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ISCO > SEC Filings for ISCO > Form 10-Q on 14-May-2013All Recent SEC Filings

Show all filings for INTERNATIONAL STEM CELL CORP | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for INTERNATIONAL STEM CELL CORP


14-May-2013

Quarterly Report


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

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, 2012. 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.

We have not generated any revenues from our principal operations in therapeutic research and development. To date, we have generated limited and unpredictable incidental revenues to support our core therapeutic research and development efforts.

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 also offers the potential for the creation of immune-matched cells and tissues that are less likely to be rejected following transplantation. ISCO scientists have created the first parthenogenetic, homozygous stem cell line that can be a source of therapeutic cells for hundreds of millions of individuals of differing genders, ages and racial background with minimal immune rejection after transplantation. ISCO's collection of hpSCs, known as UniStemCell™, currently consists of fifteen stem cell lines. We have facilities and manufacturing protocols that comply with the requirements of Good Manufacturing Practice (GMP) standards as promulgated by the US Code of Federal Regulations and enforced by the Food and Drug Administration ("FDA").

We are developing different cell types from our stem cells that may result in therapeutic products. We focus on applications where cell and tissue therapy is already proven but where there is an insufficient supply of functional cells or tissue. We believe that the most promising potential clinical applications of our technology are:

• Neuronal cells for treatment of Parkinson's disease and potentially other central nervous system disorders, such as traumatic brain injury, stroke and Alzheimer's disease.

• Liver cells ("hepatocytes") that may be used to treat a variety of congenital and acquired liver diseases. Using the same precursor cell that leads to liver cells, it is also possible to create islet cells for potential treatment of diabetes.

• Three-dimensional eye structures to treat degenerative retinal diseases, corneal blindness, and to accelerate corneal healing.

Each of these product candidates will require extensive preclinical and clinical development and may require specific unforeseen licensing rights obtained at substantial cost before regulatory approval may be achieved and the products sold for therapeutic use.

ISCO's wholly-owned subsidiary Lifeline Skin Care, Inc. ("LSC") 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. LSC currently sells its products nationally and internationally through a branded website and select distributors.

ISCO's wholly-owned subsidiary Lifeline Cell Technology, LLC ("LCT") develops, manufactures and commercializes human cells and the reagents needed to culture and study human cells. LCT'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. LCT is unique in the industry in that it has 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. LCT also provides important funds to help support our internal development of therapeutic products. LCT's products are marketed and sold by its internal sales force, OEM partners and LCT 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.


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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 entity with no revenue generated from our principal operations in therapeutic research and development efforts. To date, we have generated limited and unpredictable incidental revenues to support our core therapeutic research and development efforts. Revenue for the three months ended March 31, 2013 totaled $1.29 million, compared to $1.08 million for the three months ended March 31, 2012. LSC contributed $650,000 or 51% of total revenue in the three months ended March 31, 2013, compared to $547,000 or 51% of total revenue for the three months ended March 31, 2012. The increase of $103,000 or 19% in LSC's revenue was as a result of our strategic efforts to expand and diversify our sources of revenue. LCT's revenue of $635,000 for the three months ended March 31, 2013, accounted for 49% of total revenue, compared to $530,000, or 49% of total revenue for the three months ended March 31, 2012. LCT's revenue increased by $105,000 or 20% primarily due to by higher sales to OEM customers and international distributors.

Cost of sales

Cost of sales for the three months ended March 31, 2013 was $334,000 or 26% of revenue, compared to $324,000 or 30% of revenue for the three months ended March 31, 2012. The favorable reduction in cost of sales as a percentage of revenue for the three months ended March 31, 2013, compared to the corresponding period in 2012, is primarily due to lower costs of production for LSC, and a shift in sales mix from lower margin products to higher margin products for LCT.

Cost of sales reflects direct costs including salaries and benefits related to manufacturing, third party manufacturing costs, materials, general laboratory supplies and an allocation of overhead. We aim to continue refining our manufacturing processes, and as sales volume continues to increase for these products, we anticipate further improvements in the cost of sales as a percentage of revenue for both LSC and LCT.

Research and Development ("R&D")

Research and development expenses were $721,000 for the three months ended March 31, 2013, compared to $937,000 for the same period in 2012. The decrease of $216,000 or 23% is primarily due to lower laboratory supplies of $78,000, personnel-related spending of $64,000, stem cell line research and testing expenses of $40,000, and stock-based compensation expense of $27,000.

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 (NHP) PD study in the fourth quarter of 2012, the release of pre-clinical rodent and NHP 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.

Selling and Marketing Expense

Marketing expenses for the three months ended March 31, 2013 were $511,000, reflecting an increase of $15,000 or 3%, as compared to $496,000 for the three months ended March 31, 2012. The increase was primarily driven by enhanced efforts in advertising and promotion and e-commerce infrastructure, of $84,000, to market our skin care products. There was also an increase in shipping and logistical costs of $22,000 largely due to the increase in sales. The increase was partially offset by a reduction in consulting expense of $58,000, and in stock-based compensation expense of $46,000.


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We continued to intensify our marketing efforts by refining our sales and marketing strategies, and 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 March 31, 2013 were $1.42 million, reflecting a decrease of $620,000 or 30%, compared to $2.04 million for the same period in 2012. The decrease is largely attributable to a more streamlined operating cost structure including reductions in personnel-related spending resulting from lower headcount of $236,000, stock-based compensation expense of $171,000, professional accounting fees and corporate governance of $99,000, corporate support expenses of $54,000, legal fees of $36,000, and consulting expense of $25,000.

Other Income/Expense

Other expense was $12,000 for the three months ended March 31, 2013. For the three months ended March 31, 2012 we recorded other income of $42,000, mostly related to a decrease in the fair value of our warrant liabilities which expired on February 14, 2012.

Liquidity and Capital Resources

As of March 31, 2013, our cash and cash equivalents totaled $1.91 million, compared to $654,000 as of December 31, 2012. At March 31, 2013, we had working capital of $2.40 million, compared to $395,000 as of December 31, 2012.

Operating Cash Flows

Net cash used in operating activities was $1.85 million for the three months ended March 31, 2013, compared to $2.03 million for the corresponding period in 2012. The primary factors contributing to the variability in the report cash flow amounts relate to the net loss after non-cash adjustments totaling $1.10 million in the three months ended March 31, 2013, compared to $1.87 million in the same period in 2012. Offsetting this improvement was a reduction in the accounts payable of $539,000 due to the timing of payments to vendors in the quarter ended March 31, 2013.

Investing Cash Flows

Net cash used in investing activities was $168,000 for the three months ended March 31, 2013, compared to $216,000 in the same period in 2012. The decrease resulted from lower payments for patent licenses and trademarks of $4,000 along with lower capital expenditure spending of $44,000.

Financing Cash Flows

Net cash provided by financing activities was $3.27 million for the three months ended March 31, 2013, compared to $6.92 million in the same period in 2012. The net proceeds of $6.92 million received in 2012 were primarily attributable to the issuance of 5 million shares of Series G Preferred Stock for approximately $4.94 million, net of stock issuance costs while the net proceeds of $3.27 received in 2013 were from the issuance of common stock. For further discussion of the common stock issuance, see item 2. Unregistered Sales of Equity Security and Use of Proceeds. For further discussion of the prior period proceeds, see Note 6, Capital Stock, Series G Preferred Stock. In addition, during the three months ended March 31, 2012, we raised $2.09 million from the issuance of 5,000,000 shares of common stock to Aspire Capital Group. In the first quarter of 2012, we paid dividends of $108,000 to our preferred stockholders. No dividend was paid during the three months ended March 31, 2013.

Management is currently reviewing different financing sources 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 in order to 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 the next 12 months. 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 2013 and beyond;

• the extent that revenues from sales of LSC and LCT 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;


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• 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 average burn rate is approximately $620,000 per month, excluding capital expenditures and patent costs averaging $60,000. 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 January and March 2013, to obtain funding for working capital purpose, the Company sold 16,325,000 shares of common stock raising $3,289,000.

We do not currently have any obligations for milestone payments under any of our licensed patents other than the minimum royalty payment of $75,000 due in two installments per year to Advanced Cell Technology, pursuant to the amended UMass IP license agreement. 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, subject to specific registration requirements. From commencement through March 31, 2013, we sold a total of 10,533,333 shares of common stock to Aspire Capital for an aggregate of $6,206,000.

Off-Balance Sheet Arrangements

As of March 31, 2013, 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 March 31, 2013, 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.


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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 March 31, 2013 that our certifying officers concluded materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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