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Executives

Simon Craw - Executive Vice President

Jay Novak - Chief Financial Officer

Analysts

Dan Trang - Stonegate Securities

International Stem Cell Corporation (OTCQB:ISCO) Q2 2014 Earnings Conference Call August 12, 2014 11:00 AM ET

Operator

Thank you, ladies and gentlemen. Good morning, everyone. Joining us today for International Stem Cell’s Second Quarter 2014 Business Update 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 on financial and operational results for the second quarter and first half of 2014 and will be available to answer questions afterwards.

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 website located at www.internationalstemcell.com.

I will now pass the conference over to Dr. Craw. Please go ahead, sir.

Simon Craw - Executive Vice President

Good morning everybody. I would like to start this morning’s conference call by talking about some important milestones that we have achieved in our Parkinson’s disease program this quarter.

Now, to remind everybody, our Parkinson’s disease program uses human parthenogenetic neural stem cells, a novel therapeutic cellular product derived from our proprietary human pluripotent stem cell platform. These neural stem cells are self-renewing multipotent cells that are precursors for all the major cell types of the central nervous system. And these neural stem cells offer a new potential opportunity for the treatment of Parkinson’s disease. A disease of between 7 million and 10 million people suffer from worldwide and for which there are approximately 60,000 new cases diagnosed each year in the United States. There are no truly effective treatments for Parkinson’s disease.

So to the milestones, firstly, at the American Academy of Neurology Annual Meeting in Philadelphia, our Chief Scientific Officer, Dr. Ruslan Semechkin presented the latest data from our ongoing IND-enabling primate pharm/tox study. The data showed that the primates are demonstrating improvements in their behavior on Park scores, which corresponds to the Universal Parkinson’s Disease Rating Scale, the standard scale used to rate patients with Parkinson’s disease.

To remind everyone on the call, that this is a 12-month study using 18 primates and is primarily focused on safety endpoints, including toxicology and the biodistribution of the cells. However, it’s a good sign that we are seeing behavioral improvements as majority of the animals have shown significant improvement, including a return of many normal behaviors. For example, their top line efficacy data at the six months time point showed the healthy behavior scores for the treatment group increased by more than – by 170%, while that of the control group increased only by 58%.

In addition, one of the treatment groups demonstrated a significant improvement in the main Parkinson’s rating score of 63% with a P value of 0.05. While there was no significant improvement in the control group, the changes in these scores are particularly noteworthy as it signifies a greater reduction in the severity of the symptoms in the treatment group compared with the control group.

In the second quarter, we also completed the acute toxicity study in the Parkinson’s program. This study used wraps and was designed to look at the tolerability of our human neural stem cells at extremely high doses. The outcome of this study demonstrated that our clinical product human neural stem cells appears to be extremely well tolerated at doses well beyond our proposed clinical dose in humans. We intend to communicate a more detailed summary about Parkinson’s disease program including a status update on the ongoing studies and an indication of when we expect to complete the preclinical program sometime in this third quarter.

Now right to the end of the second quarter and actually reporting in early July, we also signed a research agreement with Rohto Pharmaceutical Company Limited, a large global Japanese pharmaceutical company with a strong presence in ophthalmology including products sold in the U.S. under the Mentholatum brand name. This was an important agreement for us as it provides strong validation for both our intellectual property position in human parthenogenetic stem cell technology and our scientific credentials in the publications that we have published over many years of work in this field. We expect to report progress on the agreement with Rohto before the end of June 2015.

Lastly in the quarter and on the commercial slide Lifeline Skin Care, our wholly owned subsidiary signed a distribution agreement with Grupo Venta the largest distributor of aesthetic products in Mexico. Grupo Venta will distribute Lifeline’s break through anti-aging skin care products that are used as an extract from a proprietary stem cell platform. As the listeners probably know expanding internationally in North America and Asia is a key growth strategy for Lifeline Skin Care and Grupo Venta with 85% sales force is an important part of that strategy. Although it’s too early to report sales from this new relationship, we look forward to strong growth in this area.

At this point I would like to pass things over to Jay, our Chief Financial Officer to review the financial performance of the company. Jay?

Jay Novak - Chief Financial Officer

Thank you, Simon and good morning everyone. Thank you for joining us for the call this morning. I will provide you with a brief review of our financial performance for the second quarter of 2014. Our Form 10-Q is on file with the SEC since last Friday. And this morning as you probably know we have issued a press release with our results. Please refer to those documents for more detailed information.

First let me talk about sales. Sales for the quarter ended June 30, 2014 were $1.6 million, up about 9% from $1.5 million in the second quarter of 2013. Revenues for of Lifeline Cell Technology subsidiary or LCT were $842,000, up 13% year-over-year while Lifeline Skin Care of LSC revenues were $746,000, up 5% from last year. We are continuing our strategy to diversify our LCT customer base and move towards non-exclusive arrangements with some of our distributors where this makes sense. Accordingly our OEM sales for LCT represent a growth area for us.

For the Skin Care subsidiary we are building our professional sales channel and accordingly recently hired 12 independent sales reps and now have a national sales force and this channel represents significant growth area for us with untapped market potential. In addition, we have introduced and will plan on introducing new Skin Care products as we continue to build our product offerings. For example in July, we have introduced our Brightening Cleanser to the marketplace. As far as the distribution of sales between the subsidiaries LCT contributed $842,000 or 53% of revenues compared to LSC contributing $746,000 or 47% of revenues. This compared to a relatively even split between our two subsidiaries in the prior year.

Now moving on to costs, our cost of sales was $409,000 for the quarter or approximately 26% of revenues compared to $329,000 or 23% of revenues. The slight increase here in our cost of goods as a percentage of revenues is the result of LCT sales mix and LSC’s distribution of revenues between the various sales channels. I will talk about that a little more in a moment.

Gross profit was approximately $1.2 million, up 5% year-over-year, while our gross profit margin was 74% in Q2 2014 versus 77% in 2013. LCT had a 62% gross margin for the second quarter in 2014 versus 65% in the same quarter last year. This was caused by primarily a shift in sales mix from higher margin products to lower margin items in the current quarter. This was as previously mentioned shown in our increased OEM sales. LSC had an 88% margin in the current quarter versus 90% in the same period last year primarily due to lower portion of sales being recorded from internet sales as compared to other sales channels. Historically, internet sales for Skin Care had the highest margins for us.

Now, on to R&D, as Simon mentioned, we have done a lot of work in R&D this quarter. R&D expenses were $1.4 million for the quarter compared to $974,000 for the second quarter in 2013. This represents an increase of over 45% from the prior year. This increase was primarily due to continuing investments in our research programs with a specific emphasis on our ongoing preclinical studies in Parkinson’s disease as we continue to work towards our goal of filing an IND in that indication next year. As we continue on our path to IND filing in Parkinson’s disease, we anticipate increased spending on preclinical studies to obtain sufficient data to support our filing. In addition, we recently announced stroke as an additional indication we will pursue with Tulane University in an effort to continue to build our pipeline.

Selling and marketing expenses during the quarter were at $679,000 approximately the same amount as the corresponding period last year. We continue to experience relatively high level of sales and marketing expenses as we invest in our independent sales reps infrastructure for our Skin Care business.

G&A expenses were $1.3 million, representing a decrease of $330,000 or 20% compared to $1.6 million for comparable period a year ago. The decrease in spending is primarily the result of lower employee related cost, consulting cost and lower stock-based compensation expense. It’s important to mention here that timing is also a factor here as our annual meeting costs were in the second quarter of last year as we had booked those in the first quarter in the current year.

Our loss from operations was $2.2 million during the second quarter of 2014, which is consistent with the prior year as our increased revenues, lower G&A expenses were offset by higher R&D expenses as we increased our spending on IND-enabling studies. Below the line, we have recorded a total of $2.2 million in other expense items related to our warrants. This consisted of a $1.3 million decrease in the fair value of warrant liabilities offset by a warrant exchange inducement expense of $3.4 million.

Our bottom line net loss for the second quarter of 2014 was $4.4 million compared to $2.2 million during the corresponding period in the prior year, with the increase in loss due to below the line expense related to the warrant exchange transaction that I previously mentioned.

Now, on to our cash position, our cash and cash equivalents totaled $748,000 at June 30, 2014 compared to $2.2 million in the prior year end. We received approximately $2.4 million from issuing 8.2 million shares of our common stock through our equity line as well as $1.1 million from the sale of 8.8 million shares to Dr. Andrey Semechkin, our CEO and Co-Chairman and Dr. Ruslan Semechkin, our Chief Scientific Officer and Director.

In addition, we invested $558,000 in capital and patent expenditures year-to-date in 2014 compared to $370,000 invested in 2013. Our current burn rate is approximately $560,000 per month compared to $480,000 during the second quarter or during the same period last year. The increase in burn rate is primarily due to increased cash outlays for R&D program as we move towards our IND filing as well as increases in other operating expenses.

Our cash position remains challenging, but as we mentioned in our press release today, our CEO and Co-Chairman, Dr. Semechkin continues to be committed to supporting the company until such time as additional investment can be obtained with more acceptable term to us.

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

Simon Craw - Executive Vice President

Thank you, Jay. So everyone an exciting quarter for the company both financially and from a business perspective, we have achieved another couple of the milestones on the Parkinson’s disease program and announced the expansion of our pipeline to include a new stroke program and we continued to deliver revenue growth. I would like to thank everyone for listening and dialing in this morning and we will open the call to questions.

Operator, if you could open the line for questions please.

Question-and-Answer Session

Operator

Absolutely, Dr. Craw. (Operator Instructions) We will hear first from Dan Trang with Stonegate Securities.

Dan Trang - Stonegate Securities

Hi, Simon. Congrats on a strong quarter.

Simon Craw

Thank you, Dan.

Dan Trang - Stonegate Securities

I am kind of wondering if you could provide a little more color behind the research agreement with Rohto and what that’s going to be able to allow you to do on the research side?

Simon Craw

Yes, we – Dan, we’re kind of limited in what we can say by confidentiality. But what I can tell you is that Rohto are evaluating a number of our cell lines in various animal markings of ophthalmology indications. And with the option to sign a definitive license agreement if the results of the preclinical experiments go well, if they liked it the results that they’re seeing, what I can tell you is that we have – we have a longstanding interest in this area are our sales through our retina and cornea programs. And we have done – we have worked in this area for many years and we are very confident that the experiments that Rohto are undertaking will have a positive outcome for the company because of our experience in this area. Rohto really said that they don’t want us to disclose what indications they are working in, but they are obviously very strong in ophthalmology indications including in their U.S. subsidiary. And so that’s really about all I can say. You can expect an update before the middle of next year. We hope it will be earlier than the 12 months time point, which is sort of end of June 2015. It will be nice if we could conclude these preliminary experiments well before that, but at the moment, we are not committing to communicating before that point.

Operator

(Operator Instructions) Mr. Trang, do you have any further questions?

Dan Trang - Stonegate Securities

No.

Operator

(Operator Instructions) And Dr. Craw, no further questions, my apologies, we do have a question from George (indiscernible).

Unidentified Analyst

Congratulations on an excellent quarter to both the management team and Jay, they are track to achieve the milestones. A question before we had tremendous online presence, more recent probably in the investment community and that’s being curtailed, the opportunity starting in the fall resume their online commitments and you get the story out to more of the marketplace and more of the financial community as you progress?

Simon Craw

Well, good morning, George. Good to hear you on the call and thanks for getting on with us. And regarding your question, yes, we – are you referring to our sort of previous arrangements? We don’t see the need to maintain that level of spending that we spent in the first quarter on our outreach activities. We expect that to be curtailed somewhat in the third and fourth quarters. We do continue to – continue in our outreach activities in a number of ways through strategic arrangements we have with investment relation firms and other arrangements, but we don’t see the level of spending to be the same as the first quarter. Does that answer your question, George?

Unidentified Analyst

Yes, I appreciate it. Keep up the good work. Thank you.

Simon Craw

Thank you.

Operator

(Operator Instructions) Dr. Craw, I will turn the conference back to you for any closing or additional remarks.

Simon Craw - Executive Vice President

Thank you, operator. Well, I would just like to say thank you everyone for joining us this morning. Hopefully, we will see everyone on the next quarter’s call and please look out for the updates on the Parkinson’s disease program. I think it will be a good summary of where we are and where we are going in this program. So, thanks everyone for joining us this morning.

Operator

And again, ladies and gentlemen, that does conclude our conference for today. We thank you all for your participation.

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Source: International Stem Cell (ISCO) Q2 2014 Results - Earnings Call Transcript

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