International Stem Cell's Management Discusses Q3 2013 Results - Earnings Call Transcript

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 |  About: International Stem Cell Corp. (ISCO)
by: SA Transcripts

International Stem Cell Corporation (OTCQB:ISCO) Q3 2013 Earnings Conference Call November 13, 2013 11:00 AM ET

Executives

Simon Craw - Executive Vice President of Business Development

Jay Novak - Chief Financial Officer

Sherri Franklin - Marketing Manager, QualityStocks

Analysts

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the International Stem Cell Corporation Third Quarter 2013 Financial Results and Corporate Update Conference Call. At this time, all participants are in listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions)

I'll now turn the conference over to Ms. Sherri Franklin, Marketing Manager for QualityStocks. Please go ahead.

Sherri Franklin

Good day, ladies and gentlemen. Thank you for standing by. Welcome to the International Stem Cell Corporation's third quarter 2013 business update and earnings call. During today's presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions) This conference is being recorded today, Wednesday, November 13, 2013.

On the call today from International Stem Cell Corporation are the Company's Executive Vice President, Dr. Simon Craw; and Chief Financial Officer, Mr. Jay Novak. Dr. Craw and Mr. Novak will review and comment on financial and operational results for the third quarter of 2013 and the first nine months of 2013, and will be available to answer questions after the prepared comments.

Before we begin, I would like to remind our listeners that on this call, 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 who are unable to listen to the entire call, there will be an audio replay that will be available, and the call is also being webcast, so you can log on via the Internet to review at a later time. All details were provided on the conference call announcement and in the press release today. You may also find more information on the Company's website located at www.internationalstemcell.com.

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

Simon Craw

Thank you, Sherri, and good morning, everyone, and thank you for joining us on this morning's business update call. As you can see from our 10-Q and the press release this morning and see from the stock price, we've – you've seen a little bump-up in our stock price as well which is really gratefully acknowledged. We had an extremely good third quarter of 2013 with excellent progress on our Parkinson's disease program and outstanding growth in each of our commercial businesses, both Lifeline Cell Technology and Lifeline Skin Care. Indeed the third quarter represented the highest revenue we have ever achieved as a company.

I'll come back to the commercial side in a moment, but first I'd like to make a few comments about our recent financing before discussing our scientific progress. So, we touched on this briefly last quarter, the last quarter's update call, but just to remind listeners, in July we raised approximately $3 million, most of which came from a group of new investors new to ISCO. The capital will be used to fund our R&D programs, primarily our Parkinson's disease program where we intend to start a clinical trial in 2014.

As part of the offering, we also issued B Warrants which expired in October of this year, and we now have, through the execution of these B Warrants, raised a total of about $5.45 million from this transaction which along with our continued ability to manage our burn rate successfully downwards, now funds the Company well into 2014. So we consider this to be a successful outcome for the quarter. In addition, the transaction significantly improved our daily trading volume and makes our stock more attractive to new investors. I'll be happy to answer specific questions about the financing in the Q&A session.

Let me move on now to our Parkinson's disease program and talk about that for a few minutes. We continue to proceed with our plans for an IND filing in 2014 in the subsequent clinical trial. In August, we are very excited to announce, that we signed a clinical research agreement with Duke University and the Duke Clinical Research Institute, which is actually the largest academic CRO, clinical research organization, in the world, and the main purpose of the agreement was really to tap into Duke's excellence in the fields of clinical neurology and in running early-stage clinical trials, especially trials using stem cell derived products. And it was important for us to choose a clinical research organization with significant expertise in both cell therapy and in handling stem cells, and over the years, Duke has really built an international reputation in both of these areas.

Lastly, Duke also has a world-class neurosurgical unit which is of course necessary for our cell implantation procedures, and the leader of this unit is a neurosurgeon called Dr. Dennis Turner who is a very well-renowned neurosurgeon and is actually a key part of our clinical program. So, Duke will help us by helping develop the clinical plan which forms part of the IND filing and will coordinate our Phase 1 study that we intend to begin in the middle of next year. Prof. Mark Stacy, the Vice Dean of Clinical Neurology and an internationally renowned and extremely well-respected neurologist and physician, will be the study's principal investigator, and we are very excited to have Dr. Stacy join our clinical dream.

And just to remind everyone on the call, we intend to treat Parkinson's disease by implanting stem cell derived neural stem cells into a patient's brain. Our research builds on many years of preclinical and clinical science and has two parallel mechanism of action; the direct cell replacement mechanism where the new cells replace dead and dying cells in the critical region of the brain and restore that region's function; and secondly, a neuroprotective mechanism of action where the new cells provide positive benefits to the location where they are implanted and may help by preventing more cells from dying and the disease, the underlying cause of the disease progressing further.

So one of the first things that the Duke team helped us with was by bringing together some of the most preeminent neurologists and neurosurgeons who have worked in this field of cell therapy for Parkinson's disease together for a key opinion leader meeting which we held in September of this year. Bringing such a team of clinical experts together really helped us further develop the neurosurgical implantation procedures including the exact techniques and locations of the implants along with the detailed design of the clinical study. Now we haven't published this at the moment but we do intend to publish much of this information once we have had our pre-IND meeting with the FDA, which we expect to have in the next couple of months.

So at the same time as we are working on this IND package and all that entails, we have continued to publish and present the results of our preclinical research including more data from our first pilot primate study which we completed earlier this year. An example of this would be that we recently presented how our neural stem cells can reduce the inflammatory response in the brain caused by the surgery, and the importance of this to the treatment of Parkinson's disease. And we intend to publish all of this data from the first primate study in the peer-reviewed scientific literature before the end of the year.

So with that, that really concludes my overview of the scientific progress we have made, and I'd like to pass the call over to Jay, our Chief Financial Officer, to discuss our financial performance. Jay?

Jay 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 third quarter of 2013. We filed our 10-Q this morning and issued a press release with our results. Please refer to those documents for more detailed information regarding our results.

Sales for the three months ended September 30, 2013 were $1.7 million, up 41% from $1.2 million in the third quarter of 2012. Sales for our Lifeline Cell Technology subsidiary or LCT were $860,000, up 30% year-over-year, while Lifeline Skin Care or LSC revenues were $810,000, up 54% over the corresponding period in 2012.

As far as the distribution of sales between the subsidiaries, revenues from Lifeline Cell Technology represented 51% of our total revenues while Lifeline Skin Care's revenues were the remaining 49% in the third quarter of 2013, as you can see a fairly even split between the two subsidiaries.

Now moving on to the cost side, cost of sales were $446,000 for the quarter or approximately 27% of revenue compared to $320,000, also 27% of revenues, consistent with the third quarter of 2012. Gross profit was approximately $1.2 million, up 41% year-over-year, while our gross profit margin was consistent at 73% with the same quarter in the prior year.

Moving on to research and development, research and development expenses were $932,000 for the quarter compared to $899,000 for the third quarter of 2012, representing an increase of approximately 4% over the prior year. This slight increase is due to higher stem cell line research and testing expenses incurred as well as increased consulting cost, as you can see, to invest in our research programs as previously was covered by Simon in more detail.

Marketing expenses during the current quarter were $633,000, up approximately 32% from $478,000 in the corresponding period in 2012. Advertising and marketing spending increased reflecting our efforts to promote and support the growth of our businesses, subsidiaries, with the primary increase coming from our Skin Care business to address their various sales channel.

General and administrative expenses were $1.4 million during the quarter, a decrease of $210,000 or 13% compared to $1.6 million for the comparable period a year ago. This was resulting from lower personnel related expenses and stock-based compensation expenses as well as additional areas where we had savings.

Our loss from operations during the quarter was $1.7 million and compared to a $2.1 million in the same period in 2012, representing a decrease of losses of about 18%, and this is consistent with the areas previously covered, a higher increase in revenues than slight increases in our operating expenses.

As far as below-the-line items, as described in detail in our 10-Q filed with the SEC this morning, the characteristics of our July financing transaction required us to record the fair value of warrants issued in excess of the proceeds we received and the financing cost as below-the-line expenses in our income statement. Total below-the-line expenses recorded related to the financing were approximately $2.1 million for the quarter.

As a side note, in future periods, increases in the fair value of the warrant liabilities will be recorded as expense and decreases will be recorded as income. Regardless of whether we show income or expense from the change in warrant liabilities, this is a non-cash item.

Our bottom line net loss for the third quarter of 2013 was $3.8 million compared to $2.1 million during the corresponding period in the prior year, representing an increase in net loss of approximately $1.7 million. This increase in net loss for the quarter is entirely due to recording in the income statement the impact of the July financing transaction that I just described. Our net losses attributable to common stock on a per share basis were $0.03 in the third quarter compared to $0.02 in the same period in last year.

Our cash and cash equivalents totaled $1.8 million at September 30, 2013 compared to $654,000 at the end of last year. We received during the year approximately $5.9 million, net of financing cost, from the issuance of common stock and warrants in the first three quarters of 2013. In addition, we invested approximately $500,000 in capital and patent expenditures year-to-date and this is down slightly compared to about $630,000 in the same period in 2012.

This concludes my prepared remarks. Thank you for your time and attention. I will turn the call now back over to Simon for his closing comments. Simon?

Simon Craw

Thank you, Jay. Thanks for that summary. So everyone on the call, in summary I think you can see that we had a truly excellent, excellent third quarter for 2013. Our revenues hit new highs, an absolute record for the Company, our cash burn net of patent and capital items is the lowest it's been in two years, and we now have an incredible new partner on the clinical side who brings complementary expertise to our own internal skills and will help us achieve this very ambitious scientific and clinical goals that we have set ourselves for 2014. I think it's a very exciting time for International Stem Cell, and thank you and we will open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of [Heidi Marie Flyntas] (ph), private investor. Please go ahead.

Unidentified Shareholder

Thanks for everything you guys have been doing this year. On your Phase 1 trial, how long do you anticipate it to last with the trialling?

Simon Craw

We expect it to be a 12-months trial. We will be publishing sort of in broad brushstrokes the details of the protocol probably early next year, but we expect it to be a 12-months trial with a two-year follow-up period.

Operator

Your next question comes from the line of Donald [indiscernible], private investor. Please go ahead.

Unidentified Shareholder

I have enjoyed the presentation so far. I have one question. What is the progress on the corneal transplants?

Simon Craw

That's a great question, Donald. Thank you very much. We don't have anything that we can report on the corneal program at the moment. As you probably know, the program is still in the research and development phase where we are optimizing the mechanical and optical properties of the cornea. We had hoped to have already partnered this program with some partners in India. That is of course now proving to be much more difficult than initially anticipated, and we don't have a scientific update on the progress this quarter.

Operator

(Operator Instructions) Next we have a follow-up question from [Heidi Marie Flyntas] (ph), private investor. Please go ahead.

Unidentified Shareholder

During the Phase 1 trial, how will we get update or will we get update during the trial as to the progress or will we be waiting until the trial is done, and who is in charge of those updates, will that be up to the Company or Duke?

Simon Craw

Before I answer that question, let me just go back to the corneal to answer Donald's question more completely. We are now looking for additional partners for our corneal program and we have had contact with several companies who have expressed interest in looking at the program. So we are continuing to try to partner that program and out-license that technology.

Now to answer Heidi Marie's call, ISCO is the sponsor of the clinical trial, so ISCO has control over the data flow, and although we are in partnership with Duke University, so we wouldn't be doing anything that would compromise that partnership, but we will be responsible for communicating progress on that clinical trial and we fully intend to provide interim updates as and when they become available in terms of, we'll obviously communicate when we've had our first patient in and when the first subjects have been treated and as we move forward with the various cohorts in the study.

Operator

There are no further questions at this time. Please continue.

Simon Craw

Okay, well, if there's no further questions, I'd like to thank everyone for joining us on this morning's call, and once again, I'd like to reiterate that I think we've had an outstanding quarter with just truly excellent revenue growth from both of our commercial businesses and tremendous progress from our R&D organization, and I look forward to talking about the full-year progress when we file our 10-K next year and looking back on a banner year for International Stem Cell.

Operator

Ladies and gentlemen, this concludes the conference call for today. Thanks for participating. You may now disconnect your line.

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