published 48 weeks follow-up
data of Phase I/IIa on December 5, 2014. The 48
weeks data indicated that patients have reported a decrease in pain
and a significant improvement in mobility and flexibility, while
the clinical data shows our ReJoin® regenerative
medicine treatment to be safe. We announced
interim 24 week results for ReJoin® on March 25,
2015 and released positive Phase IIb 48 week follow-up
data in January 2016, which shows the primary and secondary
endpoints of ReJoin® therapy group having all improved
significantly compared to their baseline, which has confirmed some
of the Company’s Phase I/IIa results. Our ReJoin® human
adipose-derived mesenchymal progenitor cell (haMPC) therapy for KOA
is an interventional therapy using proprietary device, process,
culture and medium:
●
|
Obtain adipose (fat) tissue from the patient using our
CFDA approved medical device, the A-Stromal™
Kit;
|
●
|
Expand haMPCs using our proprietary culture medium (serum-free and
antibiotics-free); and
|
●
|
Formulated for ReJoin therapy using our proprietary
formulation.
|
Our process is distinguishable from sole Stromal Vascular Fraction
(SVF) therapy. The immunophenotype of our haMPCs exhibited multiple
biomarkers such as CD29+, CD73+, CD90+, CD49d+, HLA-I+, HLA-DR-,
Actin-, CD14-, CD34-, and CD45-. In contrast, SVF is
merely a heterogeneous fraction including preadipocytes,
endothelial cells, smooth muscle cells, pericytes, macrophages,
fibroblasts, and adipose-derived stem cells (ASCs).
In January 2016, we launched the Allogeneic KOA Phase I Trial in
China to
evaluate the safety and efficacy of AlloJoin™, an off-the
shelf allogeneic adipose derived progenitor cell (haMPC) therapy
for the treatment of KOA.
On August 5, 2016 we completed patient treatment for the
Allogeneic KOA Phase I trial. Patients will be monitored
over the next 12 months for safety, as well as efficacy
signs.
In January 2015, we initiated patient recruitment in a phase
II clinical study, in China, of ReJoin (human adipose derived
mesenchymal progenitor cell or “haMPC”) in Cartilage
Damaged (“CD”) patients resulting from osteoarthritis
(“OA”) or sports injury, in further support of KOA
indication. The study is based on the same technology that has
shown significant efficacy in the treatment of Knee
Osteoarthritis (“KOA”), but requires two arthroscopic
examinations and the use of magnetic resonance imaging
(“MRI”) to further demonstrate the regenerative
efficacy of ReJoin. Upon further review of the protocol and the
difficulty of getting patients back for the second arthroscopic
look, we have determined to terminate the
study.
The unique lines of adult adipose-derived stem cells and the
immune cell therapies enable us to create multiple cell
formulations in treating specific medical conditions and diseases,
as well as applying single cell types in a specific treatment
protocol. Management believes that our adult adipose-derived line
will become commercially viable and market-ready in China within
three to four years. In addition, we plan to assess and initiate
cancer clinical trials leading to commercialization using safe and
most effective therapy or combination therapies.
The quality
management systems of CBMG Shanghai and CBMG Wuxi were issued a
Certificate of ISO-9001:2008 by SGS /ANAB (ANSI-ASQ
National Accreditation Board). Our facility in Shanghai was issued a Certificate
of Compliance by ENV Services, Inc., and ISO Inspection Service
Provider that (i) its rooms 1-7, 10 are certified to ISO Class 7
per ISO-14644 in accordance with cGMP; (ii) its biological safety
cabinets are certified per NSF/ANSI 49 and to ISO Class 5;and (iii)
its instrumentation calibration has been certified to perform in
accordance with ANS/NCSL Z-540-1 and document in accordance with
10CFR21.Our facility in Shanghai was issued a Testing Report by
Shanghai Food and Drug Packaging Material Control Center concluding
that some testing items of the cleanrooms are in compliance with
the Good Manufacturing Practice for Drugs (2010 Revision) of
China.
The cleanrooms in Beijing are
certified to meet the standard of CNAS L1669; and Wuxi has been
certified to meet the CNAS L0221 standard.
In addition to standard protocols, we use proprietary processes and
procedures for manufacturing our cell lines, comprised
of:
●
|
Banking processes that ensure cell preservation and
viability;
|
●
|
DNA identification for stem cell origin; and
|
●
|
Bio-safety testing at independently certified
laboratories.
|
Regenerative Medicine and Cell Therapy
Regenerative medicine is the “process of replacing or
regenerating human cells, tissues or organs to restore or establish
normal function”. Cell therapy as applied to regenerative
medicine holds the promise of regenerating damaged tissues and
organs in the body by rejuvenating damaged tissue and by
stimulating the body’s own repair mechanisms to heal
previously irreparable tissues and organs. Medical cell therapies
are classified into two types: allogeneic (cells from a third-party
donor) or autologous (cells from one’s own body), with each
offering its own distinct advantages. Allogeneic cells are
beneficial when the patient’s own cells, whether due to
disease or degeneration, are not as viable as those from a healthy
donor. Similarly, in cases such as cancer, where the disease is so
unique to the individual, autologous cells can offer true
personalized medicine.
Regenerative medicine can be categorized into major subfields as
follows:
●
Cell Therapy. Cell
therapy involves the use of cells, whether derived from adults,
third party donors or patients, from various parts of the body, for
the treatment of diseases or injuries. Therapeutic applications may
include cancer vaccines, cell based immune-therapy, arthritis,
heart disease, diabetes, Parkinson’s and Alzheimer’s
diseases, vision impairments, orthopedic diseases and brain or
spinal cord injuries. This subfield also includes the development
of growth factors and serums and natural reagents that promote and
guide cell development.
●
Tissue Engineering.
This subfield involves using a combination of cells with
biomaterials (also called “scaffolds”) to generate
partially or fully functional tissues and organs, or using a
mixture of technology in a bioprinting process. Some natural
materials, like collagen, can be used as biomaterial, but advances
in materials science have resulted in a variety of synthetic
polymers with attributes that would make them uniquely attractive
for certain applications. Therapeutic applications may include
heart patch, bone re-growth, wound repair, replacement neo-urinary
conduits, saphenous arterial grafts, inter-vertebral disc and
spinal cord repair.
●
Diagnostics and Lab
Services. This subfield involves the production and derivation of
cell lines that may be used for the development of drugs and
treatments for diseases or genetic defects. This sector also
includes companies developing devices that are designed and
optimized for regenerative medicine techniques, such as specialized
catheters for the delivery of cells, tools for the extraction of
stem cells and cell-based diagnostic tools.
All living complex organisms start as a single cell that
replicates, differentiates (matures) and perpetuates in an adult
through its lifetime. Cell therapy is aimed at tapping into the
power of cells to prevent and treat disease, regenerate damaged or
aged tissue and provide cosmetic applications. The most common type
of cell therapy has been the replacement of mature, functioning
cells such as through blood and platelet transfusions. Since the
1970s, bone marrow and then blood and umbilical cord-derived stem
cells have been used to restore bone marrow and blood and immune
system cells damaged by chemotherapy and radiation used to treat
many cancers. These types of cell therapies have been approved for
use world-wide and are typically reimbursed by
insurance.
Over the past number of years, cell therapies have been in clinical
development to attempt to treat an array of human diseases. The use
of autologous (self-derived) cells to create vaccines directed
against tumor cells in the body has been demonstrated to be
effective and safe in clinical trials. Researchers around the globe
are evaluating the effectiveness of cell therapy as a form of
replacement or regeneration of cells for the treatment of numerous
organ diseases or injuries, including those of the brain and spinal
cord. Cell therapies are also being evaluated for safety and
effectiveness to treat heart disease, autoimmune diseases such as
diabetes, inflammatory bowel disease, joint diseases and cancerous
diseases. While no assurances can be given regarding future medical
developments, we believe that the field of cell therapy is a subset
of biotechnology that holds promise to improve human health, help
eliminate disease and minimize or ameliorate the pain and suffering
from many common degenerative diseases relating to
aging.
Recent Developments in Cancer Cell Therapy
According to the U.S. National Cancer Institute’s 2013 cancer
topics research update on CAR-T-Cells, excitement is growing for
immunotherapy—therapies that harness the power of a
patient’s immune system to combat their disease, or what some
in the research community are calling the “fifth
pillar” of cancer treatment.
One approach to immunotherapy involves engineering patients’
own immune cells to recognize and attack their tumors. And although
this approach, called adoptive cell transfer ("ACT"), has been
restricted to small clinical trials so far, treatments using these
engineered immune cells have generated some remarkable responses in
patients with advanced cancer. For example, in several early-stage
trials testing ACT in patients with advanced acute lymphoblastic
leukemia ("ALL") who had few if any remaining treatment options,
many patients’ cancers have disappeared entirely. Several of
these patients have remained cancer free for extended
periods.
Equally promising results have been reported in several small
clinical trials involving patients with lymphoma. Although the lead
investigators cautioned that much more research is needed, the
results from the trials performed thus far indicate that
researchers can successfully alter patients’ T cells so that
they attack their cancer cells. As an example, we look
to Spectrum Pharmaceutical’s Folotyn approved in September
2009 for treatment of R/R peripheral T-cell lymphoma with approval
supported by a single arm trial observing an overall response rate
of 27% and median duration of response of 9.4 months. In addition,
CTI Therapeutics Pixuvri received a complete response letter in
April 2010 in R/R aggressive NHL in which a 37% overall response
rate and 5.5 month duration of response was observed.
ACT’s building blocks are T cells, a type of immune cell
collected from the patient’s own blood. After collection, the
T cells are genetically engineered to produce special receptors on
their surface called chimeric antigen receptors ("CARs"). CARs are
proteins that allow the T cells to recognize a specific protein
(antigen) on tumor cells. These engineered CAR T cells are then
grown in the laboratory until they number in the billions. The
expanded population of CAR T cells is then infused into the
patient. After the infusion, if all goes as planned, the T cells
multiply in the patient’s body and, with guidance from their
engineered receptor, recognize and kill cancer cells that harbor
the antigen on their surfaces. This process builds on a similar
form of ACT pioneered from NCI’s Surgery Branch for patients
with advanced melanoma. According to
www.cancer.gov/.../research-updates/2013/CAR-T-Cells, in 2013
NCI’s Pediatric Oncology Branch commented that the CAR T
cells are much more potent than anything they can achieve with
other immune-based treatments being studied. Although investigators
working in this field caution that there is still much to learn
about CAR T-cell therapy, the early results from trials like these
have generated considerable optimism. Researchers opined that CAR
T-cell therapy eventually may become a standard therapy for some
B-cell malignancies like ALL and chronic lymphocytic
leukemia.
The traditional cancer treatment includes surgery, chemotherapy,
and radiation therapy. In the last decade, we witnessed a boom in
targeted therapies including monoclonal antibody and small molecule
therapies, such as Iressa and Tarciva that targets EGFR activating
mutations in the NSCLC, Herceptin that treats breast cancer
patients with HER2 overexpression, Crizotinib that targets NSCLC
patients with positive ALK fusion gene.
So far, chimeric antigen receptor T cell therapy
(“CAR-T”) such as CD19 CAR-T, have been tested in
several hematological indications on patients that are
refractory/relapsing to chemotherapy, and many of them have
relapsed after stem cell transplantation. All of these
patients had very limited treatment option prior to CAR-T
therapy. CAR-T has shown positive clinical efficacy in
many of these patients. Some of have them lived for years post
CAR-T treatment.
In July 2016, Juno Therapeutics, Inc. reported the death of
patients enrolled in the U.S. Phase II clinical trial of JCAR015
for the treatment of relapsed or refractory B cell acute
lymphoblastic leukemia (B-ALL). The US FDA put the trial on
hold and lifted the hold within a week after Juno provided
satisfactory explanation and solution. Juno believes that the
patient deaths were caused by the use of Fludarabine
preconditioning and they will use only cyclophosphamide
pre-conditioning in the future enrollment. The Company
believes that its study is distinguishable from Juno Therapeutics
and plans to continue to monitor any toxicities associated with the
study.
Market for Cell-Based Therapies
In 2013, U.S. sales of products which contain stem cells or
progenitor cells or which are used to concentrate autologous blood,
bone marrow or adipose tissues to yield concentrations of stem
cells for therapeutic use were, conservatively, valued at $236
million at the hospital level. It is estimated that the orthopedics
industry used approximately 92% of the stem cell
products.
The forecast is that in the United States, shipments of treatments
with stem cells or instruments which concentrate stem cell
preparations for injection into painful joints will fuel an overall
increase in the use of stem cell based treatments and an increase
to $5.7 billion in 2020, with key growth areas being Spinal Fusion,
Sports Medicine and Osteoarthritis of the joints. According to
Centers for Disease Control and Prevention. Prevalence of
doctor-diagnosed arthritis and arthritis-attributable activity
limitation United States. 2010-2012, Osteoarthritis (OA) is a
chronic disease that is characterized by degeneration of the
articular cartilage, hyperosteogeny, and ultimately, joint
destruction that can affect all of the joints. According to Dillon
CF, Rasch EK, Gu Q et al. Prevalence of knee osteoarthritis in the
United States: Arthritis Data from the Third National Health and
Nutrition Examination Survey 1991-94. J Rheumatol. 2006, the
incidence of OA is 50% among people over age 60 and 90% among
people over age 65. KOA accounts for the majority of total OA
conditions and in adults, OA is the second leading cause of work
disability and the disability incidence is high (53%). The costs of
OA management have grown exponentially over recent decades,
accounting for up to 1% to 2.5% of the gross national product of
countries with aging populations, including the U.S., Canada, the
UK, France, and Australia. According to the American Academy of
Orthopedic Surgeons (AAOS), the only pharmacologic therapies
recommended for OA symptom management are non-steroidal
anti-inflammatory drugs (NSAIDs) and tramadol (for patients with
symptomatic osteoarthritis). Moreover, there is no approved disease
modification therapy for OA in the world. Disease progression is a
leading cause of hospitalization and ultimately requires joint
replacement surgery. In 2009, the U.S. spent over $42 billion on
replacement surgery for hip and knee joints alone.
International regulatory guidelines on
clinical investigation of medicinal products used in the treatment
of OA were updated in 2015, and clinical benefits (or trial
outcomes) of a disease modification therapy for KOA has been well
defined and recommended. Medicinal products used in the treatment
of osteoarthritis need to provide both a symptom relief effect for
at least 6 months and a structure modification effect to slow
cartilage degradation by at least 12 months. Symptom relief is
generally measured by a composite questionnaire Western Ontario and
McMaster Universities Osteoarthritis Index (WOMAC) score, and
structure modification is measured by MRI, or radiographic image as
accepted by international communities. The Company uses the WOMAC
as primary end point to demonstrate symptom relief, and MRI to
assess structure and regeneration benefits as a secondary
endpoint.
According to data published in the executive summary of the 2014
New York Stem Cell Summit Report, the U.S. specific addressable
market in KOA is $83 million, estimated to grow to $1.84 billion by
2020. According to International Journal of
Rheumatic Diseases, 2011 there are over 57 million people with
KOA in China.
The current data on CAR T-cell therapies, presented from various
institutions including MSKCC, University of Pennsylvania, National
Cancer Institute, and Fred Hutchinson Cancer Center, has been
extremely positive. Recently, T cell checkpoint
manipulation has brought hope to the struggling battle against
cancer using immune cell therapy technologies. Merck has
received fast approval for its PD-1 antibody therapy for
Melanoma. Novartis CAR-T technology has made
breakthroughs in treating B cell lymphoma using genetically
modified T cell technology.
Approved cell therapies have been appearing on the market in recent
years. In 2011, however, the industry was dealt two setbacks when
Geron Corporation discontinued its embryonic program, and when
Sanofi-Aventis acquired Genzyme Corporation and did not acquire the
product rights relating to the allogeneic cell technology of Osiris
Therapeutics, Inc., a partner of Genzyme and a leader in the field.
In both cases there were difficulties navigating the U.S.
regulatory requirements for product approval. Inadequate trial
designs were cited in the executive summary of the 2012 New York
Stem Cell Summit Report as contributing to these
failures.
The number of cell therapy companies that are currently in Phase 2
and Phase 3 trials has been gathering momentum, and we anticipate
that new cellular therapy products will appear on the market within
the next several years.
Management believes the remaining risk in monetizing cancer immune
cell therapies is concentrated in late stage clinical studies,
speed-to-approval, manufacturing and process
optimization.
Our Strategy
The majority of our biomedicine business is in the development
stage. We intend to concentrate our business on cell therapies and
in the near-term, carrying our KOA stem cell therapy and cancer
immune cell therapies to commercialization.
We are developing our business in cell therapeutics and
capitalizing on the increasing importance and promise that adult
stem cells have in regenerative medicine. Our most advanced
candidate involves adipose-derived mesenchymal stem cells to treat
KOA. Based on current estimates, we expect our biomedicine
business to generate revenues primarily through the development of
therapies for the treatment of KOA within the next three to four
years.
Presently we have two KOA cell therapy clinical studies in China, a
completed Phase IIb autologous study and an on-going Phase I
allogeneic study. If and when either therapy obtains regulatory
approval in the PRC, we will be able to market and offer the
therapy for clinical use. Our focus is on the latest translational
stages of product development, principally from the pre-clinical
stage to regulatory approval and commercialization of new
therapies.
Our strategy is to develop safe and effective cellular medicine
therapies for indications that represent a large unmet need in
China, based on technologies developed both in-house and obtained
through acquisition, licensing and collaboration arrangements
with other companies. Our near term objective is to pursue
successful clinical trials in China for our KOA
application. We intend to utilize our comprehensive cell
platform to support multiple cell lines to pursue multiple
therapies, both allogeneic and autologous. We intend to apply U.S.
Standard Operating Procedures ("SOPs") and protocols while
complying with Chinese regulations, while owning, developing and
executing our own clinical trial protocols. We plan to establish
domestic and international joint ventures or partnerships to set up
cell laboratories and/or research facilities, acquire technology or
in-license technology from outside of China, and build affiliations
with hospitals, to develop a commercialization path for our
therapies, once approved. We intend to use our first-mover
advantage in China, against a backdrop of enhanced regulation by
the central government, to differentiate ourselves from the
competition and establish a leading position in the China cell
therapeutic market. We also intend to out-license our
technologies to interested parties and are exploring the
feasibility of a U.S. allogeneic KOA clinical study with the
FDA.
CBMG initially plans to use its centralized manufacturing facility
located in Shanghai to service multiple hospitals within 200 km of
the facility. We aim to complete clinical trials for our
KOA therapy candidate as soon as practicable. Our goal is to first
obtain regulatory permission for commercial use of the therapy for
the respective hospitals in which the trials are being conducted.
CBMG plans to scale up its customer base by qualifying multiple
additional hospitals for the post-trial use of therapies, once
approved, by following regulatory guidelines. Based on
current regulation and estimates, we expect our biomedicine
business to generate revenue primarily from the development of
therapies for the treatment of KOA within the next four to six
years.
With the AG acquisition we intend to monetize AG’s U.S. and
Chinese intellectual property for immune cell therapy preparation
methodologies and patient immunity assessment by engaging with
prominent hospitals to conduct pre-clinical and clinical studies in
specific cancer indications. The T Cell clonality analysis
technology patent, together with AG’s other know-how for
immunity analysis, will enable the Company to establish an
immunoassay platform that is crucial for immunity evaluation of
patients with immune disorders as well as cancerous diseases that
are undergoing therapy.
We believe that few competitors in China are as well-equipped as we
are in the clinical trial development, diversified U.S. FDA
protocol compliant manufacturing facilities, regulatory compliance
and policy making participation, as well as a long-term presence in
the U.S. with U.S.-based management and investor base.
We intend to continue our business development efforts by adding
other proven domestic and international biotechnology partners to
monetize the China health care market.
In order to expedite fulfillment of patient treatment CBMG has been
actively developing technologies and products with a strong
intellectual properties protection, including haMPC, derived from
fat tissue, for the treatment of KOA and other indications.
CBMG’s acquisition of AG provides an enlarged opportunity to
expand the application of its cancer therapy-enabling technologies
and to initiate clinical trials with leading cancer
hospitals. With the AG acquisition, we will continue to
seek to empower hospitals' immune cell cancer therapy development
programs that help patients improve their quality of life and
improve their survival rate.
CBMG's proprietary and patent-protected production processes and
clinical protocols enable us to produce raw material, manufacture
cells, and conduct cell banking and distribution. Applying our
proprietary intellectual property, we will be able to customize
specialize formulations to address complex diseases and
debilitating conditions.
CBMG has been developing disease-specific clinical treatment
protocols. These protocols are designed for each of these
proprietary cell lines to address patient-specific medical
conditions. These protocols include medical assessment to qualify
each patient for treatment, evaluation of each patient before and
after a specific therapy, cell transplantation methodologies
including dosage, frequency and the use of adjunct therapies,
potential adverse effects and their proper management.
The protocol of allogeneic haMPC therapy for KOA has been approved
by Shanghai Renji Hospital’s Institutional Review Board for
clinical studies. Once the studies are completed, the clinical data
will be analyzed by qualified third party statisticians and reports
will be published.
We operate our manufacturing facilities under good manufacturing
practice ("GMP") conditions in the ISO accredited laboratories
standard. We employ an institutionalized and proprietary process
and quality management system to optimize reproducibility and to
hone our efficiency. Three facilities designed and built to GMP in
Beijing, Shanghai and Wuxi, China meet international standards. In
any precision setting, it is vital that all controlled-environment
equipment meet certain design standards. To achieve this goal, our
Shanghai cleanroom facility underwent rigorous cleanroom
certification. Our facility in Shanghai was issued a Certificate of
Compliance by ENV Services, Inc., and ISO Inspection Service
Provider that (i) its rooms 1-7, 10 are certified to ISO Class 7
per ISO-14644 in accordance with cGMP; (ii) its biological safety
cabinets are certified per NSF/ANSI 49 and to ISO Class 5; and
(iii) its instrumentation calibration has been certified to perform
in accordance with ANS/NCSL Z-540-1 and document in accordance with
10CFR21. The cleanrooms in Beijing are certified to meet the
standard of CNAS L1669; and Wuxi has been certified to meet the
CNAS L0221 standard. With our integrated Plasmid, Viral Vectors,
and CAR-T cells Chemistry, Manufacturing, and Controls process
as well as planned capacity expansion, we are highly
distinguishable with other companies in the cellular medicine
space.
In total, our facilities operating under GMP have over 23,000 sq.
ft. space with the capacity for twelve independent cell production
lines. We intend to continue to evaluate the expansion of our cell
manufacturing capacity and additional capabilities.
Most importantly, our management team members have more than 20 ~
30 years of relevant experience in China, the European Union, and
the United States. All of these factors make CBMG a high quality
cell products manufacturer in China.
Our Targeted Indications and Potential Therapies
Knee Osteoarthritis (KOA)
We are currently pursuing two primary therapies for the treatment
of KOA: our ReJoin ® therapy
and our AlloJoinTM therapy.
We completed the Phase I/IIa clinical trial for the
treatment of KOA. The trial tested the safety and efficacy of
intra-articular injections of autologous haMPCs in order to reduce
inflammation and repair damaged joint cartilage. The 24-week
follow-up clinical data showed ReJoin ® therapy
to be both safe and effective. We published 48 weeks follow-up data
of the 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.
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 and controlled trial. 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.
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. Patients will be monitored
over the next 12 months for safety, as well as efficacy
signs.
Osteoarthritis is a degenerative disease of the joints. KOA is one
of the most common types of osteoarthritis. Pathological
manifestation of osteoarthritis is primarily local inflammation
caused by immune response and subsequent damage of joints.
Restoration of immune response and joint tissues are the objective
of therapies.
According to International Journal of Rheumatic Diseases,
2011, 53% of KOA patients will degenerate to the point of
disability. Conventional treatment usually involves invasive
surgery with painful recovery and physical therapy. As drug-based
methods of management are ineffective, the same journal estimates
that some 1.5 million patients with this disability will degenerate
to the point of requiring artificial joint replacement surgery
every year. However, only 40,000 patients will actually be able to
undergo replacement surgery, leaving the majority of patients to
suffer from a life-long disability due to lack of effective
treatment.
haMPCs are currently being considered as a new and effective
treatment for osteoarthritis, with a huge potential
market. Osteoarthritis is one of the ten most disabling
diseases in developed countries. Worldwide estimates are that 9.6%
of men and 18.0% of women aged over 60 years have symptomatic
osteoarthritis. It is estimated that the global OA therapeutics
market was worth $4.4 billion in 2010 and is forecast to grow at a
compound annual growth rate (“CAGR”) of 3.8% to reach
$5.9 billion by 2018.
In order to bring haMPC-based KOA therapy to market, our market
strategy is to: (a) file IND with CDE through biomedicine
regulatory path and conduct necessary registration trials (b) file
NDA to get marketing approval.
Our competitors are pursuing treatments for osteoarthritis with
knee cartilage implants or other cell origins. 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, from which the stem cells are
isolated, cultured, and re-injected into the patient. The
injections are designed to induce the body’s secretion of
growth factors and recruitment of endogenous stem cells, promoting
immune response and regulation, and regrowth of cartilage. The
down-regulation of the patient’s immune response is aimed at
reducing and controlling inflammation which is a central cause of
KOA.
We believe our proprietary method, subsequent haMPC proliferation
and processing know-how will enable haMPC therapy to be a low cost
and relatively safe and effective treatment for KOA. Additionally,
banked haMPCs can continue to be stored for additional use in the
future.
Immuno-oncology (I/o)
We continue to fortify our cancer breakthrough technology platform
with I/o, programmed cell death and vaccine
technology.
Our CAR-T platform is built on well-studied lenti-virial vector and
second-generation CAR design, which is used by most of the current
trials and studies. We rigorously select the patient population for
each asset and indication to allow the optimal path forward for
regulatory approval. We also fully integrate the state of art
translational medicine effort into each clinical study to aid in
dose selection, to confirm the mechanism of action and proof of
concept, and to identify the optimal targeting patient population
whenever appropriate. We plan to continue to grow our translational
medicine team and engage key opinion leaders to meet the
demand.
Because there are many differences between hematological and solid
tumors, drug penetration or infiltration into solid tumors sites is
more challenging than hematological cancer. Antibody dependent
cell-mediated (“ADCC”) toxicity works much better in
hematological cancers. Hematological cancers usually carry fewest
mutations among all cancers and are usually less molecularly
heterogeneous than that of solid tumors. As such,
routinely hematological cancers respond better to therapeutic
interventions, there are more complete, as well as partial
responses. And the duration of response is usually
longer.
Solid tumors pose more challenge 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. CAR-T
therapy can successfully treat hematopoietic cancers because the
therapy can deplete all B cells or T cells including normal and
cancer cells in leukemia and lymphoma. When the stem cells are not
targeted these stem cells can regenerate normal B and T cells. In
contrast, effective tumor specific antigens found to be less to
target in solid tumors. When the drugs kill tumor cells,
they also kill the normal cells to a certain degree, leading to
different degrees of toxicity. We will continue to make
an effort to develop CART or other cell based therapies to target
solid tumors.
Human Adipose-Derived Mesenchymal Progenitor Cells
(haMPC)
Adult mesenchymal stem cells can currently be isolated from a
variety of adult human sources, such as liver, bone marrow, and
adipose (fat) tissue. We believe the advantages in using adipose
tissue (as opposed to bone marrow or blood) are that it is one of
the richest sources of pluripotent cells in the body, the easy and
repeatable access to fat via liposuction, and the simple cell
isolation procedures that can begin to take place even on-site with
minor equipment needs. The procedure we are testing for KOA
involves extracting a very small amount of fat using a minimally
invasive extraction process which takes up to 20 minutes, and
leaves no scarring. The haMPC cells are then processed and isolated
on site, and injected intra articularly into the knee joint with
ultrasound guidance.
These haMPC cells are capable of differentiating into bone,
cartilage, tendon, skeletal muscle, and fat under the right
conditions. As such, haMPCs are an attractive focus for medical
research and clinical development. Importantly, we believe both
allogeneic and autologously sourced haMPCs may be used in the
treatment of disease. Numerous studies have provided preclinical
data that support the safety and efficacy of allogeneic and
autologously derived haMPC, offering a choice for those where
factors such as donor age and health are an issue.
Additionally, certain disease treatment plans call for an initial
infusion of these cells in the form of SVF, an initial form of cell
isolation that can be completed and injected within ninety minutes
of receiving lipoaspirate. The therapeutic potential conferred by
the cocktail of ingredients present in the SVF is also evident, as
it is a rich source for preadipocytes, mesenchymal stem cells,
endothelial progenitor cells, T regulatory cells and
anti-inflammatory macrophages.
Immune Cell Therapy, Adoptive T cell
Adoptive T cell therapy for cancer is a form of transfusion therapy
consisting of the infusion of various mature T cell subsets with
the goal of eliminating a tumor and preventing its
recurrence. In cases such as cancer, where the disease
is unique to the individual, the adoptive T cell therapy is a
personalized treatment.
We believe that an increasing portion of healthcare spending both
in China and worldwide will be directed to immune cell therapies,
driven by an aging population, and the potential for immune cell
therapy treatments to become a safe, effective, and cost-effective
method for treating millions of cancer patients.
Cancer is a major threat to public health and the solvency of
health systems worldwide. Current treatments for these
diseases cannot meet medical needs. We believe that immune cell
therapy is a new technology that has the potential to alleviate
much of the burden of these chronic and degenerative diseases in a
cost-effective manner.
Tumor Cell Specific Dendritic Cells (TC-DC)
Recent scientific findings indicate the presence of special cells
in tumors that are responsible for cancer metastases and relapse.
Referred to as “cancer stem cells”, these cells make up
only a small portion of the tumor mass. The central concept behind
TC-DC therapy is to immunize against these cells. TC-DC therapy
takes a sample of the patient’s own purified and irradiated
cancer cells and combines them with specialized immune cells,
thereby ‘educating’ the immune cells to destroy the
cancer stem cells from which tumors arise. We believe
the selective targeting of cells that drive tumor growth would
allow for effective cancer treatment without the risks and side
effects of current therapies that also destroy healthy cells in the
body.
Our strategy is, through the acquisition of AG and the technologies
and pre-clinical and clinical data of University of the South
Florida and PLAGH, to become an immune cell business leader in the
China cancer therapy market and specialty pharmaceutical market by
utilizing CBMG’s attractiveness as a NASDAQ listed company to
consolidate key China immune cell technology leaders with fortified
intellectual property and ramp up revenue with first mover’s
advantage in a safe and efficient manner. The Company
plans to accelerate cancer trials by using the knowledge and
experience gained from the Company’s ongoing KOA trials and
the recent, CAR-T and Tcm technologies. Immune
cell therapies have not been codified by any of the Chinese
regulatory agencies. China has a bifurcated regulatory pathway,
which is different than the singular path in the United
States. Immune cell therapy is considered in China as a
Class III medical technology and it remains unclear if it will be
offered U.S.FDA-liked Fast Track designation as maintenance therapy
in subjects with advanced cancer who have limited options following
surgery and front-line platinum/taxane chemotherapy to improve
their progression-free survival. By applying U.S. SOP and protocols
and following authorized treatment plans in China, we believe we
are differentiated from our competition as we believe we have first
mover’s advantage and a fortified barrier to
entry. In addition, we began to review
the feasibility of performing synergistic U.S. clinical
studies.
Critical Accounting Policies
The
discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements,
which have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S.
GAAP”). The preparation of these financial statements
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 and the reported amounts of revenue and
expenses during the reporting period. On an ongoing basis, our
management evaluates the estimates, including those related to
revenue recognition, accounts receivable, inventory, long-lived
assets, goodwill and other intangibles, investments, stock-based
compensation, and income taxes. Of the accounting estimates we
routinely make relating to our critical accounting policies, those
estimates made in the process of: determining the valuation of
accounts receivable, inventory, long-lived assets, and goodwill and
other intangibles; measuring share-based compensation expense;
preparing investment valuations; and establishing income tax
valuation allowances and liabilities are the estimates most likely
to have a material impact on our financial position and results of
operations. The Company bases its estimates on historical
experience and on various other assumptions that are believed to be
reasonable under the circumstances. However, because these
estimates inherently involve judgments and uncertainties, there can
be no assurance that actual results will not differ materially from
those estimates.
During the three and nine months ended September 30, 2016, we
believe that there have been no significant changes to the items
that we disclosed as our critical accounting policies and estimates
in the “Critical Accounting Policies and Estimates”
section of Item 7 - Management’s Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report
on Form 10-K for the fiscal year ended December 31, 2015, except
for as below:
Goodwill and Other Intangibles
Goodwill
represents the excess of the cost of assets acquired over the fair
value of the net assets at the date of acquisition. Intangible
assets represent the fair value of separately recognizable
intangible assets acquired in connection with the Company’s
business combinations. The Company evaluates its goodwill and other
intangibles for impairment on an annual basis or whenever events or
circumstances indicate that impairment may have occurred. As of
September 30, 2016 and December 31, 2015, the goodwill is
$7,678,789, which all derived from the acquisition of
Agreen.
As
stipulated in ASC 350-20-35-3A, an entity may assess qualitative
factors to determine whether it is more likely than not that the
fair value of a reporting unit is less than its carrying amount,
including goodwill. During the reporting period, the Company ceased
its cooperation with the Jihua Hospital (its largest customer) and
several agents and was not actively pursuing the fragmented
technical services opportunities since the second quarter of 2016,
net sales and revenue for the three months ended June 30, 2016 and
September 30, 2016 significantly decreased accordingly. It
considered as triggering event indicating the goodwill impairment
test was required at end of the reporting period. The Company
therefore proceeded with “Step 1” goodwill impairment
test based on ASC 350-20-35-4 thru 35-8A. The first step of the
goodwill impairment test, used to identify potential impairment,
compares the fair value of a reporting unit with its carrying
amount, including goodwill. The Company is now prioritizing cancer
therapeutic, and focusing the clinical efforts on developing CAR-T
technologies, Vaccine, Tcm, and TCR clonality technologies, all
long-lived assets (including goodwill) are considered as an asset
group under the same reporting unit for the Company’s
research and development activities purpose. The Company’s
market capitalization as at the balance sheet date would fairly
reflect the fair value of the Company’s research and
development efforts so as to provide an indication of whether the
goodwill is subject to the impairment loss. Our market
capitalization exceeds the carrying amount of net assets (including
goodwill) of the Company, we considered first step of goodwill
impairment test passed and no second step of goodwill impairment
test shall be performed to measure the amount of impairment loss.
No impairment loss of goodwill is considered to be required as of
September 30, 2016.
Other
intangibles mainly consists of knowhow, technologies, patent,
licenses acquired and purchased software. The Company reviews the
carrying value of long-lived assets to be held and used, including
other intangible assets subject to amortization, when events and
circumstances warrants such a review. As aforementioned, all
long-lived assets (including other intangibles) are considered as
an asset group under the same reporting unit for the
Company’s research and development activities purpose. Our
market capitalization exceeds the carrying amount of net assets
(including other intangibles) of the Company, no impairment of
other intangibles is considered to be required as of September 30,
2016.
The
Company is an expanding company with a short operating history,
accordingly, the Company faces some potential events and
uncertainties encountered by companies in the earlier stages of
development and expansion, such as: (1) continuing market
acceptance for our product extensions and our services; (2)
changing competitive conditions, technological advances or customer
preferences that could harm sales of our products or services; (3)
maintaining effective control of our costs and expenses. If the
Company is not able to meet the challenge of building our
businesses and managing our growth, the likely result would be
slowed growth, lower margins, additional operational costs and
lower income, and a risk of impairment charge of intangibles in
future filings.
Results of
Operations
Below
is a discussion of the results of our operations for the three and
nine months ended September 30, 2016 and 2015. These results are
not necessarily indicative of result that may be
expected in any future period. Our prospects
should be considered in light of the risks, expenses and
difficulties that we may encounter. We may not be successful in
addressing these risks and difficulties.
Comparison of Three Months Ended September 30, 2016 to Three Months
Ended September 30, 2015
The descriptions in the results of operations below reflect our
operating results as set forth in our Consolidated Statement of
Operations filed herewith.
|
Three Months Ended September 30, 2016
|
Three Months Ended September 30, 2015
|
|
|
|
Net
sales and revenue
|
$10,012
|
$624,907
|
|
|
|
Operating
expenses:
|
|
|
Cost
of sales
|
9,128
|
443,416
|
General
and administrative
|
2,790,305
|
3,467,184
|
Selling
and marketing
|
124,143
|
190,152
|
Research
and development
|
2,897,736
|
2,190,240
|
Impairment
of investments
|
4,611,714
|
-
|
Total
operating expenses
|
10,433,026
|
6,290,992
|
Operating
loss
|
(10,423,014)
|
(5,666,085)
|
|
|
|
Other
income (expense)
|
|
|
Interest
income
|
22,338
|
8,386
|
Other
income (expense)
|
(17,314)
|
492,101
|
Total
other income, net
|
5,024
|
500,487
|
Loss
before taxes
|
(10,417,990)
|
(5,165,598)
|
|
|
|
Income
taxes credit (provision)
|
(243,230)
|
23,400
|
|
|
|
Net
loss
|
$(10,661,220)
|
$(5,142,198)
|
Other
comprehensive income (loss):
|
|
|
Cumulative
translation adjustment
|
(58,824)
|
(225,198)
|
Unrealized
gain (loss) on investments, net of tax
|
-
|
(1,520,000)
|
Reclassification
adjustments, net of tax, in connection with other-than-temporary
impairment of investments
|
(5,557,939)
|
-
|
Total
other comprehensive income (loss):
|
(5,616,763)
|
(1,745,198)
|
Comprehensive
gain (loss)
|
$(16,277,983)
|
$(6,887,396)
|
|
|
|
|
|
|
Net
loss per share:
|
|
|
Basic
|
$(0.75)
|
$(0.44)
|
Diluted
|
$(0.75)
|
$(0.44)
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
Basic
|
14,128,465
|
11,622,756
|
Diluted
|
14,128,465
|
11,622,756
|
* These line items include the following amounts of non-cash,
stock-based compensation expense for the periods
indicated:
|
Three Months Ended September 30, 2016
|
Three Months Ended September 30, 2015
|
|
|
|
Cost
of sales
|
11,765
|
42,272
|
General
and administrative
|
900,936
|
1,464,764
|
Selling
and marketing
|
28,368
|
66,962
|
Research
and development
|
590,795
|
480,907
|
|
1,531,864
|
2,054,905
|
|
|
|
Results of Operations
Net sales and revenue
|
|
|
|
|
|
|
|
|
|
For
the three months ended September 30,
|
$10,012
|
$624,907
|
$(614,895)
|
(98)%
|
All the revenue was derived from cell therapy technology service
for the three months ended September 30, 2016 and 2015. The
decrease in revenue is the result of prioritizing cancer
therapeutic technologies and focusing our clinical efforts on
developing CAR-T technologies, Vaccine, Tcm, and TCR clonality
technologies. As a result of not focusing on the cell therapy
technology service revenue, in 2nd
quarter, 2016 the Company ceased its
cooperation with the Jihua Hospital and several
agents.
Cost of Sales
|
|
|
|
|
|
|
|
|
|
For
the three months ended September 30,
|
$9,128
|
$443,416
|
$(434,288)
|
(98)%
|
The cost of sales decreased in line with the sales.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
For
the three months ended September 30,
|
$2,790,305
|
$3,467,184
|
$(676,879)
|
(20)%
|
Decreased expenses in 2016 were primarily attributed to the facts
below:
o
A decrease in
stock-based compensation expense of $564,000, which primarily
resulted from: i) forfeiture of the options in connection with the
resignation of Wei Cao as the CEO of the Company in February 2016
and as director in May 2016. For further details please refer to
Item 1 Note 13-Commitments and Contingencies - Service Agreement
with Wei (William) Cao as reported in the Company’s quarterly
report on Form 10-Q for the three-months ended March 31, 2016; ii)
the issuance of a large amount of options in the first quarter of
2013, most of which vested over 3 years. With the end of vesting
periods, the stock-based compensation expense decreased
significantly from the second quarter of 2016.
o
A decrease in
salary of $154,000, which primarily resulted from the resignations
of the Company’s CEO and chairman in first quarter
2016.
o
A decrease in
rental expense of $90,000, which primarily resulted from the
ramping up of the new Beijing facility in January 2016.The related
rental expense was recorded in cost of sales and R&D expenses
instead of general and administrative expense; and
o
Offset by an
increase in legal, audit and other professional fees of $135,000
resulting from costs associated with the ATM filing in the second
quarter 2016 compared with same period in 2015.
Selling and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
For
the three months ended September 30,
|
$124,143
|
$190,152
|
$(66,009)
|
(35)%
|
The selling and marketing expenses decrease is due to the decline
of stock-based compensation of $39,000 and salary expense of
$30,000.
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
For
the three months ended September 30,
|
$2,897,736
|
$2,190,240
|
$707,496
|
32%
|
Research and development costs increased by approximately $707,000
in the three months ended September 30, 2016 as compared to the
three months ended September 30, 2015. The increase was primarily
attributed to the facts below:
o
An increase in
payroll expenses of $350,000 in line with the increase of our
immunotherapy research and development team; the total headcount of
our R&D team increased from 46 as of September 30, 2015 to 76
as of September 30, 2016;
o
An increase in
depreciation and amortization of $187,000, which was mainly
attributed to the technology obtained from 301 Hospital in June
2015 and newly purchased equipment for immunotherapy research and
development; and
o
An increase in
stock-based compensation expense of $110,000.
Impairment of Investments
|
|
|
|
|
|
|
|
|
|
For
the three months ended September 30,
|
$4,611,714
|
$-
|
$4,611,714
|
N/A
|
The impairment of investments for the three months ended September
30, 2016 is attributed to the recognition of other than temporary
impairment on the value of shares in two investments. No such
expense existed in the same period in 2015. The impairment on
investments was primarily attributed to the valuation loss for the
stock of Arem Pacific Corporation, which share price recently
significantly dropped. The stock of Arem Pacific Corporation (ARPC)
held by us are illiquid restricted shares that are very thinly
traded on the OTC Markets, we consider that it indicates the
likelihood that the impairment is
other-than-temporary.
Operating Loss
|
|
|
|
|
|
|
|
|
|
For
the three months ended September 30,
|
$(10,423,014)
|
$(5,666,085)
|
$(4,756,929)
|
84%
|
The increase in the operating loss for the three months ended
September 30, 2016 as compared to the same period in 2015 was
primarily due to changes in revenues, research and development
expenses and impairment of investments, each of which is described
above.
Total Other Income, Net
|
|
|
|
|
|
|
|
|
|
For
the three months ended September 30,
|
$5,024
|
$500,487
|
$(495,463)
|
(99)%
|
Other income, net for the three months ended September 30, 2016 was
primarily interest income of $22,000, third party R&D subsidy
of $40,000 and government subsidy of $25,000 and netting of the
charity donation of $78,000.
Other income, net for the three months ended September 30, 2015 was
primarily decrease in fair value of accrued expenses for the
acquisition of intangible assets of $414,000, net foreign exchange
gain of $79,000 and interest income of $8,000. On June 26, 2015,
the Company completed its acquisition of the certain license rights
to technology and know-how from Blackbird and entered into an
Assignment and Assumption Agreement to acquire all of
Blackbird’s right, title and interest in and to the exclusive
worldwide license to a CD40LGVAX vaccine from the University of
South Florida. According to the Asset Purchase Agreement, 28,120
shares of Company common stock were issued as part of the
consideration of this transaction. In addition, 18,747 shares of
Company common stock (equal to $700,000 based on the 20-day
volume-weighted average price of the Company’s common stock
on the closing date of this transaction) were delivered to
Blackbird on the 6 month anniversary of the closing date upon
satisfaction of certain conditions. The above mentioned shares were
revalued according to the fair market value as of the balance sheet
date and resulted in other income of $414,000.
Income Taxes Credit (Provision)
|
|
|
|
|
|
|
|
|
|
For
the three months ended September 30,
|
$(243,230)
|
$23,400
|
$(266,630)
|
(1139)%
|
While we have optimistic plans for our
business strategy, we determined that a valuation allowance was
necessary given the current and expected near term losses and the
uncertainty with respect to our ability to generate sufficient
profits from our business model. Therefore, we established a
valuation allowance for deferred tax assets other than the extent
of the benefit from other comprehensive income. Income tax expense
for three months ended September 30, 2016 mainly represents
the reversal of
deferred income tax as a
result of tax
benefit of other comprehensive income previously recognized. Income tax expense for three months ended
September 30, 2015 represents PRC tax benefit of $24,757 and US
state tax expense of $1,357.
Net Loss
|
|
|
|
|
|
|
|
|
|
For
the three months ended September 30,
|
$(10,661,220)
|
$(5,142,198)
|
$(5,519,022)
|
107%
|
Changes in net loss are primarily attributable to changes in
operations of our biomedicine segment which are described
above.
Comprehensive Gain (Loss)
|
|
|
|
|
|
|
|
|
|
For
the three months ended September 30,
|
$(16,277,983)
|
$(6,887,396)
|
$(9,390,587)
|
136%
|
Comprehensive net loss for three months ended September 30, 2016
includes reclassification adjustments, net of tax, of approximately
$5,558,000, in connection with other-than-temporary impairment of
investments ,and a currency translation net loss of approximately
$59,000 combined with the changes in net income. The
reclassification adjustment was attributed to the valuation loss of
approximately $6,090,000 for the stock investment in ARPC, which
indicates the likelihood of the impairment is
other-than-temporary.
Comparison of Nine Months Ended September 30, 2016 to Nine Months
Ended September 30, 2015
The descriptions in the results of operations below reflect our
operating results as set forth in our Consolidated Statement of
Operations filed herewith.
|
Nine Months Ended
September 30, 2016
|
Nine Months Ended
September 30, 2015
|
|
|
|
Net
sales and revenue
|
$570,102
|
$1,885,256
|
|
|
|
Operating
expenses:
|
|
|
Cost
of sales
|
835,908
|
1,335,707
|
General
and administrative
|
8,638,877
|
9,915,956
|
Selling
and marketing
|
342,377
|
500,393
|
Research
and development
|
8,268,953
|
4,968,352
|
Impairment
of investments
|
4,611,714
|
123,428
|
Total
operating expenses
|
22,697,829
|
16,843,836
|
Operating
loss
|
(22,127,727)
|
(14,958,580)
|
|
|
|
Other
income (expense)
|
|
|
Interest
income
|
57,678
|
29,417
|
Other
income (expense)
|
6,652
|
502,921
|
Total
other income, net
|
64,330
|
532,338
|
Loss
before taxes
|
(22,063,397)
|
(14,426,242)
|
|
|
|
Income
taxes credit (provision)
|
(5,218)
|
(29,602)
|
|
|
|
Net
loss
|
$(22,068,615)
|
$(14,455,844)
|
Other
comprehensive income (loss):
|
|
|
Cumulative
translation adjustment
|
(314,189)
|
(163,353)
|
Unrealized
gain (loss) on investments, net of tax
|
5,300,633
|
6,543,460
|
Reclassification adjustments, net of tax, in connection with
other-than-temporary impairment of investments
|
(5,557,939)
|
-
|
Total
other comprehensive income (loss):
|
(571,495)
|
6,380,107
|
Comprehensive
gain (loss)
|
$(22,640,110)
|
$(8,075,737)
|
|
|
|
|
|
|
Net
loss per share:
|
|
|
Basic
|
$(1.67)
|
$(1.27)
|
Diluted
|
$(1.67)
|
$(1.27)
|
|
|
|
Weighted
average common shares outstanding:
|
|
|
Basic
|
13,253,290
|
11,399,958
|
Diluted
|
13,253,290
|
11,399,958
|
* These line items include the following amounts of non-cash,
stock-based compensation expense for the periods
indicated:
|
Nine Months Ended
September 30, 2016
|
Nine Months Ended
September 30, 2015
|
|
|
|
Cost
of sales
|
8,014
|
110,326
|
General
and administrative
|
2,254,498
|
3,837,123
|
Selling
and marketing
|
32,353
|
162,997
|
Research
and development
|
1,649,260
|
1,562,509
|
|
3,944,125
|
5,672,955
|
Results of Operations
Net sales and revenue
|
|
|
|
|
|
|
|
|
|
For
the nine months ended September 30,
|
$570,102
|
$1,885,256
|
$(1,315,154)
|
(70)%
|
All the revenue was derived from cell therapy technology service
for the nine months ended September 30, 2016 and 2015. The decrease
in revenue is the result of prioritizing cancer therapeutic
technologies and focusing our clinical efforts on developing CAR-T
technologies, Vaccine, Tcm and TCR clonality technologies. As a
result of not focusing on the cell therapy technology service
revenue, in the second quarter of 2016 the Company ceased its
cooperation with the Jihua Hospital and several
agents.
Cost of Sales
|
|
|
|
|
|
|
|
|
|
For
the nine months ended September 30,
|
$835,908
|
$1,335,707
|
$(499,799)
|
(37)%
|
The cost of sales decreased in line with the sales. As fixed costs,
such as rental and staff costs etc., accounts for a majority of the
cost of sales, the cost of sales didn’t decrease as much as
sales.
General and Administrative Expenses
|
|
|
|
|
|
|
|
|
|
For
the nine months ended September 30,
|
$8,638,877
|
$9,915,956
|
$(1,277,079)
|
(13)%
|
Decreased expenses in 2016 were primarily attributed to below
facts:
o
A decrease in
stock-based compensation expense of $1,583,000, which primarily
resulted from: i) forfeiture of the options in connection with the
resignation of Wei Cao as the CEO of the Company in February 2016
and as director in May 2016. For further details please refer to
Item 1 Note 13-Commitments and Contingencies - Service Agreement
with Wei (William) Cao as reported in the Company’s quarterly
report on Form 10-Q for the three-month ended March 31, 2016; ii)
the issuance of a large amount of options in the first quarter of
2013, most of which vested over 3 years. With the end of vesting
periods, the stock-based compensation expense decreased
significantly in 2016; and
o
Offset by an
increase in legal, audit and other professional fees of $359,000
related to the Company’s Registration Statements on Forms S-3
and S-8 filing in 2016.
Selling and Marketing Expenses
|
|
|
|
|
|
|
|
|
|
For
the nine months ended September 30,
|
$342,377
|
$500,393
|
$(158,016)
|
(32)%
|
The selling and marketing expenses decreased was mainly attributed
to the decrease in stock-based compensation of $131,000. This
mainly resulted from the fact that one sales vice president
resigned in April 2016 and part of her options were
forfeited.
Research and Development Expenses
|
|
|
|
|
|
|
|
|
|
For
the nine months ended September 30,
|
$8,268,953
|
$4,968,352
|
$3,300,601
|
66%
|
Research and development costs increased by approximately
$3,301,000 in the nine months ended September 30, 2016 as compared
to the nine months ended September 30, 2015. The increase was
primarily attributed to the facts below:
o
An increase in
payroll expenses of $1,367,000 in line with the increase of our
immunotherapy research and development team. Total headcount of our
R&D team increased from 46 as of September 30, 2015 to 76 as of
September 30, 2016;
o
An increase in
depreciation and amortization of $529,000, which was mainly
attributed to the technology obtained from 301 Hospital in June
2015 and newly purchased equipment for immunotherapy research and
development;
o
An increase in
clinical studies expenditure of $525,000;
o
An increase in raw
material consumption of $435,000;
o
An increase in
rental expense of $153,000;
o
An increase in
travelling expense of $104,000; and
o
An increase in
stock-based compensation of $87,000.
Impairment of Investments
|
|
|
|
|
|
|
|
|
|
For
the nine months ended September 30,
|
$4,611,714
|
$123,428
|
$4,488,286
|
3636%
|
The impairment of investments for the nine months ended September
30, 2016 and 2015 is attributed to the recognition of other than
temporary impairment on the value of shares in investments. The
impairment on investments was primarily attributed to the valuation
loss for the stock investment in Arem Pacific Corporation, which
share price recently significantly dropped. The stock of ARPC held
by us are illiquid restricted shares that are very thinly traded on
the OTC Markets, we consider that it indicates the likelihood that
the impairment is other-than-temporary.
Operating Loss
|
|
|
|
|
|
|
|
|
|
For
the nine months ended September 30,
|
$(22,127,727)
|
$(14,958,580)
|
$(7,169,147)
|
48%
|
The increase in the operating loss for the nine months ended
September 30, 2016 as compared to the same period in 2015 is
primarily due to changes in revenues, research and development
expenses and impairment of investments, each of which is described
above.
Total Other Income, Net
|
|
|
|
|
|
|
|
|
|
For
the nine months ended September 30,
|
$64,330
|
$532,338
|
$(468,008)
|
(88)%
|
Other income, net for the nine months ended September 30, 2016 was
primarily interest income of $58,000, third party R&D subsidy
of $40,000, foreign exchange gain and losses of $21,000 and
government subsidy of $28,000, netting of the charity donation of
$78,000.
Other income, net for the three months ended September 30, 2015 was
primarily decrease in fair value of accrued expenses for the
acquisition of intangible assets of $414,000, net foreign exchange
gain of $79,000 and interest income of $8,000. On June 26, 2015,
the Company completed its acquisition of the certain license rights
to technology and know-how from Blackbird and entered into an
Assignment and Assumption Agreement to acquire all of
Blackbird’s right, title and interest in and to the exclusive
worldwide license to a CD40LGVAX vaccine from the University of
South Florida. According to the Asset Purchase Agreement, 28,120
shares of Company common stock were issued as part of the
consideration of this transaction. In addition, 18,747 shares of
Company common stock (equal to $700,000 based on the 20-day
volume-weighted average price of Company’s common stock on
the closing date of this transaction) were delivered to Blackbird
on the 6 month anniversary of the closing date upon satisfaction of
certain conditions. The above mentioned shares were revalued
according to the fair market value as of the balance sheet date and
resulted in the other income of $414,000.
Income Taxes Credit (Provision)
|
|
|
|
|
|
|
|
|
|
For
the nine months ended September 30,
|
$(5,218)
|
$(29,602)
|
$24,384
|
(82)%
|
While we have optimistic plans for our business strategy, we
determined that a valuation allowance was necessary given the
current and expected near term losses and the uncertainty with
respect to our ability to generate sufficient profits from our
business model. Therefore, we established a valuation allowance for
deferred tax assets other than the extent of the benefit from other
comprehensive income. Income tax expense for nine months ended
September 30, 2016 all represents US state tax. Income tax for nine
months ended September 30, 2015 represents PRC tax of $24,995 and
the US state tax of $4,607.
Net Loss
|
|
|
|
|
|
|
|
|
|
For
the nine months ended September 30,
|
$(22,068,615)
|
$(14,455,844)
|
$(7,612,771)
|
53%
|
Changes in net loss are primarily attributable to changes in
operations of our biomedicine segment which are described
above.
Comprehensive Loss
|
|
|
|
|
|
|
|
|
|
For
the nine months ended September 30,
|
$(22,640,110)
|
$(8,075,737)
|
$(14,564,373)
|
180%
|
Comprehensive net loss
for nine months ended September 30, 2016 includes unrealized net
gain on investments of approximately $5,301,000, reclassification
adjustments, net of tax, of approximately $5,558,000, in connection
with other-than-temporary impairment of investments and a currency
translation net loss of approximately $314,000 combined with the
changes in net income. The unrealized gain and reclassification
adjustments on investments were primarily attributed to the
valuation change for the stock investment in
ARPC.
Liquidity and Capital Resources
We had working capital of $43,419,321 as of September 30, 2016
compared to $13,675,034 as of December 31, 2015. Our cash position
increased to $44,115,886 at September 30, 2016 compared to
$14,884,597 at December 31, 2015, as we had cash generated from
financing activities due to a private placement financing in
February and April 2016 for gross proceeds of approximately $43
million through the sale of 2,270,000 shares of common stock,
partially offset by cash used in operating and investment
activities.
Net cash provided by or used in operating, investing and financing
activities from continuing operations was as follows:
Net cash used in operating activities was approximately $12,072,000
and $8,572,000 for the nine months ended September 30, 2016 and
2015, respectively. The following table reconciles net loss to net
cash used in operating activities:
For
the nine months ended September 30,
|
|
|
|
Net
loss
|
$(22,068,615)
|
$(14,455,844)
|
$(7,612,771)
|
Non
cash transactions
|
10,712,136
|
6,925,325
|
3,786,811
|
Changes
in operating assets, net
|
(715,890)
|
(1,041,692)
|
325,802
|
Net
cash used in operating activities
|
$(12,072,369)
|
$(8,572,211)
|
$(3,500,158)
|
The 2016 change in non-cash transaction was primarily due to the
increase in impairment of investments of $4,488,000, increase in
depreciation and amortization of $497,000, decrease in fair value
of accrued expenses for the acquisition of intangible assets of
$414,000, net of decrease in share based compensation of $1,729,000
compared with same period in 2015.
Net cash used in investing activities was approximately $1,653,000
and $5,495,000 in the nine months ended September 30, 2016 and
2015, respectively. These amounts were primarily the
result of purchases of fixed assets and intangible
assets.
Cash provided by financing activities was approximately $43,123,000
and $19,444,000 in the nine months ended September 30, 2016 and
2015, respectively. These amounts were mainly attributable to the
proceeds received from the issuance of common stock.
Liquidity and Capital Requirements Outlook
Excluding any potential sponsorship of a CD40LGVAX Trial in the
U.S. and other regions outside of China CD40LGVAX Trial, we
anticipate that the Company will require approximately $31 million
in cash to operate as planned in the coming 12 months. Of this
amount, approximately $22 million will be used to operate our
facilities and offices, including but not limited to payroll
expenses, rent and other operating costs, and to fund our research
and development as we continue to develop our products through the
clinical study process. Approximately $9 million will be used as
capital expenditure in machinery, equipment and facilities to
expand our immune cell therapy business and CAR-T research and
development, although we may revise these plans depending on the
changing circumstances of our biomedicine business.
We expect to rely on current cash balances that we hold to provide
for these capital requirements. We do not intend to use, and will
not rely on our holdings in securities to fund our operations.
One of our stocks held, Arem Pacific Corporation, has a
declared effective S-1 prospectus which relates to the resale of up
to 13,694,711 shares of common stock, inclusive of the 8,000,000
shares held by the Company. However, the shares offered by this
prospectus may only be sold by the selling stockholders at $0.05
per share until the shares are quoted on the OTCQB® tier of
OTC Markets or an exchange. Another one of our stocks held, Wonder
International Education & Investment Group Corporation
(“Wonder”), is delinquent in its SEC filings for
multiple periods. We do not know whether we can liquidate our
8,000,000 shares of Arem Pacific stock or the 2,057,131 shares of
Wonder stock or any of our other portfolio securities, or if
liquidated, whether the realized amount will be meaningful at all.
As a result, we have written down above stocks to their fair
value.
On April 15, 2016, the Company completed the second and final
closing of a financing transaction with Wuhan Dangdai Science &
Technology Industries Group Inc., pursuant to which the Company
sold to the Investor 2,006,842 shares of the Company’s common
stock, par value $0.001 per share, for approximately $38,130,000 in
gross proceeds. As previously disclosed in a Current Report on Form
8-K filed on February 10, 2016, the Company conducted the initial
closing of the financing on February 4, 2016. The aggregate gross
proceeds from both closings in the financing totaled approximately
$43,130,000. In the aggregate, 2,270,000 shares of Common Stock
were issued in the financing. On March 22, 2016, the Company filed
a 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 $150,000,000. On June 17, 2016, the
SEC declared the S-3 effective; we have yet to utilize any of the
$150,000,000 registered under the S-3. As we continue to incur
losses, achieving profitability is dependent upon the successful
development of our immune therapy business and commercialization of
our technology in research and development phase, which is a number
of years in the future. Once that occurs, we will have to achieve a
level of revenues adequate to support our cost structure. We may
never achieve profitability, and unless and until we do, we will
continue to need to raise additional capital. Management intends to
fund future operations through additional private or public debt or
equity offerings, and may seek additional capital through
arrangements with strategic partners or from other
sources.
Our medium to long term capital needs involve the further
development of our biomedicine business, and may include, at
management’s discretion, new clinical trials for other
indications, strategic partnerships, joint ventures, acquisition of
licensing rights from new or current partners and/or expansion of
our research and development programs. Furthermore, as our
therapies pass through the clinical trial process and if they gain
regulatory approval, we expect to expend significant resources on
sales and marketing of our future products, services and
therapies.
In order to finance our medium to long-term plans, we intend to
rely upon external financing. This financing may be in the form of
equity and or debt, in private placements and/or public offerings,
or arrangements with private lenders. Due to our short operating
history and our early stage of development, particularly in our
biomedicine business, we may find it challenging to raise capital
on terms that are acceptable to us, or at all. Furthermore, our
negotiating position in the capital raising process may worsen as
we consume our existing resources. Investor interest in a company
such as ours is dependent on a wide array of factors, including the
state of regulation of our industry in China (e.g. the policies of
MOH and the CFDA), the U.S. and other countries, political
headwinds affecting our industry, the investment climate for
issuers involved in businesses located or conducted within China,
the risks associated with our corporate structure, risks relating
to our partners, licensed intellectual property, as well as the
condition of the global economy and financial markets in general.
Additional equity financing may be dilutive to our stockholders;
debt financing, if available, may involve significant cash payment
obligations and covenants that restrict our ability to operate as a
business; our stock price may not reach levels necessary to induce
option or warrant exercises; and asset sales may not be possible on
terms we consider acceptable. If we are unable to raise the capital
necessary to meet our medium- and long-term liquidity needs, we may
have to delay or discontinue certain clinical trials, the
licensing, acquisition and/or development of cell therapy
technologies, and/or the expansion of our biomedicine business; or
we may have to raise funds on terms that we consider
unfavorable.
Off Balance Sheet Transactions
CBMG does not have any off-balance sheet arrangements except the
lease and capital commitment disclosed in the unaudited condensed
consolidated financial statements.
Contractual Obligations
A summary of the Company’s contractual obligations was
included in the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2015. The Company’s
contractual obligations and other commercial commitments did not
change materially between December 31, 2015 and September 30,
2016.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Exposure
to credit, liquidity, interest rate and currency risks arises in
the normal course of the Company’s business. The
Company’s exposure to these risks and the financial risk
management policies and practices used by the Company to manage
these risks are described below.
Interest Rate Risk
The
Company’s interest rate risk arises primarily from cash
deposited at banks and the Company doesn’t have any
interest-bearing long-term payable/ borrowing, therefore the
exposure to interest rate risk is limited.
Currency Risk
The
Company is exposed to currency risk primarily from sales and
purchases which give rise to receivables, payables that are
denominated in a foreign currency (mainly RMB). The Company has
adopted USD as its functional currency, thus the fluctuation of
exchange rates between RMB and USD exposes the Company to currency
risk.
The
following table details the Company’s exposure as of
September 30, 2016 to currency risk arising from recognised assets
or liabilities denominated in a currency other than the functional
currency of the entity to which they relate. For presentation
purposes, the amounts of the exposure are shown in USD translated
using the spot rate as of September 30, 2016. Differences resulting
from the translation of the financial statements of entities into
the Company’s presentation currency are
excluded.
|
Exposure to foreign currencies (Expressed in USD)
|
|
|
|
|
|
Cash
and cash equivalents
|
924,848
|
402,864
|
Other
current liabilities
|
-
|
(16,666)
|
Net
exposure arising from recognised assets and
liabilities
|
924,848
|
386,198
|
The
following table indicates the instantaneous change in the
Company’s net loss that would arise if foreign exchange rates
to which the Company has significant exposure at the end of the
reporting period had changed at that date, assuming all other risk
variables remained constant.
|
|
|
increase/(decrease)
in foreign exchange rates
|
Effect on net loss (Expressed in USD)
|
|
|
|
RMB
(against USD)
|
5%
|
26,933
|
|
|
|
|
-5%
|
(26,933)
|
Results
of the analysis as presented in the above table represent an
aggregation of the instantaneous effects on each of the
Company’s subsidiaries’ net loss measured in the
respective functional currencies, translated into USD at the
exchange rate ruling at the end of the reporting period for
presentation purposes.
The
sensitivity analysis assumes that the change in foreign exchange
rates had been applied to re-measure those financial instruments
held by the Company which expose the Company to foreign currency
risk at the end of the reporting period, including inter-company
payables and receivables within the Company which are denominated
in a currency other than the functional currencies of the lender or
the borrower. The analysis excludes differences that would result
from the translation of the financial statements of subsidiaries
into the Company’s presentation currency.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it files
or submits under the Securities Exchange Act of 1934, as amended
(the “Exchange Act”) is recorded, processed, summarized
and reported within the time periods specified in the Securities
and Exchange Commission’s rules and forms. It should be
noted that the design of any system of controls is based in part
upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving
its stated goals under all potential future conditions, regardless
of how remote.
We carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive
Officer and Chief Financial Officer, of the effectiveness of our
disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that,
as of the end of the period covered in this report, our disclosure
controls and procedures were effective to ensure that information
required to be disclosed in reports filed under the Exchange Act is
recorded, processed, summarized and reported within the required
time periods and is accumulated and communicated to our management,
including our Chief Executive Officer and Chief Financial Officer,
as appropriate to allow timely decisions regarding required
disclosure.
Changes in Internal Control over Financial Reporting
During the three months ended September 30, 2016, there was no
change in our internal control over financial reporting (as such
term is defined in Rule 13a-15(f) under the Exchange Act) that has
materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On April 21, 2015, a putative class action complaint was filed
against the Company in the U.S. District Court for the Northern
District of California captioned Bonnano v. Cellular
Biomedicine Group, Inc., 3:15-cv-01795-WHO (N.D. Ca.). The complaint
also named Wei Cao, the Company’s Chief Executive Officer,
and Tony Liu, the Company’s Chief Financial Officer, as
defendants. The complaint alleged that during the class
period, June 18, 2014, through April 7, 2015, the Company made
material misrepresentations in its periodic reports filed with the
SEC. The complaint alleged a cause of action under Section
10(b) of the Securities Exchange Act of 1934 (the “1934
Act”) against all defendants and under Section 20(a) of the
1934 Act against the individual defendants. The complaint did not
state the amount of the damages sought.
On June 3, 2015, defendants were served. On June 29, 2015,
the Court ordered, as stipulated by the parties, that defendants
are not required to respond to the initial complaint in this action
until such time as a lead plaintiff and lead counsel have been
appointed and a consolidated complaint has been
filed. The deadline for filing motions for the
appointment of lead plaintiff and selection of lead counsel was
June 22, 2015. On that date, one motion was filed by the
Rosen Law Firm on behalf of putative plaintiff Michelle
Jackson. On August 3, 2015, having received no
opposition, the Court appointed Jackson as lead plaintiff and the
Rosen Law Firm as class counsel. As stipulated among the
parties, Jackson filed an amended class action complaint on
September 17, 2015.
The amended complaint names ten additional individuals and entities
as defendants (“additional defendants”), none of whom
were affiliated with the Company, and asserted an additional claim
under Section 10(b) and Rule 10b-5(a) and (c) thereunder that the
Company purportedly engaged in a scheme with the additional
defendants to promote its securities. The amended
complaint did not assert any claims against Mr. Liu.
On January 19, 2016, the Company filed a motion to dismiss, which
was argued on April 20, 2016. On May 20, 2016, the Court
granted the motion to dismiss with leave to amend. On June 6,
2016, Plaintiffs filed a Second Amended Complaint, and on June 30,
2016, the Company filed a motion to dismiss. Oral argument on
the motion was held on August 17, 2016. On September 2,
2016, the Court dismissed the Second Amended Complaint with
prejudice and entered judgment against Plaintiffs. On September 16,
2016, Plaintiffs filed a Notice of Appeal to the U.S. Court of
Appeals for the Ninth Circuit. Plaintiffs must file their opening
brief on December 27, 2016, to proceed with the
appeal.
The Company believes that the claims do not have merit and intends
to vigorously defend against them. At this stage of the
proceedings it is not possible to evaluate the likelihood of an
unfavorable outcome or to estimate the range of potential
loss.
Other than as disclosed above, during the period covered by this
report, we were not involved in any litigation that we believe
could have a materially adverse effect on our financial condition
or results of operations.
ITEM 1A. RISK FACTORS
During the three months ended September 30, 2016, there were no
material changes to the risk factors disclosed in Item 1A of our
Annual Report on Form 10-K for the year ended December 31, 2015
except the risks set forth below.
Our relationship with our controlled VIE entity, CBMG Shanghai,
through the VIE agreements, is subject to various operational and
legal risks.
Historically, the equity interests of our controlled VIE entity
were held by Mr. Wei Cao, our former chief executive officer and
director, and Mr. Chen Mingzhe. On February 6, 2016,
Mr. Cao resigned as our chief executive officer, and on May
1, 2016, Mr. Cao resigned from our Board and ceased to serve as a
director of the Company. Subsequent to Mr. Cao's resignation, Mr.
Cao initiated procedures to transfer his equity interests in the
VIE entity to Mr. Lu Junfeng and Mr. Chen
Mingzhe.
The
registrations for the equity transfer from Mr. Wei to Messrs. Chen
and Lu and for the new pledge of equity interests of the VIE entity
to our wholly-owned subsidiary, Cellular Biomedicine Group Ltd.
(Wuxi), are still in the process. As the pledge cannot be
registered unless and until the registration of the above equity
transfer is completed and such pledge shall become effective only
after the completion of its registration in accordance with laws in
China, we plan to apply for such pledge immediately after the
completion of the registration for the equity transfer. However,
during the transitional period before the pledge is registered and
effective, there is a risk that Messrs. Chen and Lu may reduce or
eliminate their ownership of the equity interests of the VIE entity
by transfering their interests to third parties, which would
undermine our control over the VIE entity.
Management believes the holders of the VIE’s registered
capital, Messrs. Chen Mingzhe and, upon completion of registration
of the above-mentioned equity transfer and pledge, Lu Junfeng, have
no interest in acting contrary to the VIE
agreements. However, if Messrs. Chen or Lu as
shareholders of the VIE entity were to reduce or eliminate their
ownership of the registered capital of the VIE entity, their
interests may diverge from that of CBMG and they may seek to act in
a manner contrary to the VIE agreements (for example by controlling
the VIE entity in such a way that is inconsistent with the
directives of CBMG management and the board; or causing non-payment
by the VIE entity of services fees). If such
circumstances were to occur the WFOE would have to assert control
rights through the powers of attorney, pledges and other VIE
agreements, which would require legal action through the PRC
judicial system. We believe based on the advice of local
counsel that the VIE agreements are valid and in compliance with
PRC laws presently in effect. However, there is a risk that the
enforcement of these agreements may involve more extensive
procedures and costs to enforce, in comparison to direct equity
ownership of the VIE entity. Notwithstanding the foregoing, if the
applicable PRC laws were to change or are interpreted by
authorities in the future in a manner which challenges or renders
the VIE agreements ineffective, the WFOE’s ability to control
and obtain all benefits (economic or otherwise) of ownership of the
VIE entity could be impaired or eliminated. In the
event of such future changes or new interpretations of PRC law, in
an effort to substantially preserve our rights we may have to
either amend our VIE agreements or enter into alternative
arrangements which comply with PRC laws as interpreted and then in
effect.
The Company’s technical services revenue may become subject
to tightened regulation that may affect the Company’s
financial condition.
Currently we are generating technical services revenue comprised of
preparation of subset T Cell and clonality assay platform
technology for treatment of cancers by our hospital partners. Our
revenue is therefore subject to the risk of progressive regulatory
actions by the PRC government in the area of immunotherapy. As
China has not yet codified any specific regulations to govern the
development and application of immune cell therapies, the outcome
of any potential Chinese regulatory action is difficult to assess
or quantify. From time to time there may also be adverse publicity
relating to the practice of immunotherapy treatments in China,
which due to the sensitive and experimental nature of the
treatment, may trigger further governmental scrutiny. Any
progressive regulatory action in China arising out of such scrutiny
may adversely affect the Company’s financial condition or
cash flows.
Our product candidates may cause undesirable side effects or have
other properties that could interrupt our clinical development,
prevent or delay regulatory approval, and limit our commercial
value or result in significant negative consequences.
Undesirable or unacceptable side effects caused by our product
candidates could cause us or regulatory authorities to delay,
suspend or stop clinical trials and could result in the delay or
denial of regulatory approval by the regulatory authorities.
Results of our trials could reveal unacceptable severe adverse
effects or unexpected characteristics.
There have been reported patient deaths in Immune Cell therapies as
a result of factors comprised of cytokine release syndrome and
neurotoxicity. Immune Cell therapy treatment-related adverse side
effects could also affect patient recruitment or the ability of
enrolled subjects to complete the trial or result in potential
liability claims. In addition, these side effects may not be
recognized or properly managed by the treating medical staff, as
medical personnel do not normally encounter in the general patient
population toxicities resulting from personalized immune cell
therapy. We plan to conduct training for the medical personnel
using immune cell therapy to understand the adverse side effect
profile for our clinical trials and upon any commercialization of
any immune cell product candidates. Inability of the medical
personnel in recognizing or managing immune cell therapy’s
potential adverse side effects could result in patient deaths. Any
of these occurrences may harm our business, financial condition and
prospects significantly.
Our manufacturing facilities are subject to extensive government
regulation, and existing or future regulations may adversely affect
our current or future operations, increase our costs of operations,
or require us to make additional capital expenditures.
Environmental advocacy groups and regulatory agencies in China have
been focusing considerable attention on the industries’
potential role in climate change. Stringent government safety,
environmental and bio-hazardous materials disposal regulations at
the city, provincial, and local level may have substantial impact
on our business and our third-party service providers. A number of
complex laws, rules, orders, and interpretations govern
environmental protection, health, safety, land use, zoning,
transportation, and related matters. The adoption of laws and
regulations to implement controls of bio-hazardous material
disposal and environmental compliance, including the imposition of
fees or taxes, could adversely affect the operations with which we
do business. Among other things, timeliness in navigating the
compliance of these regulations may restrict our operations, our
third-party service providers’ operations and adversely
affect our financial condition, results of operations, and cash
flows by imposing conditions including, but not limited to new
permits requirement, limitations or bans on disposal or
transportation of certain bio-hazardous materials or certain
categories of materials. The Company is in the process of applying
for (i) environmental
protection compliance for its new facility in Beijing and (ii)
update of the environmental protection permits for its Shanghai
facility.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
During the three months ended September 30, 2016, 10,500 shares of
the Company's restricted common stock were issued to the
Company’s employees and consultants. The issuance was made in
reliance on the exemption from registration provided by Section
4(a)(2) of the Securities Act.
All other unregistered sales and issuances of equity securities for
the three months ended September 30, 2016 that are required to be
disclosed herein were previously disclosed in a Form 8-K filed with
the SEC.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibits
Exhibit Number
|
|
Description
|
|
|
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 - Chief Executive Officer and Chief Financial
Officer.
|
|
|
Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
101.INS
|
|
XBRL Instance Document
|
101.SCH
|
|
XBRL Taxonomy Extension Schema
|
101.CAL
|
|
XBRL Taxonomy Extension Calculation Linkbase
|
101.DEF
|
|
XBRL Taxonomy Extension Definition Linkbase
|
101.LAB
|
|
XBRL Taxonomy Extension Label Linkbase
|
101.PRE
|
|
XBRL Taxonomy Extension Presentation Linkbase
|
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the registrant caused this report
to be signed on its behalf by the undersigned, thereunto duly
authorized.
|
CELLULAR BIOMEDICINE GROUP, INC.
|
|
(Registrant)
|
|
|
|
|
Date: November 8, 2016
|
By:
|
/s/ Bizuo (Tony) Liu
|
|
|
|
Bizuo (Tony) Liu
|
|
|
|
Chief Executive Officer and Chief Financial Officer
|
|
|
|
(Principal Executive Officer and Principal Financial and
Accounting Officer)
|
|
|
|
|
|