Discontinued Operations

Regenerative Medicine - China segment

In 2009, the Company operated its Regenerative Medicine-China business in the People’s Republic of China (“China” or “PRC”) through its subsidiary, a wholly foreign owned entity (“WFOE”) and entered into contractual arrangements with certain variable interest entities (“VIEs”). Foreign companies have commonly used VIE structures to operate in the PRC, and while such structures are not uncommon, recently they have drawn greater scrutiny from the local Chinese business community in the PRC who have urged the PRC State Council to clamp down on these structures. In addition, in December 2011, China’s Ministry of Health announced its intention to more tightly regulate stem cell clinical trials and stem cell therapeutic treatments in the PRC, which has created uncertainty regarding the ultimate regulatory environment in the PRC. Accordingly, the Company took steps to restrict, and ultimately eliminate, its regenerative medicine business in the PRC. As a result of these steps, the Company has discontinued its operations in its Regenerative Medicine-China business. The Company has determined that any liability arising from the activities of the WFOE and the VIEs will likely be limited to the net assets currently held by each entity. As of March 31, 2012, the Company recognized the following loss on exit of the Regenerative Medicine-China business (in thousands):



Cash	$	195.1
Prepaid expenses and other current assets	14.9
Property, plant and equipment, net	1,023.7
Other Assets	330.5
Accounts payable	(177.1		)
Accrued liabilities	(79.2		)
Accumulated comprehensive income	(169.9		)
Loss on exit of segment	$	1,138.0

The operations and cash flows of the Regenerative Medicine - China business were eliminated from ongoing operations as a result of our exit decision, and the Company will not have continuing involvement in this business going forward. The operating results of the Regenerative Medicine – China business for the years ended December 31, 2012 and 2011, which are included in discontinued operations, were as follows (in thousands):



	Year Ended December 31,
	2012			2011
Revenue	$	52.3		$	274.3
Cost of revenues	(30.6		)	(140.6		)
Research and development	(103.3		)	(378.3		)
Selling, general, and administrative	(497.3		)	(3,089.8		)
Other income (expense)	(6.8		)	(9.7		)
Loss on exit of segment	(1,138.0		)	—
Loss from discontinued operations	$	(1,723.7	)	$	(3,344.1	)

The summary of the assets and liabilities related to Regenerative Medicine-China discontinued operations as of December 31, 2011 was as follows (in thousands):



	December 31, 2011
Assets:
Cash and cash equivalents	$	103.3
Prepaid expenses and other current assets	284.4
Property, plant and equipment, net	1,256.8
Other Assets	149.0
	$	1,793.5
Liabilities:
Accounts payable	$	177.8
Accrued liabilities	31.0
	$	208.8

On October 12, 2012, the Company signed a settlement agreement with Yeyan Zhang, legal representative of the WFOE, to arrange for the orderly disposition and liquidation of the WFOE and the VIEs, and to formally assign the Company’s rights, title and interest of the WFOE to Mr. Zhang.

Pharmaceutical Manufacturing - China segment

On November 13, 2012, the Company completed the divestiture (the “Erye Sale”) of our 51% interest (the “Erye Interest”) in Suzhou Erye Pharmaceuticals Company Ltd., a Sino-foreign equity joint venture with limited liability organized under the laws of the PRC primarily engaged in the manufacture of generic antibiotics (“Erye”), to Suzhou Erye Economy & Trading Co., Ltd., a limited liability company organized under the laws of the PRC (“EET”), and Highacheive Holdings Limited, a limited liability company organized under the laws of the British Virgin Islands (“Highacheive” and together with EET, each a “Purchaser” and collectively the “Purchasers”). The Erye Sale was consummated pursuant to the terms and conditions of the Equity Purchase Agreement, dated as of June 18, 2012 (as amended, the “Equity Purchase Agreement”), by and among our Company, China Biopharmaceuticals Holdings, Inc., a Delaware corporation and a wholly-owned subsidiary of NeoStem (“CBH”), EET, Highacheive, Fullbright Finance Limited, a limited liability company organized under the laws of the British Virgin Islands (“Fullbright”), and Erye. Pursuant to the Equity Purchase Agreement, the aggregate purchase price paid to the Company by the Purchasers for the Erye Interest consisted of (i) approximately $12.3 million in cash, (ii) the return to the Company of 1,040,000 shares of NeoStem common stock and (iii) the cancellation of 1,170,000 options and 640,000 warrants to purchase our common stock. The fair value of the shares was based on the Company's closing price on the date of sale, and was recorded as Treasury Stock in our balance sheet. The fair values of the canceled options and warrants were based on the Black-Scholes values on the date of sale, and were recorded against Additional Paid in Capital in the accompanying balance sheet. The Company recognized the following loss on the date of sale of its 51% interest in Erye (in thousands):



Fair value of consideration received	$	13,397.9
Carrying value of segment non-controlling interest	6,015.0
Carrying value of segment accumulated comprehensive income	4,387.4
	$	23,800.3
Less carrying amount of assets and liabilities sold:
Cash	$	8,457.5
Restricted Cash	2,918.1
Accounts Receivable	6,130.2
Inventories	15,077.7
Prepaid expenses and other current assets	957.8
Property, plant and equipment, net	38,102.0
Other assets	5,946.3
Accounts payable	(9,604.8		)
Accrued liabilities	(2,008.8		)
Bank loans	(15,133.5		)
Notes payable	(6,599.3		)
Other liabilities	(9,166.8		)
Amount due related party	(7,859.7		)
	$	27,216.7

Loss on exit of segment	$	(3,416.4	)

The operations and cash flows of the Pharmaceutical Manufacturing - China business were eliminated from ongoing operations with the sale of the Company's 51% interest in Erye. The operating results of the Pharmaceutical Manufacturing - China business for the years ended December 31, 2012 and 2011 were as follows (in thousands):



	Year Ended December 31,
	2012			2011
Revenue	$	61,703.1		$	63,393.6
Cost of revenues	(40,245.2		)	(47,186.8		)
Research and development	(1,836.4		)	(2,904.1		)
Selling, general, and administrative	(10,740.0		)	(11,068.2		)
Other expense	(1,045.2		)	(1,081.4		)
Provision for income taxes	(1,794.1		)	(392.8		)
Asset impairments	(31,170.1		)	(19,432.7		)
Loss on sale of segment	(3,416.4		)	—
Loss from discontinued operations	$	(28,544.3	)	$	(18,672.4	)

The summary of the assets and liabilities related to Pharmaceutical Manufacturing - China discontinued operations as of December 31, 2011 were as follows (in thousands):



	December 31, 2011
Cash and cash equivalents	$	8,707.0
Accounts receivable, net	5,525.7
Inventory	16,505.7
Deferred income taxes	463.7
Prepaid expenses and other current assets	777.5
Property, plant and equipment, net	36,490.4
Land use rights, net	4,872.4
Goodwill	8,495.7
Intangible assets, net	21,846.4
Other assets	2,459.9
Total assets	$	106,144.4

Accounts payable	$	7,950.3
Accrued liabilities	1,705.8
Bank loans	15,712.0
Income tax payable	621.6
Deferred income taxes	6,177.4
Unearned revenue	1,315.4
Amount due related parties	20,862.7
Total liabilities	$	54,345.2

Related Party Transactions

At December 31, 2011, Erye owed EET, the 49% shareholder of Erye, approximately $20.9 million, which represents dividends paid and loaned back to Erye. In the year ended December 31, 2012, Erye paid EET approximately $0.7 million of accrued interest, and $11.6 million of loan principal.

Pursuant to the terms and conditions of the October 2009 Erye Joint Venture Agreement, dividend distributions to EET and the Company’s subsidiary were to be made in proportion to their respective ownership interests in Erye; provided, however, that for the three-year period commencing on the first day of the first fiscal quarter after the Joint Venture Agreement became effective distributions were to be made as follows: for undistributed profits generated subsequent to the acquisition date: (i) the 49% of undistributed profits (after tax) of the joint venture due EET were to be distributed to EET and lent back to Erye to help finance costs in connection with its construction of and relocation to a new facility (to be repaid gradually after construction is completed); and (ii) of the net profit (after tax) of the joint venture due the Company, 45% were to be provided to Erye as part of the new facility construction fund and will be characterized as additional paid-in capital for the Company’s 51% interest in Erye, and 6% will be distributed to the Company. It was contemplated by the Joint Venture Agreement that the construction would continue for three years. As such, 45% of the dividend we had been entitled to by reason of our 51% ownership would have remained in Erye through 2012 to complete the construction while EET would loan back their dividend during the same period at a prevailing bank interest rate. In January 2011, a dividend totaling approximately $13,671,100 based on earnings for Fiscal Year 2009 was declared and approximately $6,698,800 was distributed to EET and lent back to Erye and approximately $6,972,300 due the Company was reinvested and re-characterized as additional paid-in capital in the business. In April 2011, a dividend totaling $10,259,700 based on earnings for Fiscal Year 2010 was declared and approximately $5,027,300 was distributed to EET and lent back to Erye, and approximately $5,232,400 due the Company was reinvested and re-characterized as additional paid-in capital in the business. A10% withholding tax was required on dividends payable to the Company. As a result, Erye withheld approximately $1,220,500 in taxes related to the Company’s Fiscal Year 2009 and 2010 dividend amounts, and such amount has been paid to the local Chinese tax authorities as of December 31, 2011.