Shareholders' Equity

6 Months Ended

Jun. 30, 2011

Shareholders' Equity

Note 9 – Shareholders’ Equity

Common Stock:

The authorized common stock of the Company is 500 million shares, par value $0.001 per share.

On March 3, 2011, the Company consummated a private placement pursuant to which five persons and entities acquired an aggregate of 2,343,750 shares of Common Stock for an aggregate consideration of $3,000,000 (purchase price $1.28 per share). The investors included Steven S. Myers (one of the Company’s directors) (who purchased 390,625 shares) and Dr. Andrew L. Pecora (the Chief Medical Officer of the Company’s subsidiary PCT) (who purchased 78,125 shares). On April 5, 2011, we consummated a private placement pursuant to which nine persons and entities acquired an aggregate of 1,244,375 shares of Common Stock for an aggregate consideration of approximately $1,592,800 (purchase price $1.28 per share).  On June 13, 2011 we consummated a private placement pursuant to which one entity acquired 781,250 shares of Common Stock for an aggregate consideration of $1,000,000 (purchase price $1.28 per share).

Warrants:

The Company has issued common stock purchase warrants from time to time to investors in private placements and public offerings, and to certain vendors, underwriters, placement agents and consultants of the Company. A total of 25,007,979 shares of common stock are reserved for issuance upon exercise of outstanding warrants as of June 30, 2011 at prices ranging from $0.50 to $7.00 and expiring through January 2018.

During the three and six months ended June 30, 2011 and 2010, the Company issued warrants for services as follows ($ in thousands, except share data):

	Three Months Ended June 30,				Six Months Ended June 30,
	2011		2010		2011		2010
Number of Common Stock Purchase Warrants Issued		100,000		75,000		370,000		602,000
Value of Common Stock Purchase Warrants Issued	$	73.0	$	439.1	$	321.1	$	739.4

The weighted average estimated fair value of warrants issued for services in the three and six months ended June 30, 2011 was $0.73 and $0.87, respectively. The fair value of warrants at the date of grant was estimated using the Black-Scholes option pricing model. The expected volatility is based upon historical volatility of the Company’s stock. The expected term is based upon the contractual term of the warrants.

The range of assumptions used in calculating the fair values of warrants issued for services during the three and six months ended June 30, 2011 and 2010, respectively, were as follows:

	Three Months Ended June 30,		Six Months Ended June 30,
	2011	2010	2011	2010
Expected term (in years)	3 to 5	5	3 to 5	5
Expected volatility	80% - 82%	97% - 99%	80% - 86%	97% - 124%
Expected dividend yield	0%	0%	0%	0%
Risk-free interest rate	0.71% - 2.04%	1.78% - 2.04%	0.71% - 2.24%	1.78% - 2.65%

Activity related to warrants outstanding was as follows:

						Weighted
						Average
				Weighted		Remaining
	Number of			Average		Contractual		Aggregate
	Shares			Exercise Price		Term (years)		Intrinsic Value
Balance at December 31, 2010		21,843,507		$	2.62
Granted		3,400,728	*		4.60
Exercised		-			-
Expired		(236,256	)		6.18
Cancelled		-			-
Balance at June 30, 2011		25,007,979			2.85		3.8	$	98,640
Warrants Exercisable at June 30, 2011		23,644,979			2.70		3.7
* Includes 3 million warrants issued pursuant to the PCT Merger Agreement - See Note 4

The Company’s results include share-based compensation expense of approximately $69,000 and $435,000 for the three months ended June 30, 2011 and 2010, respectively, and approximately $241,900 and $580,800 for the six months ended June 30, 2011 and 2010, respectively.  The total fair value of shares vested for warrants issued for services during the three and six months ended June 30, 2011 was approximately $57,100 and $165,300, respectively.  As of June 30, 2011, there was approximately $240,600 of total unrecognized service cost related to unvested warrants of which approximately $91,600 is related to warrants that vest over a weighted average life of 0.4 years. The remaining balance of unrecognized service cost of $149,000 is related to warrants that vest based on the accomplishment of business milestones as to which expense begins to be recognized when such milestones become probable of being achieved.

Options:

The Company’s 2003 Equity Participation Plan (the “2003 Equity Plan”) permits the grant of share options and shares to its employees, directors, consultants and advisors for up to 2,500,000 shares of Common Stock as stock-based compensation. The 2009 Equity Compensation Plan (the “2009 Equity Plan”) makes up to 17,750,000 shares of Common Stock of the Company available for issuance to employees, consultants, advisors and directors of the Company and its subsidiaries pursuant to incentive or non-statutory stock options, restricted and unrestricted stock awards and stock appreciation rights.

All stock options under the 2003 Equity Plan and the 2009 Equity Plan are granted at the fair market value of the Common Stock at the grant date. Stock options vest either on the date of grant, ratably over a period determined at time of grant, or upon the accomplishment of specified business milestones, and generally expire 3, 5 or 10 years from the grant date depending on the status of the recipient as a consultant, advisor, employee or director of the Company.

The 2009 Equity Plan was originally adopted by the shareholders of the Company on May 8, 2009. On October 29, 2009, the shareholders of the Company approved an amendment to the 2009 Equity Plan to increase the number of shares of common stock available for issuance thereunder from 3,800,000 to 9,750,000. At the 2010 Annual Meeting of Shareholders of the Company held on June 2, 2010, the shareholders approved an amendment to increase this number to 13,750,000. At a Special Meeting of Shareholders of the Company held on January 18, 2011, the shareholders approved an amendment to increase this number to 17,750,000.

The 2003 Equity Plan and the 2009 Equity Plan are sometimes collectively referred to as the Company’s “U.S. Equity Plan.” The Company’s 2009 Non-U.S. Based Equity Compensation Plan (“Non-U.S. Equity Plan”) makes up to 8,700,000 shares of Common Stock of the Company available for issuance. Persons eligible to receive restricted and unrestricted stock awards, options, stock appreciation rights or other awards under the Non-U.S. Equity Plan are those service providers to the Company and its subsidiaries and affiliates providing services outside of the United States, including employees and consultants of the Company and its subsidiaries and affiliates, who, in the opinion of the Compensation Committee, are in a position to contribute to the Company’s success. Options vest either on the date of grant, ratably over a period determined at time of grant, or upon the accomplishment of specified business milestones, and generally expire 3, 5 or 10 years from the grant date depending on the status of the recipient as a consultant, advisor, employee or director of the Company.

The Non-U.S. Equity Plan was originally adopted by the shareholders of the Company on October 29, 2009. At the 2010 Annual Meeting of Shareholders of the Company held on June 2, 2010, the shareholders approved an amendment to increase the number of shares of common stock authorized for issuance thereunder from 4,700,000 to 8,700,000.

The Company’s results include share-based compensation expense of approximately $3,669,700 and $1,843,700 for the three months ended June 30, 2011 and 2010, respectively, and approximately $4,800,000 and $3,529,400 for the six months ended June 30, 2011 and 2010, respectively. Options vesting on the accomplishment of business milestones will not be recognized for compensation purposes until such milestones are deemed probable of accomplishment. At June 30, 2011 there were options to purchase 1,604,928 shares outstanding that will vest upon the accomplishment of business milestones and will be accounted for as an operating expense when such business milestones are deemed probable of accomplishment.

On April 4, 2011, the Company entered into an amendment of its May 26, 2006 employment agreement with Dr. Robin L. Smith, pursuant to which, as previously amended (the “Agreement”), Dr. Smith serves as Chairman of the Board and Chief Executive Officer of the Company. Pursuant to the amendment, (i) the term of the Agreement was extended from December 31, 2011 to December 31, 2012; (ii) Dr. Smith will receive cash bonuses on October 1, 2011 and 2012 in the minimum amount of 110% of the prior year’s bonus; (iii) a failure to renew the Agreement at the end of the term regardless of reason shall be treated as a termination by the Company without cause; (iv) the Company shall pay Dr. Smith her base salary and COBRA premiums (a) for one year in the event of a termination of the agreement by Dr. Smith for other than good reason and (b) during any period during which she is bound by non-competition, non-solicitation or similar covenants with the Company (such payments shall not be made during the time Dr. Smith is also receiving payments under (iii) or (iv)(a)); (v) Dr. Smith was granted an option to purchase 1,500,000 shares of Common Stock at a per share exercise price equal to the closing price of the Common Stock on the date of the amendment, vesting as to 500,000 shares on each of the date of grant, December 31, 2011 and December 31, 2012; (vi) all other unvested options held by Dr. Smith were immediately vested; (vii) any vested options previously or hereafter granted to Dr. Smith during the remainder of the term shall remain exercisable following termination of employment for the full option term until the expiration date; (viii) the Company agreed that, with the exception of the period of time during which Dr. Smith is a Company affiliate and for 90 days thereafter (during which time any shares owned by or issued to Dr. Smith will bear the Company’s standard affiliate legend), the Company will not place legends on shares on Common Stock owned by Dr. Smith restricting the transfer of such shares so long as such shares are sold under an effective registration statement, pursuant to Rule 144 or are eligible for sale under Rule 144 without volume limitations; and (ix) if Dr. Smith ceases to be employed by the Company and for so long as she continues to own shares of Common Stock the sale of which would require that the current public information requirement of Rule 144 be met, the Company will use its reasonable best efforts to timely meet those requirements or obtain appropriate extensions or otherwise make available such information as is required. Except as set forth in the amendment, the Agreement remains unchanged.  Pursuant to the modification on April 4, 2011 of Dr. Smith’s stock options, the Company recognized $723,000 of incremental compensation cost during the three months ended June 30, 2011.

The weighted average estimated fair value of stock options granted in the three and six months ended June 30, 2011 was $1.21 and $1.14, respectively. The fair value of options at the date of grant was estimated using the Black-Scholes option pricing model. The expected volatility is based upon historical volatility of the Company’s stock. The expected term is based upon observation of actual time elapsed between date of grant and exercise of options for all employees.

The range of assumptions used in calculating the fair values of options granted during the three and six months ended June 30, 2011 and 2010, respectively, were as follows:

	Three Months Ended June 30,		Six Months Ended June 30,
	2011	2010	2011	2010
Expected term (in years)	1 to 10	6 to 10	1 to 10	6 to 10
Expected volatility	75% - 83%	95% - 100%	75% - 85%	95% - 122%
Expected dividend yield	0%	0%	0%	0%
Risk-free interest rate	0.19% - 3.07%	2.32% - 3.58%	0.19% - 3.07%	2.32% - 3.80%

Activity related to stock options outstanding under the U.S. Equity Plan was as follows:

						Weighted
						Average
				Weighted		Remaining
	Number of			Average		Contractual		Aggregate
	Shares			Exercise Price		Term (years)		Intrinsic Value
Balance at December 31, 2010		9,932,214		$	1.87
Granted		6,909,600			1.61
Exercised		(5,000	)		1.42
Expired		-			-
Cancelled		(817,152	)		1.78
Balance at June 30, 2011		16,019,662			1.76		7.7	$	153,343
Options Exercisable at June 30, 2011		8,118,085			1.86		6.9

Activity related to stock options outstanding under the Non U.S. Equity Plan was as follows:

						Weighted
						Average
				Weighted		Remaining
	Number of			Average		Contractual		Aggregate
	Shares			Exercise Price		Term (years)		Intrinsic Value
Balance at December 31, 2010		3,100,000		$	2.02
Granted		650,000			1.74
Exercised		-			-
Expired		-			-
Cancelled		(683,334	)		2.07
Balance at June 30, 2011		3,066,666			1.95		8.8	$	9,000
Options Exercisable at June 30, 2011		816,666			2.17		8.4

The total fair value of shares vested during the three and six months ended June 30, 2011 was approximately $2,357,800 and $2,754,200, respectively.

The number of remaining shares authorized to be issued under the various equity plans at June 30, 2011 are as follows:

				Non US Equity
	US Equity Plan			Plan
Shares Authorized for Issuance under 2003 Equity Plan		2,500,000			-
Shares Authorized for Issuance under 2009 Equity Plan		17,750,000			-
Shares Authorized for Issuance under Non US Equity Plan		-			8,700,000
		20,250,000			8,700,000
Outstanding Options - US Equity Plan		(16,019,662	)		-
Exercised Options		(97,500	)		-
Outstanding Options - Non US Equity Plan		-			(3,066,666	)
Restricted stock or equity grants issued under Equity Plans		(2,401,005	)		(885,000	)
Total common shares remaining to be issued under the Equity Plans		1,731,833			4,748,334

As of June 30, 2011, there was approximately $10,005,100 of total unrecognized compensation costs related to unvested stock option awards of which approximately $7,831,800 is related to stock options that vest over a weighted average life of 1.82 years. The remaining balance of unrecognized compensation costs of $2,173,300 is related to stock options that vest based on the accomplishment of business milestones which expense begins to be recognized when such milestones become probable of being achieved.

Changes in Stockholders Equity:

The changes in Stockholders Equity for the six months ended June 30, 2011, were as follows:

	Series B Convertible								Additional		Accumulated Other					Non-Controlling
	Preferred Stock				Common Stock				Paid in		Comprehensive		Accumulated			Interest in
	Shares		Amount		Shares		Amount		Capital		Income		Deficit			Subsidiary			Total
Balance at January 1, 2011		10,000	$	100		64,221,130	$	63,813	$	141,137,522	$	2,779,066	$	(95,320,620	)	$	37,827,738		$	86,487,619
Exercise of stock options		-		-		5,000		5		7,095		-		-			-			7,100
Share-based compensation		-		-		1,256,450		1,256		6,654,739		-		-			-			6,655,995
Proceeds from issuance of common stock		-		-		4,369,375		4,369		5,903,354		-		-			-			5,907,723
Shares issued for charitable contribution		-		-				409		606,955		-		-			-			607,364
Dividends on Series E preferred stock		-		-		364,780		365		494,547		-		(357,414	)		-			137,498
Foreign currency translation		-		-		-		-		-		1,510,497		-			(9,651	)		1,500,846
Net income attributable to non-controlling interest		-		-		-		-		-		-		-			541,108			541,108
Dividends to related party		-		-		-		-		-		-		-			(11,726,099	)		(11,726,099	)
Investment in Athelos		-		-		-		-		-		-		-			927,000			927,000
Net loss attributable to NeoStem, Inc.		-		-		-		-		-		-		(20,778,757	)		-			(20,778,757	)
Repayment of Series E Preferred Principal		-		-		1,430,552		1,430		1,939,458		-		-			-			1,940,888
Shares issued in PCT Merger		-		-		10,600,000		10,600		17,855,596		-		-			-			17,866,196
Balance at June 30, 2011		10,000	$	100		82,247,287	$	82,247	$	174,599,266	$	4,289,563	$	(116,456,791	)	$	27,560,096		$	90,074,481