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ISCO > SEC Filings for ISCO > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for INTERNATIONAL STEM CELL CORP

Form 10-Q for INTERNATIONAL STEM CELL CORP


8-Aug-2014

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, 2013. 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. The factors that could affect these forward looking statements are discussed in Item 1A of Part II of this report. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any expectations expressed 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 had been a development stage company from our inception through the quarter ended September 30, 2013. During the quarter ended December 31, 2013, we exited the development stage based on a consistent, increasing revenue trend and more significant revenue totals generated from our two commercial businesses. We have generated product revenues from our two commercial businesses of $3.2 million and $2.7 million for the six months ended June 30, 2014 and 2013, respectively. We currently have no revenue generated from our principal operations in therapeutic and clinical product development.

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'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 U.S. Code of Federal Regulations and enforced by the U.S. Food and Drug Administration ("FDA").

Market Opportunity and Growth Strategy

Therapeutic Market - Clinical Applications of hpSCs for Disease Treatments. With respect to therapeutic research and product candidates, we focus on applications where cell and tissue therapy is already proven but where there is an insufficient supply of safe and functional cells or tissue. We believe that the most promising potential clinical applications of our technology are: 1) Parkinson's disease ("PD"); 2) metabolic/liver diseases; and 3) corneal blindness. Using our proprietary technologies and know-how, we are creating neural stem cells from hpSCs as a potential treatment of PD, liver cells from hpSCs that may be able to treat a variety of hepatic and metabolic liver diseases and corneal like structures from hpSCs that may be suitable for cornea transplantation and corneal healing in humans.

Cosmeceutical Market - Skin Care Products. Our wholly-owned subsidiary Lifeline Skin Care, Inc. ("LSC") develops, manufactures and markets cosmetic skin care products using an extract derived from our pluripotent stem cells. These proprietary products include a Defensive Day Serum, Recovery Night Serum and Firming Eye Complex, all of which include our patented stem cell extract. LSC's products are regulated as cosmetics. LSC's products are sold nationally and internationally through a branded website, through professional channels (including dermatologists, plastic surgeons, medical, day and resort spas) and distributors. Domestically, we plan to increase distribution of our products by increasing brand awareness and resonance through advertising, sales promotion and public relations. Internationally, we are increasing distribution and sales through agreements with specialty distributors in both Latin America and Asia.

Biomedical Market - Primary Human Cell Research Products. Our wholly-owned subsidiary Lifeline Cell Technology, LLC ("LCT") develops, manufactures and commercializes over 130 human cell culture products, including frozen human "primary" cells and the reagents (called "media") needed to grow, maintain and differentiate the cells, in order to address this significant market opportunity. 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. Each LCT cell product is quality tested for the expression of specific markers (to assure the cells are the correct type), proliferation rate, viability, morphology and absence of pathogens. Each cell system also contains associated donor information and all informed consent requirements are strictly followed. LCT's research products are marketed and sold by its internal sales force, OEM partners and LCT brand distributors in Europe and Asia.

Organizational History

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. 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.

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. LSC was formed in the State of California on June 5, 2009 and is a wholly-owned subsidiary of ISC California.

Results of Operations

Revenues

Revenue for the three months ended June 30, 2014, totaled $1.59 million, compared to $1.46 million for the three months ended June 30, 2013. LCT contributed $842,000 or 53% of total revenue for the three months ended June 30, 2014, compared to $748,000 or 51% for the three months ended June 30, 2013. The increase of $94,000 or 13% in LCT's revenue for 2014 was driven primarily by higher sales to OEM customers and international distributors. LSC's revenue of $746,000 for the three months ended June 30, 2014 accounted for 47% of total revenue, compared to $709,000 or 49% of total revenue for the three months ended June 30, 2013. The increase of $37,000 or 5% in LSC's revenue is due to our strategic efforts to expand and diversify sources of revenue across all channels. We saw the greatest sales growth in website sales and professional accounts.

For the six months ended June 30, 2014 and 2013, revenue was $3.24 million and $2.74 million, respectively. LCT contributed $1.69 million or 52% of total revenue in the six months ended June 30, 2014, compared to $1.38 million or 50% of total revenue for the six months ended June 30, 2013. LCT's revenue increased by $305,000 or 22%, primarily due to higher sales to OEM customers and international distributors. LSC's revenue of $1.55 million or 48% of total revenue in the six months ended June 30, 2014, compared to $1.36 million or 50% of total revenue in the six months ended June 30, 2013. The increase of $190,000 or 14% in LSC's revenue was a result of our strategic efforts to expand and diversify our sources of revenue.

Cost of sales

Cost of sales for the three months ended June 30, 2014 was $409,000 or 26% of revenue, compared to $329,000 or 23% of revenue for the three months ended June 30, 2013. The increase in cost of sales as a percentage of revenue is partially attributable to a 3% increase in costs for LCT and a 2% increase in costs for LSC. LCT's cost of sales for the three months ended June 30, 2014 was $317,000 or 38% of sales, compared to $260,000 or 35% of sales for the three months ended June 30, 2013. The increase in cost of sales for LCT is primarily due to a shift in sales mix from higher margin products to lower margin products for the three months ended June 30, 2014, compared to the corresponding period in 2013. LSC's cost of sales was $91,000 or 12% of sales for the three months ended June 30, 2014, compared to $69,000 or 10% of sales for the three months ended June 30, 2013. The increase in cost of sales for LSC is primarily attributable to a shift in our sales mix to a lower portion of our sales recorded from ecommerce compared to other sales channels.

Cost of sales for the six months ended June 30, 2014 was $848,000 or 26% of revenue, compared to $663,000 or 24% of revenue for the same period in 2013. The increase in cost of sales as a percentage of revenue is partially attributable to a 2% increase in costs for LCT and a 1% increase in costs for LSC. LCT's cost of sales for the six months ended June 30, 2014 was $676,000 or 40% of sales, compared to $523,000 or 38% of sales for the six months ended June 30, 2013. The increase in cost of sales for LCT is primarily due to a shift in sales mix from higher margin products to lower margin products for the six months ended June 30, 2014, compared to the corresponding period in 2013. LSC's cost of sales was $172,000 or 11% of sales for the six months ended June 30, 2014, compared to $140,000 or 10% of sales for the six months ended June 30, 2013. The increase in the cost of sales for LSC is primarily due to a shift in our sales mix to a lower portion of our sales recorded from ecommerce compared to other sales channels.

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 supply chain management to improve the cost of sales as a percentage of revenue for both LCT and LSC.

Research and Development ("R&D")

Research and development expenses were $1.41 million for the three months ended June 30, 2014, compared to $974,000 for the same period in 2013. The increase of $437,000 or 45% is primarily due to increased stem cell line research and clinical testing expenses of $591,000, partially offset by lower employee-related spending of $72,000, consulting costs of $40,000, and stock-based compensation expense of $20,000.

Research and development expenses for the six months ended, June 30, 2014 were $2.37 million, compared to $1.70 million for the same period in 2013. The increase of $674,000 or 40% was primarily due to higher stem cell line research and clinical testing expenses of $816,000, partially offset by lower employee-related spending of $48,000, consulting costs of $39,000, and stock-based compensation expense of $34,000.


R&D is primarily 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 release of preclinical rodent and non-human primate (NHP) PD study data in the first quarter of 2013. Building on the NHP PD pilot study, in May 2013 we initiated a large-scale pharmacology/toxicology primate study, which is intended to form a critical component of our Investigational New Drug (IND) application that we anticipate filing in late 2014 or early 2015. We anticipate increased R&D expenditures in 2014 and 2015 as a result of this large-scale primate study and the added costs associated with the preparation of the IND application.

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

Selling and marketing expenses for the three months ended June 30, 2014 were $679,000, approximating the same amount as the corresponding period in 2013.

Selling and marketing expenses for the six months ended June 30, 2014 were $1.35 million, compared to $1.19 million in the six months ended June 30, 2013. The increase of $157,000 or 13% was due to higher employee-related spending of $68,000, consulting expenses of $83,000, expenses for marketing materials, samples and printing of $102,000, and trade show costs of $26,000. Commission expense increased $43,000 as a result of higher sales. The increase was partially offset by a reduction of $142,000 in advertising expense.

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 June 30, 2014 were $1.33 million, reflecting a decrease of $333,000 or 20%, compared to $1.67 million for the same period in 2013. The decrease is primarily attributable to decreases in employee-related spending of $161,000, stock-based compensation expense of $62,000, filing fees of $47,000, temporary service costs of $61,000, stock-based compensation for services provided by consultants of $26,000, legal fees of $16,000, and board of director fees of $8,000. The decreases were partially offset by increases in audit and accounting related fees of $17,000, and investor relations related costs of $59,000.

General and administrative expenses for the six months ended June 30, 2014 were $2.98 million, reflecting a decrease of $117,000 or 4%, compared to $3.10 million for the same period in 2013. The decrease is primarily attributable to decreases in employee-related spending of $134,000, stock-based compensation expense of $127,000, filing fees of $24,000, temporary service costs of $18,000, stock-based compensation for services provided by consultants of $58,000, legal fees of $13,000, and board of director fees of $16,000. The decreases were partially offset by increases in audit and accounting related fees of $39,000, and investor relations related costs of $221,000.

Other Income/Expense

Other expense was $2.17 million for the three months ended June 30, 2014, primarily due to recognizing loss of $3.45 million for the warrant exchange inducement expense offset by the income of $1.27 million for the change in fair value of the warrant liability from our registered stock and warrant offering completed in July 2013, due to the subsequent final revaluation of the warrant liability during the current quarter prior to the completion of the exchange of the warrants for our common stock in June 2014. In 2013, we recorded other expense of $10,000 during the corresponding period.

Other expense for the six months ended June 30, 2014 was $1.54 million, due to recognizing loss of $3.45 million for the warrant exchange inducement expense offset by the income of $1.89 million for the change in fair value of the warrant liability from our registered stock and warrant offering completed in July 2013, due to the subsequent revaluation of the warrant liability at each balance sheet date and the final revaluation prior to the completion of the exchange of the warrants for our common stock. We recorded other expense of $9,000 during the six months ended June 30, 2013.

Liquidity and Capital Resources

As of June 30, 2014, our cash and cash equivalents totaled $748,000, compared to $2.24 million as of December 31, 2013. At June 30, 2014, we had a working capital balance of $1.17 million, compared to a $2.40 million deficit as of December 31, 2013. The positive change in our working capital from a deficit at December 31, 2013 is primarily due to removal of the fair value of warrant liability from our balance sheet as of the end of the current quarter resulting from the exchange of warrants for common stock.


Operating Cash Flows

Net cash used in operating activities was $3.36 million for the six months ended June 30, 2014, compared to $2.89 million for the corresponding period in 2013. The primary factor contributing to the variability in the reported cash flow amounts relates to the net loss after non-cash adjustments totaling $3.20 million in the six months ended June 30, 2014, compared to $2.63 million for the same period in 2013.

Investing Cash Flows

Net cash used in investing activities was $558,000 for the six months ended June 30, 2014, compared to $373,000 in the same period in 2013. The increase was the result of higher payments for capital expenditure of $207,000, partially offset by lower patent licenses and trademarks spending of $21,000.

Financing Cash Flows

Net cash provided by financing activities was $2.42 million for the six months ended June 30, 2014, compared to $3.27 million in the same period in 2013. Approximately $1.42 million of the net proceeds of $2.42 million received in 2014 was attributable to the issuance of 8.2 million shares of common stock, net of stock issuance costs of $169,000 under the purchase agreement with Lincoln Park Capital, LLC ("Lincoln Park"), which we entered into in December 2013. In addition, we received net proceeds of $1.1 million from the sale of 8.8 million shares to Dr. Andrey Semechkin, our Co-Chairman and Chief Executive Officer and Dr. Ruslan Semechkin our Chief Scientific Officer and a director. The shares were offered and sold to the purchasers in a private placement transaction. Under our purchase agreement with Lincoln Park, we may sell from time to time up to an aggregate of $10.25 million of shares of common stock to Lincoln Park through January 2017.

During the six months ended June 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. For further discussion of these transactions, see Note 6, Capital Stock, Common Stock Transactions to our condensed consolidated financial statements.

Management is currently evaluating various financing sources and options to raise working capital to help fund our current research and development programs and 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 condensed 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 2014 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;

• 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 initiatives.

During the quarter ended December 31, 2013, we exited the development stage based on a consistent, increasing revenue trend and more significant revenue totals generated from our two commercial businesses. We had been in the development stage from inception through the quarter ended September 30, 2013, and have accumulated losses from inception through the quarter ended June 30, 2014,


and expect to incur additional losses in the near future. We currently have no revenue generated from our principal operations in therapeutic and clinical product development through research and development efforts. We need to raise additional working capital. The timing and degree of any future capital requirements will depend on many factors. For the quarter ended June 30, 2014, our average burn rate was approximately $560,000 per month, excluding capital expenditures and patent costs averaging $93,000 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 2014. As part of the June 2014 warrant exchange transaction discussed above, we agreed that until September 14, 2014 we would not issue additional shares in capital raising transactions other than in private placements to our officers and directors. Based on the factors above, there is substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements were prepared assuming that we will continue to operate as a going concern. The condensed 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.

We do not currently have any obligations for milestone payments under any of our licensed patents other than the minimum license fee of $75,000 annually, payable 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.

From July 1, 2014 through to August 6, 2014, we sold a total of 6.0 million shares of common stock for an aggregate of $600,000, as discussed in Note 12, Subsequent Event, to our condensed consolidated financial statements.

Off-Balance Sheet Arrangements

As of June 30, 2014, we did not have any off-balance sheet arrangements.

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