Acquisition

On May 8, 2014, NeoStem closed (the “Closing”) its acquisition of CSC (the “CSC Acquisition”), pursuant to the terms of the Agreement and Plan of Merger, dated as of April 11, 2014 (the “Merger Agreement”), by and among NeoStem and its acquisition subsidiaries (collectively, "Subco"), CSC, and Jason Livingston, solely in his capacity as CSC stockholder representative (together with his permitted successors, the “CSC Representative”). At Closing, Fortis Advisors LLC succeeded to the duties of the CSC Representative pursuant to the Merger Agreement.

Pursuant to the Merger Agreement, on the Closing Date, Subco was merged with CSC (the “Merger”), with Subco surviving the Merger as a wholly-owned subsidiary of NeoStem. At Closing, Subco changed its legal name to NeoStem Oncology, LLC.

CSC has deep expertise in stem cell biology and is engaged in the development of therapies using a patient’s own, i.e., autologous, cells, with development efforts primarily directed at immunotherapies for cancer. Its most advanced program is a targeted cancer immunotherapy called NBS20, also referred to as DC/TC (dendritic cell/tumor cell), which uses patients’ own tumor cells to maximize the ability of their immune system to identify and eliminate the cancer initiating cells that are capable of reconstituting or developing new tumors (i.e., “cancer stem cells” or “replicating cells”). The current focus of that program is the treatment of metastatic melanoma. As a result of encouraging Phase 2 data, the Company initiated its Intus Phase 3 clinical trial in the fourth quarter of 2014, with enrollment expected to begin in the first quarter of 2015. The protocol for this study is the subject of a Special Protocol Assessment (“SPA”) and the immunotherapy has been granted Fast Track designation, as well as Orphan Drug designation.

Aggregate Merger Consideration

Pursuant to the terms of the Merger Agreement, all shares of CSC common stock (“CSC Common Stock”) and CSC preferred stock (“CSC Preferred Stock”, and collectively with the CSC Common Stock, the “CSC Capital Stock”) outstanding immediately prior to the Closing, and all outstanding unexercised options to purchase CSC Common Stock (“CSC Options”) (treated as if a net exercise had occurred), were canceled and converted into the right to receive, in the aggregate (and giving effect to the liquidation preferences accorded to the CSC Preferred Stock):

(1)An aggregate of 5,329,593 shares of NeoStem common stock (subject to payment of nominal cash in lieu of fractional shares) (the “Closing Merger Consideration”).

(2)if payable after the Closing, certain payments in an amount of up to $90.0 million in the aggregate, payable in shares of NeoStem Common Stock or cash, in NeoStem’s sole discretion, in the event of the successful completion of certain milestone events in connection with the CSC business being acquired by NeoStem (the “Milestone Payments”, and together with the Closing Merger Consideration, the “Merger Consideration”).

The fair value of the net assets acquired in the CSC Acquisition was $19.4 million. The fair value of the consideration paid by NeoStem was valued at $33.5 million, resulting in the recognition of goodwill in the amount of $14.1 million. The consideration paid was comprised of equity issued and milestone payments. The fair value of the equity issued by NeoStem was valued at $21.6 million. The fair value of the milestone payments was valued at $11.9 million, and is contingent on the achievement of certain milestones associated with the future development of the acquired programs. Such contingent consideration has been classified as a liability and will be subject to remeasurement at the end of each reporting period.

The preliminary fair value of assets acquired and liabilities assumed on May 8, 2014 is as follows (in thousands):



Cash and cash equivalents	$	51.2
Accounts receivable trade, net	45.1
Prepaids and other current assets	19.2
Property, plant and equipment, net	1,040.9
Other assets	201.0
Goodwill	14,091.7
In-Process R&D	34,290.0
Accounts payable	(333.1		)
Accrued liabilities	(2,014.1		)
Deferred tax liability	(13,901.2		)
	$	33,490.7

The total cost of the acquisition, which is still preliminary, has been allocated to the assets acquired and the liabilities assumed based upon their estimated fair values at the date of the acquisition. As of September 30, 2014, the preliminary fair values of the equity issued by NeoStem was reduced by $2.9 million, and the preliminary fair value of the milestone payments was increased by $1.1 million. In addition, the preliminary fair values of the In-Process R&D and Goodwill acquired were reduced by $ 1.5 million and $0.3 million, respectively, and the deferred tax liability assumed was decreased by $0.6 million. The estimated fair value determinations and purchase price allocation continues to be subject to revision based on additional valuation work that is being conducted. The final allocation is pending the receipt of a third-party valuation and the completion of the Company’s internal review, which is expected during the fourth quarter of 2014.

For the period since the CSC Acquisition (May 9, 2014 to September 30, 2014), NeoStem recorded $0.03 million in revenues and a net loss of approximately $5.4 million or $0.17 basic and diluted loss per share attributable to CSC.

Pro Forma Financial Information

The following supplemental table presents unaudited consolidated pro forma financial information as if the closing of the acquisition of CSC had occurred on January 1, 2013 (in thousands, except per share amounts):



	Nine Months Ended September 30, 2014
	(As Reported)			(Proforma)

Revenues	$	12,662		$	13,373
Net loss	$	(43,776	)	$	(46,273	)
Net loss attributable to NeoStem	$	(43,262	)	$	(45,759	)
Net loss per share attributable to NeoStem	$	(1.37	)	$	(1.24	)



	Three Months Ended September 30, 2013						Nine Months Ended September 30, 2013
	(As Reported)			(Proforma)			(As Reported)			(Proforma)

Revenues	$	3,707		$	3,893		$	10,590		$	11,175
Net loss	$	(9,277	)	$	(10,586	)	$	(26,767	)	$	(30,549	)
Net loss attributable to NeoStem	$	(9,071	)	$	(10,380	)	$	(26,447	)	$	(30,229	)
Net loss per share attributable to NeoStem	$	(0.45	)	$	(0.41	)	$	(1.43	)	$	(1.27	)

The unaudited supplemental pro forma financial information should not be considered indicative of the results that would have occurred if the acquisition of CSC had been consummated on January 1, 2013, nor are they indicative of future results.