John Simon Craw - Executive Vice President of Business Development & Investor Relations
Tibor Jay Novak - Interim Chief Financial Officer and Secretary
International Stem Cell (OTCQB:ISCO) Q1 2013 Earnings Call May 14, 2013 11:00 AM ET
Good morning, ladies and gentlemen. And welcome to the Audio Conference Call of International Stem Cell Corporation First Quarter 2013 Financial Results Conference Call. Thank you for standing by. [Operator Instructions] As a reminder, this conference is being recorded, Tuesday, May 14, 2013. I would now like to turn the conference over to Mr. Mark McPartland of MZ Group. Please go ahead, sir.
Thank you, operator, and good morning, everyone. Joining us today for International Stem Cell's first quarter 2013 financial results conference call are the company's Executive Vice President, Dr. Simon Craw; Interim Chief Financial Officer, Mr. Jay Novak. And Dr. Craw and Mr. Novak will review and comment on the financial and operational results for the first quarter and will be available to answer questions after prepared comments.
Now before we begin the call, I'd like to remind our listeners that on this call today, prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties, and that management may make additional statements in response to your questions. Therefore, the company claims protection from Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995. Forward-looking statements related to the business of International Stem Cell Corporation and its subsidiaries can be identified by common use forward-looking terminology, and those statements involve unknown risks and uncertainties, including all business-related risks that are more detailed in the company's financials on Form 10-K, Form 10-Q and 8-K, with the SEC. For those of you, who are unable to listen to the entire call today, there will be an audio replay available. And the call is also being webcast, so you can log in via the Internet to review at a later time. All the details are provided on the conference call announcement and in the press release earlier today. You may find more information on the company's website located at internationalstemcell.com.
Now, at this time, I'd like to turn the call over to Dr. Simon Craw, who will provide opening remarks. Simon, the call is yours.
John Simon Craw
Thank you, Mark, and good morning, everyone, and thank you for joining us to discuss International Stem Cell's first quarter 2013 financial results.
We had an extremely successful start to 2013 with both of our commercial businesses, Lifeline Cell Technology and Lifeline Skin Care, growing sales by double digits. And our R&D group presenting strong evidence that our stem cell-based approach to treating diseases is both safe and effective. These results are a direct results of the investments we've made in research and development and sales and marketing. Equally important, we continue to make good progress with our operations where we've been able to increase our gross margins significantly by both further improving our manufacturing efficiencies and by focusing on our sales and marketing on products with higher margins. We've also further reduced our general and administrative overhead. And Mr. Novak will speak about that in due course.
In March, we were extremely pleased to report positive results from our preclinical Parkinson's disease studies. At the American Academy of Neurology's 65th Annual Meeting in San Diego, a meeting that almost every significant pharmaceutical company and neurologist attends, we announced in an oral presentation at the movement disorders session that neuronal cells derived from our human parthenogenetic stem cell lines were shown to be safe in rodent and primate models of Parkinson's disease and that the cells engrafted and demonstrated increased production of the neurotransmitter, dopamine, that is an essential component for treating the symptoms of the disease. This is strong evidence that Parkinson's disease can be safely and successfully treated by implanting our neuronal cells into the brain. This evidence now allows us to move the program to the next phase of development, which will culminate in our I&D filing, a prerequisite to us beginning human clinical trials.
We also announced in the first quarter, the results from our long-term safety and efficacy study of our hepatocyte-like cells. Human liver cells derived from our parthenogenetic stem cells in an animal model of a rare genetic liver disease. The results of this study were very encouraging in terms of the ability of our cells to regenerate the function of a defective liver.
Lastly, we raised an additional $3.27 million from a group of previous and current shareholders, which I consider to be a strong vote of confidence from some of our largest shareholders. We will use this capital to advance our therapeutic R&D, primarily on our Parkinson's disease program, which we believe is closest into entering clinical trials and moving us closer towards our goal of commercializing our stem cell therapeutics.
As you can see, we are off to a great start in 2013. Our Chief Financial Officer, Jay Novak, will now present additional details regarding our financials. I'll be available to answer questions after Jay finishes his presentation. Jay?
Tibor Jay Novak
Thank you, Simon, and good morning, everyone. Thank you for joining us this morning. I'd like to provide you with a review of our financial performance for the first quarter of 2013. We filed our 10-Q and issued a press release with our results this morning. Please refer to those documents for more detailed information.
Sales for the 3 months ended March 31, 2013, were $1.29 million, representing an increase of 19% compared to $1.08 million for the same period in the prior year. Lifeline Cell Technologies or LCT, sales were $0.64 million, up 20% year-over-year representing 49% of total revenue in the first quarter of 2013. Sales for our Lifeline Skin Care, or LSC, were $0.65 million, up 19% compared to the same period in 2012. LSC represented approximately 51% of total sales in the first quarter of 2013. We are extremely pleased with the growth in our LCT and LSC businesses during 2013, thus far. Cost of sales were $0.33 million or 26% of revenue compared to $0.32 million or 30% of revenue in the first quarter of 2012.
Gross profit was approximately $0.95 million, up 26% year-over-year. We are very pleased with this result. Our gross profit margin improved by over 400 basis points from 70% to 74%. Gross margins improved as a result of efficiencies in our manufacturing and supply chain and increased contributions from higher margin products.
General and administrative expenses were $1.42 million, a decrease of $620,000 or 30% compared to $2.04 million for the compatible period a year ago. Lower personnel-related expenses and stock-based compensation expenses were the 2 main contributors due to reduction in our G&A expenses.
Marketing expenses for the 3 months ended March 31, 2013, were $0.51 million, up 3% from $0.5 million in the first quarter of 2012. This is the result of increased advertising and marketing spending, as well as logistics and selling expenses to support the growth in our businesses.
Net loss for the first quarter of 2013 was $1.7 million, down from $2.7 million in the first quarter in the prior year primarily resulting from lower cost due to strategic cost reductions obtained as well as operating income received from our LSC and LCT businesses, which were generating losses during the same period in the prior year. The weighted average shares outstanding were approximately 103.5 million shares, up from 82.5 million shares in the 3 months ended March 31, 2012. And net losses attributable to common shareholders on a per-share basis were $0.02 in the first quarter of 2013 and were reduced to $0.05 in the same period last year. We ended the first quarter with cash and cash equivalents totaling $1.9 million compared to -- approximately $650,000 as of December 31, 2012.
The increase in cash balances, as Simon previously mentioned, is the result of completing financing transactions totaling approximately $3.27 million during the first quarter, which was partially offset by working capital needs to fund our therapeutic research and development efforts and our operations. We have working capital of $2.4 million at the end of first quarter compared to $0.4 million as of December 31, 2012.
This concludes my prepared remarks. Thank you for your time and attention. I will turn the call now back over to Simon for closing comments.
John Simon Craw
Thank you very much, Jay. As you can see, the beginning of 2013 has been a very productive International Stem Cell, and we've made some tremendous progress on the commercial side and on the therapeutic area research side. I'd like to thank you for your time and attention this morning. Jay and I are both available to answer questions now. Operator, you may open the call to questions.
[Operator Instructions] Our first question is from Jeffrey Cohen, Ladenburg Thalmann.
Simon, I was wondering if you could provide any revenue composition from the 4 products in Lifeline Skin Care and talk about the addition of the Eye Firming Complex, and how that might be impacting revenues thus far?
John Simon Craw
Yes, Jeff. The Night serum continues to be our best seller followed by the, the 2 pack of the Day and the Night serum. I don't have the breakdown right in front of me. The eye cream is actually outselling the Day serum. The eye cream that we launched in November of last year is outselling the Day serum. And it's partially due to the price point, I think, partially due to the -- it's a very effective product. And there's a strong need for that product in the marketplace. So I don't have the exact balance of the sales, but that's the order that they -- that we sell it.
Got it. And second question is could you give us any kind of update as far as the anticipated I&D filing for Parkinson's?
John Simon Craw
We are still anticipating a 2014 filing for Parkinson's disease. We are currently in the process of discussing the details of the preclinical plan with the FDA. And we won't know for certain until those discussions have concluded, but we're still anticipating 2014.
Okay. I imagine you're not providing any guidance for calendar year 2013 as far as revenues. But could you talk about how this quarter is going thus far and any kind of general comments as far as revenue trajectory going forward?
John Simon Craw
Yes. Well, as you can see the first quarter was tremendous. It was pretty much our best quarter so far with good growth in both subsidiaries. We're seeing that continuing. And I'll also say that Jay pointed out that we actually -- both companies produced income, which in Lifeline Cell Technology's place was for the first time, I think, that they've -- we derived income from that subsidiary as well. So not only are revenues growing pretty strongly, and we see that continuing, but because of the operational changes that we've made in terms of efficiencies in manufacturing and what have you, we're driving income sooner than we anticipated in those businesses.
Okay. And lastly, as far as the gross margins, would you expect that to reset back a little bit towards 70%, or do you anticipate that, that will stay up in the 74% range?
John Simon Craw
I think we can maintain it to the 74%.
Our next question is Robert Lawrence [ph], a private investor.
Dr. Craw. I was wondering, last year, there was notice given that -- of shipments, your product to China, Australia, New Zealand. Could you comment on how that is progressing?
John Simon Craw
Yes. So our relationship with our Chinese distributor is going well. It is somewhat slower than we anticipated. We thought it would ramp up more quickly than it has. But the relationship is going well, and we're still shipping products to China. The distributor in Australia and New Zealand is our most long-standing distributor. We have an extremely strong relationship with them. Overall, I think that -- I don't have the overall sales figures for our international sales to hand them fortunately. So I can't share that with you, but it's still -- overseas, still represents a relatively small fraction of our total sales volume. And by small, I mean, probably less than 20%. So we -- there's a lot of headroom for international -- for growth in international sales that we've yet to achieve. And we're working hard in many Asian countries, for example, in Vietnam, in Korea, in Malaysia to sign up a new distribution -- new distributors in those territories.
Our next question is from Ron Schmidt [ph], a private investor.
First of all, congratulations on a great quarter. The second thing, what I'm trying to understand better is the cash flow requirements of your business. I'm trying to understand to what extent the increased sales from your product lines will be able to fund your additional research expenditure requirements. It looks like you've made good progress here and that your sales are up 3% and your cost of sales in both marketing are up only 3% versus the 90% for the increase in your sales. So for example, in the cost of sales, things or a portion, a significant portion of that fixed cost, and would we expect to see continued cash flow increases in net contribution as your sales go up in the future quarters? And if you think at some point in time, you'll be able to cover most of your research and development cost from your sales of your products?
John Simon Craw
Well, Ron, that's a great, great, great question. And you kind of -- you showcased our business model in essence there by the last part of your question, and let me take it in parts. Firstly, yes, for the first time that we -- in this quarter, we're deriving a significant amount of income from those businesses. So it is starting to offset the R&D expenses. We see that continuing. We see no reason why that should not continue. What we know about the second quarter looks good and our sales forecast for the remainder of the year indicate the same, so we see that continuing. There is a large fixed portion of that sales and marketing income. So we can grow sales as quickly as we have done in the first quarter. Again, that would -- we would be able to offset more of our R&D cost against that income. And lastly, the point about where we would breakeven, I doubt that we would be able to cover all of our R&D costs this year from income derived from our subsidiaries. But you can see that our net loss went down significantly in this quarter from, I think, what did it go from, Jay, from $2.7 to $1.7 million. So we're certainly on the right trajectory, whether we do it this year or next year or the year after. It's a little bit difficult to say at the moment, but it does demonstrate that our business model is working and is functioning. And the idea that we can create these businesses and derive income to fund that therapeutic research is a good strategy.
I actually have just 1 quick follow-up question. On your sales and marketing effort, if I understand it correctly, you've invested a substantial amount of money recently in new channels, new types of advertising, et cetera, et cetera. So I assume it would be reasonable to expect that the return on that investments you're making now should occur in future quarters. I guess I'm trying to understand how -- do you have some sense as to how effective those marketing expenditures have been into your new channels? And if so, I assume that we could anticipate then future increases in sales at or at an increased level than what you've done so far.
John Simon Craw
It's a little bit hard to say for us. Yes, we have invested in new channels. For example, our professional channel is something that we've invested a lot of time and money into growing, and we are seeing the fruits of those labors. International, I mentioned before, is something that we're focusing on, primarily in Asian territories. And we do expect to see growth. We don't formally give revenue projections, so I don't -- I want to hesitate when I say that we will absolutely see those continuing for the rest of the year.
[Operator Instructions] Having no further questions, this concludes today's question-and-answer session. I would like to invite Dr. Simon Craw to proceed with his closing remarks. Please go ahead, sir.
Operator, I can conclude the call if necessary, but they may have been cut off from the call. So again, we'd like to thank everyone for joining us today and taking the time to learn more about International Stem Cell Corporation. If you have any further questions, please feel free to contact Dr. Simon Craw at International Stem Cell Corporation; and/or myself, Mark McPartland at MZ Group. My direct number's (646) 593-7140. Again, thank you very much for participating. Have a great day.
This does conclude the International Stem Cell Corporation audio conference for today. Thank you very much for your participation. Have a good day, you may now disconnect.
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