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Executives

Dr. Simon Craw - EVP

Jay Novak - CFO

Analysts

Tony Bruno - Private Investor

International Stem Cell Corporation (OTCQB:ISCO) Q1 2014 Earnings Conference Call May 14, 2014 11:00 AM ET

Operator

Thank you, and good morning, everyone. Joining us today for International Stem Cell's First Quarter 2014 Business Updates and Financial Results Conference Call are the company's Executive Vice President, Dr. Simon Craw; and Chief Financial Officer, Jay Novak. Dr. Craw and Mr. Novak will review and comment the financial and operational results for the first quarter, and will be available to answer questions afterwards.

Before we begin I'd 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. 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. Please go ahead, sir.

Simon Craw

Thank you, operator, and good morning everyone, and welcome to International Stem Cell's first quarter business update and financials results today. I'm joined on this conference call by our Chief Financial Officer, Jay Novak, who will be providing the details, overview of the financial position of the -- financial performance of the company.

Firstly, I'd like to start by talking about the financial performance myself very briefly. These continue to be challenging times, and we have seen some erosion in our stock price this year. We believe this is a general trend of outflow from biotechnology, and especially regenerative medicines. We are not alone in seeing this erosion, and it's not necessarily a reflection on ISCO's performance of the company which I think has been exceptional.

If we look at the performance very quickly we grew our sales this quarter compared to first quarter of 2013 by 28%, which was an outstanding achievement from our sales and marketing organization. We did see an increase in expenses in our Skin Care unit. This was partly related to additional clinical study that we undertook to help us develop the benefit of our breakthrough Skin Care products, and also research and development on new products that we've been developing and intent to launch later this year or next year.

We also added more independent sales reps to our Skin Care organization and indeed two regional managers to the professional sales channel in this quarter.

With Lifeline Cell Technology we added an additional sales person last year to the domestic sales organization, and we announced starting to see the benefit of that investment flow-through to increase domestic sales. This quarter we've been focusing on the international distributors finding more markets overseas and moving the distributors that we have from on a exclusive basis to a non-exclusive basis, so that we couldn't potentially have more than one distributor per territory. And we think this is a way that we can grow the business now more quickly overseas.

We also saw increases in expenses associated with the therapeutic research, something we were expecting as we get closer to our IND milestone. Jay will say more about financial performance of the company in a moment. So, let me now focus on some of the scientific milestones that we achieved this quarter.

Now to remind everyone, ISCO's Parkinson's disease program usually human parthenogenetic neural stem cells, which were a novel therapeutic cellular product derived from the company's proprietary histocompatible human pluripotent stem cells. Neural stem cells are self-renewing multipotent cells that are precursors to all the main cells of the nervous system. And the ability of neural stem cells to differentiate into dopaminergic neurons and to express neurotrophic factors protect the midbrain system offers a new opportunity for the treatment of Parkinson's disease, especially in cases like current pharmaceutical products fail to adequately control symptoms.

ISCO's treatment is a one-time injection of cells into the brain. And this one-time injection may well last the lifetime of the patient.

So, firstly we had a very productive meeting with the U.S. FDA office of Cellular, Tissue and Gene Therapy products. The formal pre-IND meeting we held in January was important for us for many reasons. Firstly, to get a quick assessment of our preclinical plans and make sure that our manufacturing plans and animal studies are closely aligned with the FDA's expectations. And we anticipate completing the pharma -- the primate pharm/tox study this year and the rodent tumorigenicity study in the early part of 2015. Building on the FDA's feedback into our preclinical plans makes our IND submission that much stronger and increases our chances of posted review when we do submit.

Secondly, obtaining feedback on our proposed Phase 1 clinical study design was essential in order for us to be out to begin the study, which everyone should remember will be done at Duke University under the guidance of Professor Mark Stacy M.D., who is the Vice Dean of Neurology, as soon as possible. The study will be a single-arm open label dose escalating study looking at the safety, tolerability and efficacy, enrolling subjects with moderate idiopathic Parkinson's disease. Patients will be treated with ISCO's neural stem cells and assessed over a 12-month period.

The next important milestone we completed this quarter was the announcement of the three months data from the pharm/tox primate study. This was the first time point in the 12-month study, and so we're not necessarily looking for efficacy data. The more the that health of animals not deteriorated and it was gratifying to see that over the period the majority of the animals actually showed signs of improvements in their Parkinson's symptom.

And subsequent to the end of the quarter we recently announced top line data from the same study, but this time with the six-month time point, where the primates are continuing to show improvements in both their healthy behaviors scores which is equivalent to the human UPDRS Part 2 rating scale, and their Park score which is equivalent to the UPDRS Part 3 in the human scale. We'll talk more about those six months data in the next quarterly update.

At this point, I'd like to pass things over to Jay. And Jay will review the financial performance of the company. Jay?

Jay Novak

Thank you, Simon, and good morning everyone. Thank you for joining us for the call this morning. I will review with you our financial performance for the first quarter of 2014. We filed our Form 10-Q with the SEC, and issued our press release with the results yesterday. Please refer to those documents for more detailed information.

Sales for the first three months ended March 31, 2014 were $1.6 million, up 28% from 1.3 million in the first quarter of 2013. Revenues for our Lifeline Cell Technology subsidiary were $846,000, up 33% year-over-year, while Lifeline Skin Care revenues rose 803,000, up 24% from last year.

As far as the distribution of sales between the subsidiaries is concerned, we continue to experience a relatively even split between our two subsidiaries, which is similar to prior year.

Now, moving on to our costs, our cost of sales was $439,000 for the first quarter or approximately 27% of our revenues compared to $334,000 or 26% of revenues. This is consistent with the first quarter of 2013. Gross profit was approximately $1.2 million up 27% year-over-year while our gross profit margin was 73% in Q1 2014 versus 74% in 2013, again, relatively consistent.

Our subsidiaries gross margin stayed stable during the first quarter as compared to the first quarter of last year. R&D expenses were $958,000 for the quarter compared to 721,000 for the first quarter of last year. This represents an increase of 33% over the prior year. This increase was primarily due to continuing investments in our research programs as Simon mentioned. We had specific emphasis on our ongoing preclinical studies in Parkinson's disease as we work towards our goal of filing an IND in that indication.

Marketing expenses during the current quarter were $669,000 up 31% from 511,000 in the corresponding period of last year. Marketing spending increase reflecting our efforts to promote and support to growth of our revenue generating businesses with the primary increase coming from our Skin Care business to address targeted growth in the various sales channels.

G&A expenses were $1.6 million representing an increase of 216,000 or 15% compared to 1.4 million for the comparable period a year ago. The two main contributors to this increase are consulting expenses related to investor relations and professional accounting and corporate governance cost. The latter was due to timing differences related to having our annual meeting earlier this year compared to 2013 which pushed some of our annual meeting related cost into the first quarter this year.

Our loss from operations was $2.1 million during the first quarter of 2014 compared to 1.7 million in the same period last year representing an increase in losses of approximately 20%. As far as below the line items are concerned as described in detail in our 10-Q, the characteristic of our July financing transaction require us to record the change in fair value of our warrants as below the line items income or expense on our income statement. During the first quarter we have recorded $623,000 below the line income related to the change in fair value of our warrant liabilities. Regardless of whether we show income or expense from the change in warrant liability, it is important to note that this is a non-cash item.

Our bottom line net loss for the first quarter of 2014 was $1.4 million compared to 1.7 million during the corresponding period in the prior year representing a decrease in net loss of approximately $277,000. Net loss is attributable to common shareholders on a per share basis with one penny in the first quarter of 2014 compared to two pennies in the same period last year.

Our cash and cash equivalents totaled $991,000 at March 31, 2014 compared to 2.2 million at prior year end. We received approximately $1.1 million from issuing 5.2 million shares of our common stock through our equity line in the first quarter of 2014. In addition we invested $156,000 in capital and patent expenditures year-to-date in 2014 which is consistent with the prior year.

Our current burn rate is approximately $677,000 per month compared to 620,000 during the first quarter of 2013 primarily due to increased cash outplays for our R&D as we move towards our IND filing as well as increases in other operating expenses.

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

Dr. Simon Craw

Thank you, Jay. Thanks for that summary. So, an exciting quarter for the company, everybody, achieving a number of the key milestones in the Parkinson's disease, expanding sales forces and growing revenues again which I think is the seven successive quarter now on a year-on-year basis that we've grown sales.

So, thank you everyone for joining us this morning. And we will now open the call for questions. Operator, can you open the lines please?

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We have a question now from Donald [Schuma] (ph), Private Investor. Please go ahead.

Unidentified Analyst

Good afternoon or morning. My question is I have heard nothing recently on the retina or cornea [rather] (ph) that we started over a year or so ago, and I have seen nothing in relation to the research on that. Is there anything continuing or anything happening in that front?

Dr. Simon Craw

Yeah. Let me take that from Donald. Thanks for the question phonetically. We think focusing our R&D efforts on our primary objective of filing an IND for Parkinson's disease using novels and we believe prime evolutionary neural stem cells that we've developed over the last couple of years. We are still continuing research in cornea and retina and indeed liver. But main focus now is really moving the dial on Parkinson's and pulling that program over the finish line in terms of the IND goal.

An interesting sign, Donald, is that actually neural stem cells, the product we're developing for Parkinson's which could also be used in things like stroke and traumatic brain injury and spinal cord damage, can also be used for treating age-related macular degeneration. So there is a lot of scientific evidence that those cells could be used in the retina. And so we see a lot of opportunity there for us. We just haven't announced any formal progress in any of those areas this quarter.

Unidentified Analyst

Thank you very much.

Jay Novak

Thank you.

Dr. Simon Craw

Thanks for the question.

Operator

Thank you. (Operator Instructions) We will have another question from Tony Bruno, Private Investor. Please go ahead.

Tony Bruno

I was curious to see how the sales are going with the expansion with the Lifeline products into Mexico?

Dr. Simon Craw

The Skin Care sales, I think it maybe a little early for us to give any indication of how the Mexican accounts are going. Jay, would you like to comment?

Jay Novak

Sure. We actually signed our agreement towards the end of the first quarter.

Dr. Simon Craw

Yeah, it was actually (indiscernible) I believe in second quarter.

Jay Novak

Okay. And we actually have some limited revenues that we booked for the first shipment and that went out almost the last couple of days of the quarter, somewhere -- I don't want to give you the wrong information, but somewhere to the tune of about $20,000 to $30,000. Again, it was just an opening order.

Dr. Simon Craw

I think, Tony, it's really a little bit early to say with us only just opening that to that relationship and not saying it more than one or two orders at this point in time.

Jay Novak

Correct.

Tony Bruno

Understood. Thanks, guys.

Dr. Simon Craw

Thank you.

Jay Novak

Thank you.

Operator

Thanks. There appears to be no further questions. Please continue if there is any other you wish to make.

Dr. Simon Craw

Okay. I'd just like to wrap up and thank everyone for joining us on this call. I think you can see it's been an interesting and productive quarter, and we hope you can all join us on the second quarter business update in three months time. Thank you.

Jay Novak

Thank you all.

Operator

Thank you. Ladies and gentlemen, this concludes the conference call. Thank you for participating. You may now disconnect.

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