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ISCO > SEC Filings for ISCO > Form 10-Q on 13-Nov-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


13-Nov-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.


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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. Our 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 backgrounds with minimal immune rejection after transplantation. Our 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.

Our 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.

Our 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.

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 was 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.


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ISC California was incorporated in California in June 2006 for the purpose of restructuring the business of LCT, which was organized in California in August 2001. As a result of the restructuring, LCT became wholly-owned by ISC California, which in turn is wholly-owned by us. LCT is responsible for developing, manufacturing and distributing all of its products.

LSC was formed in the State of California on June 5, 2009 and is a wholly-owned subsidiary of ISC California. LSC creates cosmetic skin care products using an ingredient derived from our human cell technologies. LSC 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 September 30, 2013 totaled $1.67 million, compared to $1.19 million for the three months ended September 30, 2012. LSC contributed $810,000 or 49% of total revenue in the three months ended September 30, 2013, compared to $525,000 or 44% of total revenue for the three months ended September 30, 2012. The increase of $285,000 or 54% in LSC's revenue was as a result of our strategic efforts to expand and diversify our sources of revenue. LCT's revenue of $860,000 for the three months ended September 30, 2013, accounted for 51% of total revenue, compared to $663,000, or 56% of total revenue for the three months ended September 30, 2012. LCT's revenue increased by $197,000 or 30% primarily due to higher sales to OEM customers and international distributors.

For the nine months ended September 30, 2013 and 2012, revenue was $4.41 million and $3.32 million, respectively. LSC contributed $2.17 million or 49% of total revenue in the nine months ended September 30, 2013, compared to $1.59 million or 48% of total revenue for the nine months ended September 30, 2012. The increase of $580,000 or 36% in LSC's revenue was as a result of our strategic efforts to expand and diversify our sources of revenue. LCT's revenue of $2.24 million for the nine months ended September 30, 2013, accounted for 51% of total revenue, compared to $1.73 million, or 52% of total revenue for the nine months ended September 30, 2012. LCT's revenue increased by $510,000 or 29% primarily due to higher sales to OEM customers and international distributors.

Cost of sales

Cost of sales for the three months ended September 30, 2013 was $447,000 or 27% of revenue, compared to $320,000 or 27% of revenue for the corresponding period in 2012.

Cost of sales for the nine months ended September 30, 2013 was $1,110,000 or 25% of revenue, compared to $957,000 or 29% of revenue for the same period in 2012. Increased efficiency and effectiveness in manufacturing and the management of supply chain related to LSC's products contributed to a favorable reduction in the cost of sales as a percentage of revenue for the nine months ended. In addition, LCT's cost of sales as a percentage of revenues has decreased due to a shift in sales mix from lower to higher margin products.

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 continue to decrease.

Research and Development ("R&D")

Research and development expenses were $932,000 for the three months ended September 30, 2013, compared to $900,000 for the same period in 2012. The increase of $32,000 is due primarily to higher stem cell line research and testing expenses of $33,000 and higher consulting and IT consulting expenses of $70,000 and $11,000, respectively, associated with research activities and computer services, slightly higher employee-related spending of $14,000, partially offset by lower laboratory supplies and expenses of $74,000 and lower patent license fees of $21,000.

Research and development expenses were $2.63 million for the nine months ended September 30, 2013, compared to $2.70 million for the same period in 2012. The decrease of $70,000 is due primarily to lower employee-related spending of $42,000 associated with lower headcount partially offset by incentive plan accrual of $32,000, lower stock-based compensation expense of $24,000, lower laboratory supplies and expenses of $225,000, lower patent license fees of $27,000, partially offset by higher stem cell line research and testing expenses of $102,000 and higher consulting and IT consulting expenses of $110,000 associated with research activities and computer services.


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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 September 30, 2013 were $632,000, reflecting an increase of $155,000 or 32%, as compared to $477,000 for the same period in 2012. The increase was primarily driven by enhanced efforts in e-commerce marketing support and promotion, and advertising of approximately $53,000, increased employee-related spending of $72,000 due to increased staff, increased website costs of $28,000, increased trade show costs of $31,000 with resulting higher travel and meals expense of $12,000, and higher logistics related costs of $24,000. The increase was partially offset by a reduction of $52,000 in consulting expenses.

For the nine months ended September 30, 2013, marketing expenses amounted to $1.82 million, reflecting an increase of $300,000 or 20%, as compared to $1.52 million for the corresponding period in 2012. The increase was primarily driven by enhanced efforts in e-commerce marketing support and promotion, advertising of approximately $236,000, increased employee-related spending of $68,000 due to increased staff, increased website costs of $166,000, an incentive plan accrual of $81,000, logistics related costs of $65,000, and increased trade show expenses of $34,000 with resulting higher travel and meals expense of $35,000,. The increase was partially offset by a reduction of $177,000 in consulting expenses, $126,000 in commission paid to a consultant who promoted, marketed, and sold skin care products through various proprietary mailings, and $86,000 in stock-based compensation and consulting costs.

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 September 30, 2013 were $1.36 million, reflecting a decrease of $210,000 or 13%, compared to $1.57 million for the same period in 2012. The decrease reflects a more streamlined cost structure, resulting largely from reduced employee-related spending of $175,000 resulting from lower headcount, lower employee stock-based compensation of $119,000, lower board of director fees of $33,000, lower consulting expenses of $32,000, and lower corporate support expenses of $45,000. The decrease was partially offset by an increase in stock-based compensation for services provided by consultants of $43,000, higher consulting costs for investor relations of $92,000 and higher temporary labor expenses of $58,000.

General and administrative expenses for the nine months ended September 30, 2013 were $4.46 million, reflecting a decrease of $900,000 or 17%, compared to $5.36 million for the same period in 2012. The decrease is primarily attributable to lower employee stock-based compensation of $460,000, reduced employee-related spending of $455,000 resulting from lower headcount, lower consulting expenses of $175,000, lower legal fees of $143,000, lower professional accounting fees of $92,000, lower board of director fees of $76,000 and lower corporate support expenses of $201,000. The decrease was partially offset by an incentive plan accrual of $230,000, an increase in stock-based compensation for services provided by consultants of $177,000, higher consulting fees for investor relations of $142,000, and higher temporary labor expenses of $110,000.

Other Income/Expense

Other expense for the three and nine months ended September 30, 2013 was $2.10 million, primarily due to recognizing the fair value of $1.39 million for the warrant liability in excess of the investment proceeds received from our stock offering completed in July 2013, plus the associated financing costs of $738,000, offset by a net gain from the revaluation of the warrant liability of $27,000, as compared to other expense of $1,000 and $10,000 for the same periods in the prior year.

Liquidity and Capital Resources

As of September 30, 2013 and December 31, 2012, our cash and cash equivalents totaled $1.79 million and $654,000, respectively. At September 30, 2013, we had a working capital deficit of $2.38 million, compared to working capital of $395,000 as of December 31, 2012. The working capital deficit is due to the fair value of warrant liability of $4.39 million resulting from our S-1 Registration offering completed in July 2013.


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Operating Cash Flows

Net cash used in operating activities was $4.23 million for the nine months ended September 30, 2013, compared to $5.12 million for the corresponding period in 2012. The primary factors contributing to the variability in the reported cash flow amounts relate to the net loss after non-cash adjustments totaling $3.41 million in the nine months ended September 30, 2013, compared to $2.24 million in the same period in 2012. Partially offsetting this improvement was a reduction in accounts payable of $447,000 due to the timing of payments to vendors, an increase in accounts receivable of $148,000 due to timing of receipts, as well as an increase in inventory of $201,000.

Investing Cash Flows

Net cash used in investing activities was $514,000 for the nine months ended September 30, 2013, compared to $630,000 in the same period in 2012. The decrease primarily resulted from lower payments for capital expenditure spending of $163,000 offset by slightly higher spending for patent licenses and trademarks of $40,000.

Financing Cash Flows

Net cash provided by financing activities was $5.89 million for the nine months ended September 30, 2013, compared to $6.79 million in the same period in 2012.

During the nine months ended September 30, 2013, the Company has issued an additional 16.3 million shares of common stock in transactions that were not registered under the Securities Act of 1933. The Company issued a total of 1.2 million shares of common stock on various dates from January 1, 2013 through March 15, 2013 raising $264,000 from stock purchases by Aspire Capital, issued a total of 10.1 million shares of common stock on January 22, 2013 raising $2,025,000 from Dr. Andrey Semechkin, the Company's Co-Chairman and Chief Executive Officer and Dr. Simon Craw, Company's Executive Vice President Business Development, and issued 5 million shares of common stock on March 12, 2013 raising $1,000,000 from a stock purchase by Dr. Andrey Semechkin, the Company's Co-Chairman and Chief Executive Officer and by other investors with long-standing relationships with and who closely follow the Company.

On July 24, 2013, we completed a financing transaction under a Form S-1 Registration Statement filed with the U.S. Securities and Exchange Commission raising approximately $2.4 million in net proceeds (the "2013 Registered Offering"). Also during the third quarter of 2013, we raised additional net proceeds of $242,000 upon partial exercise of the Series B Warrants issued as part of the 2013 Registered Offering. For further discussion of these transactions, see Note 6, Capital Stock to our condensed consolidated financial statements.

The net proceeds of $6.86 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 $5.89 million received in 2013 were from the issuance of common stock. For further discussion of the prior period proceeds, see Note 6, Capital Stock, Series G Preferred Stock to our condensed consolidated financial statements. In addition, during the nine months ended September 30, 2012, we raised $2.09 million from the issuance of 5 million shares of common stock to Aspire Capital Group.

In the first nine months of 2012, we paid dividends of $237,000 to our preferred stockholders. No dividends were paid during the nine months ended September 30, 2013.

Management continues to review various financing sources in order 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 $470,000 per month, excluding capital expenditures and patent costs averaging $57,000. 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 the first nine months of 2013, to obtain funding for working capital purposes, the Company sold 38,025,000 shares of common stock raising net proceeds of $5,885,000.

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 September 30, 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 September 30, 2013, we did not have any off-balance sheet arrangements.

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