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International Stem Cell Corp. (OTCQB:ISCO)

Q4 2013 Results Earnings Conference Call

March 19, 2014 11:00 AM ET

Executives

Sherri Franklin - Marketing Manager, QualityStocks

Dr. Simon Craw - Executive Vice President

Jay Novak - Chief Financial Officer

Analysts

Operator

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

I will now turn the conference over to Sherri Franklin, Marketing Manager for QualityStocks. Please go ahead ma’am.

Sherri Franklin

Good day, ladies and gentlemen. Thank you for standing by. Welcome to International Stem Cell Corporation’s 2013 full year business update and financial results update call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be opened for questions. If you have a question, please press star-one on your touchdown phone [press star-zero] for operator assistance at any time. For participants using speaker equipment, it may be necessary to pick up your handset before making your selection. This conference is being recorded today, Wednesday, March 19, 2014.

Joining us today for International Stem Cell’s full year 2013 financial results conference call is the company’s Executive Vice President, Dr. Simon Craw as well as Chief Financial Officer, Mr. Jay Novak. Dr. Craw and Mr. Novak will provide a business update and financial results for the full year 2013 and will be available to answer questions after the prepared comments.

Now 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, by following the instructions posted in the press release. All details were provided on the conference call announcement and in the press release yesterday. You may also find more information on the company website located at www.internationalstemcell.com.

At this time, I’d like to turn the call over to Dr. Simon Craw, who will provide opening remarks. Simon?

Dr. Simon Craw

Good morning everybody and welcome to the call today where Jay and I will be reviewing International Stem Cell’s business and financial performance for the year ending December 31, 2013.

So, 2013 was a very good year for International Stem Cell Corporation. We continue to execute on our business plans, growing revenues to over $6 million while containing costs, but also importantly achieving a number of R&D milestones that position us extremely well for 2014 and beyond.

As you may know, our R&D strategy revolves primarily, but not exclusively, around our plans to develop human parthenogenetic neural stem cells as a clinical product with the first indication we’re targeting being Parkinson’s disease.

We derive these neural stem cells from our platform technology; a technology that we’ve shown can be used to generate all kinds of human cells from brain and liver to retina and cornea. The ability of our core technology to provide cells to potentially treat many different human diseases is a key part of ISCO’s value.

Returning to neural stem cells, we intend to use these cells in Parkinson’s disease patients to both supplement the patient’s brain by providing additional cells replacing those cells destroyed by the disease, and to protect the brain from further damage with the expression of neuro-protective factors by the implanted cells.

To this end, we’re working on the pre-requisite studies required by the U.S. Food And Drug Administration to file an investigation on New Drug Application in Parkinson’s disease. And here are a few of the important milestones that we’ve achieved. Firstly, the development and publication of a new method of manufacturing human neural stem cells. The new method offers us a much more efficient and easily controlled process for manufacturing the hundreds of millions of cells required for the primates in human studies. The work was published in the peer reviewed journal Scientific Reports of Primary Research Publication, the publishers of Nature. We also reported positive results demonstrating the safety and efficacy of these human neural stem cells in both rodent and non-human primate models of Parkinson’s disease and presented these results at a number of national scientific meetings, including The American Academy of Neurology 65th Annual Meeting in San Diego, California; The American Society of Gene and Cell Therapy Meeting in Salt Lake City, Utah; and The American Neurological Association 2013 Annual Meeting in New Orleans, Louisiana.

In 2013, we also began the large scale IND-enabling non-human primate pharmacology and toxicology GLP study under the supervision of Yale School of Medicine, Professor Eugene Redmond MD. The study is well underway, and indeed we recently reported interim results showing that most of the primates in the study are demonstrating improvements in Parkinson’s symptoms.

Lastly, in August of 2013, we engaged Duke University in a clinical research master agreement, built around conducting the Phase I clinical trial of experimental use of neural stem cells in the treatment of Parkinson’s. Professor Mark Stacy, MD, Vice Dean of Clinical Research, Neurology, at The Duke University School of Medicine and an extremely well respected neurologist will be the study’s principal investigator.

Most recently in February 2014, the company held the pre-IND meeting with the FDA, and subsequently announced that it will be working to complete the FDA required pharmacology and safety studies by the end of 2014, and file the IND shortly thereafter. In 2014, we will also be working towards bringing forward additional indications for these human neural stem cells.

We also continue to make progress in our other research programs, for example, our liver program where we presented results demonstrating that the hepatocyte-like cells generated from our core parthenogenetic stem cell platform engraft in the liver of Gunn rats, a well known model of Crigler-Najjar Syndrome which is a rare inherited disorder of the liver, and behave in a similar manner to primary human hepatocytes. These results were presented at The American Association for the Study of Liver Disease at the 64th Annual Liver Meeting in Washington, D.C. and were awarded the Presidential Poster of Distinction.

Lastly, we announced the development of a new way of creating human-induced pluripotent stem cells using a novel protein-based re-programming method and presented these findings at the American Society of Gene and Cell Therapy meeting in Salt Lake City, Utah.

Moving on to our financial performance. Firstly, I want to mention the 6.15 million in revenue for the year ending December 31, 2013, an increase of 35% compared to 2012 with Lifeline Skin Care sales, up 47% and Lifeline Cell Technology sales, up 24%. Gross margins improved to 73% in 2013, up from 72% in 2012. I think this is a tremendous result for us and continues the excellent quarterly growth trend that we have established over the last year and a half.

Indeed, our subsidiaries generated an operating income in 2013 of $650,000 with $290,000 coming from our cosmeceutical business and $360,000 from our biomedical products business compared to operating losses in 2012.

And the average net cash used in operating activities of $0.47 million per month for the 12 months ending December 31, 2013 is stable from the third quarter. The company ended 2013 with cash of $2.24 million.

In January, we took steps to further enhance our financial position and flexibility by entering into a $10 million equity commitment with Lincoln Park Capital. Under the terms of the agreement, we have the right to sell from time-to-time up to $10 million of shares of common stock to Lincoln Park over a 30-month period on market based terms subject to certain limitations and conditions set forth in the stock purchase agreement. The facility provides the company with the tool for accessing capital and additional traditional funding methods, and we intend to use this facility as appropriate to support the achievements of our operational and strategic goals.

Our Chief Financial Officer, Jay Novak, will now go over the details of our financials for the full year 2013. Jay?

Jay Novak

Thank you, Simon. Good morning, everyone and thank you for joining us this morning. I would like to provide you with a review of our financial performance for the fourth quarter and fiscal year of 2013. We filed our 10-K and issued a press release a couple of days ago with our results. Please refer to those documents for more detailed information.

As Simon indicated, 2013 was a very successful year for the company. In 2013, we have made substantial progress in our R&D development efforts, all while keeping tight control of our cash burn. I am going to speak mainly to the full year results in my remarks.

Revenues for 2013 were up $1.6 million or 35% to $6.2 million from $4.6 million in 2012. Sales of our Lifeline Cell Technology subsidiary or LCT were $2.9 million, up 24% year-over-year while Lifeline Skin Care or LSC revenues were $3.2 million, up 47% over the corresponding period in 2012.

Increases in sales for LCT were driven by higher OEM and international distributor sales, while the increase in sales for LSC, Skin Care subsidiary were the result of our continuing effort to expand and diversify our revenues across all channels. In addition, the Skin Care subsidiary had a one-time recognition of deferred revenues related to a change in estimate for our 30-day product return guarantee.

Now moving on to the cost side, costs of sales were $1.6 million for 2013 or approximately 27% of revenues compared to $1.3 million or 28% of revenues in 2012. Gross profit was approximately $4.5 million, up 37% over the prior year with relatively consistent profit margins with the prior year.

R&D expenses were [$2.6] million for the year, consistent with 2012. R&D spending is primarily related to ongoing investments in our research for our core technology and development of treatment for specific therapeutic programs. Marketing expenses during 2013 were $2.5 million, up 19% from $2.1 million in the prior year.

Advertising and marketing spending increased, reflecting our efforts to promote and support the growth in our businesses with the primary increase coming from our Skin Care business to address their various sales channels.

G&A expenses were $6 million, a decrease of $1.4 million or 19% compared to $7.4 million in 2012. Lower personnel-related expenses and stock-based compensation expenses were the two main contributors to the improvement in our G&A expenses. Our 2013 loss from operations was $7.5 million compared to $9.8 million in 2012, representing a decrease in our loss of 23%. This $2.3 million decrease in operating losses is consistent with the significant increase in our revenues and lower operating expenses.

As far as below the line items are concerned, as described in detail in our Form 10-K, our July financing transactions required us to record a fair value of warrants issued in excess of proceeds received and the financing cost as below the line expenses on our statement of operations. The total impact below the line of the July financing transaction was $2.9 million for the year.

As a general comment here, it’s important to note that in future periods, increases in the fair value of warrant liabilities will be recorded as an expense and decreases will be recorded as income. Regardless of whether we show income or expense from the change in warrant liabilities, these items are non-cash items.

We reported a $10.5 million or $0.09 per share net loss for the year compared to $9.8 million or $0.13 per share in 2012, representing an increase in net loss or a decrease in net loss of $646,000. This result was entirely due to recording the income statement impact of July financing transaction I just described.

We ended 2013 with $2.2 million in cash compared to $654,000 as of year-end 2012. We received approximately $8.1 million net of financing cost from the issuance of common stocks and warrants in 2013. In addition, we invested around $900,000 in capital and patent expenditures in 2013, up compared to approximately $800,000 invested in the prior year.

This concludes my remarks. Thank you for your time and attention. Let me now turn the call back over to Simon for his closing comments.

Dr. Simon Craw

Thank you, Jay. So, I think everyone can see, in 2013 we made some important progress in our research and development activities, primarily in our Parkinson’s disease program where we achieved a number of critical milestones that move us closer to the clinic. In 2014, we’ll be endeavoring to complete our IND enabling studies and in order to file our first IND for this experimental treatment of Parkinson’s disease. At the same time, we continue to execute on our business plan, growing revenues in our commercial subsidiaries and containing cost.

At this time, I would like to open the call to questions operator. Thank you.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). And your first question comes from the line of [James Maxwell]. Please go ahead.

Unidentified Analyst

Yes doctor, I am an independent investor, but I also have a personal interest in Parkinson’s disease, and I am curious to know what your most optimistic and most likely timelines are as to bringing the neural cell treatment for Parkinson’s disease to market?

Dr. Simon Craw

Thank you, James. That’s a very good question. So, we will be completing studies, pre-clinical IND studies this year. Associated with that is the manufacturing protocols that we’ll be finishing up, and the Phase I clinical design that forms part of the IND package. We will be submitting that to the FDA as soon as possible after the completion of those studies. I can’t give you a timeline on that at the moment whether it will be this year or next. The Phase I clinical study will begin as soon as possible thereafter as soon as our partners at Duke University will be ready. The Phase I study will contain between 12 and 15 subjects with various entry criteria, and that will be a single-arm dose escalating traditional for the Phase I study, although we’ll be treating patients with this experimental disease not healthy human volunteers of course, so it’s more of a Phase I, Phase II type study in that respect, and that’s really all I can say about the timelines I think.

Unidentified Analyst

Thank you.

Operator

(Operator Instructions). And your next question comes from Ron Schmidt. Please go ahead.

Unidentified Analyst

Yes. I just had a question about the deferred revenue that you’re able to recognize in 2013. What quarter did you recognize that in?

Dr. Simon Craw

Thank you. Let me have Jay answer that question. Jay?

Jay Novak

Sure. The deferred revenue was recognized in the fourth quarter, and historically we had a 30-day lag in recognizing revenue for the Skin Care. This is specific to our Skin Care subsidiary, and that is specifically due to the fact that they have a -- the customers have a 30-day return.

Unidentified Analyst

Okay. I think I understand that. Then my question for you is, what was your revenue in the fourth quarter then both gross and then net of the deferral?

Dr. Simon Craw

I believe the deferral…

Jay Novak

The deferral was about $277,000.

Dr. Simon Craw

Right.

Unidentified Analyst

Yes.

Dr. Simon Craw

So, it took $277,000…

Jay Novak

Revenues were about $2.9 million without the deferral, without recognition of the deferrals.

Unidentified Analyst

I was trying to figure out what kind of revenue growth -- you can go back to the past statements, you can quickly, easily identify the revenue growth that’s occurring from quarter-to-quarter also. And I was trying to figure out what kind of revenue growth was occurring in the fourth quarter or sort of natural revenue growth excluding the impact of the deferrals like in (inaudible), just wanted to get a better understanding?

Jay Novak

Yes. Sure. So, the revenue growth was 47% including the recognition of the deferral, which is obviously slightly inflated, but if you take out the recognition of deferral, it is about 33%, so still a pretty healthy rate.

Unidentified Analyst

Is that from the fourth quarter to the third quarter or is that from year-to-year?

Jay Novak

It’s year-over-year.

Dr. Simon Craw

Yes, year-over-year.

Unidentified Analyst

I guess I was interested in what the growth was from the third quarter to the fourth quarter?

Dr. Simon Craw

Okay. Well, can we take the next question, while we look out for that information? We will get back to you on that, Ron.

Unidentified Analyst

Thank you.

Operator

(Operator Instructions). Your next question comes from the line of George [Matal]. Please go ahead.

Unidentified Analyst

Simon, it’s George [Matal].

Dr. Simon Craw

Hello George.

Unidentified Analyst

Hello sir. Good to seeing you at the Roth Conference. My question is companies like Stem Cells have received a tremendous grant from California for the research, are we as a company, as International Stem Cell in line for something like that in non-dilutive funding in addition to albeit a great work you're doing?

Dr. Simon Craw

That's a good question, George. Thanks for that. The short answer is yes, we continue to apply for grants from various non-funding aides -- from various governmental funding agencies that would provide non-dilutive funding for our research and development. We are in the process of applying for a number of [same] (ph) grants through the California Institute for Regenerative Medicine.

It's fair to say that so far we have been unsuccessful in obtaining those grants; I think one of the keys is to have a very strong academic partner to your research, and over the last year or two, we’ve built some very strong links into the local academic community at Sanford-Burnham for example with the addition of Evans Snyder to our scientific board, and I think through those relationships, we can look forward to potentially being more successful in grant applications.

Unidentified Analyst

Thank you.

Operator

(Operator Instructions). And we have no further questions at this time. You may continue.

Dr. Simon Craw

Okay. Let me just cycle back to a question earlier on about the growth in the fourth quarter revenue. Unfortunately, we don't have that data in front of us right now. Is that correct Jay?

Jay Novak

I have the Q4 data, but I do not have Q3 with me here. So, I can tell you that the Q4 data tells me that Skin Care revenues were about $758,000 for the quarter, for the fourth quarter.

Dr. Simon Craw

So Ron, if you’d like to give us a call after this call, we can talk you through it in more detail. If at all, we can refer you to the 10-Q that was published in November and reference the K that we just issued. So with that, I’d like to close the call and thank everyone for joining us this morning on this update. Thank you.

Operator

Ladies and gentlemen, this concludes the conference call for today. And thank you for participating. And please disconnect your lines.

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