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| ISCO > SEC Filings for ISCO > Form 10-Q on 8-Aug-2012 | All Recent SEC Filings |
8-Aug-2012
Quarterly Report
The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes and other financial information included elsewhere herein. This information should also be read in conjunction with our audited historical consolidated financial statements which are included in our Form 10-K for the fiscal year ended December 31, 2011. The discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, expectations and intentions. Our actual results may differ significantly from management's expectations. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best assessment by our management.
Business Overview
We are a development-stage biotechnology company focused on therapeutic, biomedical and cosmeceutical product development with multiple long-term therapeutic opportunities and two revenue-generating businesses offering potential for increased future revenue.
Our products are based on multi-decade experience with human cell culture and a proprietary type of pluripotent stem cells, "human parthenogenetic stem cells" ("hpSCs"). Our hpSCs are comparable to human embryonic stem cells ("hESCs") in that they have the potential to be differentiated into many different cells in the human body. However, the derivation of hpSCs does not require the use of fertilized eggs or the destruction of viable human embryos, and they offer potential for creation of immune-matched cells and tissues that are less likely to be rejected following transplantation into people across various ethnic groups. ISCO has facilities and manufacturing protocols that comply with the requirements of the US Food and Drug Administration ("FDA") and other regulatory authorities.
With respect to therapeutic research, ISCO focuses on applications where cell and tissue therapy is already proven but where there currently is an insufficient supply of safe and efficacious cells. We have prioritized 1) the treatment of Parkinson's disease, the second most prevalent neurodegenerative disease in the United States, and one where etiology is well known; 2) inherited/metabolic liver disease, such as Crigler-Najjar syndrome and Alpha 1-antitrypsin deficiency which may offer a quick route to market through the FDA's orphan disease designation, and 3) blindness caused by corneal damage where the only requirement is for corneal tissue that can be transplanted.
ISCO's wholly-owned subsidiary Lifeline Skin Care, Inc. ("SkinCare") develops, manufactures and markets cosmetic skin care products using an extract derived from our human stem cell technologies. These products are regulated as cosmetics. Furthermore, marketing and sales are conducted direct to the consumer via the internet as well as channels such as dermatology clinics and spas, thus providing important revenue to help support our internal development of therapeutic products. SkinCare currently sells its products nationally and internationally through a branded website and select distributors.
ISCO's wholly-owned subsidiary Lifeline Cell Technology, LLC ("Lifeline") develops, manufactures and commercializes human cells and the reagents needed to culture and study human cells. Lifeline's scientists have used a technology called basal medium optimization to systematically produce optimized products designed to culture specific human cell types and to elicit specific cellular behaviors. These techniques also produce products that do not contain non-human animal proteins, a feature desirable to the research and therapeutic markets. Lifeline distinguishes itself in the industry by having in place scientific and manufacturing staff with the experience and knowledge to set up systems and facilities to produce a source of consistent, standardized, non-human animal protein free cell products, some of which are suitable for FDA approval. Lifeline also provides important funds to help support our internal development of therapeutic products. Lifeline's products are marketed and sold by its internal sales force, OEM partners and Lifeline brand distributors in Europe and Asia.
While we continued to expand our sales and marketing efforts to optimize revenue, to date we have generated limited revenue to support our core therapeutic research and development efforts.
We were originally incorporated in Delaware on June 7, 2005 as BTHC III, Inc. to effect the reincorporation of BTHC III, LLC, a Texas limited liability company, mandated by a plan of reorganization. Pursuant to the plan of reorganization, an aggregate of 500,000 shares of our common stock were issued to holders of administrative and tax claims and unsecured debt, of which 350,000 shares were issued to Halter Financial Group. The plan of reorganization required BTHC III, Inc. to consummate a merger or acquisition prior to June 20, 2007. Until the Share Exchange Agreement described below, BTHC III, Inc. conducted no operations. In October 2006, BTHC III, Inc. affected a 4.42-for-one stock split with respect to the outstanding shares of common stock.
On December 28, 2006, pursuant to a Share Exchange Agreement, BTHC III, Inc. issued 33,156,502 shares of common stock, representing approximately 93.7% of the common stock outstanding immediately after the transaction, to the shareholders of International Stem Cell Corporation, a California corporation ("ISC California"), in exchange for all outstanding stock of ISC California. This transaction is being accounted for as a "reverse merger" for accounting purposes. Consequently, the assets and liabilities and the historical operations that are reflected in our financial statements are those of ISC California.
ISC California was incorporated in California in June 2006 for the purpose of restructuring the business of Lifeline Cell Technology, LLC, which was organized in California in August 2001. As a result of the restructuring, Lifeline became wholly-owned by ISC California, which in turn is wholly-owned by us. Lifeline Cell Technology is responsible for developing, manufacturing and distributing all of its products.
Lifeline Skin Care, Inc. was formed in the State of California on June 5, 2009 and is a wholly-owned subsidiary of ISC California. SkinCare creates cosmetic skin care products using an ingredient derived from our human cell technologies. SkinCare currently sells its products nationally and internationally through a branded website and select distributors.
Results of Operations
Revenues
We are considered a development stage company, and as such our revenues are limited and not predictable. Revenue for the three months ended June 30, 2012 totaled $1.06 million, compared to $1.11 million for the three months ended June 30, 2011. The decrease in revenue is due largely to lower sales generated from our Lifeline business. Product revenues for the six months ended June 30, 2012 were $2.13 million compared to $2.63 million for the corresponding period in 2011.The decrease in revenue is due principally to fewer sales generated from our SkinCare business, partially offset by Lifeline's higher sales generated from larger distributors. SkinCare accounted for $523,000 or approximately 50% of total revenue during the three months ended June 30, 2012, compared to $530,000 or 48% of total revenue for the same period in 2011. For the six months ended June 30, 2012, SkinCare generated $1.07 million or 50% of total revenue, compared to $1.66 million or 63% of total revenue for the corresponding period in 2011. Lifeline contributed $533,000 or approximately 50% of total revenue in the three months ended June 30, 2012, compared to $584,000 or 52% of total revenue for the same period in 2011. For the six months ended June 30, 2012, Lifeline generated $1.06 million or 50% of total revenue, compared to $966,000 or 37% of total revenue for same period in 2011.
Cost of sales
Cost of sales for the three months ended June 30, 2012 was $313,000 or 30% of revenue, compared to $362,000 or 33% of revenue for the corresponding period in 2011. The favorable reduction in cost of sales as a percentage of revenue is attributable to increased efficiency and effectiveness in the manufacturing and management of supply chain related to our SkinCare products. The favorable reduction was partially offset by a provision for inventory obsolescence and higher cost of sales resulting from a shift in sales mix from higher margin products to sales of lower margin products in our Lifeline products.
Cost of sales for the six months ended June 30, 2012 was $637,000 or 30% of revenue, compared to $791,000 or 30% of revenue for the same period in 2011. Increased efficiency and effectiveness in the manufacturing and management of supply chain related to our SkinCare products contributed to a favorable reduction in the cost of sales a percentage of revenue. The favorable reduction was offset by a shift in sales mix from higher margin products related to SkinCare to sales of lower margin products related to Lifeline.
Cost of sales includes salaries and benefits related to manufacturing, third party manufacturing costs, materials, general laboratory supplies and an allocation of overhead. As we continue to refine our manufacturing processes on our media and cell type products, and our sales volume continues to increase for these products, we anticipate that our cost of sales as a percentage of product sales will decrease.
Research and Development ("R&D")
Research and development expenses were $865,000 for the three months ended June 30, 2012, compared to $1.13 million for the same period in 2011. The decrease of $265,000 is due primarily to lower consulting expenses of $93,000 associated with various research projects, lower stock-based compensation expense of $89,000, lower laboratory-related expenses of $71,000, and lower personnel-related spending of $55,000, partially offset by higher stem cell line research and testing expenses of $55,000.
Research and development expenses were $1.80 million for the six months ended June 30, 2012, compared to $2.13 million for the same period in 2011. The decrease of $330,000 is due primarily to lower consulting expenses of $186,000 associated with various research projects, lower stock-based compensation expense of $155,000, lower laboratory-related expenses of $86,000, and reduced travel expenses of $27,000, partially offset by higher stem cell line research and testing expenses of $137,000 and higher personnel-related spending of $17,000 associated with higher headcount and increased research activities.
R&D is focused on the development of treatments for Parkinson's disease (PD), metabolic liver diseases (such as Crigler-Najjar syndrome, (CNS) and Alpha 1-antitrypsin deficiency (A1AD)), diseases of the eye and the creation of new cGMP grade human parthenogenetic stem cell lines. These projects are long-term investments that involve developing both new stem cell lines and new differentiation techniques that can provide higher purity populations of functional cells. We do not expect these projects to provide near-term revenue, although we have published milestones including the initiation of a non-human primate PD study in the fourth quarter of 2012, the release of rodent PD study data in the first quarter of 2013 and the initiation of a Gunn rat rodent study to look at CNS, a rare but sometimes fatal inherited liver disease.
Research and development expenses are expensed as they are incurred, and are accounted for on a project by project basis; however much of our research has potential applicability to each of our projects.
Marketing Expense
Marketing expenses for the three months ended June 30, 2012 were $548,000, reflecting an increase of $202,000 or 58%, as compared to $346,000 for the same period in 2011. The significant increase was primarily driven by enhanced efforts in e-commerce marketing support and promotion, and advertising of approximately $94,000, higher shipping and logistic expenses of $58,000, higher personnel related expenses of $55,000 resulting from higher headcount in the sales and marketing of the skin care products, higher consulting expense of $55,000 and higher stock-based consulting expense of $36,000 and higher commission of $22,000 paid to various strategic partners. The increase was partially offset by a reduction of $106,000 in commission paid to a consultant who promoted, marketed, and sold skin care products through various proprietary mailings and employee stock-based compensation of $27,000.
For the six months ended June 30, 2012, marketing expenses amounted to $1.04 million, reflecting an increase of $376,000 or 57%, as compared to $664,000 for the corresponding period in 2011. The substantial increase was primarily driven by enhanced efforts in e-commerce marketing support and promotion, and advertising of approximately $185,000, higher consulting expense of $129,000, higher shipping and logistic expenses of $107,000, higher personnel related expenses of $102,000 resulting from higher headcount in the sales and marketing of the skin care products, and higher stock-based consulting expense of $73,000 and higher commission of $37,000 paid to various strategic partners. The increase was partially offset by a reduction of $221,000 in sales commission paid to a consultant who promoted, marketed, and sold skin care products through various proprietary mailings and employee stock-based compensation of $53,000.
Regarding the marketing arrangement with the abovementioned consultant who promoted, marketed, and sold skin care products, prior and up to June 30, 2011, we incurred a 40% marketing fee on net profits generated from these proprietary mailings. Subsequent to June 30, 2011, we renegotiated and formalized this arrangement in a marketing agreement, which specifies a reduced 20% marketing fee on net revenues generated from these proprietary mailings. For the three and six months ended June 30, 2012, we recorded $46,000 and $86,000, and for the same periods in 2011, we recorded $152,000 and $307,000, respectively, as marketing expenses related to this arrangement.
We continued to augment our marketing efforts by refining our sales and marketing strategies, expanding our sales channels and strengthening our operations to achieve target sales goals.
General and Administrative Expenses
General and administrative expenses for the three months ended June 30, 2012 were $1.76 million, reflecting a decrease of $380,000 or 18%, compared to $2.14 million for the same period in 2011. The decrease, reflecting a more streamlined cost structure, resulted largely from lower employee stock-based compensation of $236,000, reduced employee-related spending resulting from lower headcount of $140,000, lower professional accounting fees of $63,000, and lower corporate support expenses of $35,000. The decrease was partially offset by higher legal fees of $57,000 relating to our corporate activities, and higher consulting expense of $30,000.
General and administrative expenses for the six months ended June 30, 2012 were $3.79 million, reflecting a decrease of $580,000 or 13%, compared to $4.37 million for the same period in 2011. The decrease is primarily attributable to lower employee stock-based compensation of $348,000, the absence of stock-based compensation for services provided by a consultant amounting to $303,000, reduced employee-related spending resulting from lower headcount of $49,000, and lower corporate support expenses of $37,000. The decrease was partially offset by an increase in legal fees of $118,000 relating to our corporate expenses, higher consulting expense of $56,000, and higher professional accounting fees related to Sarbanes-Oxley compliance efforts of $45,000.
Other Income/Expense
Other expense for the three months ended June 30, 2012 was $52,000, reflecting a loss on disposition of fixed asset, compared to other income of $469,000 for the same period in the prior year, primarily reflecting the substantial decrease in the fair value of our warrant liabilities which expired on February 14, 2012. Other expense for the six months ended June 30, 2012 was $9,000, compared to other income of $1.34 million for the same period in the prior year. The significant variance is the result of a substantial decrease in the fair value of our warrant liabilities which expired on February 14, 2012.
Liquidity and Capital Resources
As of June 30, 2012, our cash and cash equivalents totaled $4.29 million, compared to $1.34 million as of December 31, 2011. As of June 30, 2012, we had working capital of $3.82 million, compared to $905,000 as of December 31, 2011.
Operating Cash Flows
Net cash used in operating activities was $3.46 million for the six months ended June 30, 2012, compared to $2.97 million for the corresponding period in 2011. The primary factors contributing to the variability in the reported cash flow amounts relate to the net loss after non-cash adjustments totaling $3.60 million in the six months ended June 30, 2012, compared to $3.00 million in the same period in 2011. Furthermore, lower deferred revenue balances resulting from lower sales generated from skin care products, timing of customer payments and billings, vendor payments and invoicing, and lower inventory balances contributed to the increase in net cash used in operating activities in the six months ended June 30, 2012.
Investing Cash Flows
Net cash used in investing activities was $449,000 for the six months ended June 30, 2012, compared to $518,000 in the same period in 2011. Investing activities in the six months ended June 30, 2012 consisted of legal fees related to intangible assets and computer equipment, software and leasehold improvements related to our manufacturing facilities.
Financing Cash Flows
Net cash provided by financing activities was $6.86 million for the six months ended June 30, 2012, compared to $1.29 million in the same period in 2011. The net proceeds of $6.86 million received in 2012 were primarily attributable to the issuance of five million shares of Series G Preferred Stock for approximately $4.94 million, which is net of stock issuance costs. For further discussion, see Note 6, Capital Stock, Series G Preferred Stock. In addition, during the six months ended June 30, 2012, we raised $2.09 million from the issuance of 5,000,000 shares of common stock to Aspire Capital Group. We paid dividends of $173,000 to our preferred stockholders.
Management is currently reviewing different financing sources and options to raise working capital to help fund our current operations. We will need to obtain significant additional capital from sources including equity and/or debt financings, license arrangements, grants and/or collaborative research arrangements to sustain our operations and develop products. Thereafter, we will need to raise additional working capital. Unless we obtain additional financing, we do not have sufficient cash on hand to operate for 12 months from the consolidated balance sheet date. The timing and degree of any future capital requirements will depend on many factors, including:
• the accuracy of the assumptions underlying our estimates for capital needs in 2012 and beyond;
• the extent that revenues from sales of SkinCare and Lifeline products cover the related costs and provide capital;
• scientific progress in our research and development programs;
• the magnitude and scope of our research and development programs and our ability to establish, enforce and maintain strategic arrangements for research, development, clinical testing, manufacturing and marketing;
• our progress with preclinical development and clinical trials;
• the time and costs involved in obtaining regulatory approvals;
• the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims; and
• the number and type of product candidates that we pursue.
Additional financing through strategic collaborations, public or private equity financings or other financing sources may not be available on acceptable terms, or at all. Additional equity financing could result in significant dilution to our stockholders. Additional debt financing may be expensive and require us to pledge all or a substantial portion of our assets. Further, if additional funds are obtained through arrangements with collaborative partners, these arrangements may require us to relinquish rights to some of our technologies, product candidates or products that we would otherwise seek to develop and commercialize on our own. If sufficient capital is not available, we may be required to delay, reduce the scope of or eliminate one or more of our product lines.
We continue to operate as a development stage entity and as such have accumulated losses from inception and expect to incur additional losses in the near future. We need to raise additional working capital. The timing and degree of any future capital requirements will depend on many factors. Currently our burn rate is approximately $625,000 per month, excluding capital expenditures and patent costs averaging $75,000 per month. There can be no assurance that we will be successful in maintaining our normal operating cash flow and that the timing of our capital expenditures will result in cash flow sufficient to sustain our operations through 2013. Based on the above, there is substantial doubt about our ability to continue as a going concern. The consolidated financial statements were prepared assuming that we will continue to operate as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty. Management's plans in regard to these matters are focused on managing our cash flow, the proper timing of our capital expenditures, and raising additional capital or financing in the future. In March 2012, to obtain funding for working capital purpose, the Company sold 5,000,000 shares of Series G Preferred Stock raising $5 million, and during the first quarter of 2012 sold 5,000,000 shares of common stock to Aspire Capital Fund, LLC, for $2.1 million.
We do not currently have any obligations for milestone payments under any of our licensed patents other than the annual payments of $150,000 due each May to Advanced Cell Technology, plus payments that are specifically related to sales and are therefore unpredictable as to timing and amount. Royalties on sales range of 3% to 12%, and milestone payments do not begin until our first therapeutic product is launched. No licenses are terminable at will by the licensor. For further discussion of our patents, see Note 4 to our condensed consolidated financial statements.
Under our Common Stock Purchase Agreement with Aspire Capital Fund, LLC ("Aspire Capital"), we may sell from time to time up to an aggregate of $25.0 million of shares of common stock through approximately January 2014. From commencement through June 30, 2012, we sold a total of 9,333,333 shares of common stock to Aspire Capital for an aggregate of $5,942,000.
Off-Balance Sheet Arrangements
As of June 30, 2012, we did not have any off-balance sheet arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not required.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Based on that evaluation, our chief executive officer and our chief financial officer have concluded that, at June 30, 2012, our disclosure controls and procedures were effective.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our chief executive officer and chief financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Changes in internal control over financial reporting
Under the supervision and with the participation of our management, including our chief executive officer and our chief financial officer, we carried out an evaluation of any potential changes in our internal control over financial reporting during the fiscal quarter covered by this quarterly report on Form 10-Q.
There were no changes in our internal control over financial reporting during the quarter ended June 30, 2012 that our certifying officers concluded materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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