International Stem Cell Management Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 9.13 | About: International Stem (ISCO)

International Stem Cell (OTCQB:ISCO) Q2 2013 Earnings Call August 9, 2013 11:00 AM ET

Executives

Mark McPartland

John Simon Craw - Executive Vice President of Business Development & Investor Relations

Jay Tibor Novak - Interim Chief Financial Officer and Secretary

Analysts

Philp Grella

Operator

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the International Stem Cell Corporation Second Quarter 2013 Financial Results Conference Call. [Operator Instructions] This conference is being recorded today, Friday, August 9, 2013.

I would now like to turn the conference over to Mark McPartland, from MZ Group. Please go ahead, sir.

Mark McPartland

Thank you, operator, and good morning, everyone. Joining us today for International Stem Cell's Second Quarter 2013 Financial Results Conference Call are the company's Executive Vice President, Dr. Simon Craw; and the interim Chief Financial Officer, Mr. Jay Novak. Dr. Craw and Mr. Novak will review and comment on the financial and operational results for the second quarter and will be available for -- to answer your questions after the prepared remarks.

Now before we begin the call, I'd like to remind our listeners that on the 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 the protection from the 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 filings on Form 10-K, 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 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 details on the conference call announcement and the press release yesterday for the financial results. You may also find more information on the company's website, which is located at internationalstemcell.com.

At this time, I'd like to turn the call over to Dr. Simon Craw, who will provide opening remarks. Simon, the floor is yours.

John Simon Craw

Thank you, Mark, and good morning, everyone, and thank you for joining us on International Stem Cell's Second Quarter and First Half 2013 Financial Results and Business Update Call.

We had a very productive first half of 2013 with solid progress in our Parkinson's disease program and strong, double-digit growth in each of our commercial businesses, Lifeline Cell Technology and Lifeline Skin Care. I'll come back to the commercial side of the business in a moment. But first, I'd like to make a few comments about our scientific progress.

On our Parkinson's disease program, we continue to proceed with our plans for IND filing in 2014. During the second quarter, we had a pre, pre-IND meeting with the FDA's Office of Tissues, Cellular and Gene Therapies. And for those who aren't familiar with this type of meeting, the idea of a pre, pre-IND meeting is to give companies an opportunity to receive off-the-record advice from the FDA with regard to pre-clinical research. Such meetings are extremely useful in terms of making sure the formal on-the-record pre-IND meetings are successful and contain no surprises either for the FDA or for the company.

In our Parkinson's disease program, we needed guidance from the FDA regarding a number of specific questions concerning the manufacturing processes we intend to use to create our human neural stem cell product and the experimental designs of our primate and rodent studies.

Subsequent to the meeting, we began the process of large-scale manufacturing of the human neural stem cells. The manufacturing of these cells, including the creation of the master cell bank that will be used for both the rodent toxicology study and the recently announced primate toxicology/pharmacology study, will be carried out at our GMP facility in Oceanside, California.

In the second quarter, we also presented results of our in vivo safety and efficacy studies at the American Society of Gene & Cell Therapy conference in Salt Lake City, Utah, and the International Society of Stem Cell Research conference in Boston, Massachusetts. To remind listeners, these studies show that implanting human neuronal cells created from our proprietary platform into the brains of rodents and primates have a good safety profile, increased levels of dopamine in the brain compared with control and also may offer a potential neuroprotective benefit, which would be a potentially new mechanism of action for the treatment of Parkinson's disease. This work is now being prepared for publication in a peer-reviewed scientific journal, and we expect to submit this manuscript in this quarter, third quarter 2013.

Regarding our metabolic liver disease program using our hepatocyte-like cells, since reporting the positive efficacy data in the rodent models earlier this year, we've been working to scale up the manufacturing process of the hepatocyte-like cells in a manner similar to the process we use in our Parkinson's disease program to create the human neural stem cells. At this moment, I don't have more of an update on this program.

With respect to our Cornea program, and to remind everyone, that this is a pre-clinical stage program that is focused on developing human corneas from stem cells primarily for the developing world where most of the clinical need is. We are the first company in the world to have successfully created these 3-dimensional corneal tissue constructs from stem cells, and we are now optimizing their physical and optical properties to make them suitable for implantation. At this stage, this is all I can disclose.

Lastly, I'd like to remind everyone that one of the things that makes ISCO a unique company is our proprietary platform of ethical human stem cells created by the process of parthenogenesis. And the clinical success in any one of our programs validate our platform approach and unlock tremendous therapeutic and partnering opportunities for us as a company. This is what fully differentiates ISCO from other stem cell companies.

I would like to make a couple of comments on our commercial operations before handing the call over to our CFO, Jay Novak.

We're very pleased to be reporting a substantial increase in revenue and improvement in gross margin. Over the last several months, we've invested in growing our businesses in Asia, and a significant portion of this revenue growth is a result of this strategy. We expect to continue expanding in Asia. At the same time, we are also looking to add more U.S.-focused salespeople to grow our domestic market share more quickly.

The increase in profitability, as measured by gross margin, is showing up in our reduced net burn rate. This is not only driven by our switch to larger batch sizes and more efficient manufacturing processes but also by our ability to better promote our higher-margin products. In the case of Lifeline Cell Technology, for example, this represents increased sales of our human cell products over our lower-margin media products.

Finally, let me make a quick remark about our recent financing. In July of this year, we netted approximately $2.5 million from the sale of shares and warrants. Each share purchased received an A and a B Warrant. The B Warrant allows for the purchase of a second share within 65 trading days. And if all the B Warrants are exercised, we expect to receive another $3 million before the end of October, giving us a total raise of approximately $5.5 million. At that current burn rate of $482,000 per month, this represents approximately 12 months of runway and possibly longer if sales continue to grow as they have over the last few quarters. As you can see, we've had a good first half of 2013.

Our CFO, Jay Novak, will now provide additional details regarding our financial results. I'll be available to answer questions after Jay finishes his presentation. Thank you. Jay, over to you.

Jay Tibor Novak

Thank you, Simon, and good morning, everyone. Thank you for joining us this morning. I would like to provide you with a review of our financial performance for the second quarter of 2013.

We filed our 10-Q and issued a press release with our results yesterday. Please refer to those documents for more detailed information.

First, for the 3 months ended June 30, 2013, we're up 38% to $1.46 million compared to $1.06 million in the second quarter of 2012. Lifetime Cell Technologies, or LCT, sales were $0.75 million, up 40% year-over-year, representing 51% of total revenue in second quarter of 2013. Sales from Lifelines Skin Care, or LSC, were $0.71 million, up 36% compared to the same period in 2012. LSC represented approximately 49% of total sales in the second quarter of 2013.

As Simon mentioned, we are extremely pleased with the growth in operating performance of LCT and LSC during 2013 thus far. Cost of sales were $0.33 million, or 23% of revenue, compared to $0.31 million or 29% of revenue in the second quarter of 2012. Gross profit was approximately $1.1 million, up 51% year-over-year. Our gross profit margin improved by over 600 basis points year-over-year from 71% to 77%. The biggest contributors to the year-over-year improvement in gross margins were operational efficiencies and increased contributions from high-margin products.

Research and development expenses were $0.97 million for the quarter compared to $0.87 million for the second quarter in 2012, representing an increase of 11.5% year-over-year primarily resulting from higher stem cell line research and testing expenses incurred as we continued to invest in our research programs.

Marketing expenses for the 3 months ended June 30, 2013, were $0.68 million, up 24% from $0.55 million in second quarter of 2012. Advertising and marketing spending increased primarily reflecting our efforts to promote and support the growth in our businesses.

General and administrative expenses were $1.67 million, a decrease of $88,000, or 5%, compared to $1.76 million for the comparable period 1 year ago. Lower personnel-related expenses and stock-based compensation expenses were the 2 largest contributors to the improvement in general and administrative expenses.

Net loss for the second quarter of 2013 was $2.2 million compared to $2.5 million during the same period in the prior year, representing an improvement of approximately 11% primarily resulting from increased revenues generated by LSC and LCT businesses.

The weighted average shares outstanding were approximately 112.4 million, up from 87.1 million shares from the 3 months ended June 30, 2012. Net losses attributable to common shareholders on a per-share basis were $0.02 in the second quarter of 2013 compared to $0.03 in the same period last year.

Cash and cash equivalents totaled $0.65 million at June 30, 2013, and were flat compared to $0.65 million as of December 31, 2012. Company received approximately $3.27 million, net of stock issuance costs, from the issuance of 16.3 million shares of common stock in the first half of 2013. We invested $0.27 million in capital and patent expenditures in the first 6 months of 2013, down slightly compared to $0.45 million in the same period 1 year ago.

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, Jay. And once again, we're extremely pleased with the performance of the company in the first half of the year. Our therapeutic programs remain on track, and our commercial subsidiaries are sustaining the strong revenue growth that we have been able to report over the last few quarters. Thank you for your time and attention. We're now happy to answer questions you may have.

Operator, you may open the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions] The first question will come from Noah Alpern [ph] of Rolano [ph].

Unknown Analyst

I have a quick question regarding the warrants and why those were sold below the stock value at the time.

John Simon Craw

Yes, that's a very good question, Noah [ph]. The offering price that we did, the July offering, was the -- based on the advice that we got from our financial advisors and -- who were brokering the deal, which is Roth Capital Markets, as you probably know, and was something that they brought to us as -- and represented market terms for the deal structure that was laid out in our registration documents and approved by our Board of Directors.

Unknown Analyst

Okay. And are there plans in the future to do another one of these rounds of [indiscernible]?

John Simon Craw

Well, as I said on the call, if the A -- if the B Warrants get fully exercised, which we expect them to, then we should have given ourselves approximately 12 months' runway, which is enough capital to execute on the clinical plan that we laid out for the research programs and take us to approximately the middle of next year, at which point we will likely have to do another round of financing of some sort. I can't really say what that financing would be at that time. I think we will be a very different company in 12 months' time if we have been successful in filing an IND and have an early-stage clinical asset at that point. And remember that we were one of the few stem cell companies that have significant revenues and growing revenues. And if we -- if the revenues grow as we anticipate, that's going to further reduce our net capital requirements.

Operator

Our next question will come from Heidi Marie Fuentes [ph], a private investor.

Unknown Shareholder

Now there's no way for us to really see where -- who all you're selling your cellular product to. So let's just suppose someone is using your product in their own experimentation, and they decide to suddenly -- that they suddenly need a lot more. Are you in a position to ramp up very quickly?

John Simon Craw

We -- yes, we are. We have substantial capacity to ramp up our manufacturing processes.

Unknown Shareholder

Okay. And as far as the last question from the last caller, my understanding of your answer is if you do go for another round of financing, it will be after the IND has already been filed, right?

John Simon Craw

It'll -- we can't say on the exact timing of events at this stage, Heidi Marie [ph]. We are anticipating the IND filing in the middle of next year. And with the exercise of the B warrants, that should give us 12 months runway. It may give us more if we derive more income from our subsidiaries. It's going to be a -- it's a little bit too uncertain to say at the moment which event will come first. It will be fairly close now, we think.

Unknown Shareholder

Well, I'm hoping the IND gets filed first so that we're at a higher price range before that happened.

John Simon Craw

Of course.

Operator

[Operator Instructions] I'm showing no -- we do have a couple of questions coming in. The first question will be from Bill Goldsmith [ph], a private investor.

Unknown Shareholder

When you were talking about the Cornea program, it was extraordinarily short and brief. I thought, well, that's one of the -- your leading opportunities, is it not?

John Simon Craw

Sorry, Bill, is that your question?

Unknown Shareholder

Yes, the cornea transplant, that's one of your leading opportunities, but it seemed there was very little information whatsoever given regarding it.

John Simon Craw

Yes, yes. And it is -- we have 3 programs that we've prioritized at the moment. And it is probably the third of those 3. So our Parkinson's disease program is our first priority, where we are spending the majority of our human and capital resources. The liver program is our second, and the Cornea program is our third priority. And as a third priority, we haven't been able to dedicate the resources we would like to the program to be able to report the progress that we would like to report. So you're correct, it is a priority, but it is a lower priority than our other 2 programs.

Unknown Shareholder

All right, the reason it was so short then, there just wasn't a lot of movement in that area, if I understand it correctly.

John Simon Craw

Correct.

Operator

Your next question will come from Phil Grella of RBC Capital Management (sic) RBC Wealth Management.

Philp Grella

I wanted to ask regarding the skincare creams. What is the distribution for that? How are you planning to grow sales on that? And then to follow that up, it seems like that portion of your business is designed to sort of maybe fund the more medically used applications for your stem cells. So are you guys -- I guess the real question is, are we dedicating enough to expand that business at this time? Because it does seem like that's where the money is coming from.

John Simon Craw

Well, Phil, that's a very good question. And -- but let me -- and I'll -- it's -- I'll answer it in a moment. But don't forget that we have a second subsidiary, Lifeline Cell Technology, which is actually very successfully growing its revenues and producing income, as well as Lifeline Skin Care. To answer your -- the question on skincare in terms of distribution, we have a number of distribution channels, including online and e-tailers and house accounts, U.S. distributors and independent sales reps who sell into the professional spas, dermatologists and cosmetic/plastic surgeon channels. So the channel that we have been focusing on is the professional channel and growing that sales channel, along with international, which we use our distributors in overseas markets to sell the products. And we've successfully grown the international. About -- I would say about 80% of the growth in skincare for the last quarter compared to the first quarter came from international business.

Operator

[Operator Instructions] We have a follow-up question from Heidi Marie Fuentes [ph].

Unknown Shareholder

This isn't really a question, but I had to comment on the skincare since I've personally used it. It is fabulous and works as it's billed to work. My skin has been more healthy than it's been in years. Anyway, that's all. I just want to comment on that.

John Simon Craw

Well, thank you. Heidi Marie [ph], thank you for the eulogy. And we appreciate that.

Operator

[Operator Instructions] We have a question from George Modell [ph] of Financial PR.

Unknown Analyst

Simon, it's George Modell [ph]. This morning [indiscernible] My question is, there's an extensive research piece, I believe it was Crystal Associates?

John Simon Craw

Yes.

Unknown Analyst

That was promulgated on the company. It's an incredible document. And I was wondering, maybe you could break it down and give us an idea of some of the key points we should take away from this going forward with the stem cell right now by your company.

John Simon Craw

Yes. Yes, well, Crystal Research is a -- thank you, George -- is an independent research organization based out of New York. They approached us last year and wanted to do a piece on us. They have now published that a few days ago, I believe. It's a very detailed report that lays out in pretty scientific terms, the science behind our platform technology and why it's so powerful and how we are exploiting those benefits in our therapeutic programs. And I would encourage everyone on the call to go to Crystal Research and download the report. I think it's freely available. And it really is very well written. It's not so much as a research analyst report. It doesn't give a price recommendation. It really talks about the science and the technology and the differentiators that ISCO is -- has and is bringing to the table and why we are such a special company. And I talked on the call about we're not just a company with a couple of shots on goal for -- in the clinic like many stem cell companies are. We're very, very different. We have this ethical stem cell platform that, if we can validate it in 1 or multiple targets, gives us almost unlimited opportunities to use that platform technology in many, many therapeutic areas. So I would encourage people to go to Crystal Research and download the report. And if people have got questions, my email is on the bottom of every press release we do. They could -- people can email me directly. Thank you for bringing that up, George. It's a good resource for people.

Operator

And the next question is from Bill Goldsmith [ph], a follow-up.

Unknown Analyst

Simon, regarding what you just said about Crystal Research that they approached you, what I just -- I want to make sure I'm clear and if I understand it correctly. The company actually paid Crystal Research to write that report, did it not? Or is that something that Crystal Research did on its own?

John Simon Craw

No, it's paid research.

Unknown Analyst

Okay. I just -- I didn't know if they could come to you. I thought that the company had paid to have that information disseminated. That's a fair statement, correct?

John Simon Craw

Yes.

Operator

Ladies and gentlemen, that will conclude our question-and-answer session. I would like to turn the conference back over to Dr. Craw for his closing remarks.

John Simon Craw

Well, I just -- it remains for me to thank everyone for joining us on this call and once again remind everyone that we've had a pretty successful second quarter and first half. And we look forward to the next quarter's conference call and reporting our third quarter results. Thank you very -- thank you, everyone, for attending.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect your lines.

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