UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

 

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 [X] No [   ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

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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 [X]

 

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:  5,341,112 as of August 11, 2008.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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MEDISTEM INC.

 

 

 

Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

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PART I - FINANCIAL INFORMATION

 

Forward-Looking Information

 

The statements contained in this Quarterly Report on Form 10-Q that are not historical fact are forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995), within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The forward-looking statements contained herein are based on current expectations that involve a number of risks and uncertainties. These statements can be identified by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,” “should,” “intend,” “plan,” “could,” “is likely,” or “anticipates,” or the negative thereof or other variations thereon or comparable terminology, or by discussions of strategy that involve risks and uncertainties. The Company wishes to caution the reader that these forward-looking statements that are not historical facts are only predictions. No assurances can be given that the future results indicated, whether expressed or implied, will be achieved. While sometimes presented with numerical specificity, these projections and other forward-looking statements are based upon a variety of assumptions relating to the business of the Company, which, although considered reasonable by the Company, may not be realized. Because of the number and range of assumptions underlying the Company's projections and forward-looking statements, many of which are subject to significant uncertainties and contingencies that are beyond the reasonable control of the Company, some of the assumptions inevitably will not materialize, and unanticipated events and circumstances may occur subsequent to the date of this report. These forward-looking statements are based on current expectations and the Company assumes no obligation to update this information. Therefore, the actual experience of the Company and the results achieved during the period covered by any particular projections or forward-looking statements may differ substantially from those projected. Consequently, the inclusion of projections and other forward-looking statements should not be regarded as a representation by the Company or any other person that these estimates and projections will be realized, and actual results may vary materially. There can be no assurance that any of these expectations will be realized or that any of the forward-looking statements contained herein will prove to be accurate.

 

 

 

 

 

 

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Item 1.  Financial Statements.

 

Medistem Inc.

Balance Sheets

(unaudited)

 

 

 

 

See accompanying notes to unaudited financial statements.

 

 

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Medistem Inc.

Statements of Operations

(unaudited)

 

 

 

⁽¹⁾  Includes consolidation of licensee, ICM, which was subsequently deconsolidated at December 31, 2007

⁽²⁾  Retroactively adjusted for the 1-for-25 reverse stock split described in Note 1

 

 

See accompanying notes to unaudited financial statements.

 

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Medistem Inc.

Statements of Cash Flows

(unaudited)

 

 

 

⁽¹⁾  Includes consolidation of licensee, ICM, which was subsequently deconsolidated at December 31, 2007

 

 

See accompanying notes to unaudited financial statements.

 

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Note 1:  Background and Basis of Presentation

 

Medistem Inc., formerly Medistem Laboratories, Inc., (“Medistem” or the Company) is an adult stem cell biotechnology company that discovers, develops, and commercializes adult stem cell products that address serious medical conditions.  The company's primary focus is entry to clinical trials of its novel “universal donor” stem cell, the Endometrial Regenerative Cell (“ERC”), with its initial product candidates aimed at the treatment of critical limb ischemia and ischemic heart disease.

 

Prior to December 31, 2007, the Institute for Cellular Medicine in Costa Rica (“ICM”), a licensee of Medistem technology, met the qualifications for consolidation under  Financial Accounting Standards Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 41” as amended December 2003 (“FIN No. 46”).  Effective December 31, 2007, the license agreement was modified such that the licensee no longer met the requirements for consolidation.  No historical periods have been restated.  However, the statements of operations included herein include the financial results of ICM through December 31, 2007, the “trigger” date of de-consolidation.  

  

The accompanying unaudited financial statements as of June 30, 2008 and for the three and six months ended June 30, 2008 and 2007, respectively, have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for audited financial statements. In the opinion of Medistem's management, the interim information includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods. The footnote disclosures related to the interim financial information included herein are also unaudited. Such financial information should be read in conjunction with the consolidated financial statements and related notes thereto as of December 31, 2007 and for the year then ended included in Medistem's annual report on Form 10-K for the fiscal year ended December 31, 2007.  

 

The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Significant estimates and assumptions have been used by management in conjunction with the estimated useful lives of fixed assets and the computation of stock-based compensation.   Actual results could differ from these estimates.

 

On July 10, 2008, the holder of a majority of the outstanding common stock of the Company approved an amendment to the Company's Articles of Incorporation to change the name to “Medistem Inc.”  The Company's Board of Directors and majority stockholder approved the name change in order to avoid confusion with respect to its business activities.  Also on July 10, 2008, the holder of a majority of the Company's outstanding common stock approved an amendment to the Company's Articles of Incorporation to effect a 1-for-25 reverse split of its common stock.  The Company's Board of Directors and majority stockholder believe the reverse stock split is a necessary step towards pursuing the Company's short- and mid-term financing objectives.    The Company  filed a Certificate of Amendment to the Articles of Incorporation with the Nevada Secretary of State on July 14, 2008, to effect the amendments described above.  The effective date of the name change and reverse stock split was August 11, 2008.

All share and per share amounts have been retroactively restated for the effects of the 1-for-25 reverse stock split.

 

Note 2:  Going Concern and Operations

 

The accompanying financial statements have been prepared assuming the Company will continue as a going concern.  The Company has incurred losses and operational cash outflows since inception, and has a limited history of revenues.  The future of the Company is dependent upon future profitable operations and the development of new business opportunities.  Management currently intends to raise additional funds via a combination of equity and/or debt offerings in order to finance the Company's operations until it achieves profitability.   

 

These conditions raise substantial doubt about the Company's ability to continue as a going concern. These financial statements do not include any adjustments that might arise from this uncertainty.

 

   

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Note 3:  Stock Options and Warrants

 

The Company utilizes restricted stock, stock options and warrants to compensate employees, officers, directors and consultants. Total stock based compensation expense (including options, warrants and restricted stock) was $158,998 and $797,741 for the three and six months ended June 30, 2008, respectively, and $332,856 and $713,593 for the three and six months ended June 30, 2007, respectively.

During March 2008, the Company issued an aggregate of 398,000 stock options to employees, officers, directors and consultants.  The aggregate value of such awards was $613,288 (excluding estimated forfeitures), which is being amortized on a straight-line basis over the vesting period.  Of the aggregate number of shares, 209,000 vested immediately, 179,000 will vest on December 31, 2008, and 10,000 will vest one year from the date of grant.

 

The fair value of each stock option and warrant grant is estimated on the date of grant using the Black-Scholes option pricing model with the following range of assumptions:

 

 

⁽¹⁾ Shares that immediately vest on grant date have a forfeiture rate of 0%

 

During periods prior to 2008, the Company utilized an average of the volatility of selected representative peer companies as it did not have sufficient trading history for its common stock.  During the first quarter of 2008, it determined that it then had sufficient trading history to utilize the volatility of its common stock in its Black-Scholes computations.

 

A summary of stock option transactions follows:

 

 

 

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The following summarizes Medistem's outstanding options and their respective exercise prices:  

 

 

No warrants were granted as compensation during the six months ended June 30, 2008.

 

The following is a summary of warrant activity:

 

 

The following summarizes Medistem's outstanding warrants and their respective exercise prices:

 

 

Medistem has an aggregate of $315,903 of unrecognized stock compensation expense (net of estimated forfeitures) related to options, warrants and restricted stock awards granted through June 30, 2008 that will be recognized over their respective vesting periods.

 

Note 4:  License Agreement

 

On March 20, 2008, the Company entered into a licensing agreement with a third party for the exclusive use of certain Medistem technologies and know-how in the countries of India, Malaysia, Pakistan, Bangladesh, Sri Lanka, Nepal, Maldives, Bhutan, Afghanistan, Indonesia and Thailand.  In exchange for the grant of the exclusive license, the Company will receive cash, a non-controlling equity interest in the licensee and a license to use and commercialize all of the third parties' current and future stem cell technologies.  At June 30, 2008, $175,000 of the receivable remains outstanding.

 

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The Company evaluated the revenue recognition related to the contract under the provisions of Staff Accounting Bulletin No. 101 (“SAB 101”).  Under the requirements of SAB 101, the Company determined that the cash component of the contract met the qualifications for revenue recognition.  The Company recognized $250,000 in royalty revenue during the three months ended March 31, 2008 associated with this agreement.  The Company did not recognize any revenue associated with both the equity interest in the licensee and the rights to commercialize current and future technologies as such items did not meet the criteria for recognition under SAB 101.  

 

Note 5:  Net Loss Per Share

 

Net loss per share is calculated using the weighted average number of shares of common stock outstanding during the period.  As Medistem incurred a net loss in all periods presented, the following dilutive securities were excluded from the calculation of earnings per share as the effects were anti-dilutive:

 

 

Note 6:  Related Party Transactions

 

During the three and six months ended June 30, 2008, the Company recognized net revenues of $160,200 and $281,145 from its royalty agreement with ICM, an entity controlled by the Company's Chairman of the Board, President and majority shareholder.  At June 30, 2008, the Company was owed an aggregate of $863,243 from ICM, consisting of royalties receivable of $151,742 and other amounts due of $711,501.

 

In connection with the licensing agreement described in Note 4, the third party licensee also entered into a separate contractual arrangement with ICM, an entity controlled by the Company's Chairman of the Board and majority shareholder, to provide training and technical support that could not otherwise be provided by Medistem.

 

During the six months ended June 30, 2008, the Company paid an aggregate of $7,990 to Rivers & Moorehead PLLC, an entity controlled by the Company's Chief Financial Officer, for Sarbanes-Oxley related consulting services.  

 

Note 7:  Commitments and Contingencies

 

Medistem is from time to time involved in legal proceedings arising from the normal course of business.  There are no pending or threatened legal proceedings as of June 30, 2008.

 

Note 8:  Risks and Uncertainties

 

A substantial portion of the Company's revenues are derived from licensing activities conducted outside the United States.  The Company's licensing revenues are subject to various political, economic, and other risks and uncertainties inherent in the countries in which the licensees operate. Among other risks, the Company's licensing revenues may be subject to the risks of restrictions on transfer of funds; export duties, quotas and embargoes; domestic and international customs and tariffs; changing taxation policies; foreign exchange restrictions; and political conditions and governmental regulations.

 

 

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Note 9:  Recent Accounting Pronouncements

 

In December 2007, the FASB issued SFAS No 160, “Noncontrolling Interests in Consolidated Financial Statements; an amendment of ARB No. 51” (“SFAS 160”).  SFAS 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  The effect of adopting SFAS 160 is not expected to have a material impact on Medistem's financial statements.

 

Note 10:  Subsequent Event

 

On July 14, 2008, the Company issued 250,000 warrants to a third-party for legal services.  All warrants were priced at the closing stock price on the date of grant.

 

As described in Note 1, on August 11, 2008, the Company changed its name to “Medistem Inc.” and effected a 1-for-25 reverse split of its common stock.

 

 

 

 

 

 

 

 

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Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis provides information that management believes is relevant for an assessment and understanding of our results of operations and financial condition.  The following selected financial information is derived from our historical financial statements and should be read in conjunction with such financial statements and notes thereto set forth elsewhere herein and the “Forward-Looking Statements” explanation included herein.  This information should also be read in conjunction with our audited historical consolidated financial statements which are included in our Form 10-K for the fiscal year ended December 31, 2007 filed with the Securities and Exchange Commission on March 10, 2008.

 

Overview

 

Founded in 2005, Medistem Inc. is a U.S. based biotechnology company focused on the development and commercialization of adult stem cell-based technologies used in the treatment of inflammatory and degenerative diseases.

 

Our primary focus is commercialization of our novel stem cell type, termed the “endometrial regenerative cell” (“ERC”), whose discovery won the 2007 Publication of the Year Award in Medicine from BioMed Central, a publisher of more than 200 peer reviewed journals.  Sourced from menstrual blood, these cells originate in the endometrium where they are believed to have one vital function: to make new blood vessels (angiogenesis).  Stimulation of this process is believed to offer hope for patients with circulatory disorders in which certain tissues are lacking oxygen because of restricted blood flow.

 

Our initial product candidates are aimed at the treatment of critical limb ischemia (1.1 million people in the USA) and ischemic heart disease (18.5 million people in the USA).  These are conditions for which we believe currently approved therapies are insufficient.

 

The ability of stem cells to produce blood vessels is widely known and at least four other companies are in preclinical or clinical trials using stem cells for critical limb ischemia.  However, such therapies either consist of painful invasive procedures (such as bone marrow extraction) or utilize a source of stem cells (placental or umbilical cord blood) that is expensive to manufacture and requires immunologic matching. The unique nature of ERC cells and their ample supply provide competitive advantages to other stem cell types for the treatment of these conditions.

 

Together with our management, researchers from Scripps Research Institute, University of Western Ontario and Indiana University have assisted in the characterization of Medistem's cells and the development of written protocols for initiating FDA approved clinical trials.  We plan to submit our Investigational New Drug Application (IND) with the FDA in late 2008.

 

Our management has significant experience in discovering cellular based therapeutics and translating these into commercial opportunities, and is experienced at developing intellectual property positions and navigating the FDA approval process.  We have developed an extensive collaborator network of leading scientists from world-renowned institutions and continually add to this network.  Centered on the strengths of management, our core business strategy is to focus on initial discoveries and early-stage development.  If early clinical trials are successful, we expect to monetize our discoveries through outlicensing, co-development or outright sale to third parties.

 

We operate a lean infrastructure and our corporate expenses are largely self-funded through licensing revenues.

 

License Activities

 

Several technologies, trade secrets, and know-how have been licensed to external parties involved in development and application of regenerative technologies. We have engaged in recent licensing activities with entities in Costa Rica and India.  These licensing activities permit us to finance a portion of our research and development activities.

 

 

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Recent Developments

 

Discovery of ERC Cells Wins Medicine Publication of the Year

 

In March 2008, a recent article co-authored by our CEO, Dr. Thomas Ichim, and Dr. Xiaolong Meng entitled, "Endometrial regenerative cells: a novel stem cell population" received BioMed Central's research article of the year in medicine award. The award recognizes excellence in research that has been made universally accessible through open access publication in one of BioMed Central's more than 170 peer reviewed scientific journals. The award was presented to Dr. Ichim and Dr. Meng at the Royal Society of Medicine in London, England.

 

ERC Type Cells Receive Independent Verification

 

Aspects of our work were recently successfully reproduced and advanced by scientists at the prestigious Keio University School of Medicine located in Tokyo, Japan. In an independent publication authored by scientists at the Keio University School of Medicine, a stem cell type found in menstrual blood similar to our ERC cells was recently described as capable of not only becoming heart tissue in vitro, but also having ability to repair injured hearts in animal models of heart attacks.  

 

Expansion of Strategic Advisory Board

 

During the first quarter of 2008, we expanded our strategic advisory board to include Dr. Nora Sarvetnick of the Scripps Research Institute, La Jolla, California.  Dr. Sarvetnick is a widely respected research scientist and a collaborator of ours on the testing of the ERC cells in animal studies.  Dr. Sarvetnick joined the faculty at The Scripps Research Institute in 1990 and in 2000 became a full Professor in the Department of Immunology.  She has over 190 peer reviewed publications and has received a number of international awards, which include a Career Development Award from the Juvenile Diabetes Foundation (1990-1993) and a Multidisciplinary Diabetes Program Project Award from the Juvenile Diabetes Foundation (1995-2000). She has also twice been awarded an American Diabetes Association Mentor-Based Postdoctoral Fellowship Program Award (1996-2002 and 2005-2009).

 

Dr. Sarvetnick joins the existing SAB board members Drs. Keith March, Mike Murphy, and Kyle Chan.

 

New Licensing Activities

 

On March 20, 2008, we entered into a licensing agreement with an Indian company for the exclusive use of Medistem technologies and know-how in the countries of India, Malaysia, Pakistan, Bangladesh, Sri Lanka, Nepal, Maldives, Bhutan, Afghanistan, Indonesia and Thailand.  In exchange for the grant of the exclusive license, we received cash, a non-controlling equity interest in the licensee and a license to use and commercialize all of the licensee's current and future stem cell technologies.  The Company recognized revenue of $250,000 during the first quarter of 2008 associated with this licensing agreement.

 

Change in Officers and Directors

 

On March 18, 2008, our board of directors appointed Dr. Thomas Ichim as our Chief Executive Officer. Dr. Ichim, our former head of research and development activities, succeeds Neil Riordan who continues serving as President and Chairman of the Board of Directors.  The change was made as part of our ongoing succession planning and enables Dr. Riordan to devote his efforts to directing research and expanding market opportunities for Medistem.   Dr. Ichim was also elected to our Board of Directors.

 

Effective March 31, 2008, John Peterson retired from our Board of Directors.

 

Effective May 16, 2008, Chris McGuinn resigned from his position as Chief Operating Officer of our company.

 

 

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Results of Operations

 

Effective December 31, 2007, we renegotiated our license agreement with ICM.  Because of the modification to the license agreement, ICM no longer meets the criteria for consolidation and was deconsolidated in our financial statements beginning December 31, 2007. The financial data presented in this quarterly report for all periods prior to December 31, 2007 include the operating results of ICM and Medistem as de-consolidation did not occur until December 31, 2007.    

 

Revenues  

 

 

Revenues consist of fees generated through licensing activities.  For the three months ended June 30, 2008, revenues consisted of royalties from our license agreement with ICM.  For the six months ended June 30, 2008, revenues included $250,000 related to the new license agreement entered into for the use of our technologies in India and certain countries in Asia and the Middle East, and $281,145 of royalties from our license agreement with ICM.  During the three and six months ended June 30, 2007, ICM was consolidated in our results of operations and revenues attributable to ICM totaled $385,398 and $855,528 respectively.  On a pro forma basis, had our renegotiated license agreement with ICM been effective at January 1, 2007 (resulting in the deconsolidation of ICM) our revenues would have been $162,510 and $263,736 during the three and six months ended June 30, 2007 respectively.

 

Factors that influence future revenue growth include our ability to develop and refine commercially attractive know-how and intellectual property, finding new licensing opportunities, the effectiveness of our licensees' marketing activities and the growth of their businesses, medical acceptance of adult stem cell related treatments, the expansion of our methods using adult stem cells to combat disease, the continued stability and desirability of licensee clinic locations, and client satisfaction rates.

 

Cost of Services

 

 

Cost of services consists of expenses related to the performance of our license agreements.  Expenses in the first quarter of 2008 consist primarily of stock based compensation charges for awards granted to licensee physicians in 2005.  Such awards were fully vested as of March 31, 2008.  We expect our future cost of services to be minimal with respect to our existing licensing agreements.  

 

During the three and six months ended June 30, 2007, ICM was consolidated in our results of operations.  Cost of services during this period includes costs associated with revenue-generating activities of this entity.  The decrease in cost of services is the result of ICM's deconsolidation.

 

Stock-based compensation charges included in cost of services were $4,373 and $208,158 for the three and six months ended June 30, 2008 and $167,807 and $333,549 for the three and six months ended June 30, 2007, respectively.  

 

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Research and Development

 

 

Research and development expenses decreased for the three and six months ended June 30, 2008 as compared with the three and six months ended June 30, 2007 due primarily to non-recurring investments made in 2007 to initiate collaborative research as well as lower stock-based compensation charges in 2008 due to the vesting of certain awards.

 

Research and development costs include research staff salaries, fees to universities for research collaborations, patent investigational expenditures, application filing fees, patent attorney costs, and other research and development costs.  Factors that influence our amount of research and development costs include the number of patents to be pursued, the volume of clinical trials to be conducted, and the amount of medical discoveries or breakthroughs that merit further research and development.

 

The difference in our research and development costs between the three and six month periods ended June 30, 2008 and June 30, 2007, respectively, were not significantly attributable to ICM's deconsolidation.

 

Professional Fees

 

 

Professional fees include payments made to consultants and other professionals for a variety of outsourced services, including legal, accounting, tax, business development, business process design and execution and marketing.

 

Professional fees decreased for the three and six months ended June 30, 2008 compared with the three and six months ended June 30, 2007 partially due to decreased legal fees and the effects of the deconsolidation of ICM (which incurred $13,968 and $21,886 in profession fees for the three and six months ended June 30, 2007 respectively).  Legal fees fluctuate depending on the amount of compliance, litigation and general corporate related activities that are being pursued.  Professional fees also decreased as the result of decreased media, investor relations and internet consulting in 2008 as part of cost containment initiatives.

 

General and Administrative

 

 

 

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General and administrative expenses include stock based compensation, salaries, rent, utilities, general office expenses, insurance and other costs necessary to conduct business operations.

 

General and administrative expenses decreased in the three months ended June 30, 2008 as compared to June 30, 2007 due to the effects of the deconsolidation of ICM (which incurred $148,862 in general and administrative expenses for the three months ended June 30, 2007) and a non-recurring loss of $272,900 on a settlement of a contractual dispute with a vendor that occurred in 2007.  General and administrative expenses also decreased for the six months ended June 30, 2008 as compared to June 30, 2007 due to the effects of the deconsolidation of ICM (which incurred $263,136 in general and administrative expenses for the six months ended June 30, 2007) and the effects of the vendor settlement in 2007, partially offset by increased stock based compensation in 2008.   The stock based compensation expense included in general and administrative was $143,676 and $565,495 for the three and six months ended June 30, 2008 and $149,073 and $321,303 for the three and six months ended June 30, 2007 respectively.

 

We utilize stock-based compensation as a long-term incentive and as a mechanism for reducing our cash outlays to key employees, officers, directors and consultants.  The amount of stock based compensation to be recognized is affected by the value of each award and their respective vesting periods.  We utilize the Black-Scholes model for valuing stock option awards which is affected by changes in several variables, including volatility.  For awards granted during 2006 and 2007 our volatility varied between 44 percent and 62 percent as compared to volatility of 118 percent in 2008.  During periods prior to 2008, we utilized an average of the volatility of selected representative peer companies as we did not have sufficient trading history for our common stock.  During the first quarter of 2008, we determined that we had a sufficient trading history to utilize the volatility of our common stock in our Black-Scholes computations.  

 

Net Loss

 

 

Our net loss decreased for the three and six months ended June 30, 2008 as compared to the three months ended June 30, 2007, primarily due to the effects of the deconsolidation of ICM and reduced operating expenses, partially offset by revenues associated with a new licensing agreement, each of which is described above.

 

Liquidity and Capital Resources

 

During the six months ended June 30, 2008, we incurred $6,793 in operating cash outflows and $16,374 of investing cash outflows, which were financed by existing cash on hand.  At June 30, 2008, we had cash and cash equivalents totaling $156,284, working capital of $274,017, other amounts due from licensees of $711,501, liabilities of $248,348 and stockholders' equity of $1,007,588.

 

Sources and Uses of Cash

 

We require cash to fund our research and development activities, to build our operating infrastructure, to pay our personnel and management team and to finance continued growth.

 

 

 

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We expect that the cash flows from our licensing arrangements, together with existing cash on hand and the repayment of outstanding balances, will permit us to finance our existing operating activities for the next twelve months.  However, the operations of ICM are subject to certain degrees of uncertainty and could be negatively affected by the effects of competition and local government regulations.  This could impair or restrict ICM's ability to make its required payments under the license agreement, which could adversely affect our cash flows.  There can be no assurance that existing license agreements will provide sufficient cash flows to finance our operations.  Additionally, we are currently pursuing the expansion of our biotech activities in the United States and to do so we will need to secure additional financing through future equity or debt offerings or both.  There can be no assurance that such equity or borrowings will be available or, if available, will be at rates or prices acceptable to us.

 

The accompanying financial statements have been prepared assuming we will continue as a going concern.  We have incurred losses and operational cash outflows since inception, and have a limited history of revenues.  Our future is dependent upon future profitable operations and the development of new business opportunities.  We currently intend to raise additional funds via a combination of equity and/or debt offerings in order to finance our operations until we achieve profitability.  

 

These conditions raise substantial doubt about our ability to continue as a going concern. These financial statements do not include any adjustments that might arise from this uncertainty.

 

Analysis of Cash Flows

 

Net cash used in operating activities was $6,793 during the six months ended June 30, 2008.  These cash flows consisted of payments for legal, professional and consulting expenses, officer salaries, rent and other expenditures necessary to develop our business infrastructure, and expand our research and development portfolio and collaborative efforts, which were almost entirely offset by cash collections from license agreements.  Net cash used in investing activities was $16,374 for the six months ended June 30, 2008, consisting of minor payments made to vendors on behalf of ICM.  Prior to our deconsolidation of ICM, many vendors of ICM were paid directly by Medistem and we have transitioned all but a few of these relationships directly to the licensee.  There were no financing activities during the three months ended June 30, 2008.  

 

Net cash used in operating activities was $266,485 during the six months ended June 30, 2007. These cash flows consisted of payments for legal, professional and consulting expenses, medical supplies, rent and other expenditures necessary to develop our business infrastructure. Net cash used in investing activities was $167,255 for the six months ended June 30, 2007, consisting of net expenditures for medical and laboratory equipment, leasehold improvements and other fixed assets. There were no financing activities during the six months ended June 30, 2007.  

 

We do not currently have any off-balance sheet arrangements.  

 

Recent Accounting Pronouncements

 

In December 2007, the FASB issued SFAS No 160, “Noncontrolling Interests in Consolidated Financial Statements; an amendment of ARB No. 51” (“SFAS 160”).  SFAS 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  SFAS 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  The effect of adopting SFAS 160 is not expected to have a material impact on our financial statements.

 

Inflation and Seasonality

 

We do not believe that our operations are significantly impacted by inflation.  Our business is not seasonal in nature.

 

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

 

As of June 30, 2008, we did not participate in any market risk-sensitive commodity instruments for which fair value disclosure would be required under Statement of Financial Accounting Standards No. 107. We believe that we are not subject in any material way to other forms of market risk, such as foreign currency exchange risk or foreign customer purchases (of which there were none in the periods set forth in this report) or commodity price risk.

 

 

 

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Item 4T.  Controls and Procedures.

 

In accordance with Rule 13a-15(b) or Rule 15d-15(b) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report on Form 10-Q, Medistem's management evaluated, with the participation of Medistem's principal executive officer and principal financial officer, the effectiveness of the design and operation of Medistem's disclosure controls and procedures (as defined in Rule 13a-15(e) or Rule 15d-15(e) under the Exchange Act). Based on their evaluation of these disclosure controls and procedures, Medistem's chief executive officer and chief financial officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report.

 

There has been no change in Medistem's internal control over financial reporting that occurred during the quarter covered by this report that has materially affected, or is reasonably likely to materially affect, Medistem's internal control over financial reporting.

 

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless how remote.

 

PART II - OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

As of the date of this report, Medistem is not currently involved in any legal proceedings.

 

Item 1A.  Risk Factors.

 

There have been no changes to the risk factors identified in our annual report on Form 10-K for the year ended December 31, 2007 and they are hereby incorporated by reference herein.

 

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds.

 

None.

 

Item 3.  Defaults Upon Senior Securities.

 

None.

 

Item 4.  Submission of Matters to a Vote of Security Holders.

 

None.

 

Item 5.  Other Information.

 

None.

 

 

 

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Item 6.  Exhibits.

 

Exhibit Number	Description	By Reference from Document
31.1	Certification of Chief Executive Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934	*
31.2	Certification of Chief Financial Officer Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934	*
32.1	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	*
32.2	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	*

*  

Filed herewith

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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