10-K 1 cbmg_10k.htm ANNUAL REPORT Blueprint
 

  UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
———————
FORM 10-K
———————
 
☒     ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the Fiscal Year Ended December 31, 2019
 
OR
 
☐     TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____ to _____
 
Commission File Number: 001-36498
 
———————
CELLULAR BIOMEDICINE GROUP, INC.
(Exact name of registrant as specified in its charter)
———————
 
Delaware
 
86-1032927
State of Incorporation
 
IRS Employer Identification No.
 
1345 Avenue of Americas, 15th Floor
New York, New York 10105
(Address of principal executive offices)
 
 (347) 905 5663
(Registrant’s telephone number)
 
Securities registered pursuant to Section 12(b) of the Exchange Act:
 
Title of Each Class
Trading Symbol(s)
Name of Each Exchange on Which Registered
Common Stock, par value $0.001
CBMG
Nasdaq Global Select Market
 
Securities registered pursuant to Section 12(g) of the Exchange Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☑ No 
 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☑ No 
 
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 ☑  
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑  
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
 
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☑ No
 
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter – $200,634,545 as of June 30, 2019.
 
Indicate the number of shares outstanding of each of the registrant’s classes of common stock, as of the latest practicable date: As of February 24, 2020, there were 19,355,292 shares of common stock outstanding.
 
Documents Incorporated By Reference – Portions of the Registrant’s definitive Proxy Statement for its 2020 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K.
 
THE INFORMATION REQUIRED BY PART III OF THIS ANNUAL REPORT ON FORM 10-K, TO THE EXTENT NOT SET FORTH HEREIN, IS INCORPORATED BY REFERENCE FROM THE REGISTRANT’S DEFINITIVE PROXY STATEMENT RELATING TO THE ANNUAL MEETING OF STOCKHOLDERS, WHICH DEFINITIVE PROXY STATEMENT SHALL BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION WITHIN 120 DAYS AFTER THE END OF THE FISCAL YEAR TO WHICH THIS ANNUAL REPORT ON FORM 10-K RELATES.
 


 
 
CELLULAR BIOMEDICINE GROUP, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED December 31, 2019
 
TABLE OF CONTENTS
 
 
 
 
Page
PART I
 
 
     
 
 
 
     
 
4
 
 
 
     
 
25
 
 
 
     
 
53
 
 
 
     
 
53
 
 
 
     
 
53
 
 
 
     
 
53
 
 
 
     
PART II
 
 
     
 
 
 
     
 
54
 
 
 
     
 
59
 
 
 
     
 
60
 
 
 
     
 
75
 
 
 
     
 
77
 
 
 
     
 
77
 
 
 
     
 
78
 
 
 
     
 
78
 
 
 
     
PART III
 
 
     
 
 
 
     
 
79
 
 
 
     
 
79
 
 
 
     
 
79
 
 
 
     
 
79
 
 
 
     
 
79
 
 
 
     
PART IV
 
 
     
 
 
 
     
 
80
 
 
 
     
 
81
 
 
 
     
 
 
82
 
 
2
 
 
Cautionary Note Regarding Forward-Looking Statements and Risk Factors
 
This Annual Report on Form 10-K (“Annual Report”), may contain “forward-looking statements” 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, or the Exchange Act and the Private Securities Litigation Reform Act of 1995, which are subject to the “safe harbor” created by those sections. Our actual results could differ materially from those anticipated in these forward-looking statements. This annual report on Form 10-K of the Company may contain forward-looking statements which reflect the Company’s current views with respect to future events and financial performance. The words “believe,” “expect,” “anticipate,” “intends,” “estimate,” “forecast,” “project” and similar expressions identify forward-looking statements. All statements other than statements of historical fact are statements that could be deemed to be forward-looking statements, including plans, strategies and objectives of management for future operations; proposed new products, services, developments or industry rankings; future economic conditions or performance; belief; and assumptions underlying any of the foregoing. Although we believe that we have a reasonable basis for each forward-looking statement contained in this report, we caution you that these statements are based on a combination of facts and factors currently known by us and our projections of the future, about which we cannot be certain. Such “forward-looking statements” are subject to risks and uncertainties set forth from time to time in the Company’s SEC reports and include, among others, the Risk Factors set forth under Item 1A below.
 
The risks included herein are not exhaustive. This annual report on Form 10-K filed with the SEC includes additional factors which could impact the Company’s business and financial performance. Moreover, the Company operates in a rapidly changing and competitive environment. New risk factors emerge from time to time and it is not possible for management to predict all such risk factors. Further, it is not possible to assess the impact of all risk factors on the Company’s business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. Forward-looking statements in this report include, but are not limited to, statements about:
 
the success, cost and timing of our product development activities and clinical trials;
our ability and the potential to successfully advance our technology platform to improve the safety and effectiveness of our existing product candidates;
the potential for our identified research priorities to advance our cancer and degenerative disease technologies;
our ability to obtain drug designation or breakthrough status for our product candidates and any other product candidates, or to obtain and maintain regulatory approval of our product candidates, and any related restrictions, limitations and/or warnings in the label of an approved product candidate;
public health crises, such as the coronavirus outbreak at the beginning of 2020;
the ability to generate or license additional intellectual property relating to our product candidates;
regulatory developments in China, the United States and other foreign countries;
the potential of the technologies we are developing (each as defined below);
fluctuations in the exchange rate between the U.S. dollar and the Chinese Yuan; and
our plans to continue to develop our manufacturing facilities.
 
Readers are cautioned not to place undue reliance on such forward-looking statements as they speak only of the Company’s views as of the date the statement was made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. 
 
Note Regarding Third-Party Information
 
This Annual Report includes data that we obtained from industry publications and third-party research, surveys and studies. Industry publications and third-party research, surveys and studies generally indicate that their information has been obtained from sources believed to be reliable, although they do not guarantee the accuracy or completeness of such information. This Annual Report also includes data based on our own internal estimates and research. Our internal estimates and research have not been verified by any independent source, and, while we believe the industry publications and third-party research, surveys and studies are reliable, we have not independently verified such data. Such third-party data and our internal estimates and research are necessarily subject to a high degree of uncertainty and risk due to a variety of factors, including those described in Item 1A—Risk Factors in this Annual Report. These and other factors could cause results to differ materially from those expressed in this Annual Report.
 
 
3
 
 
PART I
 
ITEM 1. BUSINESS.
 
As used in this annual 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 or deemed controlled companies.
 
Overview
 
We are a clinical-stage biopharmaceutical company committed to using our proprietary cell-based technologies to develop immunotherapies for the treatment of cancer and stem cell therapies for the treatment of degenerative diseases. We view ourselves as a leader in cell therapy industry through our diverse, multi-target, broad pipeline ranging from immuno-oncology, featuring CAR-T, TCR-T and TIL to regenerative medicine. Our focus is to bring our potentially best-in-class products to market while also aiming to reduce manufacturing cycle time and aggregate cost while striving to ensure quality products of cell therapies. We provide comprehensive and integrated research and manufacturing services throughout the discovery, development and manufacturing spectrum for cell-based technologies. We have two major components to our global strategy. First, we intend on developing our own internal pipeline, focusing on immune cell therapy, regenerative medicine, as well as other innovative biotechnology modalities that can leverage our infrastructure, human capital and intellectual property. Second, we plan to partner with leading companies to monetize our innovative technologies in markets where we do not currently have a presence and may also seek to bring their technologies to markets where we have infrastructure.
 
Our end-to-end platform enables discovery, development and manufacturing of cell-based therapies from concept to commercial manufacturing in a cost-efficient manner. The manufacturing and delivery of T cell therapies involve complex, integrated processes, comprised of isolating T-cells from patients, T cell enrichment, activation, viral vector transduction, expansion, harvest and fill-finish. Our in-house cell therapy manufacturing is comprised of a semi-automated, fully closed system and can manufacture high quality plasmids, and serum-free reagents as well as viral vectors for our immuno-oncology cell therapy products. Because we are vertically integrated, we are able to reduce the aggregate cost of cell therapies. We plan to build out our manufacturing capacity to scale for commercial supply at an economical cost. We hone our manufacturing process in our good manufacturing practice (GMP) facilities in China to achieve cycle time reduction, improve quality assurance and control and increase efficiency and early development to understand our therapies’ efficacy. Our other objective on institutionalizing our manufacturing process is portability and ease of tech transfer to other facilities and ease of deployment in future locations.
 
Our technologies include two major cell platforms:
 
A. Immune cell therapy for treatment of a broad range of cancer indications.
 
a. Hematological Cancer
 
i. Chimeric Antigen Receptor modified T-cells (CAR-T); and
 
b. Solid Tumors
 
i. T-cells with genetically modified, tumor antigen-specific T-Cell Receptors (TCRs); and
 
ii. Next-generation neoantigen-reactive, bio-markers based Tumor Infiltrating lymphocytes (TILs).
 
B. Regenerative Medicines using human adipose-derived mesenchymal progenitor cells (haMPC) for treatment of joint diseases.
 
a. Knee Osteoarthritis (Autologous & Allogeneic); and
 
b. Other degenerative and dermatologic diseases (assessing the feasibility).
 
 
4
 
 
Our initial target market is China, where we believe that our cell-based therapies will be able to help patients with significant unmet medical needs. For hematological cancer we have:
 
Finished enrolling patients for the second cohort in a Phase I dose escalation clinical study for our anti-B cell maturation antigen(“anti-BCMA”) CAR-T therapy for the treatment of multiple myeloma in China. Currently we are enrolling patients for the third cohort in China. The Phase Ia clinical study will enroll 22 patients in several stratified cohorts and has been expanded into multiple clinical sites. We have submitted our Investigational New Drug (IND) dossier to the New Medical Products Administration (NMPA) for approval for the Phase Ib study and are waiting for feedback.
 
Initiated first-in-human non-Hodgkin lymphoma clinical trials in China for our CD19 and CD20 bi-specific CAR-T products.
 
Achieved the first-in-human milestone and continued patient recruitment in China for our Phase I investigator initiated clinical trial of anti-CD20 CAR-T targeting anti-CD19 antibody or CAR-T treated, relapsed diffuse large B-cell lymphoma (DLBCL) and small B-cell lymphoma patients.
 
For solid tumors:
 
The clinical trial of Alpha-fetoprotein T-cell receptor (AFP-TCR-T) targeting hepatocellular carcinoma (HCC) has been approved by Zhongshan Hospital in Shanghai and our first HCC patient has been infused with our AFP TCR-T-cells in December 2019; and
 
We plan to launch non-small cell lung cancer (NSCLC) TIL clinical trials in the U.S. in the first half of 2021.
 
If the data from certain of our China-based, immuno-oncology clinical trials proves to be positive, we intend to submit IND applications with the U.S. FDA in order to conduct clinical trials in the United States.
 
On regenerative medicine development we have been approved by the NMPA in China to initiate a Phase II clinical trial of AlloJoin®, our allogenic haMPC therapy for the treatment of knee osteoarthritis, which is the first stem cell drug application approved by the NMPA for a Phase II clinical trial in knee osteoarthritis since the NMPA clarified its cell therapy regulations in December 2017. We launched our Phase II AlloJoin® clinical trial on September 12, 2019. Using data from our Phase IIb clinical studies before the NMPA clarified its cell therapy regulations, we have submitted our IND application with the NMPA for our autologous knee osteoarthritis. We have also been approved by the NMPA in China to initiate a Phase II clinical trial of ReJoin®, our autologous haMPC therapy for the treatment of knee osteoarthritis.
 
In addition to our own internal clinical pipelines, we have formed and plan to continue to seek partnerships with other cell therapy focused companies to expand their technology in the Chinese market. Our comprehensive capabilities have attracted inbound inquiries from global pharmaceutical companies seeking to improve the efficiency of their drug development process and/or to co-develop their therapeutic products by initially conducting investigator initiated trials in China, and upon verification on proof-of-concept (POC) to launch clinical trials in the U.S. and in China. We believe that we are positioned to capture opportunities from the rapid expansion of global pharmaceutical companies by leveraging our focus on cell manufacturing process improvement, which offers the benefits of improving product quality and creates cost savings. Positioned at the forefront of science, we believe our established clinical network in China will enable us to collaborate with these global firms as they seek to enter the Chinese market to develop in-house capabilities and infrastructure and to improve efficiency throughout the drug development process.
 
In September 2018, we executed a License and Collaboration Agreement (hereinafter Novartis LCA) with Novartis AG (Novartis) to manufacture and supply their U.S. FDA-approved CD19 CAR-T cell therapy product Kymriah® in China. Pursuant to the Novartis LCA agreement, we also granted Novartis a worldwide license to certain of our CAR-T intellectual property for the development, manufacture and commercialization of CAR-T products. We are entitled to an escalating single-digit percentage royalty of Kymriah®’s net sales in China. CBMG is responsible for the cost of bi-directional technology transfers between the two companies. We will receive collaboration payments equal to a single-digit escalating percentage of net sales of Kymriah® in China, subject to certain caps set forth under the Novartis LCA, for sales in diffuse large B-cell lymphoma and pediatric acute lymphoblastic leukemia indications and up to a maximum amount to be agreed upon for sales in other indications. We are also obligated to assist Novartis with the development of Kymriah® in China as Novartis may request and are responsible for a certain percentage of the total development cost for the development of Kymriah® in China for indications other than diffuse large B-cell lymphoma and pediatric acute lymphoblastic leukemia indications. As of December 31, 2019, we have achieved three major milestones on the technology transfer and collaboration with Novartis on commercialization of Kymriah®, specifically: process and analytical training, feasibility runs and an export license for feasibility/comparability.
 
On October 2, 2018, we executed a non-exclusive license agreement with the U.S. National Cancer Institute (“NCI”) for ten tumor infiltrating lymphocytes patents, pursuant to which we acquired rights to the worldwide development, manufacture and commercialization of autologous, tumor-reactive lymphocyte adoptive cell therapy products, isolated from tumor infiltrating lymphocytes for the treatment of non-small cell lung, stomach, esophagus, colorectal and head and neck cancer(s) in humans. We agreed to pay certain license fees for such license, including (i) an initial up-front cash payment; (ii) a de minimis non-refundable annual royalty that may be credited against any earned royalties due from net sales; (iii) a small single-digit percentage of net sales of the licensed products, payable on a semi-annual basis, which may be adjusted downward in the event that the Company must pay a license fee to a third party; (iv) an additional small single-digit sublicense fee on the fair market value of any consideration received for granting a sublicense; and (v) a milestone payment component tied to certain clinical and commercial developments. We have a unilateral right to terminate the license agreement. Th e NCI has the right to terminate the license agreement if CBMG (i) commits a material breach; (ii) fails to use commercially reasonable effort in developing the licensed products or processes; (iii) fails to achieve certain performance benchmarks; (iv) willfully makes a false statement; (v) is not keeping licensed products or processes reasonably available to the public after commercial use; (vi) cannot reasonably satisfy unmet health and safety needs; or (vii) cannot meet certain requirements by federal regulations. The license agreement will expire upon the expiration of the last to expire of the patent rights licensed pursuant thereto. Other than an initial upfront payment and a de minimis annual royalty payment, the Company has not paid any additional royalty under the license agreement as of December 31, 2019.
 
 
5
 
 
In order to expedite fulfillment of patient treatment, we have been actively developing technologies and products with strong intellectual property protection. CBMG’s worldwide exclusive license to the T Cell patent rights owned by Augusta University provides an opportunity to expand the application of CBMG’s cancer therapy-enabling technologies and to initiate clinical trials with leading cancer hospitals. On February 14, 2019, Augusta University granted us an exclusive, worldwide license with sublicense rights to its patent rights to Human Alpha Fetoprotein-Specific T Cell Receptor modified T-cells (AFP TCR-T). In consideration for the license granted, the Company agreed to pay the university a one-time, non-refundable, non-creditable license fee within 30 days of execution of the license agreement and a single-digit percent of running royalty on net sales of the licensed products. The Company also agreed to (a) use its commercially reasonable efforts to develop and conduct such research, development and validation studies as necessary or desirable to obtain all regulatory approvals to manufacture and market the licensed products in at least one country in certain major markets listed in the license agreement, and (b) upon receipt of such approvals, to use commercially reasonable efforts to market each licensed product in such country. The Company, at its sole expense, has the obligation to fund the costs of all research, development, preclinical and clinical trials, regulatory approval and commercialization of the licensed products. The license agreement will expire upon the termination of the Company’s obligation to pay royalty pursuant to the terms thereof. Upon expiration of the term, the license granted the Company will survive the expiration of the license agreement, and convert to a perpetual, fully paid up license. The Company may terminate the agreement, in its sole discretion, upon 30 days’ prior written notice to Augusta University and either party may terminate the license agreement upon or after the breach of a material provision of the agreement that is not cured within 45 days after notice thereof by the non-breaching party. The Company has not paid any royalty since there have not been any sales of licensed products as of the date of this report.
 
Corporate History
 
Headquartered in New York, the Company is a Delaware biopharmaceutical company focused on developing treatment for cancer and joint diseases for patients in China. The Company was formerly known as EastBridge Investment Group Corporation, originally incorporated in the State of Arizona on June 25, 2011, and reincorporated as Cellular Biomedicine Group, Inc. in the State of Delaware on January 18, 2013. The Company started its regenerative medicine business in China in 2009 and expanded to CAR-T therapies in 2014.
 
Recent Developments
 
On January 8, 2019, we initiated patient recruitment for CAR088 (anti-BCMA CAR-T) in China.
 
On January 17, 2019, our AlloJoin® Therapy for KOA got approved for Phase II trial in China.
 
On June 17, 2019, we initiated a Phase I clinical trial of CAR066 (anti-CD20 CAR-T) targeting previously anti-CD19 CAR-T treated, relapsed diffuse large B-cell lymphoma (DLBCL) and small B-cell lymphoma patients in China, and dosed the first CD19 CAR-T relapsed DLBCL patient.
 
On July 4, 2019, we submitted our autologous haMPC (ReJoin®) KOA Phase II IND filing with the NMPA under the new regulation.
 
On July 4, 2019, CD20-CD19 bi-specific CAR-Ts showed desired in vitro and in vivo anti-tumor activity. We plan to introduce an improved CAR-T manufacturing process with reduced manufacturing duration and better product quality controls for the bi-specific CD20-CD19 CAR-Ts targeting NHL, and the same development strategy is also utilized for our BCMA manufacturing platform. Based on scientific evidence known to the public, CD20-CD19 bi-specific CAR-Ts have shown reactivity against both single positive (CD20+ or CD19+) and double positive (CD20+CD19+) tumor targets.
 
On July 5, 2019, we filed a shelf 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 $200,000,000, which was declared effective by the Securities and Exchange Commission on July 16, 2019.
 
On August 27, 2019, we entered into a Facility Improvement and Process Validation Agreement with Duke University. Pursuant to this agreement, the Company paid for improvement of Duke’s GMP facility, Duke University agreed to conduct and the Company agreed to fund a tumor infiltrating lymphocytes clinical trial.
 
On September 12, 2019, we launched our allogenic haMPC AlloJoin® KOA Phase II clinical trial.
 
As of September 30, 2019, CBMG had a total of 11 labs (suites) that were certified as Biosafety Level-2 (BSL-2) meeting the local regulatory requirements for the handling of biological materials.
 
On October 2, 2019, we entered into a lease agreement to build a 22,000 square foot facility in Rockville, Maryland to expand R&D and to support clinical development in the U.S.
 
 
6
 
 
On December 7, 2019 we announced early data from our ongoing investigator initiated trial at an oral presentation titled “Novel Anti-BCMA CAR-T for Relapsed or Refractory Multiple Myeloma” at the 61st American Society of Hematology “ASH” annual meeting in Orlando, FL.
 
On December 23, 2019, we dosed our first patient in our clinical trial of AFP-TCR-T targeting HCC.
 
In the next 12 months, we aim to accomplish the following: 
 
Bifurcate our markets and launch clinical studies in the U.S. upon establishing good POC from the clinical studies in China and transfer the clinical assets from Shanghai to the U.S., including our quick cycle-time, highly differentiated, proprietary manufacturing process comprised of short cycle-time, semi-automation and closed system;
 
Advance our Rockville site’s research and development and manufacturing to support our clinical development in the U.S.;
 
Assess the feasibility of expanding our stem cell platform to include dermatology;
 
Execute clinical trial sponsorship with U.S.-based Principal Investigators (PI) to develop our clinical assets in the U.S.;
 
Collaborate with Duke University on TIL process development to improve cycle time and institutionalized scalability;
 
Explore the feasibility of establishing a new R&D and clinical manufacturing site in China to adapt to our rapid business expansion and explore the addition of Contract Development and Manufacturing Organization (CDMO) business to support certain specific market-oriented business strategies;
 
Evaluate our strategy to further increase our enterprise value and expand our capital market strategy;
 
Execute the technology transfer and align the manufacturing processes with the global CAR-T leader to support the development of the world’s first CAR-T therapy in China;
 
Explore and introduce a gene therapy technology platform, product development and manufacturing for our current business to create synergy with our cell therapy pipelines;
 
Bolster R&D resources to fortify our intellectual property portfolio and scientific development;
 
 
7
 
 
Evaluate and implement a digital data tracking and storage technology system for research and development, material management, GMP production and integrated clinical data management;
 
Evaluate emerging regenerative medicine technology platform for other indications and review recent developments in the competitive landscape;
 
Strengthen our Quality Management System (QMS) centralized document control system and electronic batch recording system for quality assurance, and laboratory information management system (LMS) for quality control;
 
Leverage our QMS system and our strong scientific expertise in both the U.S. and China;
 
Collaborate with multinational pharmaceutical companies to co-develop cell therapy products in China and possibly in the U.S.; and
 
Continue to implement International Organization for Standardization (ISO) 27001 standard to fortify our information assets security.
 
Key Anticipated 2020 Milestones
 
 
R&D Milestones

Completing construction of the Rockville R&D site to support our continued effort for pipeline development
Continued effort to support IIT and IND in China, and US IND for key CBMG clinical assets
Continuing to build a dynamic clinical pipeline for cell therapy, including new assets for CAR-T and TCR-T, and allogeneic cell therapy products
 
Manufacturing Milestones
 
Completing construction of the Rockville manufacturing site to support our clinical development in the U.S.
Continuing to assess the feasibility of expanding manufacturing capacity at new site(s) in both the U.S. and China
 
Clinical Milestones
 
Advancing haMPC Phase II trials in China for both AlloJoin® and ReJoin®
Continue enrollment into I/O programs in China for CAR088, CAR188, CAR066, EXPO-039 and AFP TCR-T
Advancing I/O programs in the U.S. for TIL Therapy (TIL1)
 
Regulatory Milestones
 
Filing an IND in the U.S. for TIL Therapy CAR088 and EXPO-039
Seeking additional INDs for other clinical programs in China
Expand clinical research programs in the U.S.
 
Other Milestones
 
Continuing collaboration with current and new clinical sites and 3A hospitals in China
Continuing translation and clinical collaboration with Duke University on TIL Therapy
Continuing collaboration with current partners in manufacturing and process development for next-generation cell therapies
Evaluating co-development and/or strategic partnerships for both in-licensing and out-licensing with high quality, multinational partners
 
 
8
 
 
 
Our operating expenses for year ended December 31, 2019 were in line with management’s plans and expectations. We had an increase in total operating expenses of approximately $10.6 million for the year ended December 31, 2019, as compared to the year ended December 31, 2018, which is primarily attributable to increased R&D expenses and clinical developments in 2019.
 
 
9
 
 
Corporate Structure
 
Our current corporate structure is illustrated in the following diagram:
 
 
 
Currently we have the following subsidiaries (including a controlled VIE entity):
 
Eastbridge Investment Corporation ("Eastbridge Sub"), a Delaware corporation, is a wholly owned subsidiary of the Company.

Cellular Biomedicine Group VAX, Inc. ("CBMG VAX"), a California corporation, is a wholly owned subsidiary of the Company.
 
Cellular Biomedicine Group HK Limited, a Hong Kong company limited by shares, is a holding company and wholly owned subsidiary of the Company.
 
Cellular Biomedicine Group Ltd. (Wuxi) (“CBMG Wuxi”) license number 320200400034410 (the “WFOE”) is a wholly foreign-owned entity that is 100% owned by Cellular Biomedicine Group HK Limited. This entity’s legal name in Chinese translates to “Xi Biman Biological Technology (Wuxi) Co. Ltd.” The WFOE controls and holds ownership rights in the business, assets and operations of Cellular Biomedicine Group Ltd. (Shanghai) (“CBMG Shanghai”) through variable interest entity (VIE) agreements. We conduct certain biopharmaceutical business activities through the WFOE, including research and development, technical support, technical service, technology transfer in the biomedical technology field, manufacturing of non-food, pharmaceutical polypeptides and medical devices (in vitro diagnostic reagents) extracted by biology; making foreign investments with its own funds; and cosmetics, sanitary products and biological agents wholesale and commission agents.
 
Cellular Biomedicine Group Ltd. (Shanghai) license number 310104000501869, is a PRC domestic corporation, which we control and hold ownership rights in, through the WFOE and the above-mentioned VIE agreements. This entity’s legal name in Chinese translates to “Xi Biman Biotech (Shanghai) Co., Ltd.” We conduct certain biopharmaceutical business activities through our controlled VIE entity, CBMG Shanghai, including clinical trials and certain other activities requiring a domestic license in the PRC. Chen Mingzhe and Lu Junfeng, together, are the record holders of all of the outstanding registered capital of CBMG Shanghai. Chen and Lu are also directors of CBMG Shanghai constituting the entire management of the same.
 
Beijing Agreen Biotechnology Co., Ltd. is a PRC domestic corporation and wholly owned subsidiary of CBMG Shanghai.
 
Wuxi Cellular Biopharmaceutical Group Ltd., established on January 17, 2017, is a PRC domestic corporation and wholly owned subsidiary of CBMG Shanghai.

 Shanghai Cellular Biopharmaceutical Group Ltd., established on January 18, 2017, is a PRC domestic corporation and wholly owned subsidiary of CBMG Shanghai.
 
 
10
 
 
Variable Interest Entity (VIE) Agreements
 
Through our wholly foreign-owned entity and 100% subsidiary, Cellular Biomedicine Group Ltd. (Wuxi), we control and have ownership rights by means of a series of VIE agreements with CBMG Shanghai. The shareholders of record for CBMG Shanghai were Cao Wei and Chen Mingzhe, who together owned 100% of the equity interests in CBMG Shanghai before October 26, 2016. On October 26, 2016, Cao Wei, Chen Mingzhe and Lu Junfeng entered into an equity transfer agreement and a supplementary agreement pursuant to which Cao Wei transferred his equity interests in CBMG Shanghai to Chen Mingzhe and Lu Junfeng. As a result of the transfer, each of Chen and Lu now owns a 50% equity interest in CBMG Shanghai. On the same day, WFOE, CBMG Shanghai, Cao Wei and Chen Mingzhe entered into a termination agreement, pursuant to which the series of VIE agreements executed among the WFOE, CBMG Shanghai, Chen Mingzhe and Cao Wei were terminated and a new set of VIE agreements were executed. The following is a description of each of these VIE agreements:
 
Exclusive Business Cooperation Agreement. Through the WFOE, we are a party to an exclusive business cooperation agreement dated October 26, 2016 with CBMG Shanghai, which provides that (i) the WFOE shall exclusively provide CBMG Shanghai with complete technical support, business support and related consulting services; (ii) without prior written consent of the WFOE, CBMG Shanghai may not accept the same or similar consultancy and/or services from any third party, nor establish any similar cooperation relationship with any third party regarding same matters during the term of the agreement; (iii) CBMG Shanghai shall pay the WFOE service fees as calculated based on the time of service rendered by the WFOE multiplying the corresponding rate, plus an adjusted amount decided by the board of the WFOE; and (iv) CBMG Shanghai grants to the WFOE an irrevocable and exclusive option to purchase, at its sole discretion, any or all of CBMG Shanghai’s assets at the lowest purchase price permissible under PRC laws. The term of the agreement is 10 years, provided however the agreement may extended at the option of the WFOE. Since this agreement permits the WFOE to determine the service fee at its sole discretion, the agreement in effect provides the WFOE with rights to all earnings of the VIE.
 
Loan Agreement. Through the WFOE, we are a party to a loan agreement with CBMG Shanghai, Lu Junfeng and Chen Mingzhe dated October 26, 2016, in accordance with which the WFOE agreed to provide an interest-free loan to CBMG Shanghai. The term of the loan is 10 years, which may be extended upon written consent of the parties. The method of repayment of CBMG Shanghai shall be at the sole discretion of the WFOE, including but not limited to an acquisition of CBMG Shanghai in satisfaction of its loan obligations.
 
Exclusive Option Agreement with Lu Junfeng. Through the WFOE, we are a party to an option agreement with CBMG Shanghai and Lu Junfeng dated October 26, 2016, in accordance with which: (i) Lu Junfeng granted the WFOE an irrevocable and exclusive right to purchase, or designate another person to purchase the entire equity interest in CBMG Shanghai as then held by him, at an aggregate purchase price to be determined; and (ii) any proceeds obtained by Lu Junfeng through the above equity transfer in CBMG Shanghai shall be used for the payment of the loan provided by the WFOE under the aforementioned Loan Agreement.
 
Exclusive Option Agreement with Chen Mingzhe. Through the WFOE, we are a party to an exclusive option agreement with CBMG Shanghai and Chen Mingzhe dated October 26, 2016, under which: (i) Chen Mingzhe granted the WFOE an irrevocable and exclusive right to purchase, or designate another person to purchase the entire equity interest in CBMG Shanghai for an aggregate purchase price to be determined; and (ii) any proceeds obtained by Chen Mingzhe through the above equity transfer in CBMG Shanghai shall be used for the payment of the loan provided by the WFOE under the aforementioned Loan Agreement.
  
Power of Attorney from Lu Junfeng. Through the WFOE, we are the recipient of a power of attorney executed by Lu Junfeng on October 26, 2016, in accordance with which Lu Junfeng authorized the WFOE to act on his behalf as his exclusive agent with respect to all matters concerning his equity interest in CBMG Shanghai, including without limitation attending the shareholders’ meetings of CBMG Shanghai, exercising voting rights and designating and appointing senior executives of CBMG Shanghai.
 
Power of Attorney from Chen Mingzhe. Through the WFOE, we are the recipient of a power of attorney executed by Chen Mingzhe on October 26, 2016, in accordance with which Chen Mingzhe authorized the WFOE to act on his behalf as his exclusive agent with respect to all matters concerning his equity interest in CBMG Shanghai, including without limitation attending the shareholders’ meetings of CBMG Shanghai, exercising voting rights and designating and appointing senior executives of CBMG Shanghai.
 
Equity Interest Pledge Agreement with Lu Junfeng. Through the WFOE, we are a party to an equity interest pledge agreement with CBMG Shanghai and Lu Junfeng dated October 26, 2016, in accordance with which: (i) Lu Junfeng pledged to the WFOE the entire equity interest he holds in CBMG Shanghai as security for payment of the consulting and service fees by CBMG Shanghai under the Exclusive Business Cooperation Agreement; (ii) Lu Junfeng and CBMG Shanghai submitted all necessary documents to ensure the registration of the Pledge of the Equity Interest with the State Administration for Industry and Commerce (SAIC) and the pledge became effective on November 22, 2016; and (iii) on the occurrence of any event of default, unless it has been successfully resolved within 20 days after the delivery of a rectification notice by the WFOE, the WFOE may exercise its pledge rights at any time by a written notice to Lu Junfeng.
 
Equity Interest Pledge Agreement with Chen Mingzhe. Through the WFOE we are a party to an equity interest pledge agreement with CBMG Shanghai and Chen Mingzhe dated October 26, 2016, in accordance with which: (i) Chen Mingzhe pledged to the WFOE the entire equity interest he holds in CBMG Shanghai as security for payment of the consulting and service fees by CBMG Shanghai under the Exclusive Business Cooperation Agreement; (ii) Chen Mingzhe and CBMG Shanghai submitted all necessary documents to ensure the registration of the Pledge of the Equity Interest with SAIC, and the pledge became effective on November 22, 2016; and (iii) on the occurrence of any event of default, unless it has been successfully resolved within 20 days after the delivery of a rectification notice by the WFOE, the WFOE may exercise its pledge rights at any time by a written notice to Chen Mingzhe. 
 
Our relationship with our controlled VIE entity, CBMG Shanghai, through the VIE agreements, is subject to various operational and legal risks. Management believes that Chen and Lu, as record holders of the VIE’s registered capital, have no interest in acting contrary to the VIE agreements. However, if Chen and 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 and other VIE agreements, which would require legal action through the PRC judicial system. While we believe the VIE agreements are legally enforceable in the PRC, there is a risk that enforcement of these agreements may involve more extensive procedures and costs to enforce, in comparison to direct equity ownership of the VIE entity. We believe based on the advice of local counsel that the VIE agreements are valid and in compliance with PRC laws presently in effect. 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.
 
For further discussion of risks associated with the above, please see Item 1A – Risk Factors under the subheading “Risks Related to Our Structure.”
 
 
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BIOPHARMACEUTICAL BUSINESS
 
The biopharmaceutical business was founded in 2009 by a team of seasoned Chinese-American executives, scientists and doctors. In 2010, we established a facility designed and built to comply with China’s GMP standards in Wuxi, China, and in 2012, we established a U.S. FDA compliant manufacturing facility in Shanghai. In November 2017, we opened our Zhangjiang facility in Shanghai, of which 40,000 square feet, or 35% of the total facility, was designed and built to GMP standards and dedicated to advanced cell manufacturing. Our focus has been to serve the rapidly growing health care market initially in China by marketing and commercializing immune cell and stem cell therapeutics, related tools and products from our patent-protected homegrown and acquired cell technology, as well as by utilizing in-licensed and other acquired intellectual properties before shifting our attention to serve the mature and highly competitive health care market in the U.S. We continue to explore new products and gene therapies that may require the investment of a material amount of assets.
 
Our current treatment focal points are cancer and KOA.
 
Cancer. We are focusing our clinical development efforts on B-cell maturation antigen (BCMA)-specific, and CD20 CAR-T therapies, T-cells with genetically engineered T-cell receptor (TCR-Ts) and tumor infiltrating lymphocytes (TILs) technologies. As discussed above in Item 1 – Business, under the subheading “Overview,” we entered into the Novartis LCA in September of 2018. With the execution of the Novartis LCA, we have prioritized our efforts on working with Novartis to bring Kymriah® to patients in China as soon as practicable. In light of our collaboration with Novartis, we will no longer pursue our own ALL and DLBCL biologics license application submission with the NMPA. On the research and development side, we seek to bring our CD22 CAR-T, CD20 CAR-T for CD19 CAR-T Relapsing NHL, CD19-CD20 bispecific CAR-T product, BCMA CAR-T for Multiple Myeloma (MM), NKG2D CAR-T for acute myeloid leukemia (AML), AFP TCR-T for HCC and neoantigen reactive TIL on solid tumors, respectively, in first-in-human trial as soon as possible. We plan to continue leveraging our cutting-edge Chemistry, Manufacturing and Control (CMC) platform, as well as our Quality Management System and our strong scientific expertise in the U.S and in China, to collaborate with multinational pharmaceutical companies to co-develop cell therapies in China.
 
KOA. In 2013, we completed a Phase I/IIa clinical study, in China, for our 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. Since 2013, we have continued clinical studies on ReJoin® and our trial data has demonstrated positive results on the performance of ReJoin®. Our ReJoin® human adipose-derived mesenchymal progenitor cell (haMPC) therapy for KOA is an interventional therapy using our proprietary process, culture and medium.
 
Our process is distinguishable from sole Stromal Vascular Fraction (SVF) therapy. The immunophenotype of our haMPCs exhibited a homogenous population expressing multiple biomarkers such as CD73+, CD90+, CD105+, HLA-DR-, 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.
 
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, and on December 9, 2016, we announced interim three-month safety data from the Allogenic KOA Phase I Trial in China. The interim analysis of the trial has demonstrated a preliminary safety and tolerability profile of AlloJoin® in the three doses tested, and no serious adverse events (SAE) have been observed. On March 16, 2018, we announced a positive 48-week AlloJoin® Phase I data in China, which demonstrated good safety and early efficacy for the slowing of cartilage deterioration. China finalized its cell therapy regulatory pathway in December 2017. Our AlloJoin® IND application to conduct a Phase II clinical trial with the NMPA was been approved in January 2019 and we launched our Phase II AlloJoin® clinical trial on September 12, 2019. On September 27, 2019, we received the ReJoin® therapy application acceptance for Phase II clinical trials by the NMPA.
 
We established adult adipose-derived progenitor cell and immuno-oncology cellular therapy platforms in treating specific medical conditions and diseases. Our Quality Management Systems (QMS) have been assessed and certified to meet the requirements of ISO 9001: 2015, and a quality manual based on GMP guidelines has been finalized. The facilities, utilities and equipment in both Zhangjiang and Wuxi Sites have been calibrated and/or qualified and in compliance with requirements of local health authorities. We installed an Enterprise Quality Management System (EQMS) in April 2019 to facilitate the quality activities. A document management system and Laboratory Information Management System (LIMS) will be installed and qualified in early 2020.
 
Our proprietary manufacturing processes and procedures include (i) banking of allogenic cellular product and intermediate product; (ii) manufacturing process of GMP-grade viral vectors; (iii) manufacturing process of GMP-grade cellular product; and (iv) analytical testing to ensure the safety, identity, purity and potency of cellular products.
 
Recent Developments in Adoptive Immune Cell Therapy (ACT)
 
The immune system plays an essential role in cancer development and growth. In the past decade, immune checkpoint blockade has demonstrated a major breakthrough in cancer treatment and has currently been approved for the treatment of multiple tumor types. Adoptive immune cell therapy (ACT) with tumor-infiltrating lymphocytes (TIL) or gene-modified T-cells expressing novel T cell receptors (TCR) or chimeric antigen receptors (CAR) is another strategy to modify the immune system to recognize tumor cells and thus carry out an anti-tumor effector function.
 
The TILs consist of tumor-resident T-cells which are isolated and expanded ex vivo after surgical resection of the tumor. Thereafter, the TILs are further expanded in a rapid expansion protocol (REP). Before intravenous adoptive transfer into the patient, the patient is treated with a lymphodepleting conditioning regimen. TCR gene therapy and CAR gene therapy are ACT with genetically modified peripheral blood T-cells. For both treatment modalities, peripheral blood T-cells are isolated via leukapheresis. These T-cells are then transduced by viral vectors to either express a specific TCR or CAR. These treatments have shown promising results in various tumor types.

 
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CAR-Ts
 
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. This approach is called adoptive cell transfer (ACT). ACT’s building blocks are T cells, a type of immune cell collected from the patient’s own blood. One of the well-established ACT approaches is CAR-T cancer therapy. 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 until the number reaches dose level. 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. In 2013, NCI’s Pediatric Oncology Branch commented that the CAR-T-cells are much more potent than anything they can achieve with other immuno-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.
 
CAR-T cell therapies, such as anti-CD19 CAR-T and anti-BCMA 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 limited treatment options prior to CAR-T therapy. CAR-T has shown encouraging clinical efficacy in many of these patients, and some of them have had durable clinical response for years. However, some adverse effects, such as cytokine release syndrome (CRS) and neurological toxicity, have been observed in patients treated with CAR-T-cells. For example, in July 2016, Juno Therapeutics, Inc. reported the death of patients enrolled in the U.S. Phase II clinical trial of JCAR015 (anti-CD19 CAR-T) for the treatment of relapsed or refractory B cell acute lymphoblastic leukemia (B-ALL). The U.S. FDA put the trial on hold and lifted the hold within a week after Juno provided a satisfactory explanation and solution. Juno attributed the cause of patient deaths to the use of Fludarabine preconditioning and they switched to use only cyclophosphamide pre-conditioning in subsequent enrollment.
 
In August 2017, the U.S. FDA approved Novartis’ Kymriah® (tisagenlecleucel) a CD19-targeted CAR-T therapy, for the treatment of patients up to 25 years old for relapsed or refractory (r/r) acute lymphoblastic leukemia (ALL), the most common cancer in children. Current treatments show a rate of 80% remission using intensive chemotherapy. However, there are almost no conventional treatments to help patients who have relapsed or are refractory to traditional treatment. Kymriah® has shown results of complete and long lasting remission, and was the first U.S. FDA-approved CAR-T therapy. In October 2017, the U.S. FDA approved Kite Pharmaceuticals’ (Gilead) CAR-T therapy for diffuse large B-cell lymphoma (DLBCL) the most common type of NHL in adults. The initial results of axicabtagene ciloleucel (Yescarta), the prognosis of high-grade chemo refractory NHL, is dismal with a medium survival time of a few weeks. Yescarta is a therapy for patients who have not responded to or who have relapsed after at least two other kinds of treatment.
 
In May 2018, the U.S. FDA approved Novartis’ Kymriah® for intravenous infusion for its second indication—the treatment of adult patients with relapsed or refractory (r/r) large B-cell lymphoma after two or more lines of systemic therapy including diffuse large B-cell lymphoma (DLBCL) not otherwise specified, high grade B-cell lymphoma and DLBCL arising from follicular lymphoma. Kymriah® is now the only CAR-T cell therapy to receive U.S. FDA approval for two distinct indications in non-Hodgkin lymphoma (NHL) and B-cell ALL. On September 25, 2018, we entered into the Novartis LCA with Novartis to manufacture and supply Kymriah® to Novartis in China.
 
Besides anti-CD19 CAR-T, anti-BCMA CAR-T has shown promising clinical efficacy in treatment of multiple myeloma. For example, bb2121, a CAR-T therapy targeting BCMA, has been developed by Bluebird bio, Inc. and Celgene for previously treated patients with multiple myeloma. Based on preliminary clinical data from the ongoing Phase I study CRB-401, bb2121 has been granted Breakthrough Therapy Designation by the U.S. FDA and PRIME eligibility by the European Medicines Agency (EMA) in November 2017. We plan to initiate our anti-BCMA CAR-T investigator initiated trial in the near future.
 
Recent progress in Universal Chimeric Antigen Receptor (UCAR) T-cells showed benefits such as ease of use, availability and the drug pricing challenge. Currently, most therapeutic UCAR products are being developed with gene editing platforms such as CRISPR or TALEN. For example, UCART19 is an allogeneic CAR T-cell product candidate developed by Cellectis for treatment of CD19-expressing hematological malignancies. UCART19 Phase I clinical trials started in adult and pediatric patients in Europe in June 2016 and in the U.S. in 2017. The use of UCAR may has the potential to overcome the limitation of the current autologous approach by providing an allogeneic, frozen, “off-the-shelf” T-cell product for cancer treatment.
 
TILs
 
While CAR-T cell therapy has proven successful in treatment of several hematological malignancies, other cell therapy approaches, including Tumor Infiltrating Lymphocytes (TIL) are being developed to treat solid tumors. For example, Iovance Biotherapeutics is focused on the development of autologous tumor-directed TILs for treatments of patients with various solid tumor indications. Iovance is conducting several Phase II clinical trials to assess the efficacy and safety of autologous TIL for treatment of patients with Metastatic Melanoma, Squamous Cell Carcinoma of the Head and Neck, Non-Small Cell Lung Cancer (NSCLC) and Cervical Cancer in the U.S. and Europe.
 
 
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TCRs
 
Adaptimmune is partnering with GlaxoSmithKline to develop TCR-T therapy targeting the NY-ESO-1 peptide, which is present across multiple cancer types. Their NY-ESO SPEAR T-cell has been used in multiple Phase I/II clinical trials in patients with solid tumors and haematological malignancies, including synovial sarcoma, myxoid round cell liposarcoma, multiple myeloma, melanoma, NSCLC and ovarian cancer. The initial data suggested positive clinical responses and evidence of tumor reduction in patients. NY-ESO SPEART T-cell has been granted breakthrough therapy designation by the U.S. FDA and PRIME regulatory access in Europe. Adaptimmune’s other TCR-T product, AFP SPEAR T-cell targeting AFP peptide, is aimed at the treatment of patients with hepatocellular carcinoma (HCC). AFP SPEAR T-cell is in a Phase I study and enrolling HCC patients in the U.S.
 
CBMG’s Adoptive Immune Cell Therapy (ACT) Programs
 
In December 2017, the Chinese government issued trial guidelines concerning the development and testing of cell therapy products in China. Although these trial guidelines are not yet codified as mandatory regulation, we believe they provide a measure of clarity and a preliminary regulatory pathway for our cell therapy operations in an uncertain regulatory environment. On April 18 and April 21, 2018, the Center for Drug Evaluation (CDE) posted on its website acceptance of the IND application for CAR-T cancer therapies in treating patients with NHL and adult ALL submitted by the Company’s wholly-owned subsidiaries, CBMG Shanghai and Shanghai Cellular Biopharmaceutical Group Ltd. On September 25, 2018 we entered into Novartis LCA to manufacture and supply Kymriah® in China. As part of the deal, Novartis took approximately a 9% equity stake in CBMG, and CBMG is discontinuing development of its own anti-CD19 CAR-T cell therapy. This collaboration with Novartis reflects our shared commitment to bringing the first marketed CAR-T cell therapy, Kymriah®, a transformative treatment option currently approved in the U.S., EU and Canada for two difficult-to-treat cancers, to China, where the number of patients in need remains the highest in the world. Together with Novartis, we plan to bring the first CAR-T cell therapy to patients in China as soon as possible. We continue to develop CAR-T therapies other than CD 19 on our own and Novartis has the first right of negotiation on these CAR-T developments. The CBMG oncology pipeline includes CAR-T targeting CD20-, CD22- and B-cell maturation antigen (BCMA), AFP TCR-T, which could specifically eradicate AFP positive HCC tumors and TIL technologies. Our current priority is to collaborate with Novartis to bring Kymriah® to China. At the same time, we remain committed to developing our existing pipeline of immunotherapy candidates for hematologic and solid tumor cancers to help deliver potential new treatment options for patients in China. We are striving to build a competitive research and development function, a translational medicine unit, along with a well-established cellular manufacturing capability and ample capacity, to support Kymriah® in China and our development of multiple assets in multiple indications. We believe that these efforts will allow us to boost the Company’s Immuno-Oncology presence. We initiated a clinical trial to evaluate anti-BCMA CAR-T therapy in Multiple Myeloma (“MM”) and started first in-human studies for multiple CAR-T and TCR-T programs in 2019. 
 
Market for Immune Cell Therapies
 
Our immune cell therapies involve the genetic engineering of T-cells to express either chimeric antigen receptors, or CARs, or T cell receptors, or TCRs and TIL. These T-cells are designed to recognize and attack cancer cells. Kymriah is a type of immune cell therapy that is made from a patient’s own white blood cells and is a prescription cancer treatment used in patients up to 25 years old who have acute lymphoblastic leukemia that is either relapsing or is refractory. It is also used in patients with non-Hodgkin lymphoma that has relapsed or is refractory after having at least two other kinds of treatment. On August 30, 2017, Kymriah was approved by the U.S. FDA for the treatment of children and young adults with ALL. By October 18, 2017, the U.S. FDA granted approval for Yescarta for treating patients with relapsed/refractory diffuse large B-cell lymphoma (r/rDLBCL) and other rare large B-cell lymphomas. On May 1, 2018, the U.S.FDA approved Kymriah for a second indication (diffuse large B-cell lymphoma). In August 2018, Kymriah and Yescarta secured European Union approval for the treatment of blood cancers, including B-cell acute lymphoblastic leukemia (ALL) and relapsed or refractory diffuse large B-cell lymphoma (DLBCL). Health Canada approved Kymriah as the first CAR-T therapy in Canada and the Therapeutic Goods Administration (TGA) approved it as the first CAR-T therapy in Australia.
 
In 2019, 1,762,450 new cancer cases and 606,880 cancer deaths are projected to occur in the U.S. According to a 2018 International Agency for Cancer publication, China, as the most populous country in the world with an estimated population of nearly 1.42 billion, is projected to have around 4.51 million cancer cases and 3.04 million cancer death by year 2020. A 2018 Global Cancer Statistics Cancer Communications report states that compared (the 2018 Global Cancer Statistics Report) to the U.S. and UK, China has a 30% and 40% higher cancer mortality among which 36.4% of the cancer-related deaths were from the digestive tract cancers (stomach, liver and esophagus cancer) and have relatively poorer prognoses.
 
The 2018 Global Cancer Statistics Report also reported that in 2018, lung cancer was the most diagnosed cancer type worldwide and in China with 2,093,8761 and 733,3002 new cases respectively. HCC is the 4th most common cancer in China and more than 50% of new HCC cases world-wide are in China. About 466,000 new liver cancer cases each year and the mortality is around 343,7003 annually in China. Chen et al. In 2018, it was estimated about 510,000 new case of Non Hopkins lymphoma (NHL) and 248,724 patients died from NHL worldwide.4 
 
Multiple myeloma accounts for 1% of all cancers and approximately 10% of all hematological malignancies.5 In 2016 there were about 138,509 incident cases worldwide. The United States had the most cases (about 24,407) and the most deaths (about 14,212), China was the second in both measures which incident cases were about 16,537 and deaths about 10,363. The global incidence of multiple myeloma rose by 126% from 1990 to 2016. East Asia (China, North Korea, and Taiwan) saw incident cases of multiple myeloma jump by 262%, which was the largest increase among any of the 21 global regions.6
 

1 Chen et al. CA Cancer J Clin. 2016; 66:155-132
2 Bray F et al. CA Cancer J Clin. 2018: 68:394-424
3 Chen et al. CA Cancer J Clin. 2016; 66:155-132
4 Bray F et al. CA Cancer J Clin. 2018: 68:394-424
5 Moreau P et al., Annals of Oncol. 24 (Supplement 6): vi133–vi137, 2013)
6 Cowan AJ et al., JAMA Oncol. 2018;4(9):1221-1227
  
 
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Market for Stem Cell-Based Therapies
 
The U.S. forecast is that 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 resulting in an increase to $5.7 billion in 2020, with key growth areas being Spinal Fusion, Sports Medicine and Osteoarthritis of the joints. 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 a paper published by Dillon CF, Rasch EK, Gu Q et al. entitled, “Prevalence of knee osteoarthritis in the United States: Arthritis Data from the Third National Health and Nutrition Examination Survey,” 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 rate is high (53%). The costs of OA management has 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. According to an article published by the Journal of the American Medical Association, approximately 505,000 hip replacements and 723,000 knee replacements were performed in the United States in 2014, collectively costing more than $20 billion. 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 six months and a structure modification effect to slow cartilage degradation by at least 12 months. Symptom relief is generally measured by a composite questionnaire, the 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 the primary end point to demonstrate symptom relief, and MRI to assess structure and regeneration benefits as a secondary endpoint.
 
According to the Foundation for the National Institutes of Health, there are 27 million Americans with Osteoarthritis (OA), and symptomatic Knee Osteoarthritis (KOA) occurs in 13% of persons aged 60 and older. According to a nationwide population-based longitudinal survey among the Chinese retired population, approximately 8.1% of participants were found to suffer from symptomatic knee OA. Currently no treatment exists that can effectively preserve knee joint cartilage or slow the progression of KOA.
 
According to Alternative and Integrative Medicine, 53% of KOA patients will degenerate to the point of disability. Conventional treatment usually involves invasive surgery with painful recovery and physical therapy and replacement surgeries are typically only suggested and performed on patients in the late stage of KOA.
 
Our Global Strategy
 
CBMG is a drug development company focusing on developing cell therapies first in China, to take advantage of cost efficiencies, leveraging the expeditious Investigator Initiated Trials (“IIT”) process in China, publish and share our data in major conferences and scientific journals and then address the rest-of-the-world market after safety and efficacy of those programs are established. Our goal is to develop safe and effective cellular therapies for indications that represent a large unmet need in China. 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 intend to invest and expand our clinical research capabilities by building drug development and manufacturing infrastructure in China and in the U.S., expanding our clinical research platform, hiring new talent and enhancing our existing coverage. We believe that few competitors in China are as well-equipped as we are in the areas of clinical trial development, internationally compliant manufacturing, quality assurance and control, as well as our dedication to regulatory compliance and process improvement.
 
 The key issues with cell therapy as modality are drug therapeutic index, institutionalized, scalable manufacturing and an affordable price for the patients. We believe our manufacturing platform is unique as we utilize a semiautomatic, fully closed system, which is expected to lead to economies of scale. Additionally, our focus on being a fully integrated cell therapy company has enabled us to be one of only a few companies that are able to manufacture clinical grade viral vectors in China to cater to the increasing global demand for cell and gene therapies.
 
 In China, Good Clinical Practice (GCP) only requires institutional review board (“IRB”) approval from the hospital and local NMPA approval for Investigator Initiated Trial (IIT), which is more expeditious than the traditional IND route. IITs can provide early evidence of POC for novel drugs which are more time and cost efficient than the traditional IND approach. IITs are also good ways to identify and develop novel platforms. Currently, we have our own drug development pipeline in CAR-T, AFP TCR-T, TIL and KOA. Our R&D team continues to identify additional platform cell therapy technologies to develop internally or acquire established technologies.
 
 In addition to the manufacturing of Novartis’ Kymriah® for patients in China as contemplated by the Novartis LCA and the Manufacture and Supply Agreement with Novartis, we are actively developing and evaluating other therapies comprised of other CAR-T, TCR-T and TIL therapies. We have also advanced our KOA AlloJoin® Phase II clinical trial and ReJoin® Phase II clinical trial with the NMPA.
 
 In addition to our drug development efforts, we are planning on evaluating co-development, strategic partnerships and both in-licensing and out-licensing opportunities with high quality, multinational partners. Such partnerships will enable us to take advantage of the technologies of our partners while leveraging our quality control and manufacturing infrastructure to further expand our pipelines.
 
 
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Our proprietary and patent-protected manufacturing processes enable us to produce, store and distribute ancillary media, viral vectors and cellular product. Our clinical protocols include medical assessment to qualify each patient for treatment, evaluation of each patient before and after a specific therapy, cell infusion methodologies including dosage, frequency and the use of adjunct therapies, handling potential adverse effects and their proper management. Applying our proprietary intellectual property, we plan to customize specialize formulations to address complex diseases and debilitating conditions.
 
Currently, we have a total of approximately 70,000 square feet of manufacturing space in three locations, the majority of which is in the new Shanghai facility. We operate our manufacturing facilities under the design of the standard GMP conditions as well ISO standards. We employ institutionalized and proprietary process and quality management system to optimize reproducibility and to hone our efficiency. Our Shanghai and Wuxi facilities are designed and built to meet GMP standards. With our integrated Plasmid, Viral Vectors platforms, our T-cells manufacturing capacities are highly distinguishable from other companies in the cellular therapy industry. We are currently assessing the feasibility of expanding manufacturing spaces in new sites in both China and the U.S.
 
 Most importantly, our seasoned cell therapy team members have decades of highly relevant experience in the U.S., China and the European Union. We believe that these are the primary factors that make CBMG a high-quality cell products manufacturer in China. We have been implementing significant human resources initiatives such as stock incentive programs, graduate school and continuing education sponsorship and a robust health insurance plan to attract and retain quality talent to support our rapid growth.
 
Our Targeted Indications and Potential Therapies
 
The chart below illustrates CBMG’s pipelines:
 
 
 
16
 
 
Immuno-oncology (I/o)
 
Our CAR-T platform is built on lenti-virial vector and second-generation CAR design, which is used by most of the current trials and studies. We select the patient population for each asset and indication to allow the optimal path forward for potential regulatory approval. We integrate the state-of-the-art translational medicine effort into each clinical study to aid in dose selection, to investigate the mechanism of action and POC, and to attempt to identify the optimal targeting patient population. We plan to continue to grow our translational medicine team and engage key opinion leaders to support our development efforts.
 
We have developed a serial of CAR-Ts to treat hematological malignancies including CD20, CD22 and BCMA CAR-Ts, which have been proved to be potent and effective in treating hematology tumors in the early phase of clinical studies.
 
CD20 CAR
 
CD20 is broadly overexpressed in a serial of B cell malignant tumors. In the patients relapsed after CD19 CAR-T treatment, the expression of CD20 on target tumor cells is relatively stable. It is proven to be an optimal target for treating CD19 CAR-T relapsing patients. We have developed a novel CD20 CAR-Ts clinical lead product, which demonstrated strong anti-tumor activity in both in vitro assays and in vivo animal studies. We have filed a patent application in China and have initiated a first in human investigator initiated trial with CD19 CAR-T relapsed NHL patients.
 
CD22 CAR
 
CD22 is another surface marker highly expressed in B cell malignancies especially in hairy cell leukemia. It also expresses in the patients relapsed after CD19 CAR-T treatment. We have developed a novel CD22 CARs clinical lead, which displayed effective anti-tumor activity in in vitro cytotoxicity assays. We plan to initiate an investigator initiated trial with CD19 CAR-T relapsing ALL patients and hairy cell leukemia.
 
BCMA CAR
 
BCMA is a member of the TNF receptor superfamily, universally expressed in multiple myeloma (MM) cells. It is not detectable in normal tissues except plasma and mature B cells. It is a proven, effective and safer target for treating refractory MM patients in several clinical trials. We have developed unique BCMA CARs. Our BCMA CAR clinical lead exhibits potent anti-tumor activity both in vitro and in vivo. We have filed a patent for BCMA CAR in China and begun an investigator initiated trial in refractory MM patients in January 2019.
 
NKG2D CAR
 
Early studies on CAR-T therapy targeting NK cell signaling has shown promising clinical benefits. We are developing novel second generation CAR-Ts using NKG2D extracellular fragment as antigen binding domain. These CARs can recognize target tumor cells expressing NKG2D ligands. We plan to initiate a first in human investigator initiated trial with R/R AML patients.
 
Solid tumors pose more challenges 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. We will continue our effort in developing cell-based therapies to target both hematological cancers and solid tumors.
 
AFP TCR
 
We license the AFP-TCR technology from Augusta University. We are continuing our evaluation on the efficacy and specificity of the AFP TCRs to identity the most appropriate candidate for a first time in human (FTIH) study. We plan to redirect Human T-cells with the AFP TCRs and evaluate their anti-tumor activity on in vitro cytokine release and cytotoxicity assays; and potential on/off-target toxicity including allo-reactivity as well as in vivo efficacy tests in animal models.
 
 
17
 
 
TIL
 
Augmented by the U.S. National Cancer Institute (“NCI”) technology license, CBMG is developing neoantigen reactive TIL therapies to treat immunogenic cancers. In the early stages of cancer, lymphocytes infiltrate into the tumor, specifically recognizing the tumor targets and mediating anti-tumor response. These cells are known as TIL. TIL-based therapies have shown encouraging clinical results in early development. For example, in Phase-2 clinical studies in patients with metastatic melanoma performed by Dr. Rosenberg at NCI, TIL therapy demonstrated robust efficacy in patients with metastatic melanoma with objective response rates of 56% and complete response rates of 24%. We have started our development with NSCLC, and plan to expand into other cancer indications.
 
Knee Osteoarthritis (KOA)
 
We are currently pursuing two primary therapies for the treatment of KOA: ReJoin® therapy and AlloJoin® 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 six-month follow-up clinical data showed ReJoin® therapy to be both safe and effective.
 
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 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 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.
 
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.
 
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 multipotent 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 autologous 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 intraarticularly into the knee joint with ultrasound guidance. For allogeneic KOA, we use donor haMPC cells.
 
These haMPC cells are capable of differentiating into bone, cartilage 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 autologous haMPC, offering a choice for those where factors such as donor age and health are an issue.
 
The 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 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) establish regional laboratories that comply with cGMP standards in Shanghai and Beijing that meet Chinese regulatory approval; (b) submit to the NMPA an IND package for Allojoin™ to treat patients with donor haMPC cells; and (c) file joint applications with Class AAA hospitals to use ReJoin® to treat patients with their own haMPC cells.
 
Our competitors are pursuing treatments for osteoarthritis with knee cartilage implants. 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, which is cultured and re-injected into the patient. The injections are designed to induce the body’s secretion of growth factors 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.
 
 
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 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.
 
Based on current estimates, we expect to generate collaboration payment and revenues through our sale of Kymriah® products to Novartis within the next two years. We plan to systematically advance our own cell therapy pipeline and timely seek BLA opportunities to commercialize our products within the next three years although we cannot assure you that we will be successful at all or within the foregoing timeframe.

Competition
 
Many companies operate in the cellular biopharmaceutical field. We face competition based on several factors, including quality and breadth of services, ability to protect our intellectual property or other confidential information, timeliness of implementation, maintenance of quality standards, depth of collaboration partner relationships, price and geography. Currently there are several approved stem cell therapies on the market including Canada’s pediatric graft-versus-host disease and the European Commission’s approval in March 2018 for the treatment of complex perianal fistulas in adult Crohn’s disease. There are several public and private cellular biopharmaceutical-focused companies outside of China with varying phases of clinical trials addressing a variety of diseases. We compete with these companies in bringing cellular therapies to the market. However, our focus is to develop a core business in the China market, with plans to expand in the U.S. market. This difference in focus places us in a different competitive environment from other western companies with respect to fund raising, clinical trials, collaborative partnerships and the markets in which we compete.
 
In terms of entry barriers, cellular biopharmaceutical business generally requires high, upfront capital and other resources, significant financial and time commitment in recruiting experienced talents, a successful track record and solid reputation to build up synergies with business partners and emphasis on cost efficiency. Our core competitive edge is our strong capacity to cover the full research and development process of the full life cycle of a product, and to satisfy the increasing demand for timely realization and localization in China of key products already approved in foreign markets. We believe that we are able to maintain our competitiveness by leveraging our established position in the global research and development in the cellular biopharmaceutical market and capitalizing on the opportunities offered by the booming pharmaceutical market in China.
 
 To meet the overall social, economic and healthcare challenges in China, the PRC central government has a focused strategy to enable China to compete effectively in certain designated areas of biotechnology and the health sciences. Because of the aging population in China, China’s Ministry of Science and Technology (MOST) has targeted stem cell development as high priority field, and development in this field has been intense in the agencies under MOST. For example, the 973 Program has funded a number of stem cell research projects such as differentiation of human embryonic stem cells and the plasticity of adult stem cells. To the best of our knowledge, none of the companies in China are utilizing our proposed international manufacturing protocol and our unique technologies in conducting what we believe will be fully compliant NMPA-sanctioned clinical trials to commercialize cell therapies in China. Our management believes that it is difficult for most of these Chinese companies to turn their results into translational stem cell science or commercially successful therapeutic products using internationally acceptable standards.
 
We compete globally with respect to the discovery and development of new cell-based therapies, and we also compete within China to bring new therapies to market. In the biopharmaceutical specialty segment, namely in the areas of cell processing and manufacturing, clinical development of cellular therapies and cell collection, processing and storage, are characterized by rapidly evolving technology and intense competition. Our competitors worldwide include pharmaceutical, biopharmaceutical and biotechnology companies, as well as numerous academic and research institutions and government agencies engaged in drug discovery activities or funding, in the U.S., Europe and Asia. Many of these companies are well-established and possess technical, research and development, financial and sales and marketing resources significantly greater than ours. In addition, many of our smaller potential competitors have formed strategic collaborations, partnerships and other types of joint ventures with larger, well established industry competitors that afford these companies potential research and development and commercialization advantages in the technology and therapeutic areas currently being pursued by us. Academic institutions, governmental agencies and other public and private research organizations are also conducting and financing research activities which may produce products directly competitive to those being commercialized by us. Moreover, many of these competitors may be able to obtain patent protection, obtain government (e.g., the U.S. FDA) and other regulatory approvals and begin commercial sales of their products before us.
 
Our primary competitors in the field of cancer immune cell therapies include pharmaceutical, biotechnology companies such as Eureka Therapeutics, Inc., Iovance Biotherapeutics Inc., Juno Therapeutics, Inc. (acquired by Celgene), Kite Pharma, Inc. (acquired by Gilead), CARSgen, Sorrento Therapeutics, Inc. and others. Among our competitors, the ones based in and operating in Greater China are CARsgen, Hrain Biotechnology, Nanjing Legend Biotechnology Galaxy Biomed, Persongen, Anke Biotechnology, Shanghai Minju Biotechnology, Unicar Therapy (Cooperated with Terumo BCT), Wuxi Biologics, Junshi Pharma, BeiGene, Immuno China Biotech, Chongqing Precision Biotech, Innovative Cellular Therapeutics and China Oncology Focus Limited. Other companies in the cancer immune cell therapies space have made inroads in China by partnering with local companies. For example, in April, 2016, Seattle-based Juno Therapeutics, Inc. started a new company with WuXi AppTec in China named JW Biotechnology (Shanghai) Co., Ltd. In January 2017, Shanghai Fosun Pharmaceutical created a joint venture with Santa Monica-based Kite Pharma Inc. to develop, manufacture and commercialize CAR-T and TCR products in China. The NMPA has received IND applications for CD19 chimeric antigen receptor T-cells cancer therapies from many companies and have granted the initial phase of acceptance to several companies thus far.
 
 
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The osteoarthritis industry is highly competitive and subject to rapid and significant technological change. The large size and expanding scope of the pain market makes it an attractive therapeutic area for biopharmaceutical businesses. Our potential competitors include pharmaceutical, biotechnology, medical device and specialty pharmaceutical companies. Several of these companies have robust drug pipelines, readily available capital and established research and development organizations. We believe our success will be driven by our ability to develop and commercialize treatment options that make a meaningful difference for patients with KOA. Our primary competitors in the field of stem cell therapy for osteoarthritis and other indications include Mesoblast Ltd., Caladrius Biosciences, Inc. and others. On September 12, 2019, we launched allogenic haMPC KOA Phase II of the clinical trial across six leading hospitals in China with a plan to recruit 108 patients. We submitted our autologous adipose stem cell therapy (ReJoin®) KOA with IND filing with the CDE and the application was approved by NMPA. Additionally, in the general area of cell-based therapies for knee osteoarthritis ailments, we potentially compete with a variety of companies, from big pharma to specialty medical products or biotechnology companies. Some of these companies, such as Abbvie, Merck KGaA, Sanofi, Teva, GlaxosmithKline, Baxter, Johnson & Johnson, Sanumed, Medtronic and Miltenyi Biotech are well-established and have substantial technical and financial resources compared to ours. However, as cell-based products are only just recently emerging as viable medical therapies, many of our more direct competitors are smaller biotechnology and specialty medical products companies comprised of Vericel Corporation, Regeneus Ltd., Advanced Cell Technology, Inc., Nuo Therapeutics, Inc., ISTO technologies, Inc., Ember Therapeutics, Athersys, Inc., Bioheart, Inc., Mesoblast, Pluristem, Inc., Medipost Co. Ltd. and others. There are also several non-cell-based, small molecule and peptide clinical trials targeting knee osteoarthritis, and several other U.S. FDA-approved treatments for knee pain.
 
 Other companies have OA product candidates in advanced stages of clinical development. These product candidates include:
 
Anika Therapeutics, Inc.’s Cingal®, which is a mixture of Anika’s Monovisc combined with a low dose of a commonly used immediate-release steroid. In February 2019, Anika announced that, based on their discussions with the FDA, they will need to conduct another Phase III clinical trial before they can potentially obtain approval for Cingal in the U.S.
 
Kolon TissueGene, Inc.’s Invossa™, which is a combination of human allogeneic chondrocytes and TGF-b1 transfected allogeneic chondrocytes. In November 2018, Kolon TissueGene announced they enrolled the first patient in a pivotal U.S. Phase 3 trial. According to clinicaltrials.gov, the estimated primary completion date for the trial is April 2021.
 
Ampio Pharmaceuticals, Inc.’s Ampion™, which is a derivative of human serum albumin, is described as having anti-inflammatory properties, and is formulated for immediate-release. Ampio stated that Ampion is in Phase 3 development but has not announced a timeline for potentially submitting a Biologics License Application, or BLA.
 
Centrexion Therapeutics Corporation’s CNTX-4975, which is a synthetic, ultra-pure injection of trans-capsaicin. In December 2018, Centrexion announced completion of patient enrollment in its Phase 3 VICTORY-1 trial. Topline results are expected to be reported in the first quarter of 2020.
 
A number of investigational nerve growth factor antibodies are in development. Regeneron’s fasinumab and Pfizer and Eli Lilly’s tanezumab are both in Phase 3 development. Initial results from Phase 3 clinical trials for each were announced in 2018. In January 2019, Pfizer and Lilly announced results from a second Phase 3 study showing that the tanezumab 5 mg treatment arm met all three co-primary endpoints at 24 weeks, however in the 2.5 mg treatment arm, patients’ overall assessment of their OA was not statistically different than placebo. Rapidly progressive OA was seen in 2.1% of tanezumab-treated patients and was not observed in the placebo arm.
 
Servier and Galapagos NV’s S201086/GLPG1972, an ADAMTS-5 inhibitor, is currently in Phase II clinical development.
 
Taiwan Liposome Company’s TLC599, which is a liposomal formulation of dexamethasone sodium phosphate. TLC599 is currently in Phase II clinical development.
 
Certain CBMG competitors also work with adipose-derived stem cells. To the best of our knowledge, none of these companies are currently utilizing the same technologies as ours to treat KOA, nor are we aware of any of these companies conducting government-approved clinical trials in China.
 
Some of our targeted disease applications may compete with drugs from traditional pharmaceutical or Traditional Chinese Medicine companies. We do not believe that our chosen targeted disease applications are in competition with the products and therapies offered by traditional pharmaceutical or Traditional Chinese Medicine companies.
 
We believe we have a strategic advantage over our competitors based on our outstanding quality management system and robust and efficient manufacturing capability, which we believe is possessed by few, if any, of our competitors in China, in an industry in which meeting exacting standards and achieving extremely high purity levels is crucial to success. In addition, in comparison to the broader range of cellular biopharmaceutical firms, we believe we have the advantages of cost and expediency, and a first mover advantage with respect to commercialization of cell therapy products and treatments in the China market.
 
 
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Intellectual Property
 
We have built our intellectual property portfolio with a view towards protecting our freedom of operation in China within our specialties in the cellular biopharmaceutical field. Our portfolio contains patents, trade secrets and know-how.
 
The production of stem cells for therapeutic use requires the ability to purify and isolate these cells to an extremely high level of purity. Accordingly, our portfolio is geared toward protecting our proprietary process of isolation, serum free-cell expansion, cell processing and related steps in stem cell production. The combination of our patents and trade secrets protects various aspects of our cell line production methods and methods of use, including methods of isolation, expansion, freezing, preservation, processing and use in treatment.
 
For our haMPC therapy:
 
We believe our intellectual property portfolio for haMPC is well-built and abundant. It covers aspects of adipose stem cell medicine production, including acquisition of human adipose tissue, preservation and storage; tissue processing, stem cell purification, expansion and banking; formulation for administration and administration methods.
 
Our portfolio also includes adipose derived cellular medicine formulations and their applications in the potential treatment of degenerative diseases and autoimmune diseases, including osteoarthritis, and rheumatoid arthritis, as well as potential applications with age-related illnesses and conditions.
 
Our haMPC intellectual property portfolio:
 
o
provides coverage of all steps in the production process;
 
o
enables achievement of high yields of Stromal Vascular Fraction (SVF), i.e., stem cells derived from adipose tissue extracted by liposuction;
 
o
makes adipose tissue acquisition convenient and useful for purposes of cell banking; and
 
o
employs preservation techniques enabling long distance shipment of finished cell medicine products.
 
For our CAR-T and Tcm cancer immune cell therapy:
 
Our recent amalgamation of technologies from AG and PLAGH in the cancer cell therapy is comprehensive and well-rounded. It comprises T-cell clonality, 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) Immunooncology patent applications, several preliminary clinical studies of various CAR-T constructs targeting CD19-positive acute lymphoblastic leukemia, CD20-positive lymphoma, CD30-positive Hodgkin’s lymphoma and EGFR-HER1-positive advanced lung cancer and Phase I/II clinical data of the aforementioned therapies and manufacturing knowledge.
 
In addition, our intellectual property portfolio covers various aspects of other therapeutic categories, including umbilical cord-derived huMPC therapy and bone marrow-derived hbMPC therapy.
 
Moreover, our clinical trial protocols are proprietary, and we rely upon trade secret laws for protection of these protocols.
 
We intend to continue to vigorously pursue patent protection of the technologies we develop, both in China and under the Patent Cooperation Treaty. Additionally, we require all of our employees to sign proprietary information and invention agreements, and compartmentalize our trade secrets in order to protect our confidential information.
 
 
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Patents
 
The following is a brief list of our patents, patent applications and work in process as of December 31, 2019:
 
 
 
China Patents
 
 
U.S. Patents
 
 
EU Patents
 
 
Rest of the World
 
 
Patent Cooperation Treaty (PCT)
 
 
Total
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Work in Process
  10 
  - 
  - 
  - 
  - 
  10 
Patents Filed, Pending
 27
 5
 4
 7
 5
 48
Granted
  29 
  3 
  1 
  2 
  - 
  35 
Total
 66
 8
 5
 9
 5
 93
 
Generally, our patents cover technology, methods, design and composition of and relating to medical device kits used in collecting cell specimens, cryopreservation of cells, purification, use of stem cells in a range of potential therapies, adipose tissue extraction, cell preservation and transportation, preparation of chimeric antigen receptor, gene detection and quality control.
 
Manufacturing
 
We manufacture cells for our own research, testing and clinical trials. We are scaling up and optimizing our manufacturing capacity. Our facilities are operated by a manufacturing and technology team with decades of relevant experience in China, the EU and the U.S.
 
In any precision setting, it is vital that all controlled environment equipment meet certain design standards. We operate our manufacturing facilities under GMP conditions as well the ISO standards. We employ an institutionalized and proprietary process and quality management system to optimize reproducibility and to hone our efficiency. Three of our facilities designed and built to GMP in Shanghai and Wuxi, China meet international standards. Specifically, our Shanghai cleanroom facility underwent rigorous cleanroom certification since 2013.
 
The quality management systems of CBMG Shanghai have been assessed and certified as meeting the requirements of ISO 9001: 2015, including (i) the cleanrooms in our new facility have been inspected and certified to meet the requirements of ISO 14644 and in compliance with China’s GMP requirements (2010 edition); and (ii) the equipment, including critical ones like biological safety cabinets in the new Shanghai facility has been calibrated and qualified, and the biological safety cabinets were also qualified. The quality management systems of CBMG Wuxi were certified as meeting the requirements of ISO 9001: 2015, and the facility and equipment in Wuxi Site were also qualified.
 
With our integrated GMP level plasmid, viral vectors and CAR-T cell chemistry, manufacturing and controls processes, as well as planned capacity expansion, we believe that we are highly distinguishable with other companies in the cellular therapy industry.
 
In January 2017, we leased a 113,038-square foot building located in the “Pharma Valley” of Shanghai, the People’s Republic of China. We are establishing 43,000 square foot facilities there with 25 clean-rooms and equipped with 12 independent production lines to support clinical batch production and commercial scale manufacturing. With the above expansion, the Company could support up to thousands of patients with CAR-T therapy and thousands of KOA patients with the stem cell therapy per annum.
 
Employees
 
As of December 31, 2019, the total enrollment of full-time employees of the Company is 217. Among these 217 professionals, 136 have postgraduate and PhD degrees and 71 have undergraduate degrees. In other words, 95.4% of our employees have a germane educational background. As a biotech company, 182 out of our 217 employees have medical or biological scientific credentials and qualifications.
 
 
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Certain Tax Matters
 
Following the completion of our merger with EastBridge Investment Group Corporation (Delaware) on February 6, 2013, CBMG and its controlled subsidiaries (the “CBMG Entities”) became a Controlled Foreign Corporation (CFC) under U.S. Internal Revenue Code Section 957. As a result, the CBMG Entities are subject to anti-deferral provisions within the U.S. federal income tax system that were designed to limit deferral of taxable earnings otherwise achieved by putting profit in low taxed offshore entities. While the CBMG Entities are subject to review under such provisions, the CBMG Entities’ earnings are from an active business and should not be deemed to be distributions made to its U.S. parent company.
 
On December 22, 2017, the tax reform bill was passed (Tax Cut and Jobs Act (H.R.1)) and reduced the top corporate tax rate from 35% to 21% effective from January 1, 2018. Pursuant to this new Act, non-operating loss carry-back period is eliminated and the loss carry-forward period was expanded from 20 years to an indefinite period.
 
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% from 2015. CBMG Shanghai re-applied and Shanghai SBM applied for the certificate of “advanced and new technology enterprise” in 2018. Both of them received approval on November 27, 2018 with an effective period of three years.
  
BIOPHARMACEUTICAL REGULATION
 
PRC Regulations
 
Our cellular medicine business operates in a highly regulated environment. In China, aside from provincial and local licensing authorities, there are hospitals and their internal ethics and utilization committees, and a system of IRBs which in many cases have members appointed by provincial authorities. With respect to cell therapies, however, the Chinese regulatory infrastructure is less established. In December 2017, the Chinese government issued trial guidelines concerning development and testing of cell therapy products, including stem cell treatments and immune cell therapies such as CAR-T cell therapeutics. These trial guidelines are not mandatory regulation but provide some general principles and basic requirements for cell therapy products in the areas of pharmaceutical research, non-clinical research and clinical research. The cell therapy products provided in the trial guideline refer to the human-sourced living cell products which are used for human disease therapy, whose source, operation and clinical trial process are in line with ethics and whose research and registration application are in line with regulations on pharmaceutical administration. The competent authority of pharmaceutical administration is the NMPA. It is further clarified by the NMPA that the non-registered clinical trial data would be acceptable for drug registration on a case by case basis, pending on the consistency of the samples used for the clinical trial and the drug applied for registration, the generation process of the clinical trial data, whether the data is authentic, complete, accurate and traceable to the source and the inspection outcome of the NMPA on the clinical trial. Moreover, an applicant of the clinical trial of the said cell therapy products can propose the phases of the clinical trial and the trial plan by itself (generally the trial can be divided into early stage clinical trial phase and confirmatory clinical trial phase), instead of the application of the traditional phases I, II and III of a clinical trial. However, it remains unclear if any of our clinical trials will be offered U.S. FDA-like 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. standards 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 in an undeveloped industry. In addition, we have begun to review the feasibility of performing synergistic U.S. clinical studies.
 
PRC Operating Licenses
 
Our business operations in China are subject to customary regulation and licensing requirements under regulatory agencies including the local Administration for Industry and Commerce, General Administration of Quality Supervision, Inspection and Quarantine and the State Administration of Taxation, for each of our business locations. Additionally, our clean room facilities and the use of reagents is also regulated by local branches of the Ministry of Environmental Protection. We are in good standing with respect to each of our business operating licenses.
 
U.S. Government Regulation
 
The health care industry is one of the most highly regulated industries in the United States. The federal government and individual state and local governments, as well as private accreditation organizations, oversee and monitor the activities of individuals and businesses engaged in the development, manufacture and delivery of health care products and services. Federal laws and regulations seek to protect the health, safety and welfare of the citizens of the U.S., as well as to prevent fraud and abuse associated with the purchase of health care products and services with federal monies. The relevant state and local laws and regulations similarly seek to protect the health, safety and welfare of the states’ citizens and prevent fraud and abuse. Accreditation organizations help to establish and support industry standards and monitor new developments.
 
 
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HCT/P Regulations
 
Manufacturing facilities that produce cellular therapies are subject to extensive regulation by the U.S. FDA. In particular, U.S. FDA regulations set forth requirements pertaining to establishments that manufacture human cells, tissues and cellular and tissue-based products (“HCT/Ps”). Title 21, Code of Federal Regulations, Part 1271 (21 CFR Part 1271) provides for a unified registration and listing system, donor-eligibility, current Good Tissue Practices (“cGTP”) and other requirements that are intended to prevent the introduction, transmission and spread of communicable diseases by HCT/Ps. While we currently do not conduct these activities within the United States, these regulations may be relevant to us if in the future we become subject to them, or if parallel rules are imposed on our operations in China.
 
We currently collect, process, store and manufacture HCT/Ps, including manufacturing cellular therapy products. We also collect, process and store HCT/Ps. Accordingly, we comply with cGTP and cGMP guidelines that apply to biological products. Our management believes that certain other requirements pertaining to biological products, such as requirements pertaining to premarket approval, do not currently apply to us because we are not currently investigating, marketing or selling cellular therapy products in the United States. If we change our business operations in the future, the U.S. FDA requirements that apply to us may also change.
 
Certain state and local governments within the United States also regulate cell-processing facilities by requiring them to obtain other specific licenses. Certain states may also have enacted laws and regulations, or may be considering laws and regulations, regarding the use and marketing of stem cells or cell therapy products, such as those derived from human embryos. While these laws and regulations should not directly affect our business, they could affect our future business. Presently we are not subject to any of these state law requirements, because we do not conduct these regulated activities within the United States.
 
Pharmaceutical and Biological Products
 
In the United States, pharmaceutical and biological products, including cellular therapies, are subject to extensive pre- and post-market regulation by the U.S. FDA. The Federal Food, Drug, and Cosmetic Act (“FD&C Act”) and other federal and state statutes and regulations, govern, among other things, the research, development, testing, manufacture, storage, recordkeeping, approval, labeling, promotion and marketing, distribution, post-approval monitoring and reporting, sampling and import and export of pharmaceutical products. Biological products are approved for marketing under provisions of the Public Health Service Act, or PHS Act. However, because most biological products also meet the definition of “drugs” under the FD&C Act, they are also subject to regulation under FD&C Act provisions. The PHS Act requires the submission of a biologics license application (“BLA”) rather than a New Drug Application (“NDA”) for market authorization. However, the application process and requirements for approval of BLAs are similar to those for NDAs, and biologics are associated with similar approval risks and costs as drugs. Presently we are not subject to any of these requirements, because we do not conduct these regulated activities within the United States. However, these regulations may be relevant to us should we engage in these activities in the United States in the future.
 
AVAILABLE INFORMATION
 
You are advised to read this Form 10-K in conjunction with other reports and documents that we file from time to time with the SEC. In particular, please read our Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that we file from time to time. We make available free of charge on our website, www.cellbiomedgroup.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
 
 
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ITEM 1A. RISK FACTORS
 
RISKS RELATED TO OUR COMPANY
 
Please carefully consider the following discussion of significant factors, events and uncertainties that make an investment in our securities risky. The events and consequences discussed in these risk factors could, in circumstances we may not be able to accurately predict, recognize or control, have a material adverse effect on our business, growth, reputation, prospects, financial condition, operating results (including components of our financial results such as sales and profits), cash flows, liquidity and stock price. These risk factors do not identify all risks that we face; our operations could also be affected by factors, events or uncertainties that are not presently known to us or that we currently do not consider to present significant risks to our operations.
 
We have a limited operating history and expect significant operating losses for the next few years.
 
We are a company with a limited operating history and have incurred substantial losses and negative cash flow from operations through the year ended December 31, 2019. Our cash flow from operations has not and may continue to not be consistent from period to period, our biopharmaceutical business has not yet generated substantial revenue and we may continue to incur losses and negative cash flow in future periods, particularly within the next several years.
 
Our biopharmaceutical product development programs are based on novel technologies and are inherently risky.
 
We are subject to the risks of failure inherent in the development of products based on new biomedical technologies. The novel nature of these cell-based therapies creates significant challenges in regard to product development and optimization, manufacturing, government regulation, third-party reimbursement and market acceptance, including the challenges of:
 
 Educating medical personnel regarding the application protocol;
Sourcing clinical and commercial supplies for the materials used to manufacture and process our product candidates;
Developing a consistent and reliable process, while limiting contamination risks regarding the application protocol;
Conditioning patients with chemotherapy in conjunction with delivering immune cell therapy treatment, which may increase the risk of adverse side effects;
Obtaining regulatory approval, as the NMPA, and other regulatory authorities have limited experience with commercial development of cell-based therapies, and therefore the pathway to regulatory approval may be more complex and require more time than we anticipate; and
Establishing sales and marketing capabilities upon obtaining any regulatory approval to gain market acceptance of cell therapy.
 
 These challenges present difficulties in developing and commercializing products on a timely or profitable basis or at all.
 
 
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We face risks relating to the cell therapy industry, clinical development and commercialization.
 
Cell therapy is still a developing field and a significant global market for our services has yet to emerge. Our cellular therapy candidates are based on novel cell technologies that are inherently risky and may not be understood or accepted by the marketplace. The current market principally consists of providing manufacturing of cell- and tissue-based therapeutic products for clinical trials and processing of stem cell products for therapeutic programs. 
 
The degree of market acceptance of any future product candidates will depend on a number of factors, including:
 
the clinical safety and effectiveness of the product candidates, the availability of alternative treatments and the perceived advantages of the particular product candidates over alternative treatments;
 
the relative convenience and ease of administration of the product candidates;
 
ethical concerns that may arise regarding our commercial use of stem cells, including adult stem cells, in the manufacture of the product candidates;
 
the frequency and severity of adverse events or other undesirable side effects involving the product candidates or the products or product candidates of others that are cell-based; and
 
the cost of the products, the reimbursement policies of government and third-party payors and our ability to obtain sufficient third-party coverage or reimbursement.
 
Laws and the regulatory infrastructure governing cellular biopharmaceuticals in China are relatively new and less established in comparison to the U.S. and other countries; accordingly, regulation can be less stable and predictable than desired, and regulatory changes may disrupt our commercialization process.
 
In December 2017, the Chinese government issued trial guidelines concerning development and testing of cell therapy products, including stem cell treatments and immune cell therapies such as CAR-T cell therapeutics. These trial guidelines are not mandatory regulation but provide some general principles and basic requirements for cell therapy products in the areas of pharmaceutical research, non-clinical research and clinical research. The cell therapy products provided in the trial guideline refer to the human-sourced living cell products which are used for human disease therapy, whose source, operation and clinical trial process are in line with ethics and whose research and registration application are in line with regulations on pharmaceutical administration. The competent authority of pharmaceutical administration is the NMPA. It is further clarified by the NMPA that the non-registered clinical trial data would be acceptable for drug registration on a case by case basis, pending on the consistency of the samples used for the clinical trial and the drug applied for registration, the generation process of the clinical trial data, whether the data is authentic, complete, accurate and traceable to the source and the inspection outcome of the NMPA on the clinical trial. Moreover, an applicant of the clinical trial of the said cell therapy products can propose the phases of the clinical trial and the trial plan by itself (generally the trial can be divided into early stage clinical trial phase and confirmatory clinical trial phase) instead of the application of the traditional phases I, II and III of a clinical trial. However, it remains unclear if any of our clinical trials will be offered U.S. FDA-like 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. We do not know if our animal studies documentation will be approved to support trials in humans. We also do not know if our cell lines will be accepted by the PRC health authorities. These factors could adversely affect the timing of the clinical trials, the timing of receipt and reporting of clinical data, the timing of Company-sponsored IND filings, and our ability to conduct future planned clinical trials, and any of the above could have a material adverse effect on our business.
 
NMPA’s regulations can limit our ability to develop, license, manufacture and market our products and services.
 
Some or all of our operations in China will be subject to oversight and regulation by the NMPA and MOH. Government regulations, among other things, cover the inspection of and controls over testing, manufacturing, safety and environmental considerations, efficacy, labeling, advertising, promotion, record keeping and sale and distribution of pharmaceutical products. Such government regulations may increase our costs and prevent or delay the licensing, manufacturing and marketing of any of our products or services. In the event we seek to license, manufacture, sell or distribute new products or services, we likely will need approvals from certain government agencies as the future growth and profitability of any operations in China would be contingent on obtaining the requisite approvals. There can be no assurance that we will obtain such approvals.
 
In 2003, the CFDA implemented new guidelines for the licensing of pharmaceutical products. All existing manufacturers with licenses were required to apply for the cGMP certifications. According to Good Manufacturing Practices for Pharmaceutical Products (revised edition 2010) or the New GMP Rules promulgated by the Ministry of Health of the PRC on January 17, 2011 which became effective on March 1, 2011, all the newly constructed manufacturing facilities of drug manufacture enterprises in China shall comply with the requirements of the New GMP Rules, which are stricter than the original GMP standards.
 
 
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In addition, delays, product recalls or failures to receive approval may be encountered based upon additional government regulation, legislative changes, administrative action or changes in governmental policy and interpretation applicable to the Chinese pharmaceutical industry. Our pharmaceutical activities also may subject us to government regulations with respect to product prices and other marketing and promotional-related activities. Government regulations may substantially increase our costs for developing, licensing, manufacturing and marketing any products or services, which could have a material adverse effect on our business, operating results and financial condition.
 
The NMPA and other regulatory authorities in China have implemented a series of new punitive and stringent measures regarding the pharmaceuticals industry to redress certain past misconducts in the industry and certain deficiencies in public health reform policies. Given the nature and extent of such new enforcement measures, the aggressive manner in which such enforcement is being conducted and the fact that newly-constituted local level branches are encouraged to issue such punishments and fines, there is the possibility of large scale and significant penalties being levied on manufacturers. These new measures may include fines, restriction and suspension of operations and marketing and other unspecified penalties. This new regulatory environment has added significantly to the risks of our businesses in China and may have a material adverse effect on our business, operating results and financial condition.
 
Our technology platforms, including our CAR-T, AFP-TCR and TIL, whether preclinical or clinical, are new approaches to cancer treatment that present significant challenges.
 
We have concentrated our research and development efforts on T cell immunotherapy technology, and our future success in cancer treatment is dependent on the successful development of T-cell immunotherapies in general and our CAR technologies and product candidates in particular. Our approach to cancer treatment aims to alter T-cells ex vivo through genetic modification using viruses designed to reengineer the T-cells to recognize specific proteins on the surface or inside cancer cells. Because this is a new approach to cancer immunotherapy and cancer treatment generally, developing and commercializing our product candidates subjects us to many challenges.
 
We cannot be sure that our T cell immunotherapy and will yield satisfactory products that are safe and effective, scalable or profitable. Additionally, because our technology involves the genetic modification of patient cells ex vivo using viral vector, we are subject to many of the challenges and risks that gene therapies face, including regulatory requirements governing gene and cell therapy products have evolved frequently.
  
Moreover, public perception of therapy safety issues, including adoption of new therapeutics or novel approaches to treatment, may adversely influence the willingness of subjects to participate in clinical trials, or if approved, of physicians to subscribe to the novel treatment mechanics. Physicians, hospitals and third-party payers often are slow to adopt new products, technologies and treatment practices that require additional upfront costs and training. Physicians may not be willing to undergo training to adopt this novel and personalized therapy, may decide the therapy is too complex to adopt without appropriate training and may choose not to administer the therapy. Based on these and other factors, hospitals and payers may decide that the benefits of this new therapy do not or will not outweigh its costs.
 
Our near-term ability to generate significant product revenue is dependent on the success of one or more of our CAR-T, AFP TCR-T and TIL product candidates, each of which are at an early-stage of development and will require significant additional clinical testing before we can seek regulatory approval and begin commercial sales.
 
Our near-term ability to generate significant product revenue is highly dependent on the POC results of our cell therapy assets, and our ability to obtain regulatory approval of and successfully commercialize these products. All of these products are in the early stages of development, and will require additional pre-clinical and clinical development, regulatory review and approval in each jurisdiction in which we intend to market the products, substantial investment, access to sufficient commercial manufacturing capacity and significant marketing efforts before we can generate any revenue from product sales. Before obtaining marketing approval from regulatory authorities for the sale of our product candidates, we must conduct extensive clinical studies to demonstrate the safety, purity and potency of the product candidates in humans. We cannot be certain that any of our product candidates will be successful in clinical studies and they may not receive regulatory approval even if they are successful in clinical studies.
 
Developed products that encounter safety or efficacy problems, developmental delays, regulatory issues or other problems, could significantly harm our development plans and business. Further, competitors who are developing products with similar technology may experience problems with their products that could identify problems that would potentially harm our business.
 
 
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Our CAR-T, AFP TCR-T and TIL product candidates are biologics and the manufacture of our product candidates is complex and can lead to difficulties in production, particularly with respect to process development or scaling-out of our manufacturing capabilities. Such difficulties would likely impact our ability to provide supply of our product candidates for clinical trials or our products for patients, if approved, resulting in delays or stoppages or in inability to maintain a commercially viable cost structure.
 
Our immune cell CAR-T, AFP TCR-T and TIL product candidates are biologics and the process of manufacturing our products is complex, highly regulated and subject to multiple risks. The manufacture of our product candidates involves complex processes, including harvesting T-cells from patients, genetically modifying the T-cells ex vivo, multiplying the T-cells to obtain the desired dose and ultimately infusing the T-cells back into a patient’s body. As a result of the complexities, the cost to manufacture these biologics in general, and our genetically modified cell product candidates in particular, is generally higher than the adipose stem cell, and the manufacturing process is less reliable and is more difficult to reproduce. Our manufacturing process will be susceptible to product loss or failure due to logistical issues associated with the collection of white blood cells, or starting material, from the patient, shipping such material to the manufacturing site, shipping the final product back to the patient and infusing the patient with the product, manufacturing issues associated with the differences in patient starting materials, interruptions in the manufacturing process, contamination, equipment or reagent failure, improper installation or operation of equipment, vendor or operator error, inconsistency in cell growth and variability in product characteristics. Even minor deviations from normal manufacturing processes could result in reduced production yields, product defects and other supply disruptions. If for any reason we lose a patient’s starting material or later-developed product at any point in the process, the manufacturing process for that patient will need to be restarted and the resulting delay may adversely affect that patient’s outcome. If microbial, viral or other contaminations are discovered in our product candidates or in the manufacturing facilities in which our product candidates are made, such manufacturing facilities may need to be closed for an extended period of time to investigate and remedy the contamination. Because our product candidates are manufactured for each particular patient, we will be required to maintain a chain of identity with respect to materials as they move from the patient to the manufacturing facility, through the manufacturing process and back to the patient. Maintaining such a chain of identity is difficult and complex, and failure to do so could result in adverse patient outcomes, loss of product or regulatory action including withdrawal of our products from the market. Further, as product candidates are developed through preclinical to late stage clinical trials towards approval and commercialization, it is common that various aspects of the development program, such as manufacturing methods, are altered along the way in an effort to optimize processes and results. Such changes carry the risk that they will not achieve these intended objectives, and any of these changes could cause our product candidates to perform differently and affect the results of planned clinical trials or other future clinical trials.
 
Although we continue to develop our own manufacturing facilities to support our clinical and commercial manufacturing activities, we may, in any event, never be successful in establishing our own manufacturing facilities. We have not yet caused our product candidates to be manufactured or processed on a commercial scale and may not be able to do so for any of our product candidates. Although our manufacturing and processing approach is based upon the current approach undertaken by our third-party research institution collaborators, we do not have experience in managing the clinical and commercial manufacturing process, and our process may be more difficult or expensive than the approaches currently in use. We will make changes as we work to optimize the manufacturing process, and we cannot be sure that even minor changes in the process will not result in significantly different CAR-T, AFP TCR-T, TIL or stem cells that may not be as safe and effective as the current products deployed by our third-party research institution collaborators. As a result of these challenges, we may experience delays in our clinical development and/or commercialization plans. The manufacturing risks could delay or prevent the completion of our clinical trials or the approval of any of our product candidates by the U.S. FDA, NMPA or other regulatory authorities, result in higher costs or adversely impact commercialization of our product candidates. In addition, we will rely on third parties to perform certain specification tests on our product candidates prior to delivery to patients. Inappropriately conducted tests and unreliable data could put patients at risk of serious harm and the U.S. FDA, NMPA or other regulatory authorities could require additional clinical trials or place significant restrictions on our company until deficiencies are remedied. We are not always able to reduce the cost of goods for our product candidates to levels that will allow for an attractive return on investment if and when those product candidates are commercialized.
 
We rely heavily on third parties to conduct clinical trials on our product candidates.
 
We presently are party to, and expect that we will be required to enter into, agreements with hospitals and other research partners to perform clinical trials for us and to engage in sales, marketing and distribution efforts for our products and product candidates we may acquire in the future. We are not always able to establish or maintain third-party relationships on a commercially reasonable basis. In addition, these third parties may have similar or more established relationships with our competitors or other larger customers. Moreover, the loss for any reason of one or more of these key partners could have a significant and adverse impact on our business. If we are unable to obtain or retain third-party sales and marketing vendors on commercially acceptable terms, we may not be able to commercialize our therapy products as planned and we may experience delays in or suspension of our marketing launch. Our dependence upon third parties can adversely affect our ability to generate profits or acceptable profit margins and our ability to develop and deliver such products on a timely and competitive basis.
 
Outside scientists and their third-party research institutions on whom we rely for research and development and early clinical testing of our product candidates may have other commitments or conflicts of interest, which could limit our access to their expertise and harm our ability to leverage our technology platform.
 
We currently have limited internal research and development capabilities in solid tumors. We therefore rely at present on our third-party research institution collaborators for both capabilities. 
 
The outside scientists who conduct the clinical testing of our current product candidates, and who conduct the research and development upon which our product candidate pipeline depends, are not our employees; rather they serve as either independent contractors or the primary investigators under collaboration that we have with their sponsoring academic or research institution. Such scientists and collaborators may have other commitments that would limit their availability to us. Although our scientific advisors generally agree not to do competing work, if an actual or potential conflict of interest between their work for us and their work for another entity arises, we may lose their services. We are currently evaluating the feasibility of conducting these trials ourselves or commencing the trial in the United States or elsewhere. These factors could adversely affect the timing of the clinical trials, the timing of receipt and reporting of clinical data, the timing of Company-sponsored IND filings and our ability to conduct future planned clinical trials. It is also possible that some of our valuable proprietary knowledge may become publicly known through these scientific advisors if they breach their confidentiality agreements with us, which would cause competitive harm to, and have a material adverse effect on our business.
 
 
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We are not always able to maintain our licenses, patents or other intellectual property and could lose important protections that are material to continuing our operations and our future prospects.
 
We operate in the highly technical field of development of regenerative and immune cellular therapies. In addition to patents, we rely in part on trademark, trade secret and protection to protect our intellectual properties comprised of proprietary know how, technology and processes. However, trade secrets are difficult to protect. We have entered and expect to continue to enter into confidentiality and intellectual property assignment agreements with our employees, consultants, outside scientific collaborators, sponsored researchers, affiliates, other advisors and potential investors. These agreements generally require that the other party keep confidential and not disclose to third parties all confidential information developed by the party or made known to the party by us. These agreements may also provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, these agreements may be difficult to enforce, or can be breached and may not effectively protect our intellectual property rights.
 
In addition to contractual measures, we try to protect the confidential nature of our proprietary information by compartmentalizing our intellectual properties as well as using other security measures. Such physical and technology measures may not provide adequate protection for our proprietary information. For example, our security measures may not prevent an employee or consultant with authorized access from misappropriating our trade secrets and providing them to a competitor, and the recourse we have available against such misconduct may be inadequate to adequately protect our interests. Enforcing a claim that a party illegally disclosed or misappropriated a trade secret can be difficult, expensive and time consuming, and the outcome is unpredictable. In addition, courts outside the United States may be less willing to protect trade secrets. Furthermore, others may independently develop our proprietary information in a manner that could prevent legal recourse by us. If any of our confidential or proprietary information, including our trade secrets and know how, were to be disclosed or misappropriated, or if a competitor independently developed any such information, our competitive position could be harmed.
 
Failure to obtain or maintain patent protection for our products and product candidates could have a material adverse effect on our business.
 
Our commercial success will depend, in part, on obtaining and maintaining patent protection for new technologies, product candidates, products and processes and successfully defending such patents against third-party challenges. To that end, we file or acquire patent applications, and have been issued patents that are intended to cover certain methods and uses relating to stem cells and cancer immune cell therapies.
 
The patent positions of biotechnology companies can be highly uncertain and involve complex legal, scientific and factual questions and recent court decisions have introduced significant uncertainty regarding the strength of patents in the industry. Moreover, the legal systems of some countries do not favor the aggressive enforcement of patents and may not protect our intellectual property rights to the same extent as they would, for instance, under the laws of the United States. Any of the issued patents we own or license that are challenged by third parties and held to be invalid, unenforceable or with a narrower or different scope of coverage that what we currently believe, could effectively reduce or eliminate protection we believed we had against competitors with similar products or technologies. If we ultimately engage in and lose any such patent disputes, we could be subject to competition and/or significant liabilities, we could be required to enter into third-party licenses or we could be required to cease using the disputed technology or product. In addition, even if such licenses are available, the terms of any license requested by a third party could be unacceptable to us.
 
The claims of any current or future patents that may issue or be licensed to us may not contain claims that are sufficiently broad to prevent others from utilizing the covered technologies and thus may provide us with little commercial protection against competing products. Consequently, our competitors may independently develop competing products that do not infringe our patents or other intellectual property. To the extent a competitor can develop similar products using a different chemistry, our patents and patent applications may not prevent others from directly competing with us. Product development and approval timelines for certain products and therapies in our industry can require a significant amount of time (i.e., many years). As such, it is possible that any patents that may cover an approved product or therapy may have expired at the time of commercialization or only have a short remaining period of exclusivity, thereby reducing the commercial advantages of the patent. In such case, we would then rely solely on other forms of exclusivity which may provide less protection to our competitive position. 
 
 
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Litigation and other proceedings relating to intellectual property are expensive, time consuming and uncertain, and we are not always successful in our efforts to protect against infringement by third parties or defend ourselves against claims of infringement or otherwise.
 
To protect our intellectual property, we may initiate litigation or other proceedings. In general, intellectual property litigation is costly, time-consuming, diverts the attention of management and technical personnel and could result in substantial uncertainty regarding our future viability, even if we ultimately prevail. Some of our competitors may be able to sustain the costs of such litigation or other proceedings more effectively than we can because of their substantially greater financial resources. The loss or narrowing of our intellectual property protection, the inability to secure or enforce our intellectual property rights or a finding that we have infringed the intellectual property rights of a third party could limit our ability to develop or market our products and services in the future or adversely affect our revenues. Furthermore, any public announcements related to such litigation or regulatory proceedings could adversely affect the price of our common stock. Third parties may allege that the research, development and commercialization activities we conduct infringe patents or other proprietary rights owned by such parties. This may turn out to be the case even though we have conducted a search and analysis of third-party patent rights and have determined that certain aspects of our research and development and proposed products activities apparently do not infringe on any third-party Chinese patent rights. If we are found to have infringed the patents of a third party, we may be required to pay substantial damages; we also may be required to seek from such party a license, which may not be available on acceptable terms, if at all, to continue our activities. A judicial finding of infringement or the failure to obtain necessary licenses could prevent us from commercializing our products, which would have a material adverse effect on our business, operating results and financial condition.
 
We have in the past, and may in the future, need to initiate litigation or other proceedings to protect our intellectual property. Third parties have in the past, and may in the future, initiate proceedings to challenge our intellectual property rights. For instance, in April 2018, a company based in Hangzhou, China, submitted a petition with the PRC Trademark Office to challenge our ReJoin™ trademark on the basis of a lack of use. We collected evidence and timely submitted a response to refute the claim and the State Trademark Office accepted our response, overruling the Hangzhou company’s application for revoking ReJoin™. Although we are dedicated to protecting our intellectual property in such proceedings and believe that we have resources to do so, there is no assurance that we will successfully defend such notice in each of these matters. The loss or narrowing of our intellectual property protection, the inability to secure or enforce our intellectual property rights or a finding that we have infringed the intellectual property rights of a third party would likely limit our ability to develop or market our products and services in the future or adversely affect our revenues, which would have a material adverse effect on our business, operating results and financial condition.
 
We do not seek to protect our intellectual property rights in all jurisdictions throughout the world and we may not be able to adequately enforce our intellectual property rights even in the jurisdictions where we seek protection.
 
Filing, prosecuting and defending patents on our product candidates in all countries and jurisdictions throughout the world would be impracticable and cost prohibitive, and our intellectual property rights in some countries could be less extensive than those in the People’s Republic of China or the United States, assuming that rights are obtained in these jurisdiction. In addition, the laws of some foreign countries may not protect all of our intellectual properties.
 
Failure to protect the confidentiality of trade secrets, our competitive position could be impaired.
 
A significant amount of our technology, particularly with respect to our proprietary manufacturing processes, is unpatented and is held in the form of trade secrets. Our efforts to protect these trade secrets are comprised of the use of confidentiality and proprietary information agreement, physically secured documentation and knowledge segmentation among our staff. Even so, improper use or disclosure of our confidential information could occur and in such cases adequate remedies may be insufficient to protect our competitive position or may not exist. The inadvertent disclosure of our trade secrets could also impair our competitive position.
 
PRC intellectual property law requires us to compensate our employees for the intellectual property that they may help to develop under certain situations.
 
We have entered and expect to continue to enter into confidentiality and intellectual property assignment agreements with most of our employees, consultants, outside scientific collaborators, sponsored researchers, affiliates and other advisors. These agreements generally require that the other party keep confidential and not disclose to third parties all confidential information developed by the party or made known to the party by us. These agreements may also provide that inventions conceived by the party in the course of rendering services to us will be our exclusive property. However, these agreements may be difficult to enforce, or can be breached and may not effectively protect our intellectual property rights.
 
The PRC laws codify a “reward/award” policy which entitles employees to certain levels of compensation and bonus from their service invention-creations for which their employers filed for and were granted patent protection. In the absence of any contractual understanding, the Implementing Regulations of the Patent Law of the PRC require a minimum compensation and bonus to such employees as: (a) bonuses for (i) each invention patent, a one-time reward of no less than 3,000 RMB, or (ii) each utility model or design patent, a one-time reward of no less than 1,000 RMB, and (b) compensation: (i) for each invention patent and utility model, at least 2% of annual operating profits derived from the use of the patent during its validity period (or a one-time compensation with reference to the such ratio), (ii) for each design patent, at least 0.2% of annual operating profits derived from the use of the design patent during its validity period (or a one-time compensation with reference to such ratio) and (iii) of at least 10% of royalties received from the licensing the patent to a third party.
 
 
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Although our bylaws allow us to issue bonuses to our employees, we have not contractually limited the amount of compensation that we may pay them for being granted patents for their ideas, developments, discoveries or inventions. As such, should any of our employees who have not contractually agreed otherwise seek to enforce these rights, we may be required to pay the statutorily mandated minimum to our employees as required by this law. Our product candidates are still in the clinical trial stage and as of the date of this annual report, we have not derived any revenue from our product-related patents. However, if and when we commercialize our product candidates or therapies, or if we are required to pay our employees any compensation for patents relating to our technical services, such compensation could be substantial and may harm our business prospects, financial condition and results of operations.
 
Our technologies are at early stages of discovery and development, and may not necessarily lead to any commercially acceptable or profitable products.
 
We have yet to develop any therapeutic products that have been approved for marketing, and we do not expect to become profitable within the next several years, but rather expect our biopharmaceutical business to incur additional and increasing operating losses. Before commercializing any therapeutic product in China, we may be required to obtain regulatory approval from the MOH, NMPA, local regulatory authorities and/or individual hospitals, and outside China from equivalent foreign agencies after conducting extensive preclinical studies and clinical trials that demonstrate that the product candidate is safe and effective.
 
We have in the past and may in the future elect to delay or discontinue studies or clinical trials based on unfavorable results. Any product developed from, or based on, cell technologies may fail to:
 
survive and persist in the desired location;
 
provide the intended therapeutic benefit;
 
engraft or integrate into existing tissue in the desired manner; or
 
achieve therapeutic benefits equal to, or better than, the standard of treatment at the time of testing.
  
In addition, our therapeutic products may cause undesirable side effects. Results of preclinical research in animals may not be indicative of future clinical results in humans.
 
Ultimately if regulatory authorities do not approve our products or if we fail to maintain regulatory compliance, we would be unable to commercialize our products, and our business and results of operations would be harmed. Even if we do succeed in developing products, we will face many potential obstacles such as the need to develop or obtain manufacturing, marketing and distribution capabilities. Furthermore, because transplantation of cells is a new form of therapy, the marketplace may not accept any products we may develop.
 
Most potential applications of our technology are pre-commercialization, which subjects us to development and marketing risks.
 
We are in a relatively early stage on the path to commercialization with many of our products. Successful development and market acceptance of our products is subject to developmental risks, including failure to achieve innovative solutions to problems during development, ineffectiveness, lack of safety, unreliability, failure to receive necessary regulatory clearances or approvals, approval by hospital ethics committees and other governing bodies, high commercial cost, preclusion or obsolescence resulting from third parties’ proprietary rights or superior or equivalent products, competition and general economic conditions affecting purchasing patterns. There is no assurance that we or our partners will successfully develop and commercialize our products, or that our competitors will not develop competing products, treatments or technologies that are less expensive or superior. Failure to successfully develop and market our products would have a substantial negative effect on our results of operations and financial condition.
 
Market acceptance of new technology such as ours can be difficult to obtain.
 
New and emerging cell therapy and cell banking technologies may have difficulty or encounter significant delays in obtaining market acceptance in some or all countries around the world due to the novelty of our cell therapy and cell banking technologies. Therefore, the market adoption of our cell therapy and cell banking technologies may be slow and lengthy with no assurances that the technology will be successfully adopted. The lack of market adoption or reduced or minimal market adoption of cell therapy and cell banking technologies may have a significant impact on our ability to successfully sell our future product(s) or therapies within China or in other countries. Our strategy depends in part on the adoption of the therapies we may develop by state-owned hospital systems in China, and the allocation of resources to new technologies and treatment methods is largely dependent upon ethics committees and governing bodies within the hospitals. Even if our clinical trials are successful, there can be no assurance that hospitals in China will adopt our technology and therapies as readily as we may anticipate.
 
 
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Future clinical trial results can differ significantly from our expectations.
 
While we have proceeded incrementally with our clinical trials in an effort to gauge the risks of proceeding with larger and more expensive trials, we cannot guarantee that we will not experience negative results with larger and much more expensive clinical trials than we have conducted to date. Poor results in our clinical trials could result in substantial delays in commercialization, substantial negative effects on the perception of our products and substantial additional costs. These risks are increased by our reliance on third parties in the performance of many of the clinical trial functions, including the clinical investigators, hospitals and other third-party service providers.
 
Failure of our clinical trials to demonstrate safety and efficacy to the satisfaction of the relevant regulatory authorities, including the PRC’s National Medicinal Product Administration and the Ministry of Health, or failure to otherwise produce positive results, subjects us to additional costs or delays in completing the development and commercialization of such product candidates.
 
Currently, a regulatory structure has not been established to standardize the approval process for products or therapies based on the technology that exists or that is being developed in our field. Therefore we must conduct, at our own expense, extensive clinical trials to demonstrate the safety and efficacy of the product candidates in humans, and then archive our results until such time as a new regulatory regime is put in place. If and when this new regulatory regime is adopted, it may be easier or more difficult to navigate than CBMG may anticipate, with the following potential barriers:
 
regulators or institutional review boards may not authorize us or our investigators to commence clinical trials or conduct clinical trials at a prospective trial site;
 
clinical trials of product candidates may produce negative or inconclusive results, and we may decide, or regulators may require us, to conduct additional clinical trials or abandon product development programs that we expect to be pursuing;
 
the number of patients required for clinical trials of product candidates may be larger than we anticipate, enrollment in these clinical trials may be slower than we anticipate, or participants may drop out of these clinical trials at a higher rate than we anticipate;
 
third party contractors may fail to comply with regulatory requirements or meet their contractual obligations to us in a timely manner or at all;
 
we might have to suspend or terminate clinical trials of our product candidates for various reasons, including a finding that the participants are being exposed to unacceptable health risks;
 
regulators or institutional review boards may require that we or our investigators suspend or terminate clinical research for various reasons, including noncompliance with regulatory requirements;
 
the cost of clinical trials of our product candidates may be greater than anticipated;
 
we may be subject to a more complex regulatory process, since cell-based therapies are relatively new and regulatory agencies have less experience with them as compared to traditional pharmaceutical products;
 
the supply or quality of our product candidates or other materials necessary to conduct clinical trials of these product candidates may be insufficient or inadequate; and
 
our product candidates may have undesirable side effects or other unexpected characteristics, causing us or our investigators to halt or terminate the trials.
 
We may be unable to generate interest or meaningful revenue in out-licensing our intellectual property.
 
 
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The results of preclinical studies do not always correlate with the results of human clinical trials. In addition, early stage clinical trial results do not ensure success in later stage clinical trials, and interim trial results are not necessarily predictive of final trial results.
 
To date, we have not completed the development of any products through regulatory approval. The results of preclinical studies in animals may not be predictive of results in a clinical trial. Likewise, the outcomes of early clinical trials are not necessarily predictive of the success of later clinical trials. New information regarding the safety and efficacy of such product candidates can be less favorable than the data observed to date. AG’s budding technical service revenue in the Jilin Hospital should not be relied upon as evidence that later or larger-scale clinical trials will succeed. In addition, even if the trials are successfully completed, we cannot guarantee that the NMPA will interpret the results as we do, and more trials could be required before we submit our product candidates for approval. To the extent that the results of the trials are not satisfactory to the NMPA or other foreign regulatory authorities for support of a marketing application, approval of our product candidates may be significantly delayed, or we may be required to expend significant additional resources, which may not be available to us, to conduct additional trials in support of potential approval of our product candidates.
 
If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.
 
We may experience difficulties in patient enrollment in our clinical trials for a variety of reasons. The timely completion of clinical trials in accordance with their protocols depends, among other things, on our ability to enroll a sufficient number of patients who remain in the study until its conclusion. The enrollment of patients depends on many factors, including:
 
the patient eligibility criteria defined in the protocol;
the size of the patient population required for analysis of the trial’s primary endpoints;
the proximity of patients to study sites;
the design of the trial;
our ability to recruit clinical trial investigators with the appropriate competencies and experience;
our ability to obtain and maintain patient consents; and
the risk that patients enrolled in clinical trials will drop out of the trials before completion.
 
In addition, our clinical trials may compete with other clinical trials for product candidates that are in the same therapeutic areas as our product candidates, and this competition may reduce the number and types of patients available to us, because some patients who might have opted to enroll in our trials may instead opt to enroll in a trial being conducted by one of our competitors. Since the number of qualified clinical investigators is limited, we expect to conduct some of our clinical trials at the same clinical trial sites that some of our competitors use, which will reduce the number of patients who are available for our clinical trials in such clinical trial site. Moreover, because our product candidates represent a departure from more commonly used methods for cancer treatment, potential patients and their doctors may be inclined to use conventional therapies, such as chemotherapy and or traditional Chinese medicine, rather than enroll patients in any future clinical trial.
 
Upon commencing clinical trials, delays in patient enrollment may result in increased costs or may affect the timing or outcome of the planned clinical trials, which could prevent completion of these trials and adversely affect our ability to advance the development of our product candidates.
 
We are exposed to general liability, nonclinical and clinical liability risks which could place a substantial financial burden upon us, should lawsuits be filed against us.
 
Our business exposes us to potential liability risks that are inherent in the testing, manufacturing and marketing of our therapies and product candidates. Such claims may be asserted against us at some point. In addition, the use in our clinical trials of our therapies and products and the subsequent sale of these therapies or product candidates by us or our potential collaborators may cause us to bear a portion of or all product liability risks. We currently have insurance coverage relating to inventory, property plant and equipment and office premises. The Company also purchased insurance covering personal injury, medical expenses and several clinical trials. However, any claim under such insurance policies may be subject to certain exceptions, and may not be honored fully, in part, in a timely manner, or at all, and may not cover the full extent of liability we may actually face. Therefore, a successful liability claim or series of claims brought against us could have a material adverse effect on our business, financial condition and results of operations.
 
 
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We currently have no CAR-T, TCR-T, TIL or KOA product marketing and sales organization and have no experience in marketing such products. Failure to establish product marketing and sales capabilities or enter into agreements with third parties to market and sell our product candidates may result in less product revenue than expected.
 
We currently have no CAR-T, TCR-T, TIL or KOA product sales, marketing or distribution capabilities and have no experience in marketing products. We intend to develop an in-house product marketing organization and sales force, which will require significant capital expenditures, management resources and time. We will have to compete with other pharmaceutical and biotechnology companies to recruit, hire, train and retain marketing and sales personnel.
 
If we are unable or decide not to establish internal sales, marketing and distribution capabilities, we will pursue collaborative arrangements regarding the sales and marketing of our products, however, there can be no assurance that we will be able to establish or maintain such collaborative arrangements, or if we are able to do so, that they will have effective sales forces. Any revenue we receive will depend upon the efforts of such third parties, which may not be successful. We may have little or no control over the marketing and sales efforts of such third parties and our revenue from product sales may be lower than if we had commercialized our product candidates ourselves. We also face competition in our search for third parties to assist us with the sales and marketing efforts of our product candidates. There can be no assurance that we will be able to develop in-house sales and distribution capabilities or establish or maintain relationships with third-party collaborators to commercialize any product in China or overseas.
 
Coverage and reimbursement can be limited or unavailable in certain market segments for our product candidates, which could make it difficult for us to sell our product candidates profitably.
 
Successful sales of our product candidates, if approved, depend on the availability of adequate coverage and reimbursement from third-party payers. In addition, because our product candidates represent new approaches to the treatment of cancer, we cannot accurately estimate the potential revenue from our product candidates.
 
Patients who are provided medical treatment for their conditions generally rely on third-party payers to reimburse all or part of the costs associated with their treatment. Adequate coverage and reimbursement from governmental healthcare programs and commercial payers are critical to new product acceptance. In China, government authorities decide which drugs and treatments they will cover and the amount of reimbursement. Obtaining coverage and reimbursement approval of a product from a government or other third-party payer is a time-consuming and costly process that could require us to provide to the payer supporting scientific, clinical and cost-effectiveness data for the use of our products. Even if we obtain coverage for a given product, the resulting reimbursement payment rates will not necessarily be adequate for us to achieve or sustain profitability or may require co-payments that patients find unacceptably high. Patients are unlikely to use our product candidates unless coverage is provided and reimbursement is adequate to cover a significant portion of the cost of our product candidates. Obtaining approval in one or more jurisdictions outside of China for our product candidates will subject us to rules and regulations in those jurisdictions. In some foreign countries, particularly those in the EU, the pricing of biologics is subject to governmental control. In these countries, pricing negotiations with governmental authorities can take considerable time after obtaining marketing approval of a product candidate. In addition, market acceptance and sales of our product candidates will depend significantly on the availability of adequate coverage and reimbursement from third-party payers for our product candidates and may be affected by existing and future health care reform measures. The continuing efforts of the government, insurance companies, managed care organizations and other payers of healthcare services to contain or reduce costs of healthcare and/or impose price controls may adversely affect:
 
the demand for our product candidates, if we obtain regulatory approval;
our ability to set a price that we believe is fair for our products;
our ability to generate revenue and achieve or maintain profitability;
the level of taxes that we are required to pay; and
the availability of capital.
 
Any reduction in reimbursement from any government programs may result in a similar reduction in payments from private payers, which may adversely affect our future profitability.
 
Our product candidates sometimes 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.
 
 
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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 our industry’s potential role in climate change. Stringent government safety, environmental and biohazardous 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 biohazardous materials or certain categories of materials. The Company has completed the legal procedure of construction completion acceptance of environmental protection facilities for its new Zhangjiang facility for R&D and clinical status in January 2019. Subsequently, the Company has launched the Environment Impact Assessment (EIA) for its upcoming production, and the government approval of the EIA report is estimated to be obtained in February 2020. The Company has terminated its lease in the Beijing facility and is updating the environmental protection permits for its Shanghai facility.
 
Technological and medical developments or improvements in conventional therapies could render the use of cell therapy and our services and planned products obsolete.
 
Advances in other treatment methods or in disease prevention techniques could significantly reduce or entirely eliminate the need for our cell therapy services, planned products and therapeutic efforts. There is no assurance that cell therapies will achieve the degree of success envisioned by us in the treatment of disease. Nor is there any assurance that new technological improvements or techniques will not render obsolete the processes currently used by us, the need for our services or our planned products. Additionally, technological or medical developments may materially alter the commercial viability of our technology or services, and require us to incur significant costs to replace or modify equipment in which we have a substantial investment. We are focused on novel cell therapies, and if this field is substantially unsuccessful, this could jeopardize our success or future results. The occurrence of any of these factors may have a material adverse effect on our business, operating results and financial condition.
 
We face significant competition from other Chinese biotechnology and pharmaceutical companies, and our operating results will suffer if we fail to compete effectively.
 
There is intense competition and rapid innovation in the Chinese cell therapy industry, and in the cancer immunotherapy space in particular. Our competitors may be able to develop other herbal medicine, compounds or drugs that are able to achieve similar or better results. Our potential competitors are comprised of traditional Chinese medicine companies, major multinational pharmaceutical companies, established and new biotechnology companies, specialty pharmaceutical companies, state-owned enterprises, universities and other research institutions. Many of our competitors have substantially greater scientific, financial, technical and other resources, such as larger research and development staff and experienced marketing and manufacturing organizations and well-established sales forces. Smaller or early-stage companies may also prove to be significant competitors, particularly through collaborative arrangements with large, established companies or when they are well funded by venture capitals. Mergers and acquisitions in the biotechnology and pharmaceutical industries may result in even more resources being concentrated in our competitors. Competition may increase further as a result of advances in the commercial applicability of technologies and greater availability of capital for investment in these industries. Our competitors, either alone or with collaborative partners, may succeed in developing, acquiring or licensing on an exclusive basis drug or biologic products that are more effective, safer, more easily commercialized or less costly than our product candidates or may develop proprietary technologies or secure patent protection that we may need for the development of our technologies and products. We believe the key competitive factors that will affect the development and commercial success of our product candidates are efficacy, safety, tolerability, reliability and convenience of use, price and reimbursement.
 
Even if we obtain regulatory approval of our product candidates, the availability and price of our competitors’ products could limit the demand and the price we are able to charge for our product candidates. We may not be able to implement our business plan if the acceptance of our product candidates is inhibited by price competition or the reluctance of doctors to switch from existing methods of treatment to our product candidates, or if doctors switch to other new drug or biologic products or choose to reserve our product candidates for use in limited circumstances.
 
We rely on our share-based compensation programs and other competitive benefits to attract or retain key employees for our business.
 
To be competitive, we must attract, retain and motivate executives and other key employees. Hiring and retaining qualified executives, scientists, technical staff and professional staff are critical to our business, and competition for experienced employees can be intense. To help attract, retain and motivate key employees, we use share-based and other performance-based incentive awards such as stock options, restricted stock units (RSUs) and cash bonuses. If our share-based or other compensation programs cease to be viewed as competitive and valuable benefits, our ability to attract, retain and motivate key employees could be weakened, which could harm our results of operations.
 
 
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There is a scarcity of experienced professionals in the field of cell therapy and we face risks related to retaining key officers or employees or hiring new key officers or employees needed to implement our business strategy and develop our products. Failure to retain or hire key officers or employees could prevent us from growing our biopharmaceutical business or implementing our business strategy, and may materially and adversely affect the Company.
 
Given the specialized nature of cell therapy and the fact that it is a young field, there is an inherent scarcity of experienced personnel in the field. The Company is substantially dependent on the skills and efforts of current senior management for their management, operations and the implementation of their business strategy. As a result of the difficulty in locating qualified new management, the loss or incapacity of existing members of management or unavailability of qualified management or as replacements for management who resign or are terminated could adversely affect the Company’s operations. The future success of the Company also depends upon our ability to attract and retain additional qualified personnel (including medical, scientific, technical, commercial, business and administrative personnel) necessary to support our anticipated growth, develop our business, perform our contractual obligations to third parties and maintain appropriate licensure, on acceptable terms. There can be no assurance that we will be successful in attracting or retaining personnel required by us to continue to grow our operations. The loss of a key employee, the failure of a key employee to perform in his or her current position or our inability to attract and retain skilled employees, as needed, could result in our inability to grow our biopharmaceutical business or implement our business strategy, or may have a material adverse effect on our business, financial condition and operating results.
 
Failure to successfully integrate our acquired businesses, operations and assets in the expected time frame may adversely affect the combined Company’s future results.
 
We believe that our immuno-oncology acquisitions will result in certain benefits, including certain manufacturing, sales and distribution and operational efficiencies. However, to realize these anticipated benefits, our existing business and the acquired technologies must be successfully combined. We are not always able to effectively integrate the acquired technologies into our organization, make the acquired technologies profitable, or succeed in managing the acquired technologies. The process of integration of acquired technologies subjects us to a number of risks, including:
 
Failure to successfully manage relationships with hospitals, patients and suppliers;
Demands on management related to the increase in complexity of the company after the acquisition;
Diversion of management and scientists’ attention;
Potential difficulties integrating and harmonizing large scale multi-site clinical trials;
Difficulties in the assimilation and retention of employees;
Exposure to legal claims for activities of the acquired technologies; and
Incurrence of additional expenses in connection with the integration process.
 
If the acquired technologies are not successfully integrated into our company, our business, financial condition and results of operations could be materially adversely affected, as well as our professional reputation. Furthermore, failure to successfully integrate the acquired technologies, or delays in implementing clinical trials using the acquired technologies, may result in the anticipated benefits of the acquisition not being realized fully or at all or may take longer to realize than expected. Successful integration of the acquired technologies will depend on our ability to manage large scale cancer clinical trials and to realize opportunities in monetizing these technologies.
 
We will need to grow the size of our organization and face risks related to managing this growth.
 
As our development and commercialization plans and strategies develop, and as we continue to expand operation as a public company, we expect to grow our personnel needs in the managerial, operational, sales, marketing, financial and other departments. Future growth would impose significant added responsibilities on members of management, including:
 
identifying, recruiting, integrating, maintaining and motivating additional employees;
managing our internal development efforts effectively, including the clinical trials and NMPA review process for our product candidates, while complying with our contractual obligations to contractors and other third parties; and
improving our operational, financial and management controls, reporting systems and procedures.
 
Our future financial performance and our ability to commercialize our product candidates will depend, in part, on our ability to effectively manage any future growth, and our management may also have to divert a disproportionate amount of its attention away from day-to-day activities in order to devote a substantial amount of time to managing these growth activities.
 
 
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We currently rely, and for the foreseeable future will continue to rely, in substantial part on certain independent organizations such as contract research organizations and hospitals to provide certain services comprised of regulatory approval and clinical management. There can be no assurance that the services of independent organizations will continue to be available to us on a timely basis when needed, or that we can find qualified replacements. In addition, if we are unable to effectively manage our outsourced activities or if the quality or accuracy of the services provided by the independent organizations is compromised for any reason, our clinical trials may be extended, delayed or terminated, and we may not be able to obtain regulatory approval of our product candidates or otherwise advance our business. If we are not able to effectively expand our organization by hiring new employees, we may not be able to successfully implement the tasks necessary to further develop and commercialize our product candidates and, accordingly, may not achieve our research, development and commercialization goals.
 
We often form or seek strategic alliances or enter into licensing arrangements but do not always realize the benefits of such alliances or licensing arrangements.
 
We often form or seek strategic alliances, create joint ventures or collaborations or enter into licensing arrangements with third parties, including but not limited to our collaboration with Novartis, that we believe will complement or augment our development and commercialization efforts with respect to our product candidates and any future product candidates that we may develop. These relationships often require us to incur nonrecurring and other charges, increase our near and long-term expenditures, issue securities that dilute our existing stockholders or disrupt our management and business. In addition, we face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Moreover, we are not always successful in our efforts to establish a strategic partnership or other alternative arrangements for our product candidates because they may be deemed to be at too early of a stage of development for collaborative effort and third parties may not view our product candidates as having the requisite potential to demonstrate safety and efficacy. When we license products or businesses, we may not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture. We cannot be certain that, following a strategic transaction or license, we will achieve the revenue or specific net income that justifies such transaction. Any delays in entering into new strategic partnership agreements related to our product candidates could delay the development and commercialization of our product candidates in certain geographies for certain indications, which would harm our business prospects, financial condition and results of operations.
 
Among other challenges in connection with our strategic alliances and licensing transactions, our partnership with Novartis may not be successful or profitable. We face risks from unfavorable regulatory, technical or market developments. While our manufacturing capabilities on CAR-T products set us apart from many of our competitors, we have yet to commercialize any of our drug candidates and have yet to generate any revenue from the sale of our products, and there is no assurance that we will be able to generate revenue or net profit from our Kymriah® sale to Novartis. There is no assurance that we can successfully complete the transfer of Kymriah® to our manufacturing facility and receive regulatory approval to start commercial production. We cannot be assured that after a drug candidate is eventually made available for sale that it will gain market acceptance from physicians, patients, third-party payers and others in the medical community. Novartis has the right to unilaterally terminate our agreement for any reason or no reason. Market acceptance after the drug approval may cause us not be able to generate sufficient revenue to recuperate our investment in the partnership. Any unfavorable developments before or after Kymriah® is commercialized in China may have a material adverse effect on our business. Any unfavorable regulatory, technical or market development could render the partnership with Novartis untenable.
 
We, our strategic partners and our customers conduct business in a heavily regulated industry. Failure to comply with applicable current and future laws and government regulations could adversely affect our business and financial results could be adversely affected.
 
The healthcare industry is one of the most highly regulated industries. Federal governments, individual state and local governments and private accreditation organizations may oversee and monitor all the activities of individuals and businesses engaged in the delivery of health care products and services. Therefore, current laws, rules and regulations could directly or indirectly negatively affect our ability and the ability of our strategic partners and customers to operate each of their businesses.
 
 In addition, as we expand into other parts of the world, we will need to comply with the applicable laws and regulations in such foreign jurisdictions. We have not yet thoroughly explored the requirements or feasibility of such compliance. It is possible that we may not be permitted to expand our business into one or more foreign jurisdictions.
 
Although we intend to conduct our business in compliance with applicable laws and regulations, the laws and regulations affecting our business and relationships are complex, and many aspects of such relationships have not been the subject of judicial or regulatory interpretation. Furthermore, the cell therapy industry is the topic of significant government interest, and thus the laws and regulations applicable to us and our strategic partners and customers and to their business are subject to frequent change and/or reinterpretation and there can be no assurance that the laws and regulations applicable to us and our strategic partners and customers will not be amended or interpreted in a manner that adversely affects our business, financial condition or operating results.
 
 
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We anticipate that we will need substantial additional financing in the future to continue our operations; if we are unable to raise additional capital, as and when needed, or on acceptable terms, we may be forced to delay, reduce or eliminate one or more of our product or therapy development programs, cell therapy initiatives or commercialization efforts and our business will be harmed.
 
Our current operating plan will require significant levels of additional capital to fund, among other things, the continued development of our cell therapy product or therapy candidates and the operation and expansion of our manufacturing operations to our clinical development activities.
 
We plan to continue to launch several new Immune Oncology clinical trials and continue to advance our KOA clinical trials in China. We also plan to conduct solid tumor clinical trials in the United States. Successful trials will require significant additional investment capital over a multiyear period in order to conduct subsequent phases, gain approval for these therapies by the NMPA and the U.S. FDA, and commercialize these therapies. Subsequent phases may be larger and more expensive than the initial trials. In order to raise the necessary capital, we will need to raise additional money in the capital markets, enter into collaboration agreements with third parties or undertake some combination of these strategies. If we are unsuccessful in these efforts, we may have no choice but to delay or abandon the trials.
 
The amount and timing of our future capital requirements also will likely depend on many other factors, including:
 
the scope, progress, results, costs, timing and outcomes of our other cell therapy product or therapy candidates;
our ability to enter into, or continue, any collaboration agreements with third parties for our product or therapy candidates and the timing and terms of any such agreements;
the timing of and the costs involved in obtaining regulatory approvals for our product or therapy candidates, a process which could be particularly lengthy or complex given the lack of precedent for cell therapy products in China; and
the costs of maintaining, expanding and protecting our intellectual property portfolio, including potential litigation costs and liabilities.
 
To fund clinical studies and support our future operations, we would likely seek to raise capital through a variety of different public and/or private financings vehicles. This could include, but not be limited to, the use of loans or issuances of debt or equity securities in public or private financings. Raising capital through the sale of equity, or securities convertible into equity, would result in dilution to our then existing stockholders. Servicing the interest and principal repayment obligations under debt facilities could divert funds that would otherwise be available to support clinical or commercialization activities. In certain cases, we also may seek funding through collaborative arrangements, that would likely require us to relinquish certain rights to our technology or product or therapy candidates and share in the future revenues associated with the partnered product or therapy.
 
Ultimately, we may be unable to raise capital or enter into collaborative relationships on terms that are acceptable to us, if at all. Our inability to obtain necessary capital or financing to fund our future operating needs could adversely affect our business, results of operations and financial condition.
 
 
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Failure to achieve and maintain effective internal controls in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on our business and operating results.
 
It may be time consuming, difficult and costly for us to develop and implement the additional internal controls, processes and reporting procedures required by the Sarbanes-Oxley Act. We may need to hire additional financial reporting, internal auditing and other finance staff in order to develop and implement appropriate additional internal controls, processes and reporting procedures. 
 
If we fail to comply in a timely manner with the requirements of Section 404 of the Sarbanes-Oxley Act regarding internal controls over financial reporting or to remedy any material weaknesses in our internal controls that we may identify, such failure could result in material misstatements in our financial statements, cause investors to lose confidence in our reported financial information and have a negative effect on the trading price of our common stock.
 
In connection with our ongoing assessment of the effectiveness of our internal control over financial reporting, we may discover “material weaknesses” in our internal controls as defined in standards established by the Public Company Accounting Oversight Board (“PCAOB”). A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. The PCAOB defines “significant deficiency” as a deficiency that results in more than a remote likelihood that a misstatement of the financial statements that is more than inconsequential will not be prevented or detected.
 
During the year ended December 31, 2015, we made improvements in our internal control and have remediated the deficiencies identified in 2014. In the event that future material weaknesses are identified, we will attempt to employ qualified personnel and adopt and implement policies and procedures to address any material weaknesses we identify. However, the process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company.
 
Any failure to complete our assessment of our internal control over financial reporting, to remediate any material weaknesses that we may identify or to implement new or improved controls, or difficulties encountered in their implementation, could harm our operating results, cause us to fail to meet our reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of the periodic management evaluations of our internal controls and, in the case of a failure to remediate any material weaknesses that we may identify, would adversely affect the annual management reports regarding the effectiveness of our internal control over financial reporting that are required under Section 404 of the Sarbanes-Oxley Act. Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.
 
The Company’s revenue may become subject to tightened regulation that may affect the Company’s financial condition.
 
Currently we are not generating any meaningful revenue, which revenue is currently primarily comprised of technical services relating to the preparation of subset T-Cell and clonality assay platform technology for treatment of cancers. Nonetheless our revenue may be subject to the risk of progressive regulatory actions by the PRC government. From time to time there may also be adverse publicity relating to the practice of cell therapy 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.
 
 
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Our business activities for fiscal 2020 are expected to be adversely affected by the recent coronavirus outbreak in China.
 
In December 2019, a novel strain of coronavirus was reported to have surfaced in Wuhan, China. The Wuhan coronavirus, or 2019-nCoV, currently appears to be spreading at a fast rate, indicating its highly contagious nature. The number of confirmed cases in China has been steadily increasing, with the mortality rate around 2.1%. The coronavirus also displayed longer incubation period and is contagious before symptoms appear. In reaction towards the outbreak of this new contagious disease, an increasing number of countries imposed travel suspensions to/from China following the World Health Organization’s “public health emergency of international concern” (PHEIC) announcement on January 30, 2020. For the month after the outbreak of the coronavirus, domestic business activities in China had been disrupted by a series of emergency quarantine measures taken by the government.
 
Emergency quarantine measures and travel restrictions cause business disruptions across China, which we expect to seriously slow down our business operation, which would harm our financial condition and increase our costs and expenses. The evolution of quarantine measures and travel restrictions will likely result in negative consequences for our process development and clinical studies in China. Our business operations, and those of our third-party research institution collaborators, suppliers and other contractors, are subject to the business interruptions arising from these measures. Business disruptions across China would also negatively affect the sources and availability of raw material, which are essential to the operation of our business. Damage or extended periods of interruption to our corporate, development, research or manufacturing facilities due to this coronavirus outbreak will likely cause us to cease or delay process development or clinical studies of some or all of our pipeline drug candidates. In addition, our business is subject to risks associated with the global spread of the coronavirus as we operate in both China and the U.S. Our process development of drug candidates involves traveling of key personnel between China and the U.S. on a frequent and regular basis, which has been disrupted due to travel restrictions and cancellation of flights. Accordingly, our business and financial results in the future will likely be adversely affected due to significant adverse development of the coronavirus globally.
 
The extent to which the coronavirus negatively impacts our business results is highly uncertain and cannot be accurately predicted. We believe that the coronavirus outbreak and the measures taken to control it may have a large negative impact on economic activities in China. A majority part of our business operations is conducted in China and we have strategic partnership with Chinese partners or partners’ Chinese operations with regard to our supply chain, clinical development and pipeline projects, which are all expected to be negatively affected by the coronavirus outbreak. The magnitude of this negative effect on the continuity of our business operation and supply chains in China remains uncertain. These uncertainties impede our ability to conduct our daily operations and could materially and adversely affect our business, financial condition and results of operations.
 
Our clinical development activities for fiscal 2020 are expected to be adversely affected by the recent coronavirus outbreak in China.
 
Our investigator has initiated clinical trials on our drug candidates that have been negatively affected by the emergency quarantine measures adopted by the Chinese government, which include holiday extension, travel restrictions and cancellation of major events nationwide. Disruptions or restrictions on our ability to travel or to conduct clinical trials, as well as temporary closures of our facilities or the facilities of our clinical trials partners and their contract manufacturers, would negatively impact our clinical development activities in China. We have invested a significant portion of our efforts and financial resources in the development of clinical-stage drug candidates. We partially rely on our third-party institution collaborators, such as hospitals for conducting clinical trials of our drug candidates, which may be affected by the emergency measures. The timely completion of our clinical trials in accordance with their protocols depends, among other things, on our ability to enroll a sufficient number of patients who remain in the trial until its conclusion. We may experience difficulties in patient enrollment due to government-imposed travel restrictions, limited access to public venues and patients’ unwillingness to visit hospitals for fear of attracting the coronavirus. Such difficulties would likely slow enrollment significantly in, and completion of, our clinical trials (which are mostly conducted on-site in hospitals), as well as completion of pre-clinical studies.
 
The duration of the business disruption, reduced patient enrollment and related operational impact cannot be reasonably estimated at this time but are expected to materially affect our clinical development activities. A significant outbreak of contagious diseases in the human population could result in a widespread health crisis that could adversely affect the economy and financial markets of China and may escalate globally, resulting in significant clinical trial or regulatory delays, which may also increase our development costs and could materially and adversely affect our clinical development activities. 
 
 
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RISKS RELATED TO OUR STRUCTURE
 
Our operations are subject to risks associated with emerging markets.
 
The Chinese economy is not well established and is only recently emerging and growing as a significant market for consumer goods and services. Accordingly, there is no assurance that the market will continue to grow. Perceived risks associated with investing in China, or a general disruption in the development of China’s markets could materially and adversely affect the business, operating results and financial condition of the Company.
 
Investors can face difficulty enforcing federal securities laws or other legal rights because some of our assets are currently located in the PRC.
 
A portion of our assets are located in the PRC. As a result, it can be difficult for investors in the U.S. to enforce their legal rights, to effect service of process upon certain of our directors or officers or to enforce judgments of U.S. courts predicated upon civil liabilities and criminal penalties against any of our directors and officers located outside of the U.S.
 
The PRC government has the ability to exercise significant influence and control over our operations in China.
 
In recent years, the PRC government has implemented measures for economic reform, the reduction of state ownership of productive assets and the establishment of corporate governance practices in business enterprises. However, many productive assets in China are still owned by the PRC government. In addition, the government continues to play a significant role in regulating industrial development by imposing business regulations. It also exercises significant control over the country’s economic growth through the allocation of resources, controlling payment of foreign currency-denominated obligations, setting monetary policy and providing preferential treatment to particular industries or companies.
 
There can be no assurance that China’s economic, political or legal systems will not develop in a way that becomes detrimental to our business, results of operations and financial condition. Our activities may be materially and adversely affected by changes in China’s economic and social conditions and by changes in the policies of the government, such as measures to control inflation, changes in the rates or method of taxation and the imposition of additional restrictions on currency conversion.
 
Additional risks we face in connection with having operations in China that may adversely affect our business and results of operations include:
 
our inability to enforce or obtain a remedy under any material agreements;
PRC restrictions on foreign investment that could impair our ability to conduct our business or acquire or contract with other entities in the future;
restrictions on currency exchange that may limit our ability to use cash flow most effectively or to repatriate our investment;
fluctuations in currency values;
cultural, language and managerial differences that may reduce our overall performance; and
political instability in China.
 
Cultural, language and managerial differences can adversely affect our overall performance.
 
We have experienced difficulties in assimilating cultural, language and managerial differences with our subsidiaries in China. Personnel issues have developed in consolidating management teams from different cultural backgrounds. In addition, language translation issues from time to time have caused miscommunications. These factors make the management of our operations in China more difficult. Difficulties in coordinating the efforts of our U.S.-based management team with our China-based management team may cause our business, operating results and financial condition to be materially and adversely affected.
 
 
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We face risks related to enforcing our rights in China given certain features of its legal and judicial system.
 
China’s legal and judicial system can negatively impact foreign investors. The legal system in China is evolving rapidly, and enforcement of laws is inconsistent. Obtaining swift and equitable enforcement of laws or enforcement of the judgment of one court by a court of another jurisdiction is not always possible. China’s legal system is based on civil law or written statutes and a decision by one judge does not set a legal precedent that must be followed by judges in other cases. In addition, the interpretation of Chinese laws can vary to reflect domestic political changes.
 
Since a significant portion of our operations are presently based in China, service of process on our business and officers can be difficult to effect within the United States. Also, some of our assets are located outside the United States and a judgment obtained in the United States against us is not always enforceable outside the United States.
 
There are substantial uncertainties regarding the interpretation and application to our business of PRC laws and regulations, since many of the rules and regulations that companies face in China are not made public. The effectiveness of newly enacted laws, regulations or amendments may be delayed, resulting in detrimental reliance by foreign investors. New laws and regulations that apply to future businesses may be applied retroactively to existing businesses. We cannot predict what effect the interpretations of existing or new PRC laws or regulations may have on our business. 
 
The inability to utilize our assets in China can result in losses.
 
The Company’s Shanghai and Wuxi laboratory facilities were originally intended for stem cell research and development, but have been equipped to provide comprehensive cell manufacturing, collection, processing and storage capabilities to provide cells for clinical trials. If the Company does determines not to renew the lease due to limitations on its utility under the new regulatory initiatives in China or otherwise, the Company will be subject to certain expenses in connection with returning the premises to the landlord.
 
Restrictions on currency exchange can limit our ability to utilize our cash flow effectively.
 
Our interests in China will be subject to China’s rules and regulations on currency conversion. In particular, the initial capitalization and operating expenses of the VIE (CBMG Shanghai) are funded by our WFOE, Cellular Biomedicine Group Ltd. (Wuxi). In China, the State Administration for Foreign Exchange (the “SAFE”) regulates the conversion of the Chinese Renminbi into foreign currencies and the conversion of foreign currencies into Chinese Renminbi. Foreign investment enterprises are allowed to open currency accounts including a “basic account” and “capital account.” However, conversion of currency in the “capital account,” including capital items such as direct investments, loans and securities, require approval of the SAFE even though according to the Notice of the State Administration of Foreign Exchange on Reforming the Administration of the Settlement of Foreign Exchange Capital of Foreign-invested Enterprise promulgated on April 8, 2015, or the SAFE Notice 19, and Notice of the State Administration of Foreign Exchange on Reforming and Regulating the Policies for the Administration of Settlement of Foreign Exchange under Capital Accounts promulgated on June 9, 2016, or the SAFE Notice 16, foreign-invested enterprises are able to settle foreign exchange capital at their discretion, Chinese banks restricts foreign currency conversion for fear of “hot money” going into China and may continue to limit our ability to channel funds to the VIE entities for their operation. There can be no assurance that the PRC regulatory authorities will not impose further restrictions on the convertibility of the Chinese currency. Future restrictions on currency exchanges can limit our ability to use our cash flow for the distribution of dividends to our stockholders or to fund operations we may have outside of China, which could materially adversely affect our business and operating results.
 
Fluctuations in the value of the Renminbi relative to the U.S. dollar can affect our operating results. 
 
We prepare our financial statements in U.S. dollars, while our underlying businesses operate in two currencies, U.S. dollars and Chinese Renminbi. We anticipate our Chinese operations will conduct their operations primarily in Renminbi and our U.S. operations will conduct their operations in dollars. At the present time, we do not expect to have significant cross currency transactions that will be at risk to foreign currency exchange rates. Nevertheless, the conversion of financial information using a functional currency of Renminbi will be subject to risks related to foreign currency exchange rate fluctuations. The value of Renminbi against the U.S. dollar and other currencies may fluctuate and is affected by, among other things, changes in China’s political and economic conditions and supply and demand in local markets. As we have significant operations in China, and will rely principally on revenues earned in China, any significant revaluation of the Renminbi can materially and adversely affect our financial results. For example, to the extent that we need to convert U.S. dollars we receive from an offering of our securities into Renminbi for our operations, appreciation of the Renminbi against the U.S. dollar would likely have a material adverse effect on our business, financial condition and results of operations.
 
Future foreign investments in CBMG that are subject to review by the Committee on Foreign Investment in the United States (CFIUS) may prevent, delay, limit or otherwise adversely affect any proposed investment.
 
The Foreign Investment Risk Review Modernization Act (FIRRMA) enacted in August 2018, significantly expanded the jurisdiction of CFIUS, permitting CFIUS to review certain non-controlling investments by foreign persons in U.S. businesses. In November 2018, the U.S. Department of the Treasury initiated a pilot program to implement this new authority. Under the pilot program, CFIUS requires that it be given prior notice of and an opportunity to review certain proposed non-controlling foreign investments in companies engaged in biotechnology research and development that deal in “critical technologies.” Depending upon the results of its review, CFIUS could impose mitigation measures or block the investment. The term “critical technologies,” includes items subject to certain U.S. export controls and “emerging and foundational technologies.” U.S. regulators have yet to define “emerging and foundational technologies,” but have indicated that this category may be defined to include certain biotechnology.
 
 
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To date, CBMG has not identified any “critical technologies” that would subject future foreign investment in CBMG to CFIUS review. However, depending on the particulars of any future investments, how the concept of “critical technologies” is applied to CBMG’s existing business and any future developments thereto, and any relevant regulatory developments in the future, future foreign investment in CBMG could be subject to CFIUS review, which could prevent, delay, limit or otherwise adversely affect the contemplated financing, any of which could have a material adverse effect on CBMG’s business, financial condition and results of operations.
 
Trade controls and related legal risks can have a material adverse effect on our business.
 
We are subject to trade controls, including U.S. sanctions and export controls, which impose certain restrictions on our international operations. We are committed to conducting all of our operations around the globe ethically and in compliance with applicable laws and company policy, including these trade controls and, to date, we have not identified any instances of noncompliance. However, despite our compliance efforts, we cannot assure you that we will effectively prevent any and all future noncompliance, particularly given the uncertainties regarding the interpretation and implementation of these trade controls in each jurisdiction in which we have a presence.
 
New and changing trade protections, regulatory requirements and policies affecting trade and investment, trade disputes, regulations governing imports or exports, economic sanctions and enforcement activities present added and ever-changing risks for our global business. However, it is not possible to predict what types of new controls may be imposed or how existing controls will be administered, and therefore we cannot predict the effect such changes could have on our international operations. These changes could adversely affect our business, and failure to react and adapt and ultimately comply with any of the foregoing can lead to sanctions, fines, penalties and other government-imposed mandates that could have a material adverse effect on our business, financial condition and results of operations.
 
Some of the laws and regulations governing our business in China are vague and subject to risks of interpretation.
 
Some of the PRC laws and regulations governing our business operations in China are vague and their official interpretation and enforcement may involve substantial uncertainty. These include, but are not limited to, laws and regulations governing our business and the enforcement and performance of our contractual arrangements in the event of the imposition of statutory liens, death, bankruptcy and criminal proceedings. Despite their uncertainty, we will be required to comply.
 
New laws and regulations that affect existing and proposed businesses may be applied retroactively. Accordingly, the effectiveness of newly enacted laws, regulations or amendments may not be clear. We cannot predict what effect the interpretation of existing or new PRC laws or regulations will have on our business.
 
The pharmaceutical industry in China is highly regulated, and such regulations are subject to change, which may affect approval and commercialization of our drugs.
 
The pharmaceutical industry in China is subject to comprehensive government regulation and supervision, encompassing the approval, registration, manufacturing, packaging, licensing and marketing of new drugs. In recent years, The NMPA and other regulatory authorities in China have implemented a series of new laws and regulations regarding the pharmaceuticals industry, including medical research and the stem cell industry, and we expect such significant changes will continue. In addition, there are uncertainties regarding the interpretation and enforcement of PRC laws, rules and regulations. For example, under the trial guidelines concerning development and testing of cell therapy products issued in December 2017, there remain uncertainties regarding the interpretation and application of PRC Laws on our clinical studies and these factors could adversely affect the timing of the clinical studies, the timing of receipt and reporting of clinical data, the timing of Company-sponsored IND filings, and our ability to conduct future planned clinical studies, and any of the above could have a material adverse effect on our business.
 
The NMPA’s recent reform of the drug and approval system may face implementation challenges. On August 26, 2019, the Standing Committee of the PRC National People’s Congress approved the new Drug Administration Law, which went into effect on December 1, 2019. The new Drug Administration Law incorporates many reform measures that have been introduced by various administrative notices in the past few years, such as the adoption of a nationwide MAH system, switch from an approval to a simpler filing process for institutions conducting clinical trials for new drugs, and the cancellation of the GMP and GSP certification procedure (though the relevant GMP and GSP rules are still applicable to the manufacturing and business activities.) The Drug Administration Law is positioned as the foundational law in the field of drug regulation and may also materially impact commercialization of Kymriah® and our pipeline drugs and increase our compliance costs. The full impact of such reforms is uncertain and could prevent us from commercializing our drug candidates in a timely manner.
 
The National Health Commission and other departments jointly issued the Implementation Plan for Cancer Prevention and Control (2019-2022) (the “Implementation Plan”) proposing to enhance the cancer prevention and control. Supported by the development of integration of the healthcare industry, education and research the National Health Commission intends to promote cancer prevention and treatment, covering a broad scope such as medical services, health management, health insurance, pharmaceutical equipment, rehabilitation nursing, etc. The Implementation Plan emphasized the improvement of the availability of anticancer drugs, acceleration on the registration and approval of new anticancer drugs the PRC and abroad, the promotion of the synchronous market listing in the PRC of new anticancer drugs already marketed abroad, and smooth the temporary import channels of anticancer drugs urgently needed in clinical trial medicine. Currently, it is not clear on the future impact of the Implementation Plan on our business and strategies.
 
 
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While we believe our strategies regarding pharmaceutical research, development, manufacturing and commercialization in China are aligned with the Chinese government’s policies, these policies may in the future diverge, such as the new Drug Administration Law, requiring a change in our strategies. Any such change can result in increased compliance costs on our business or cause delays in or prevent the successful research, development, manufacturing or commercialization of our drug candidates or drugs in China and reduce the current benefits we believe are available to us from developing and manufacturing drugs in China.
 
Our future capital needs are uncertain, which gives rise to a substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to raise additional capital or obtain loans from financial institutions and our operations could be curtailed if we are unable to obtain the required additional funding when needed. We are not always able to do so when necessary, and/or the terms of any financings will not necessarily be advantageous to us.
 
Our financial statements for the period ended December 31, 2019 have been prepared assuming we will continue to operate as a going concern. However, there can be no assurance that we will have the financial resources to satisfy our current liabilities and the capital expenditure needs in the next 12 months, and therefore, there is substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is subject to our ability to obtain necessary funding from outside sources, including obtaining additional funding from the sale of our securities, grants or other forms of financing. Our continued negative cash flow increases the difficulty in completing such sales or securing alternative sources of funding, and there can be no assurances that we will be able to obtain such funding on favorable terms or at all. Our inability to obtain sufficient financing from the sale of our securities or from alternative sources may require us to reduce, defer or discontinue certain of our research and development and operating activities or we may not be able to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of the uncertainty regarding our ability to continue as a going concern. If we cannot continue as a going concern, our shareholders may lose their entire investment in our ordinary shares. Future reports from our independent registered public accounting firm may also contain statements expressing doubt about our ability to continue as a going concern.
 
Changes and new proposed rulemaking in China regarding foreign investment can affect our operations in China.
 
Our operations in China are subject to government regulations that limit or prohibit direct foreign investment, which can limit our ability to control operations based in China. The PRC government has imposed regulations in various industries, including medical research and the stem cell industry, that limit foreign investors’ equity ownership or prohibit foreign investments altogether in companies that operate in such industries. We are currently structured as a U.S. corporation (Delaware) with subsidiaries and controlled entities in China. As a result of these regulations and the manner in which they may be applied or enforced, our ability to control our existing operations based in China may be limited or restricted.
 
If the relevant Chinese authorities find us or any business combination to be in violation of any laws or regulations, they would have broad discretion in dealing with such violation, including, without limitation: (i) levying fines; (ii) revoking our business and other licenses; (iii) requiring that we restructure our ownership or operations; and (iv) requiring that we discontinue any portion, or all, of our business.
 
China’s legal framework surrounding foreign investment entered into a new era after the new Foreign Investment Law goes into effect on January 1, 2020. The Foreign Investment Law is positioned as the foundational law in the field of foreign investment and will apply uniformly across all foreign investment in China. It replaces the Law of the People’s Republic of China on Wholly Foreign-Owned Enterprises, the Law of the People’s Republic of China on Sino-Foreign Equity Joint Ventures, and the Law of the People’s Republic of China on Sino-Foreign Cooperative Joint Ventures (the three previous foreign investment laws). It is expected that the relevant authorities will take this opportunity to systematically evaluate and revise the current foreign investment system and rules in order to form a unified legal system for foreign investment, which is comprised of:
 
Pre-establishment national treatment and negative list system. Foreign investors and their investments will be granted treatment no less favorable than that granted to Chinese domestic investors and their investments at the entrance stage of the investment. Foreign investors may not invest in fields where a “negative list” prohibits foreign investment, unless the investor meets certain conditions stipulated in the list.
Foreign investment information reporting system. Foreign investors or foreign-invested enterprises must submit investment information to the competent department of commerce through the enterprise registration system and the enterprise credit information publicity system.
Foreign investment national security review system. This system is adopted to determine whether a foreign investment may affect national security. Subsequent legislation may clarify the scope, content, procedure, time limit and legal consequences of the review process.
 
The Foreign Investment Law is expected to affect foreign investors with regard to organizational structure and governance structure, transfer of monetary funds and intellectual property protection and technology transfer. If the relevant Chinese authorities find us or any business combination to be in violation of the Foreign Investment Law and its implementation rules, our current corporate governance practices and business operations may be materially affected and our compliance costs may increase significantly.
 
 
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Certain of our clinical studies are not registered with relevant authorities.
 
Under the trial guidelines concerning development and testing of cell therapy products issued in December 2017, an applicant of the clinical trial of the said cell therapy products can be divided into early clinical trials and confirmatory clinical trials, instead of the application of the traditional phases I, II and III of a clinical trial. Certain of our clinical studies initiated or sponsored or being initiated or being sponsored by our PRC subsidiaries have not been duly registered or filed by our clinical trial partners with, or have been issued the approval by, the NMPA or the National Health Commission of the PRC, or the NHC, in accordance with then-applicable PRC Law. All clinical studies on trials conducted in China will be required to be approved, registered or filed and conducted at hospitals accredited by the NMPA or by the NHC after the relevant implementing regulations are implemented within the allotted time and any failure of the hospitals to register or file the clinical studies with the NMPA may result in delays or interruptions to such clinical studies or trials. There remain uncertainties regarding the interpretation and application of PRC Laws on our clinical studies and these factors can adversely affect the timing of the clinical studies, the timing of receipt and reporting of clinical data, the timing of Company-sponsored IND filings and our ability to conduct future planned clinical studies, and any of the above could have a material adverse effect on our business.
 
The uncertainties surrounding the current healthcare reform measures in China can affect all material aspects of the research, development, manufacturing and commercialization of pharmaceutical products.
 
In recent years, the regulatory framework in China regarding the pharmaceutical industry has undergone significant changes, which we expect will continue. While we believe our strategies regarding pharmaceutical research, development, manufacturing and commercialization in China are aligned with the Chinese government’s policies, they may in the future diverge, requiring a change in our strategies. Any such change can result in increased compliance costs on our business or cause delays in or prevent the successful research, development, manufacturing or commercialization of our drug candidates or drugs in China and reduce the current benefits we believe are available to us from developing and manufacturing drugs in China.
 
We expect that healthcare reform measures by the MOH and NMPA may result in more rigorous coverage criteria and an additional downward pressure on the development and manufacturing of drugs. Legislative and regulatory proposals have been made to expand approval requirements and restrict clinical trial activities for pharmaceutical products. We cannot be sure whether additional legislative changes will be enacted, or whether MOH and NMPA regulations, guidance or interpretations will be changed, or what the impact of such changes on the regulatory approvals of our drug candidates, if any, may be. In particular, because these laws, rules and regulations are relatively new and often give the relevant regulator significant discretion in how to enforce them, and because of the limited number of published decisions and the nonbinding nature of such decisions, the interpretation and enforcement of these laws, rules and regulations involve uncertainties and can be inconsistent and unpredictable. For example, we may need to amend clinical trial protocols submitted to applicable regulatory authorities to reflect changes in regulatory requirements and guidance. Resubmission may impact the costs, timing or successful completion of a clinical trial. Amendments may require us to resubmit clinical trial protocols to institutional review boards or ethics committees for reexamination, which may impact the costs, timing or successful completion of a clinical trial. Any delays in completing our clinical trials will increase our costs, slow down our drug candidate development and approval process and jeopardize our ability to commence product sales and generate related revenues for that candidate. Any of these occurrences may harm our business, financial condition and prospects significantly.
 
The PRC government does not permit direct foreign investment in stem cell research and development businesses. Accordingly, we operate these businesses through local companies with which we have contractual relationships but in which we do not have direct equity ownership.
 
PRC regulations prevent foreign companies from directly engaging in stem cell-related research, development and commercial applications in China. Therefore, to perform these activities, we conduct much of our biopharmaceutical business operations in China through a domestic variable interest entity, or VIE, a Chinese domestic company controlled by the Chinese employees of the Company. Our contractual arrangements may not be as effective in providing control over these entities as direct ownership. For example, the VIE could fail to take actions required for our business or fail to conduct business in the manner we desire despite their contractual obligation to do so. These companies are able to transact business with parties not affiliated with us. If these companies fail to perform under their agreements with us, we may have to rely on legal remedies under PRC law, which may not be effective. In addition, we cannot be certain that the individual equity owners of the VIE would always act in our best interests, especially if they have no other relationship with us.
 
Although other foreign companies have used VIE structures similar to ours and such arrangements are not uncommon in connection with business operations of foreign companies in China in industry sectors in which foreign direct investments are limited or prohibited, recently there has been greater scrutiny by the business community of the VIE structure and, additionally, the application of a VIE structure to control companies in a sector in which foreign direct investment is specifically prohibited carries increased risks.
 
In addition, the Ministry of Commerce (“MOFCOM”) promulgated the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors in August 2011, or the MOFCOM Security Review Rules, to implement the Notice of the General Office of the State Council on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated on February 3, 2011, or Circular No. 6. The MOFCOM Security Review Rules came into effect on September 1, 2011 and replaced the Interim Provisions of the Ministry of Commerce on Matters Relating to the Implementation of the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by MOFCOM in March 2011. According to these circulars and rules, a security review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises having “national security” concerns. In addition, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to the security review, the MOFCOM will look into the substance and actual impact of the transaction. The MOFCOM Security Review Rules further prohibit foreign investors from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions. There is no explicit provision or official interpretation stating that our business falls into the scope subject to the security review, and there is no requirement for foreign investors in those mergers and acquisitions transactions already completed prior to the promulgation of Circular No. 6 to submit such transactions to MOFCOM for security review. The enactment of the MOFCOM National Security Review Rules specifically prohibits circumvention of the rules through VIE arrangement in the area of foreign investment in business of national security concern. Although we believe that our business, judging from its scale, should not cause any concern for national security review at its current state, there is no assurance that MOFCOM would not apply the same concept of anti-circumvention in the future to foreign investment in prohibited areas through VIE structure, the same way that our investment in China was structured.
 
 
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Our relationship with our controlled VIE entity, CBMG Shanghai, through the VIE agreements, is subject to various operational and legal risks.
 
Management believes the holders of the VIE’s registered capital, Chen Mingzhe and Lu Junfeng, have no interest in acting contrary to the VIE agreements. However, if 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 nonpayment 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.
 
Failure to comply with the U.S. Foreign Corrupt Practices Act subjects us to penalties and other adverse consequences.
 
We are subject to the U.S. Foreign Corrupt Practices Act, which generally prohibits U.S. companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Foreign companies, including some that may compete with us, are not subject to these prohibitions. Corruption, extortion, bribery, payoffs, theft and other fraudulent practices occur from time-to-time in the PRC. There can be no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we are subject to severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.
 
Share compensation grants to persons who are PRC citizens may require registeration with SAFE. We also face regulatory uncertainties that could restrict our ability to adopt share compensation plans for our directors and employees and other parties under PRC laws.
 
On April 6, 2007, SAFE issued the “Operating Procedures for Administration of Domestic Individuals Participating in the Employee Stock Ownership Plan or Stock Option Plan of An Overseas Listed Company,” also known as Circular 78. On February 15, 2012, SAFE promulgated the Circular on Relevant Issues Concerning Foreign Exchange Administration for Domestic Individuals Participating in an Employees Share Incentive Plan of an Overseas-Listed Company, often known as Circular 7. Circular 7 has superseded Circular 78. Under Circular 7, PRC resident individuals who participate in a share incentive plan of an overseas listed company are required to register with SAFE and complete certain other procedures. All such participants need to retain a PRC agent through PRC subsidiary to handle issues like foreign exchange registration, account opening, funds transfer and remittance. Circular 7 further requires that an offshore agent should also be designated to handle matters in connection with the exercise or sale of share awards and proceeds transferring for the share incentive plan participants. We have obtained the SAFE approvals under Circular 7 for one PRC subsidiary. Failure to comply with these regulations subjects us or our PRC employees who have been granted stock options to fines and legal sanctions and we may no longer be able to grant share compensation to our PRC employees. In that case, our ability to compensate our employees and directors through share compensation would be hindered and our business operations may be adversely affected.
 
The Labor Contract Law and its implementation regulations can increase our operating expenses and materially and adversely affect our business, financial condition and results of operations.
 
Substantial uncertainty of the PRC Labor Contract Law, or Labor Contract Law, and the Implementation Regulation for the PRC Labor Contract Law, or Implementation Regulation, remains as to their potential impact on our business, financial condition and results of operations. The implementation of the Labor Contract Law and the Implementation Regulation can increase our operating expenses, in particular our human resources costs and our administrative expenses. In addition, as the interpretation and implementation of these regulations are still evolving, there can be no assurance that our employment practices will at all times be deemed to be in full compliance with the law. In the event that we decide to significantly modify our employment or labor policy or practice, or reduce the number of our sales professionals, the Labor Contract Law and the Implementation Regulation can limit our ability to effectuate the modifications or changes in the manner that we believe to be most cost-efficient or otherwise desirable, which could materially and adversely affect our business, financial condition and results of operations. Severe penalties or incur significant liabilities in connection with labor disputes or investigations can adversely affect our business and results of operations.
 
Relations between the United States and China impacts our stock price and can lead to difficulty accessing the U.S. capital markets.
 
At various times during recent years, the United States and China have had disagreements over trade, economic and other policy issues, leading to future controversies between these two countries. Any political or trade controversies between the U.S. and China can adversely affect the market price of our common stock and our and our clients’ ability to access U.S. capital markets.
 
 
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PRC regulations of loans to PRC entities and direct investment in PRC entities by offshore holding companies can delay or prevent us from using the proceeds of this offering to make loans or additional capital contributions to our PRC subsidiary. 
 
We have in the past and may in the future transfer funds to our PRC subsidiary or finance our PRC subsidiary by means of shareholder loans or capital contributions. Any loans from us to our PRC subsidiary, which is a foreign-invested enterprise, is subject to a quota based on the statutory formulas and there are two alternative applicable quotas: the difference between the registered capital and total investment of the PRC subsidiary; certain times of the net asset value of PRC subsidiary (currently up to twice of the net assets value) and shall be registered with the State Administration of Foreign Exchange, or SAFE, or its local counterparts. Any capital contributions we make to our PRC subsidiary shall be approved by or registered with (as the case may be) the Ministry of Commerce or its local counterparts. We are not always able to obtain these government registrations or approvals on a timely basis, if at all. Failure to receive such registrations or approvals impacts our ability to provide loans or capital contributions to our PRC subsidiary in a timely manner may be negatively affected, which could materially and adversely affect our liquidity and our ability to fund and expand our business. 
 
In addition, registered capital of a foreign-invested company settled in RMB converted from foreign currencies may only be used within the business scope approved by the applicable governmental authority. Foreign-invested companies may not change how they use such capital without SAFE’s approval, and may not in any case use such capital to repay RMB loans if proceeds of such loans have not been utilized. Violations of these regulations may result in severe penalties. These regulations may significantly limit our ability to transfer the net proceeds from offshore offering and subsequent offerings or financings to our PRC subsidiary, which may adversely affect our liquidity and our ability to fund and expand our business in China.
 
We face risks relating to restrictions on our ability to inject capital into our PRC subsidiary and our PRC subsidiary’s ability to distribute profits to us in connection with PRC resident shareholders beneficial owners that fail to comply with relevant PRC foreign exchange rules. 
 
The Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Financing and Inbound Investment via Offshore Special Purpose Vehicles, often known as Circular 75, was issued by SAFE in 2005. Circular 75 requires PRC residents to register with the local SAFE branch in connection with their establishment or control of any offshore special purpose vehicle for the purpose of overseas equity financing involving a roundtrip investment whereby the offshore special purpose vehicle acquires or controls onshore assets or equity interests held by the PRC residents. On July 4, 2014, SAFE issued the Notice on Relevant Issues Concerning Foreign Exchange Administration for PRC Residents to Engage in Outbound Investment and Financing and Inbound Investment via Special Purpose Vehicles, or Circular 37, which has superseded Circular 75. Under Circular 37 and other relevant foreign exchange regulations, PRC residents who make, or have made, prior to the implementation of these foreign exchange regulations, direct or indirect investments in offshore companies are required to register those investments with SAFE. In addition, any PRC resident who is a direct or indirect shareholder of an offshore company is also required to file or update the registration with SAFE, with respect to that offshore company for any material change involving its round-trip investment, capital variation, such as an increase or decrease in capital, transfer or swap of shares, merger, division, long-term equity or debt investment or the creation of any security interest. If any PRC shareholder fails to make the required registration or update the registration, the PRC subsidiary of that offshore company may be prohibited from distributing its profits and the proceeds from any reduction in capital, share transfer or liquidation to that offshore company, and that offshore company may also be prohibited from injecting additional capital into its PRC subsidiary. Moreover, failure to comply with the foreign exchange registration requirements described above could result in liability under PRC laws for evasion of applicable foreign exchange restrictions.
 
 We cannot provide any assurance that all of our shareholders and beneficial owners who are PRC residents have fully complied or will obtain or update any applicable registrations or have fully complied or will fully comply with other requirements required by Circular 37 or other related rules in a timely manner. The failure or inability of our shareholders resident in China to comply with the registration requirements set forth therein may subject them to fines and legal sanctions and may also limit our ability to contribute additional capital into our PRC subsidiaries, limit our PRC subsidiaries’ ability to distribute profits and other proceeds to our company or otherwise adversely affect our business.
 
We and/or our Hong Kong subsidiary may be classified as a “PRC resident enterprise” for PRC enterprise income tax purposes. Such classification would likely result in unfavorable tax consequences to us and our non-PRC shareholders and have a material adverse effect on our results of operations and the value of your investment. 
 
The Enterprise Income Tax Law provides that an enterprise established outside China whose “de facto management body” is located in China is considered a “PRC resident enterprise” and will generally be subject to the uniform 25% enterprise income tax on its global income. Under the implementation rules of the Enterprise Income Tax Law, “de facto management body” is defined as “the organizational body which effectively manages and controls the production and business operation, personnel, accounting, properties and other aspects of operations of an enterprise.” 
 
Pursuant to the Notice Regarding the Determination of Chinese-Controlled Offshore Incorporated Enterprises as PRC Tax Resident Enterprises on the Basis of De Facto Management Bodies, issued by the State Administration of Taxation in 2009, a foreign enterprise controlled by PRC enterprises or PRC enterprise groups is considered a PRC resident enterprise if all of the following conditions are met: (i) the senior management and core management departments in charge of daily operations are located mainly within the PRC; (ii) financial and human resources decisions are subject to determination or approval by persons or bodies in the PRC; (iii) major assets, accounting books, company seals and minutes and files of board and shareholders’ meetings are located or kept within the PRC; and (iv) at least half of the enterprise’s directors with voting rights or senior management reside within the PRC. Although the notice states that these standards only apply to offshore enterprises that are controlled by PRC enterprises or PRC enterprise groups, such standards may reflect the general view of the State Administration of Taxation in determining the tax residence of foreign enterprises. 
 
We believe that neither our company nor our Hong Kong subsidiary is a PRC resident enterprise because neither our company nor our Hong Kong subsidiary meets all of the conditions enumerated. For example, board and shareholders’ resolutions of our company and our Hong Kong subsidiary are adopted in Hong Kong and the minutes and related files are kept in Hong Kong. However, if the PRC tax authorities were to disagree with our position, our company and/or our Hong Kong subsidiary may be subject to PRC enterprise income tax reporting obligations and to a 25% enterprise income tax on our global taxable income, except for our income from dividends received from our PRC subsidiary, which may be exempt from PRC tax. If we and/or our Hong Kong subsidiary are treated as a PRC resident enterprise, the 25% enterprise income tax may adversely affect our ability to satisfy any of our cash needs. 
 
 
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In addition, if we were to be classified as a PRC “resident enterprise” for PRC enterprise income tax purpose, dividends we pay to our non-PRC enterprise shareholders and gains derived by our non-PRC shareholders from the sale of our shares and ADSs may be become subject to a 10% PRC withholding tax. In addition, future guidance may extend the withholding tax to dividends we pay to our non-PRC individual shareholders and gains derived by such shareholders from transferring our shares and ADSs. In addition to the uncertainty in how the new “resident enterprise” classification could apply, it is also possible that the rules may change in the future, possibly with retroactive effect. If PRC income tax were imposed on gains realized through the transfer of our ADSs or ordinary shares or on dividends paid to our nonresident shareholders, the value of your investment in our ADSs or ordinary shares may be materially and adversely affected.
 
Any limitation on the ability of our PRC subsidiary to make payments to us, or the tax implications of making payments to us, can have a material adverse effect on our ability to conduct our business or our financial condition. 
 
We are a holding company, and we rely principally on dividends and other distributions from our PRC subsidiary for our cash needs, including the funds necessary to pay dividends to our shareholders or service any debt we may incur. Current PRC regulations permit our PRC subsidiary to pay dividends only out of its accumulated profits, if any, determined in accordance with PRC accounting standards and regulations. In addition, our PRC subsidiary is required to set aside at least 10% of its after tax profits each year, if any, to fund certain statutory reserve funds until the aggregate amount of such reserve funds reaches 50% of its registered capital. Apart from these reserves, our PRC subsidiary may allocate a discretionary portion of its after-tax profits to staff welfare and bonus funds at its discretion. These reserves and funds are not distributable as cash dividends. Furthermore, if our PRC subsidiary incurs debt, the debt instruments may restrict its ability to pay dividends or make other payments to us. We cannot assure you that our PRC subsidiary will generate sufficient earnings and cash flows in the near future to pay dividends or otherwise distribute sufficient funds to enable us to meet our obligations, pay interest and expenses or declare dividends.
 
Distributions made by PRC companies to their offshore parents are generally subject to a 10% withholding tax under the Enterprise Income Tax Law. Pursuant to the Enterprise Income Tax Law and the Arrangement between the Mainland of China and the Hong Kong Special Administrative Region for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with respect to Taxes on Income, the withholding tax rate on dividends paid by our PRC subsidiary to our Hong Kong subsidiary would generally be reduced to 5%, provided that our Hong Kong subsidiary is the beneficial owner of the PRC sourced income. Our PRC subsidiary has not obtained approval for a withholding tax rate of 5% from the local tax authority and does not plan to obtain such approval in the near future as we have not achieved profitability. However, the Notice on How to Understand and Determine the Beneficial Owners in a Tax Agreement, also known as Circular 601, promulgated by the State Administration of Taxation in 2009, provides guidance for determining whether a resident of a contracting state is the “beneficial owner” of an item of income under China’s tax treaties and similar arrangements. According to Circular 601, a beneficial owner generally must be engaged in substantive business activities. An agent or conduit company will not be regarded as a beneficial owner and, therefore, will not qualify for treaty benefits. For this purpose, a conduit company is a company that is set up for the purpose of avoiding or reducing taxes or transferring or accumulating profits. Although our PRC subsidiary is wholly owned by our Hong Kong subsidiary, we will not be able to enjoy the 5% withholding tax rate with respect to any dividends or distributions made by our PRC subsidiary to its parent company in Hong Kong if our Hong Kong subsidiary is regarded as a “conduit company.” 
 
In addition, if Cellular Biomedicine Group Ltd. (HK), a wholly owned subsidiary of the Company (“CBMG HK”) were deemed to be a PRC resident enterprise, then any dividends payable by CBMG HK to CBMG Delaware Corporation may become subject to PRC dividend withholding tax. 
 
A new China taxation rule about the “beneficial owner” in a tax agreement became effective on April 1, 2018 which superseded Circular 601 and could affect the determination of whether a resident of a contracting state is the “beneficial owner” of an item of income under China’s tax treaties and similar arrangements.
 
Restrictions on the remittance of RMB into and out of China and governmental control of currency conversion can limit our ability to pay dividends and other obligations, and affect the value of your investment. 
 
The PRC government imposes controls on the convertibility of the RMB into foreign currencies and the remittance of currency out of China. We receive substantially all of our revenues in RMB and substantially all of our cash inflows and outflows are denominated in RMB. Under our current corporate structure, our revenues are primarily derived from dividend payments from our subsidiary in China after it receives payments from the VIE under various service and other contractual arrangements. We may convert a portion of our revenues into other currencies to meet our foreign currency obligations, such as payments of dividends declared in respect of our ordinary shares, if any. Shortages in the availability of foreign currency may restrict the ability of our PRC subsidiary to remit sufficient foreign currency to pay dividends or other payments to us, or otherwise satisfy its foreign currency denominated obligations. 
 
Under existing PRC foreign exchange regulations, payments of current account items, including profit distributions, interest payments and trade and service-related foreign exchange transactions, can be made in foreign currencies without prior SAFE approval as long as certain routine procedural requirements are fulfilled. Therefore, our PRC subsidiary is allowed to pay dividends in foreign currencies to us without prior SAFE approval by following certain routine procedural requirements. However, approval from or registration with competent government authorities is required where the RMB is to be converted into foreign currency and remitted out of China to pay capital expenses such as the repayment of loans denominated in foreign currencies. The PRC government may at its discretion restrict access to foreign currencies for current account transactions in the future. If the foreign exchange control system prevents us from obtaining sufficient foreign currencies to satisfy our foreign currency demands, we may not be able to pay dividends in foreign currencies to our shareholders, including the U.S. shareholders.
 
Our financial condition and results of operations can be materially and adversely affected if recent value added tax reforms in the PRC become unfavorable to our PRC subsidiary or VIE. 
 
Our PRC subsidiary and the VIE have been subject to a value added tax, or VAT, at a base rate of 6% since September 1, 2012. The VIE’s subsidiary has been subject to VAT at a base rate of 6% since July 1, 2013. Our financial condition and results of operations could be materially and adversely affected if the interpretation and enforcement of these tax rules become materially unfavorable to our PRC subsidiary and VIE.
 
 
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Failure to comply with PRC regulations regarding the registration requirements for stock ownership plans or stock option plans subjects PRC plan participants or us to fines and other legal or administrative sanctions. 
 
Under SAFE regulations, PRC residents who participate in an employee stock ownership plan or stock option plan in an overseas publicly listed company are required to register with SAFE or its local branch and complete certain other procedures. Participants of a stock incentive plan who are PRC residents must retain a qualified PRC agent, which could be a PRC subsidiary of such overseas publicly listed company, to conduct the SAFE registration and other procedures with respect to the stock incentive plan on behalf of these participants. Such participants must also retain an overseas entrusted institution to handle matters in connection with their exercise or sale of stock options. In addition, the PRC agent is required to amend the SAFE registration with respect to the stock incentive plan if there is any material change to the stock incentive plan, the PRC agent or the overseas entrusted institution or other material changes. 
 
We and our PRC resident employees who participate in our share incentive plans are subject to these regulations as our company is publicly listed in the United States. We have obtained the SAFE approvals regarding our PRC resident employees participating in our share incentive plans. If we or any our PRC resident option grantees fail to follow the compliance with above regulations, we or our PRC resident option grantees may be subject to fines and other legal or administrative sanctions.
 
Fluctuation in the value of the RMB can have a material adverse effect on the value of the investment. 
 
The value of the RMB against the U.S. dollar and other currencies is affected by changes in China’s political and economic conditions and China’s foreign exchange policies, among other things. On July 21, 2005, the PRC government changed its decades-old policy of pegging the value of the RMB to the U.S. dollar, and the RMB appreciated more than 20% against the U.S. dollar over the following three years. Between July 2008 and June 2010, this appreciation halted and the exchange rate between the RMB and the U.S. dollar remained within a narrow band. The PRC government has allowed the RMB to appreciate slowly against the U.S. dollar again, and it has appreciated more than 10% since June 2010. It is difficult to predict how market forces or PRC or U.S. government policy may impact the exchange rate between the RMB and the U.S. dollar in the future. In addition, there remains significant international pressure on the PRC government to adopt a substantial liberalization of its currency policy, which could result in further appreciation in the value of the RMB against the U.S. dollar. In 2015, due to the slow-down of China economic growth rate and environment, RMB depreciated against the U.S. dollar from the third quarter.
 
Our revenues and costs are mostly denominated in RMB, and a significant portion of our financial assets are also denominated in RMB, whereas our reporting currency is the U.S. dollar. Any significant depreciation of the RMB can materially and adversely affect our revenues, earnings and financial position as reported in U.S. dollars. To the extent that we need to convert U.S. dollars we received from this offering into RMB for our operations, appreciation of the RMB against the U.S. dollar would have an adverse effect on the RMB amount we would receive from the conversion. Conversely, if we decide to convert our RMB into U.S. dollars for the purpose of making payments for dividends on our ordinary shares or for other business purposes, appreciation of the U.S. dollar against the RMB would have a negative effect on the U.S. dollar amount available to us.
 
PRC laws and regulations establish more complex procedures for some acquisitions of Chinese companies by foreign investors, which could make it more difficult for us to pursue growth through acquisitions in China. 
 
A number of PRC laws and regulations, including the Regulations on Mergers and Acquisitions of Domestic Enterprises by Foreign Investors adopted by six PRC regulatory agencies in 2006, or the M&A Rules, the Anti-monopoly Law and the Rules of Ministry of Commerce on Implementation of Security Review System of Mergers and Acquisitions of Domestic Enterprises by Foreign Investors promulgated by the Ministry of Commerce in August 2011, or the Security Review Rules, have established procedures and requirements that are expected to make merger and acquisition activities in China by foreign investors more time consuming and complex. These include requirements in some instances that the Ministry of Commerce be notified in advance of any change of control transaction in which a foreign investor takes control of a PRC domestic enterprise, or that the approval from the Ministry of Commerce be obtained in circumstances where overseas companies established or controlled by PRC enterprises or residents acquire affiliated domestic companies. PRC laws and regulations also require certain merger and acquisition transactions to be subject to merger control review or security review.
 
The Security Review Rules were formulated to implement the Notice of the General Office of the State Council on Establishing the Security Review System for Mergers and Acquisitions of Domestic Enterprises by Foreign Investors, also known as Circular 6, which was promulgated in 2011. Under these rules, a security review is required for mergers and acquisitions by foreign investors having “national defense and security” concerns and mergers and acquisitions by which foreign investors may acquire the “de facto control” of domestic enterprises have “national security” concerns. In addition, when deciding whether a specific merger or acquisition of a domestic enterprise by foreign investors is subject to the security review, the Ministry of Commerce will look into the substance and actual impact of the transaction. The Security Review Rules further prohibits foreign investors from bypassing the security review requirement by structuring transactions through proxies, trusts, indirect investments, leases, loans, control through contractual arrangements or offshore transactions. 
 
There is no requirement for foreign investors in those mergers and acquisitions transactions already completed prior to the promulgation of Circular 6 to submit such transactions to the Ministry of Commerce for security review. As we have already obtained the “de facto control” over our affiliated PRC entities prior to the effectiveness of these rules, we do not believe we are required to submit our existing contractual arrangements to the Ministry of Commerce for security review. 
 
 
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However, as these rules are relatively new and there is a lack of clear statutory interpretation on the implementation of the same, there is no assurance that the Ministry of Commerce will not apply these national security review-related rules to the acquisition of equity interest in our PRC subsidiary. If we are found to be in violation of the Security Review Rules and other PRC laws and regulations with respect to the merger and acquisition activities in China, or fail to obtain any of the required approvals, the relevant regulatory authorities would have broad discretion in dealing with such violation, including levying fines, confiscating our income, revoking our PRC subsidiary’s business or operating licenses, requiring us to restructure or unwind the relevant ownership structure or operations. Any of these actions could cause significant disruption to our business operations and may materially and adversely affect our business, financial condition and results of operations. Further, if the business of any target company that we plan to acquire falls into the ambit of security review, we may not be able to successfully acquire such company either by equity or asset acquisition, capital contribution or through any contractual arrangement. We may grow our business in part by acquiring other companies operating in our industry. Complying with the requirements of the relevant regulations to complete such transactions could be time consuming, and any required approval processes, including approval from the Ministry of Commerce, may delay or inhibit our ability to complete such transactions, which could affect our ability to expand our business or maintain our market share.
 
On July 30, 2017, MOFCOM issued the Interim Measures on Filing Administration of Establishment and Changes of Foreign-Invested Enterprises (2017 Revision) which came into force as of July 30, 2017. It is stipulated in the Interim Measures that the transformation of a non-foreign invested enterprise into a foreign invested enterprise through M&A, merger by absorption, foreign investor’s strategic investment into non-foreign invested listed company, etc. would no longer be subject to MOFCOM approval, but instead would only need to undergo the simplified filing procedures with MOFCOM, in case the business of the target enterprise does not fall into the foreign investment negative list. But, if any business of the target enterprise falls into the foreign investment negative list, the complex procedures for an acquisition of the target enterprise by foreign investors would be still applicable.
 
The heightened scrutiny over acquisition transactions by the PRC tax authorities can have a negative impact on our business operations, our acquisition or restructuring strategy or the value of your investment in us. 
 
Pursuant to the Notice on Strengthening Administration of Enterprise Income Tax for Share Transfers by Non-PRC Resident Enterprises, or Circular 698, issued by the State Administration of Taxation in December 2009 with retroactive effect from January 1, 2008, where a non-PRC resident enterprise transfers the equity interests of a PRC resident enterprise indirectly by disposition of the equity interests of an overseas non-public holding company, or an Indirect Transfer, and such overseas holding company is located in a tax jurisdiction that: (i) has an effective tax rate of less than 12.5% or (ii) does not impose income tax on foreign income of its residents, the non-PRC resident enterprise, being the transferor, must report to the competent tax authority of the PRC resident enterprise this Indirect Transfer and may be subject to PRC enterprise income tax of up to 10% of the gains derived from the Indirect Transfer in certain circumstances.
 
To clarify the issues related to Circular 698, the State Administration of Taxation released the Announcement of the State Administration of Taxation on Several Issues Relating to the Administration of Income Tax on Non-resident Enterprises in 2011, known as Notice 24, and the Announcement on Issues Related to Applications of Special Tax Treatment for Equity Transfer by Non-resident Enterprises in 2013.
 
On February 3, 2015, the State Administration of Taxation issued the Announcement on Several Issues Concerning the Enterprise Income Tax on Indirect Property Transfers by Non-PRC Resident Enterprises, or Notice 7. Notice 7 introduces a new tax regime that is significantly different from that under Circular 698. It superseded the previous tax rules in relation to the offshore indirect equity transfer, including those under Circular 698 as described above. It extends the tax jurisdiction of State Administration of Taxation to capture not only the Indirect Transfer but also the transactions involving indirect transfer of (i) real properties in China and (ii) assets of an “establishment or place” situated in China, by a non-PRC resident enterprise through a disposition of equity interests in an overseas holding company.
 
However, Notice 7 also brings uncertainties to the parties of the offshore indirect transfers as the transferee and the transferor have to make self-assessment on whether the transactions should be subject to the corporate income tax and file or withhold the corporate income tax accordingly. In addition, the PRC tax authorities have discretion under Notice 7 to adjust the taxable capital gains based on the difference between the fair value of the transferred equity interests and the investment cost. We may pursue acquisitions in the future that may involve complex corporate structures. If we are considered as a non-PRC resident enterprise under the EIT Law and if the PRC tax authorities make adjustments to the taxable income of the transactions under Notice 7, our income tax expenses associated with such potential acquisitions will be increased, which may have an adverse effect on our financial condition and results of operations.
 
We face risks relating to the real properties that we lease. 
 
We primarily lease office and manufacturing space from third parties for our operations in China. Any defects in lessors’ title to the leased properties can disrupt our use of our offices, which may in turn adversely affect our business operations. For example, certain buildings and the underlying land are not allowed to be used for industrial or commercial purposes without relevant authorities’ approval, and the lease of such buildings to companies like us may subject the lessor to pay premium fees to the PRC government. We cannot assure you that the lessor has obtained all or any of approvals from the relevant governmental authorities. In addition, some of our lessors have not provided us with documentation evidencing their title to the relevant leased properties. We cannot assure you that title to these properties we currently lease will not be challenged. In addition, we have not registered any of our lease agreements with relevant PRC governmental authorities as required by PRC law, and although failure to do so does not in itself invalidate the leases, we will not necessarily be successful in defending these leases against bona fide third parties. 
 
As of the date of this filing, we are not aware of any actions, claims or investigations being contemplated by government authorities with respect to the defects in our leased real properties or any challenges by third parties to our use of these properties. However, if third parties who purport to be property owners or beneficiaries of the mortgaged properties challenge our right to use the leased properties, we may not be able to protect our leasehold interest and may be ordered to vacate the affected premises, which could in turn materially and adversely affect our business and operating results.
 
 
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Our auditor, like other independent registered public accounting firms operating in China, is not permitted to be subject to inspection by Public Company Accounting Oversight Board, and consequently investors may be deprived of the benefits of such inspection. 
 
Our auditor, the independent registered public accounting firm that issued the audit reports included elsewhere in this report, as an auditor of companies that are traded publicly in the United States and a firm registered with the Public Company Accounting Oversight Board (United States) or PCAOB, is required by the laws of the United States to undergo regular inspections by the PCAOB to assess its compliance with the laws of the United States and applicable professional standards. Our auditor is located in China and the PCAOB is currently unable to conduct inspections on auditors in China without the approval of the PRC authorities. Therefore, our auditor, like other independent registered public accounting firms operating in China, is currently not inspected by the PCAOB.
 
In May 2013, the PCAOB announced that it has entered into a Memorandum of Understanding (MOU) on Enforcement Cooperation with the China Securities Regulatory Commission (the CSRC) and the Ministry of Finance (the MOF). The MOU establishes a cooperative framework between the parties for the production and exchange of audit documents relevant to investigations in both countries’ respective jurisdictions. More specifically, it provides a mechanism for the parties to request and receive from each other assistance in obtaining documents and information in furtherance of their investigative duties. In addition to developing enforcement MOU, the PCAOB has been engaged in continuing discussions with the CSRC and MOF to permit joint inspections in China of audit firms that are registered with the PCAOB and audit Chinese companies that trade on U.S. exchanges.
 
Inspections of other firms that the PCAOB has conducted outside of China have identified deficiencies in those firms’ audit procedures and quality control procedures, and such deficiencies may be addressed as part of the inspection process to improve future audit quality. The inability of the PCAOB to conduct inspections of independent registered public accounting firms operating in China makes it more difficult to evaluate the effectiveness of our auditor’s audit procedures or quality control procedures, and to the extent that such inspections might have facilitated improvements in our auditor’s audit procedures and quality control procedures, investors may be deprived of such benefits. 
 
On November 18, 2016, the PCAOB issued its 2016 to 2020 Strategic Plan on improving the quality of the audit for the protection and benefits of investors, which revised the plan to update initiatives relating to the PCAOB’s new standard-setting process, planning for and adopting a permanent broker-dealer inspection program, inspecting firms located in China, audit quality indicators, monitoring and developing reports related to independence and the business model of the firms and business continuity. This may eventually improve PCAOB’s ability to conduct inspections of independent registered public accounting firms operating in China.
 
RISKS RELATED TO OUR COMMON STOCK
 
Failure to meet all applicable Nasdaq Global Market requirements can lead to Nasdaq delisting our common stock, which delisting could adversely affect the market liquidity of our common stock, impair the value of your investment, adversely affect our ability to raise needed funds and subject us to additional trading restrictions and regulations.
 
Our common stock trades on the Nasdaq Global Market. If we fail to satisfy the continued listing requirements of the Nasdaq Global Market, such as the corporate governance requirements or the minimum closing bid price requirement, the Nasdaq Stock Market (or Nasdaq) may take steps to de-list our common stock. Such a de-listing would likely have a negative effect on the price of our common stock and would impair your ability to sell or purchase our common stock when you wish to do so. In the event of a de-listing, we would take actions to restore our compliance with Nasdaq’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock to become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below the Nasdaq minimum bid price requirement or prevent future noncompliance with Nasdaq’s listing requirements.
 
If we fail to meet all applicable Nasdaq requirements and Nasdaq delists our securities from trading on its exchange, we expect our securities could be quoted on the Over-The-Counter Bulletin Board (OTCBB) or the “pink sheets.” If this were to occur, we face significant material adverse consequences, including:
 
a limited availability of market quotations for our securities;
reduced liquidity for our securities;
a determination that our common stock is “penny stock” which will require brokers trading in our common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities;
a limited amount of news and analyst coverage; and
a decreased ability to issue additional securities or obtain additional financing in the future.
 
Furthermore, the National Securities Markets Improvement Act of 1996 (NSMIA) which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Because our common stock is listed on Nasdaq, they are covered securities for the purpose of NSMIA. If our securities were no longer listed on Nasdaq and therefore not “covered securities,” we would be subject to regulation in each state in which we offer our securities.
 
 
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We do not intend to pay cash dividends.
 
We do not anticipate paying cash dividends on our common stock in the foreseeable future. We may not have sufficient funds to legally pay dividends. Even if funds are legally available to pay dividends, we may nevertheless decide in our sole discretion not to pay dividends. The declaration, payment and amount of any future dividends will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements and other factors our board of directors may consider relevant. There is no assurance that we will pay any dividends in the future, and, if dividends are declared, there is no assurance with respect to the amount of any such dividend.
 
Our operating history and lack of profits can lead to wide fluctuations in our share price. The market price for our common shares is particularly volatile given our status as a relatively unknown company with a small and thinly traded public float.
 
The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than a seasoned issuer for the indefinite future. The volatility in our share price is attributable to a number of factors. First, as noted above, our common shares are sporadically and thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our stockholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand, as compared to a seasoned issuer which could better absorb those sales without adverse impact on its share price. Secondly, we are a speculative or “risky” investment due to our limited operating history and lack of profits to date. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect that the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.
 
We received a preliminary nonbinding proposal from a consortium led by our Chief Executive Officer to acquire all of our outstanding equity securities, and uncertainty regarding the potential transaction and/or announcements related to the potential transaction can impact our business, financial condition, results of operations, and the market price of our common stock.
 
On November 11, 2019, the Company received a preliminary nonbinding proposal letter from a consortium led by our Chief Executive Officer, Mr. Bizuo (Tony) Liu, certain other senior management members of the Company, Hillhouse Bio Holdings, L.P., TF Capital Ranok Ltd., Dangdai International Group Co., Limited and Mission Right Limited to acquire all outstanding shares of common stock (each, a “Share,” collectively, the “Shares”) of the Company (other than those Shares held by members of the consortium that may be rolled over in connection with the proposed transaction) for U.S.$19.50 per Share in cash in a “going-private” transaction (the “Original Proposed Transaction”). Upon receipt of the letter, the Company’s Board of Directors (the “Board”) formed a special committee (the “Special Committee”) comprised of independent, disinterested directors to evaluate strategic alternatives with the assistance of its advisors, including the Original Proposed Transaction. The Special Committee consists of four members of the Board, Alan Au, Edward Schafer, Terry A. Belmont and Wen Tao (Steve) Liu, PhD, each of whom are independent, with Alan Au serving as chairperson.
 
On February 21, 2020, the Special Committee received a new preliminary non-binding proposal letter from a consortium led by Liu, certain other senior management members of the Company, Hillhouse Bio Holdings, L.P., TF Capital Ranok Ltd., Dangdai International Group Co., Limited, Mission Right Limited, Maplebrook Limited, Viktor Pan, Zheng Zhou, OPEA SRL, Wealth Map Holdings Limited, Earls Mill Limited (the “Consortium Members”) to acquire all outstanding Shares of the Company (other than those Shares held by members of the Consortium that may be rolled over in connection with the proposed transaction) for U.S.$19.50 per Share in cash in a “going-private” transaction (the “New Proposed Transaction”). The Special Committee will consider the New Proposed Transaction in connection with its evaluation of strategic alternatives.
 
The possibility of a “going-private” transaction, such as the Original Proposed Transaction or the New Proposed Transaction, or any other potential strategic alternative transaction, exposes us and our operations to a number of risks and uncertainties, including the potential failure to retain, attract or strengthen our relationships with key personnel, current and potential customers, suppliers, licensors and partners, which may cause them to terminate, or not to renew or enter into, arrangements with us; the potential incurrence of expenses associated with the retention of legal, financial and other advisors regardless of whether any transaction is consummated; distractions and disruptions in our business; and exposure to potential litigation in connection with this process and effecting any transaction, any of which could adversely affect our share price, business, financial condition and results of operations as well as the market price of our common stock. Moreover, there can be no assurance that any definitive offer in connection with the Original Proposed Transaction or the New Proposed Transaction will be made or executed, or that the Original Proposed Transaction, the New Proposed Transaction, or any other alternative transaction, will be approved or consummated. Announcements regarding developments relating to the Original Proposed Transaction or the New Proposed Transaction can cause the market price of our common stock to fluctuate significantly.
 
 
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ITEM 1B. UNRESOLVED STAFF COMMENTS
 
None. 
 
ITEM 2. PROPERTIES
 
Our corporate headquarters are located at 1345 Avenue of Americas, 15th Floor, New York, New York. On January 1, 2017, CBMG Shanghai entered into a 10-year lease agreement with Shanghai Chuangtong Industrial Development Co., Ltd., pursuant to which the Company leased a 10,501.6 square meter building located in the “Pharma Valley” of Shanghai, the People’s Republic of China for research and development, manufacturing and office space purposes. The term of the Lease is 10 years, starting from January 1, 2017 and ending on December 31, 2026 (the “Original Term”). During the Original Term, the monthly rent will increase by 6% every two years. We are establishing a 43,000 square foot facility in Shanghai that will house 25 clean-rooms and equipped with 12 independent production lines to support clinical batch production and commercial scale manufacturing.
 
We currently pay rent for a total of $316,000 per month for an aggregate of approximately 195,000 square feet of space to house our administration, research and manufacturing facilities in Maryland and in the cities of Wuxi and Shanghai in China. 
 
ITEM 3. LEGAL PROCEEDINGS
 
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.
 
ITEM 4. MINE SAFETY DISCLOSURES
 
Not applicable. 
 
 
53
 
 
PART II 
 
ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
 
Our common stock is quoted on the Nasdaq Global Market under the symbol “CBMG.” Our stock was formerly quoted under the symbol “EBIG.”
 
As of February 24, 2020, there were 20,410,791 shares and 19,355,292 shares of common stock of the Company issued and outstanding, respectively and there were approximately 1,700 stockholders of record of the Company’s common stock.
 
Effective January 18, 2013, the Company completed its reincorporation from the State of Arizona to the State of Delaware (the “Reincorporation”). In connection with the Reincorporation, shares of the former Arizona entity were exchanged into shares of the Delaware entity at a ratio of 100 Arizona shares for each 1 Delaware share, resulting in the same effect as a 1:100 reverse stock split. The Reincorporation became effective on January 31, 2013. Please refer to the Current Report on Form 8-K, filed by the Company on January 25, 2013. All values have been retroactively adjusted.
  
Equity Compensation Plans
 
2009 Stock Option Plan
 
During the first quarter of 2009, the Company’s Board of Directors approved and adopted the 2009 Stock Option Plan (the “2009 Plan”) and designated 100,000 of its common stock for issuance under the 2009 Plan to employees, directors or consultants for the Company through either the issuance of shares or stock option grants. Under the terms of the 2009 Plan, stock option grants shall be made with exercise prices not less than 100% of the fair market value of the shares of common stock on the grant date. As of December 31, 2019, there are 4,593 shares that have not been issued under this plan.
 
2011 Incentive Stock Option Plan (as amended)
 
During the last quarter of 2011, the Company’s Board of Directors approved and adopted the 2011 Incentive Plan (the “2011 Plan”) and designated 300,000 of its no par common stock for issuance under the 2011 Plan to employees, directors or consultants for the Company through either the issuance of shares or stock option grants. Under the terms of the 2011 Plan, stock option grants were authorized to be made with exercise prices not less than 100% of the fair market value of the shares of common stock on the grant date. On November 30, 2012, the Company’s Board of Directors approved the Amended and Restated 2011 Incentive Stock Option Plan (the “Restated 2011 Plan”), which amended and restated the 2011 Plan to provide for the issuance of up to 780,000 (increasing up to 1% per year) shares of common stock. The Restated 2011 Plan was approved by our stockholders on January 17, 2013. There are 2,231 shares available for issuance under this plan as of December 31, 2019.
 
2013 Stock Incentive Plan
 
On August 29, 2013, the Company’s Board of Directors adopted the Cellular Biomedicine Group, Inc. 2013 Stock Incentive Plan (the “2013 Plan”) to attract and retain the best available personnel, to provide additional incentive to employees, directors and consultants and to promote the success of the Company’s business. The 2013 Plan was approved by our stockholders on December 9, 2013. There are 90,011 shares available for issuance under this plan as of December 31, 2019.
 
The following summary describes the material features of the 2013 Plan. The summary, however, does not purport to be a complete description of all the provisions of the 2013 Plan. The following description is qualified in its entirety by reference to the Plan.
 
Description of the 2013 Plan
 
The purpose of the 2013 Plan is to attract and retain the best available personnel, to provide additional incentive to employees, directors and consultants and to promote the success of the Company’s business. The Company has reserved up to 1,000,000 of the authorized but unissued or reacquired shares of common stock of the Company. The Board or its appointed administrator has the power and authority to grant awards and act as administrator thereunder to establish the grant terms, including the grant price, vesting period and exercise date.
 
Each sale or award of shares under the 2013 Plan is made pursuant to the terms and conditions provided for in an award agreement (an “Award Agreement”) entered into by the Company and the individual recipient. The number of shares covered by each outstanding Award Agreement shall be proportionately adjusted for (a) any increase or decrease in the number of issued shares of common stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the common stock or similar transaction affecting the common stock or (b) any other increase or decrease in the number of issued shares of common stock affected without receipt of consideration by the Company.
 
 
54
 
 
Under the 2013 Plan, the Board or its administrator has the authority: (i) to select the employees, directors and consultants to whom awards may be granted from time to time hereunder; (ii) to determine whether and to what extent awards are granted; (iii) to determine the number of shares or the amount of other consideration to be covered by each award granted; (iv) to approve forms of Award Agreements for use under the 2013 Plan; (v) to determine the terms and conditions of any award granted; (vi) to establish additional terms, conditions, rules or procedures to accommodate the rules or laws of applicable foreign jurisdictions and to afford grantees favorable treatment under such rules or laws; provided, however, that no award shall be granted under any such additional terms, conditions, rules or procedures with terms or conditions which are inconsistent with the provisions of the 2013 Plan; (vii) to amend the terms of any outstanding award granted under the 2013 Plan; provided that any amendment that would adversely affect the grantee’s rights under an outstanding award shall not be made without the grantee’s written consent; (viii) to construe and interpret the terms of the 2013 Plan and awards, including without limitation, any notice of award or Award Agreement granted pursuant to the 2013 Plan; and (ix) to take such other action, not inconsistent with the terms of the 2013 Plan, as the administrator deems appropriate.
 
The awards under the 2013 Plan other than Incentive Stock Options may be granted to employees, directors and consultants. Incentive Stock Options may be granted only to employees of the Company, a parent or a subsidiary. An employee, director or consultant who has been granted an award may, if otherwise eligible, be granted additional awards. Awards may be granted to such employees, directors or consultants who are residing in foreign jurisdictions as the administrator may determine from time to time. Options granted under the 2013 Plan will be subject to the terms and conditions established by the administrator. Under the terms of the 2013 Plan, the exercise price of the options will not be less than the fair market value (as determined under the 2013 Plan) of our common stock at the time of grant. Options granted under the 2013 Plan will be subject to such terms, including the exercise price and the conditions and timing of exercise, as may be determined by the administrator and specified in the applicable award agreement. The maximum term of an option granted under the 2013 Plan will be ten years from the date of grant. Payment in respect of the exercise of an option may be made in cash, by certified or official bank check, by money order or with shares, pursuant to a “cashless” or “net issue” exercise, by a combination thereof or by such other method as the administrator may determine to be appropriate and has been included in the terms of the option.
 
             
The 2013 Plan may be amended, suspended or terminated by the Board, or an administrator appointed by the Board, at any time and for any reason.
 
2014 Stock Incentive Plan
 
On September 22, 2014, the Company’s Board of Directors adopted the Cellular Biomedicine Group, Inc. 2014 Stock Incentive Plan (the “2014 Plan”) covering 1,200,000 shares to attract and retain the best available personnel, to provide additional incentive to employees, directors and consultants and to promote the success of the Company’s business. The 2014 Plan was approved by our stockholders on November 7, 2014. In 2017, the Company’s Board of Directors approved the Amended and Restated 2014 Incentive Stock Option Plan (the “Restated 2014 Plan”), which amended and restated the 2014 Plan to increase the number of shares available for issuance by 1,000,000 shares. The Restated 2014 Plan was approved by our stockholders on April 28, 2017. There are 167,048 shares available for issuance under this plan as of December 31, 2019.
 
The following summary describes the material features of the 2014 Plan. The summary, however, does not purport to be a complete description of all the provisions of the 2014 Plan. The following description is qualified in its entirety by reference to the Plan.
 
Description of the 2014 Plan
 
The purpose of the 2014 Plan is to attract and retain the best available personnel, to provide additional incentive to employees, directors and consultants and to promote the success of the Company’s business. The Company has reserved up to 1,200,000 of the authorized but unissued or reacquired shares of common stock of the Company. The Board or its appointed administrator has the power and authority to grant awards and act as administrator thereunder to establish the grant terms, including the grant price, vesting period and exercise date.
 
Each sale or award of shares under the 2014 Plan is made pursuant to the terms and conditions provided for in an Award Agreement entered into by the Company and the individual recipient. The number of shares covered by each outstanding Award Agreement shall be proportionately adjusted for (a) any increase or decrease in the number of issued shares of common stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the common stock or similar transaction affecting the common stock or (b) any other increase or decrease in the number of issued shares of common stock affected without receipt of consideration by the Company.
 
Under the 2014 Plan, the Board or its administrator has the authority: (i) to select the employees, directors and consultants to whom awards may be granted from time to time hereunder; (ii) to determine whether and to what extent awards are granted; (iii) to determine the number of shares or the amount of other consideration to be covered by each award granted; (iv) to approve forms of Award Agreements for use under the 2014 Plan; (v) to determine the terms and conditions of any award granted; (vi) to establish additional terms, conditions, rules or procedures to accommodate the rules or laws of applicable foreign jurisdictions and to afford grantees favorable treatment under such rules or laws; provided, however, that no award shall be granted under any such additional terms, conditions, rules or procedures with terms or conditions which are inconsistent with the provisions of the 2014 Plan; (vii) to amend the terms of any outstanding award granted under the 2014 Plan; provided that any amendment that would adversely affect the grantee’s rights under an outstanding award shall not be made without the grantee’s written consent; (viii) to construe and interpret the terms of the 2014 Plan and awards, including without limitation, any notice of award or Award Agreement granted pursuant to the 2014 Plan; and (ix) to take such other action, not inconsistent with the terms of the 2014 Plan, as the administrator deems appropriate.
 
 
55
 
 
The awards under the 2014 Plan other than Incentive Stock Options may be granted to employees, directors and consultants. Incentive Stock Options may be granted only to employees of the Company, a parent or a subsidiary. An employee, director or consultant who has been granted an award may, if otherwise eligible, be granted additional awards. Awards may be granted to such employees, directors or consultants who are residing in foreign jurisdictions as the administrator may determine from time to time. Options granted under the 2014 Plan will be subject to the terms and conditions established by the administrator. Under the terms of the 2014 Plan, the exercise price of the options will not be less than the fair market value (as determined under the 2014 Plan) of our common stock at the time of grant. Options granted under the 2014 Plan will be subject to such terms, including the exercise price and the conditions and timing of exercise, as may be determined by the administrator and specified in the applicable award agreement. The maximum term of an option granted under the 2014 Plan will be ten years from the date of grant. Payment in respect of the exercise of an option may be made in cash, by certified or official bank check, by money order or with shares, pursuant to a “cashless” or “net issue” exercise, by a combination thereof or by such other method as the administrator may determine to be appropriate and has been included in the terms of the option.
 
 The 2014 Plan may be amended, suspended or terminated by the Board, or an administrator appointed by the Board, at any time and for any reason.
 
2019 Stock Incentive Plan
 
On July 1, 2019, the Company’s Board of Directors adopted the Cellular Biomedicine Group, Inc. 2019 Stock Incentive Plan (the “2019 Plan”) covering 1,500,000 shares to attract and retain the best available personnel, to provide additional incentive to employees, directors and consultants and to promote the success of the Company’s business. The 2019 Plan was approved by our stockholders on April 26, 2019. There are 1,418,370 shares available for issuance under this plan as of December 31, 2019.
 
The following summary describes the material features of the 2019 Plan. The summary, however, does not purport to be a complete description of all the provisions of the 2019 Plan. The following description is qualified in its entirety by reference to the Plan.
 
Description of the 2019 Plan
 
The purpose of the 2019 Plan is to attract and retain the best available personnel, to provide additional incentive to employees, directors and consultants and to promote the success of the Company’s business. The Company has reserved up to 1,500,000 of the authorized but unissued or reacquired shares of common stock of the Company. The Board or its appointed administrator has the power and authority to grant awards and act as administrator thereunder to establish the grant terms, including the grant price, vesting period and exercise date.
 
Each sale or award of shares under the 2019 Plan is made pursuant to the terms and conditions provided for in an Award Agreement entered into by the Company and the individual recipient. The number of shares covered by each outstanding Award Agreement shall be proportionately adjusted for (a) any increase or decrease in the number of issued shares of common stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the common stock or similar transaction affecting the common stock or (b) any other increase or decrease in the number of issued shares of common stock affected without receipt of consideration by the Company.
 
Under the 2019 Plan, the Board or its administrator has the authority: (i) to select the employees, directors and consultants to whom awards may be granted from time to time hereunder; (ii) to determine whether and to what extent awards are granted; (iii) to determine the number of shares or the amount of other consideration to be covered by each award granted; (iv) to approve forms of Award Agreements for use under the 2014 Plan; (v) to determine the terms and conditions of any award granted; (vi) to establish additional terms, conditions, rules or procedures to accommodate the rules or laws of applicable foreign jurisdictions and to afford grantees favorable treatment under such rules or laws; provided, however, that no award shall be granted under any such additional terms, conditions, rules or procedures with terms or conditions which are inconsistent with the provisions of the 2019 Plan; (vii) to amend the terms of any outstanding award granted under the 2019 Plan; provided that any amendment that would adversely affect the grantee’s rights under an outstanding award shall not be made without the grantee’s written consent; (viii) to construe and interpret the terms of the 2019 Plan and awards, including without limitation, any notice of award or Award Agreement granted pursuant to the 2019 Plan; and (ix) to take such other action, not inconsistent with the terms of the 2019 Plan, as the administrator deems appropriate.
 
The awards under the 2019 Plan other than Incentive Stock Options may be granted to employees, directors and consultants. Incentive Stock Options may be granted only to employees of the Company, a parent or a subsidiary. An employee, director or consultant who has been granted an award may, if otherwise eligible, be granted additional awards. Awards may be granted to such employees, directors or consultants who are residing in foreign jurisdictions as the administrator may determine from time to time. Options granted under the 2019 Plan will be subject to the terms and conditions established by the administrator. Under the terms of the 2019 Plan, the exercise price of the options will not be less than the fair market value (as determined under the 2019 Plan) of our common stock at the time of grant. Options granted under the 2019 Plan will be subject to such terms, including the exercise price and the conditions and timing of exercise, as may be determined by the administrator and specified in the applicable award agreement. The maximum term of an option granted under the 2019 Plan will be ten years from the date of grant. Payment in respect of the exercise of an option may be made in cash, by certified or official bank check, by money order or with shares, pursuant to a “cashless” or “net issue” exercise, by a combination thereof or by such other method as the administrator may determine to be appropriate and has been included in the terms of the option.
 
 The 2019 Plan may be amended, suspended or terminated by the Board, or an administrator appointed by the Board, at any time and for any reason.
 
 
56
 
 
Stock Performance Graph
 
The line graph that follows compares the cumulative total stockholder return on our shares of common stock with the cumulative total return of the Nasdaq Healthcare Index (^IXHC)* and the Russell 3000 Index (RUA)* Index for the five years ended December 31, 2019. The graph and table assume that $100 was invested on the last day of trading for the fiscal year 2014 in each of our shares of common stock, the Nasdaq Healthcare Index and the Russell 3000 Index, and that no dividends were paid. Cumulative total stockholder returns for our shares of common stock, Nasdaq Healthcare Index and the Russell 3000 Index are based on our fiscal year, which is the same as the calendar year.
 
 
 
 
 
 
 
57
 
 
Dividends
 
We have not in the past and do not anticipate paying cash dividends on our common stock in the foreseeable future. The declaration, payment and amount of future dividends, if any, will be made at the discretion of the board of directors, and will depend upon, among other things, the results of our operations, cash flows and financial condition, operating and capital requirements and other factors our board of directors may consider relevant.
 
Recent Sales of Unregistered Securities
 
None.
 
Issuer Purchases of Equity Securities
 
As previously disclosed on a Current Report on Form 8-K filed on June 1, 2017, the Company authorized a share repurchase program (the “2017 Share Repurchase Program”) pursuant to which the Company may, from time to time, purchase shares of its common stock for an aggregate purchase price not to exceed $10 million under which approximately $6.52 million in shares of common stock were repurchased. On October 10, 2018, the Company commenced a share repurchase program (the “2018 Share Repurchase Program”) pursuant to which the Company may, from time to time, purchase shares of its common stock for an aggregate purchase price not to exceed approximately $8.48 million. We completed all of our repurchase plans on March 31, 2019 for a grand total of 1,055,499 shares for a total purchase price of $14.99 million. There were no shares of common stock repurchased by the Company during the three months period ended December 31, 2019.
 
Period
 
Total number of shares purchased
 
 
Average price paid per share
 
 
 
 
 
 
 
 
June 9, 2017 ~ June 30, 2017
  170,169 
 $7.98 
July 1, 2017 ~ September 30, 2017
  114,156 
 $9.51 
October 1, 2017 ~ December 31, 2017
  142,469 
 $10.77 
January 1, 2018 ~ March 31, 2018
  37,462 
 $19.10 
April 1, 2018 ~ June 30, 2018
  96,512 
 $11.86 
July 1, 2018 ~ September 30, 2018
  - 
 $- 
October 1, 2018 ~ December 31, 2018
  440,731 
 $16.88 
January 1, 2019 ~ March 31, 2019
  54,000 
 $19.24 
 
    
    
Total
  1,055,499 
 $14.20 
 
 
58
 
 
ITEM 6. SELECTED FINANCIAL DATA
 
 The following tables set forth certain of our selected consolidated financial data as of the dates and for the years indicated. Historical results are not necessarily indicative of the results to be expected for any future period.
 
The following selected consolidated financial information was derived from our fiscal year end consolidated financial statements. The following information should be read in conjunction with those statements and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our summary consolidated statement of operations and comprehensive loss data for the fiscal years ended December 31, 2019, 2018 and 2017 and our summary consolidated balance sheet data as of December 31, 2019 and 2018, as set forth below, are derived from, and are qualified in their entirety by reference to, our audited consolidated financial statements, including the notes thereto, which are included in this Annual Report. The summary balance sheet data as of December 31, 2017, 2016 and 2015, and summary consolidated statement of operations and comprehensive loss data for the fiscal years ended December 31, 2016 and 2015, set forth below are derived from our audited consolidated financial statements which are not included herein.
 
Our consolidated financial statements are prepared and presented in accordance with accounting principles generally accepted in the United States (“GAAP”).
 
 
 
For the Year EndedDecember 31,
 
 
 
2019
 
 
2018
 
 
2017
 
 
2016
 
 
2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Summary Consolidated statement of operations and comprehensive loss data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net sales and revenue
 $339,920 
 $224,403 
 $336,817 
 $627,930 
 $2,505,423 
     
    
    
    
    
    
Operating expenses:
    
    
    
    
    
Cost of sales
  62,378 
  135,761 
  162,218 
  860,417 
  1,880,331 
General and administrative
  13,458,151 
  13,220,757 
  12,780,483 
  11,670,506 
  13,068,255 
Selling and marketing
  141,597 
  308,830 
  360,766 
  425,040 
  709,151 
Research and development
  37,669,978 
  24,150,480 
  14,609,917 
  11,475,587 
  7,573,228 
Impairment of non-current assets
  - 
  2,914,320 
  - 
  4,611,714 
  123,428 
         Total operating expenses
  51,332,104 
  40,730,148 
  27,913,384 
  29,043,264 
  23,354,393 
Operating loss
  (50,992,184)
  (40,505,745)
  (27,576,567)
  (28,415,334)
  (20,848,970)
     
    
    
    
    
    
Other income:
    
    
    
    
    
Interest income
  809,785 
  392,328 
  133,621 
  78,943 
  42,220 
Other income
  199,390 
  1,172,879 
  1,955,086 
  132,108 
  630,428 
        Total other income
  1,009,175 
  1,565,207 
  2,088,707 
  211,051 
  672,648 
Loss before taxes
  (49,983,009)
  (38,940,538)
  (25,487,860)
  (28,204,283)
  (20,176,322)
     
    
    
    
    
    
Income taxes credit (provision)
  (1,045)
  (4,954)
  (2,450)
  (4,093)
  728,601 
     
    
    
    
    
    
     
    
    
    
    
    
Net loss
 $(49,984,054)
 $(38,945,492)
 $(25,490,310)
 $(28,208,376)
 $(19,447,721)
Other comprehensive income (loss):
    
    
    
    
    
Cumulative translation adjustment
  8,242 
  (1,079,689)
  967,189 
  (743,271)
  (307,950)
   Unrealized gain (loss) on investments, net of tax
  - 
  - 
  (240,000)
  5,300,633 
  (1,376,540)
   Reclassification adjustments, net of tax, in connection with other-than-temporary impairment of investments
  - 
  - 
  - 
  (5,557,939)
  - 
Total other comprehensive income (loss):
  8,242 
  (1,079,689)
  727,189 
  (1,000,577)
  (1,684,490)
     
    
    
    
    
    
Comprehensive loss
 $(49,975,812)
 $(40,025,181)
 $(24,763,121)
 $(29,208,953)
 $(21,132,211)
     
    
    
    
    
    
Net loss per share :
    
    
    
    
    
  Basic and diluted
 $(2.63)
 $(2.20)
 $(1.78)
 $(2.09)
 $(1.70)
     
    
    
    
    
    
Weighted average common shares outstanding:
    
    
    
    
    
  Basic and diluted
  18,983,206 
  17,741,104 
  14,345,604 
  13,507,408 
  11,472,306 
 
 
59
 
 
 
 
As ofDecember 31,
 
 
 
2019
 
 
2018
 
 
2017
 
 
2016
 
 
2015
 
Summary Consolidated balance sheet data:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
 $15,443,649 
 $52,812,880 
 $21,568,422 
 $39,252,432 
 $14,884,597 
Current working capital (1)
  10,356,774 
  46,566,505 
  20,118,725 
  38,328,048 
  13,675,034 
Total assets
  97,324,300 
  107,581,349 
  61,162,296 
  68,628,467 
  49,460,422 
Other non-current liabilities
  17,933,743 
  14,321,751 
  183,649 
  370,477 
  76,229 
Stockholders’ equity
  55,717,691 
  85,218,392 
  57,302,526 
  65,893,954 
  46,364,936 
 
(1)
Current working capital is the difference between total current assets and total current liabilities.
(2)
Current working capital, total assets and other non-current liabilities do not include the retrospective adjustments for adoption of ASU No. 2016-02 “Leases (Topic 842)” as of December 31, 2017, 2016 and 2015.
 
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
 
The following is management’s discussion and analysis of certain significant factors that have affected our financial position and operating results during the periods included in the accompanying consolidated financial statements, as well as information relating to the plans of our current management. This report includes forward-looking statements. Generally, the words “believes,” “anticipates,” “may,” “will,” “should,” “expect,” “intend,” “estimate,” “continue” and similar expressions or the negative thereof or comparable terminology are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties, including the matters set forth in this report or other reports or documents we file with the Securities and Exchange Commission from time to time, which could cause actual results or outcomes to differ materially from those projected. Undue reliance should not be placed on these forward-looking statements which speak only as of the date hereof. We undertake no obligation to update these forward-looking statements.
 
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the related notes thereto and other financial information included in Item 8 - Financial Statements and Supplemental Data of this Annual Report on Form 10-K.
 
Critical Accounting Policies and Estimates
 
We prepare our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Our management periodically evaluates the estimates and judgments made. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates as a result of different assumptions or conditions.
 
The following summarizes critical estimates made by management in the preparation of the consolidated financial statements.
 
Revenue Recognition
 
Revenues consist mainly of cell banking services as well as cell therapy technology services with customers. The Company evaluates the separate performance obligation(s) under each contract, allocates the transaction price to each performance obligation considering the estimated stand-alone selling prices of the services and recognizes revenue upon the satisfaction of such obligations over time or at a point in time dependent on the satisfaction of one of the following criteria: (1) the customer simultaneously receives and consumes the economic benefits provided by the vendor’s performance; (2) the vendor creates or enhances an asset controlled by the customer; or (3) the vendor’s performance does not create an asset for which the vendor has an alternative use, and the vendor has an enforceable right to payment for performance completed to date. Revenue from rendering of services is measured at the fair value of the consideration received or receivable under the contract or agreement. Revenue from cell therapy technology services is recognized in profit or loss at the point when customers simultaneously receive and consume the services. Revenue from cell banking storage is recognized in profit or loss on a straight-line basis over the storage period.
 
 
60
 
 
Property, Plant and Equipment
 
Property, plant and equipment are recorded at cost. Depreciation is provided for on the straight-line method over the estimated useful lives of the assets ranging from three to ten years and begins when the related assets are placed in service. Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Betterments or renewals are capitalized when incurred. Property, plant and equipment are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. If the sum of the expected future undiscounted cash flow is less than the carrying amount of the asset, a loss is recognized for the difference between the fair value and carrying value of the asset. Repair and maintenance costs are charged to operating expense as incurred.
 
For the years ended December 31, 2019, 2018 and 2017, depreciation expense was $4,187,330, $3,360,517 and $1,195,705, respectively.
 
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. The evaluation includes comparing the fair value of the reporting unit to the carrying value, including goodwill. If the fair value exceeds the carrying value, no impairment loss is recognized. However, if the carrying value of the reporting unit exceeds its fair value, the goodwill of the reporting unit may be impaired. Impairment is measured by comparing the implied fair value of the goodwill to its carrying value.
 
The carrying amount of the goodwill at December 31, 2019 and 2018 represents the cost arising from the business combinations in previous years and no impairment on goodwill was recognized for the years ended December 31, 2019 and 2018 as the Company continues to use the patents and knowhow acquired in the business combination in the Company’s current immune therapy R&D activities and there was no indication for impairment.
 
Government Grants
 
Government grants are recognized in the balance sheet initially when there is reasonable assurance that they will be received and that the enterprise will comply with the conditions attached to them. When the Company received the government grants but the conditions attached to the grants have not been fulfilled, such government grants are deferred and recorded as deferred income. The classification of short-term or long-term liabilities is depended on the management’s expectation of when the conditions attached to the grant can be fulfilled. Grants that compensate the Company for expenses incurred are recognized as other income in statement of income on a systematic basis in the same periods in which the expenses are incurred.
 
 
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For the years ended December 31, 2019, 2018 and 2017, the Company received government grants of $824,782, $1,105,272 and $1,905,213, respectively, for purposes of R&D and related capital expenditure. Government subsidies recognized as other income in the statement of income for the year ended December 31, 2019, 2018 and 2017 were $671,404, $1,119,827 and $2,077,486, respectively.
 
Valuation of Long-lived Asset
 
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. The carrying value of a long-lived asset is considered impaired when the anticipated undiscounted cash flow from such asset is separately identifiable and is less than its carrying value. In that event, a loss is recognized based on the amount by which the carrying value exceeds the fair market value of the long-lived asset and intangible assets. Fair market value is determined primarily using the anticipated cash flows discounted at a rate commensurate with the risk involved. Losses on long-lived assets and intangible assets to be disposed are determined in a similar manner, except that fair market values are reduced for the cost to dispose.
 
Income Taxes
 
Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance would be provided for those deferred tax assets if it is more likely than not that the related benefit will not be realized.
 
A full valuation allowance has been established against all net deferred tax assets as of December 31, 2019 and 2018 based on estimates of recoverability. While the Company has optimistic plans for its business strategy, we determined that such a valuation allowance was necessary given the current and expected near term losses and the uncertainty with respect to the Company’s ability to generate sufficient profits from its business model.
 
Share-Based Compensation
 
The Company periodically uses stock-based awards, consisting of shares of common stock and stock options, to compensate certain officers and consultants. Shares are expensed on a straight-line basis over the requisite service period based on the grant date fair value, net of estimated forfeitures, if any. We currently use the Black-Scholes option-pricing model to estimate the fair value of our stock-based payment awards. This model requires the input of subjective assumptions, including the fair value of the underlying common stock, the expected volatility of the price of our common stock, risk-free interest rates, the expected term of the option and the expected dividend yield of our common stock. These estimates involve inherent uncertainties and the application of management’s judgment. If factors change and different assumptions are used, our stock-based compensation expense could be materially different in the future. These assumptions are estimated as follows:
 
Fair Value of Our Common Stock — Our common stock is valued by reference to the publicly-traded price of our common stock.
 
Expected Volatility — Prior to the Eastbridge merger, we did not have a history of market prices for our common stock and since the merger, we do not have what we consider a sufficiently active and readily traded market for our common stock to use historical market prices for our common stock to estimate volatility. Accordingly, we estimate the expected stock price volatility for our common stock by taking the median historical stock price volatility for industry peers based on daily price observations over a period equivalent to the expected term of the stock option grants. Industry peers consist of other public companies in the stem cell industry similar in size, stage of life cycle and financial leverage. We intend to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of our own common stock share price becomes available.
 
Risk-Free Interest Rate — The risk-free interest rate assumption is based on observed interest rates appropriate for the expected terms of our awards. The risk-free interest rate assumption is based on the yields of U.S. Treasury securities with maturities similar to the expected term of the options for each option group.
 
Expected Term — The expected term represents the period that our stock-based awards are expected to be outstanding. The expected terms of the awards are based on a simplified method which defines the life as the average of the contractual term of the options and the weighted-average vesting period for all open tranches.
 
Expected Dividend Yield — We have never declared or paid any cash dividends and do not presently plan to pay cash dividends in the foreseeable future. Consequently, we used an expected dividend yield of zero.
 
 
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In addition to the assumptions used in the Black-Scholes option-pricing model, the amount of stock option expense we recognize in our consolidated statements of operations includes an estimate of stock option forfeitures. We estimate our forfeiture rate based on an analysis of our actual forfeitures and will continue to evaluate the appropriateness of the forfeiture rate based on actual forfeiture experience, analysis of employee turnover and other factors. Changes in the estimated forfeiture rate can have a significant impact on our stock-based compensation expense as the cumulative effect of adjusting the rate is recognized in the period the forfeiture estimate is changed. If a revised forfeiture rate is higher than the previously estimated forfeiture rate, an adjustment is made that will result in a decrease to the stock-based compensation expense recognized in the consolidated financial statements. If a revised forfeiture rate is lower than the previously estimated forfeiture rate, an adjustment is made that will result in an increase to the stock-based compensation expense recognized in our consolidated financial statements.
 
Fair Value of Financial Instruments
 
Under authoritative guidance from the Financial Accounting Standards Board (“FASB”) on fair value measurements, fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining the fair value, the Company uses various methods including market, income and cost approaches. Based on these approaches, the Company often utilizes certain assumptions that market participants would use in pricing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable, market corroborated or generally unobservable inputs. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. Based on observability of the inputs used in the valuation techniques, the Company is required to provide the following information according to the fair value hierarchy. The fair value hierarchy ranks the quality and reliability of the information used to determine fair values. Financial assets and liabilities carried at fair value are classified and disclosed in one of the following three categories:
 
Level 1: Valuations for assets and liabilities traded in active exchange markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
 
Level 2: Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third-party pricing services for identical or similar assets or liabilities.
 
Level 3: Valuations for assets and liabilities that are derived from other valuation methodologies, including option pricing models, discounted cash flow models and similar techniques, and not based on market exchange, dealer or broker traded transactions. Level 3 valuations incorporate certain unobservable assumptions and projections in determining the fair value assigned to such assets.
 
All transfers between fair value hierarchy levels are recognized by the Company at the end of each reporting period. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an investment’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement in its entirety requires judgment, and considers factors specific to the investment. The inputs or methodology used for valuing financial instruments are not necessarily an indication of the risks associated with investment in those instruments.
 
The carrying amounts of other financial instruments, including cash, accounts receivable, accounts payable and accrued liabilities, income tax payable and related party payable approximate fair value due to their short maturities. The carrying value of the Company's borrowing from China Merchant Bank Shanghai Branch approximates fair value as the borrowing bears interest rates that are similar to existing market rates
 
Lease
 
We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our consolidated balance sheets.
 
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.
 
Investments
 
Equity investments, with or without readily determinable fair values, are measured at fair value with changes in the fair value recognized through other income (expense) net.
 
 
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Recent Accounting Pronouncements
 
Accounting pronouncements adopted during the year ended December 31, 2019
 
In June 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-07, which simplifies several aspects of the accounting for nonemployee share-based payment transactions resulting from expanding the scope of Topic 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services from non-employees. Some of the areas for simplification apply only to nonpublic entities. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide (1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract accounted for under Topic 606, Revenue from Contracts with Customers. The amendments in this Update are effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted. The adoption of the ASU 2018-07 did not have a material impact on the Company’s consolidated financial statements.
 
In February 2018, the FASB issued ASU No. 2018-02, “Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”) which provides financial statement preparers with an option to reclassify stranded tax effects within accumulated other comprehensive income to retained earnings in each period in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act (or portion thereof) is recorded. The amendments in this ASU are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of ASU 2018-02 is permitted, including adoption in any interim period for the public business entities for reporting periods for which financial statements have not yet been issued. The amendments in this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the Tax Cuts and Jobs Act is recognized. The adoption of the ASU 2018-02 did not have a material impact on the Company’s consolidated financial statements.
 
In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception” (“ASU 2017-11”) which addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. The amendments in Part I of this ASU are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The adoption of the ASU 2017-11 did not have a material impact on the Company’s 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. The adoption impact of the ASU 2016-02 on the Company’s consolidated financial statements is illustrated in notes of the accompanying consolidated financial statements.
 
 
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Accounting pronouncements not yet effective
 
In August 2018, the FASB issued Accounting Standards Update (“ASU”) No. 2018-13,Fair Value Measurement (Topic 820)” which eliminates, adds and modifies certain disclosure requirements for fair value measurements. The modified standard eliminates the requirement to disclose changes in unrealized gains and losses included in earnings for recurring Level 3 fair value measurements and requires changes in unrealized gains and losses be included in other comprehensive income for recurring Level 3 fair value measurements of instruments. The standard also requires the disclosure of the range and weighted average used to develop significant unobservable inputs and how weighted average is calculated for recurring and nonrecurring Level 3 fair value measurements. The amendment is effective for fiscal years beginning after December 15, 2019 and interim periods within that fiscal year with early adoption permitted. We do not expect the standard to have a material impact on our consolidated financial statements.
 
In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”) which removes Step 2 from the goodwill impairment test. An entity will apply a one-step quantitative test and record the amount of goodwill impairment as the excess of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. The new guidance does not amend the optional qualitative assessment of goodwill impairment. Public business entity that is a U.S. Securities and Exchange Commission filer should adopt the amendments in this ASU for its annual or any interim goodwill impairment test in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We do not expect the standard to have a material impact 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 do not expect the standard to have a material impact on our consolidated financial statements.
 
 
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Comparison of Year Ended December 31, 2019 to Years Ended December 31, 2018 and 2017
       
 
 
For the Year Ended December 31,
 
 
 
2019
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
Net sales and revenue
 $339,920 
 $224,403 
 $336,817 
 
    
    
    
Operating expenses:
    
    
    
Cost of sales *
  62,378 
  135,761 
  162,218 
General and administrative *
  13,458,151 
  13,220,757 
  12,780,483 
Selling and marketing *
  141,597 
  308,830 
  360,766 
Research and development *
  37,669,978 
  24,150,480 
  14,609,917 
Impairment of non-current assets
  - 
  2,914,320 
  - 
         Total operating expenses
  51,332,104 
  40,730,148 
  27,913,384 
Operating loss
  (50,992,184)
  (40,505,745)
  (27,576,567)
 
    
    
    
Other income
    
    
    
Interest income
  809,785 
  392,328 
  133,621 
Other income
  199,390 
  1,172,879 
  1,955,086 
        Total other income
  1,009,175 
  1,565,207 
  2,088,707 
Loss before taxes
  (49,983,009)
  (38,940,538)
  (25,487,860)
 
    
    
    
    Income taxes provision
  (1,045)
  (4,954)
  (2,450)
Net loss
 $(49,984,054)
 $(38,945,492)
 $(25,490,310)
Other comprehensive income (loss):
    
    
    
Cumulative translation adjustment
  8,242 
  (1,079,689)
  967,189 
   Unrealized loss on investments, net of tax
  - 
  - 
  (240,000)
Total other comprehensive income (loss):
  8,242 
  (1,079,689)
  727,189 
 
    
    
    
Comprehensive loss
 $(49,975,812)
 $(40,025,181)
 $(24,763,121)
 
    
    
    
Net loss per share:
    
    
    
  Basic and diluted
 $(2.63)
 $(2.20)
 $(1.78)
 
    
    
    
Weighted average common shares outstanding:
    
    
    
  Basic and diluted
  18,983,206 
  17,741,104 
  14,345,604 
 
 * These line items include the following amounts of non-cash, stock-based compensation expense for the periods indicated:
 
 
 
For the Year Ended December 31,
 
 
 
2019
 
 
2018
 
 
2017
 
 
 
 
 
 
 
 
 
 
 
Cost of sales
  - 
  - 
  51,288 
General and administrative
  1,885,653 
  2,307,191 
  2,935,798 
Selling and marketing
  10,225 
  79,845 
  52,984 
Research and development
  2,168,103 
  2,439,709 
  2,305,141 
 
  4,063,981 
  4,826,745 
  5,345,211 
 
 
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Segments
 
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 results of the operations 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.
 
Results of Operations:
 
Revenues
 
 
 
 
 
 
 
 
 
 
 
 
 2019 versus 2018
 
 
 2018 versus 2017
 
 
 
2019
 
 
2018
 
 
2017
 
 
Change
 
 
Percent
 
 
Change
 
 
Percent
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31,
 $339,920 
 $224,403 
 $336,817 
 $115,517 
  51%
 $(112,414)
  (33)%
 
Fiscal Year Ended December 31, 2019, Compared to Fiscal Year Ended December 31, 2018
 
Revenue for the year ended December 31, 2019 was mainly derived from technology development service whereas revenue for the year ended December 31, 2018 was mainly derived from both cell banking services and cell therapy technology service.
 
Fiscal Year Ended December 31, 2018, Compared to Fiscal Year Ended December 31, 2017
 
Revenue for the year ended December 31, 2018 was mainly derived from both cell banking services and cell therapy technology service whereas revenue for the year ended December 31, 2017 was solely derived from cell therapy technology service. In 2018, we determined to further deprioritize our cell therapy technology service, which was only partially offset by the introduction of our cell banking services.
 
Cost of Sales
 
 
 
 
 
 
 
 
 
 
 
 
 2019 versus 2018
 
 
 2018 versus 2017
 
 
 
2019
 
 
2018
 
 
2017
 
 
Change
 
 
Percent
 
 
Change
 
 
Percent
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Year ended December 31,
 $62,378 
 $135,761 
 $162,218 
 $(73,383)
  (54)%
 $(26,457)
  (16)%
 
 
Fiscal Year Ended December 31, 2019, Compared to Fiscal Year Ended December 31, 2018
 
The gross margin change was a result of the revenue mix change toward technology development services.
 
Fiscal Year Ended December 31, 2018, Compared to Fiscal Year Ended December 31, 2017
 
The gross margin change was a result of the revenue mix change toward adipose cell banking services.
 
 
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General and Administrative Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 2019 versus 2018
 
 
 2018 versus 2017
 
 
 
2019
 
 
2018
 
 
2017
 
 
Change
 
 
Percent
 
 
Change
 
 
Percent