International Stem Cell (OTCQB:ISCO) 2012 Earnings Call March 28, 2013 11:00 AM ET
John Simon Craw - Executive Vice President of Business Development and Investor Relations
Linh T. Nguyen - Chief Financial Officer, Principal Accounting Officer and Secretary
Good morning, ladies and gentlemen, and thank you for standing by. And welcome to the International Stem Cell Corporation Year-End 2012 Business Update Conference Call. [Operator Instructions] This conference is being recorded today, Thursday, March 28, 2013.
I would now like to turn the conference to our host, Mr. Mark McPartland. Please go ahead, sir.
Thank you, operator, and good morning, everyone. Joining us today for International Stem Cell's fourth quarter and full year 2012 financial results conference call are the company's Executive Vice President, Dr. Simon Craw; and Chief Financial Officer, Ms. Linh Nguyen. Dr. Craw and Ms. Nguyen will review and comment on the financial and operation results for the fourth quarter and will be available for questions and answers after their prepared comments.
Now before we begin, I'd like to remind our listeners that on this 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 question. Therefore, the company claims protection for the Safe Harbor statement in the -- contained in the 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 used 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 aren't able to listen to the entire call today, there will be an audio replay available, and the call is also being webcast so you can log in via the Internet to review at a later time as well. All details were provided on the conference call announcement and in the press [indiscernible] filed from yesterday. You may also find more information on the company's website located at internationalstemcell.com.
At this time, I'd like to turn the call over to Dr. Simon Craw, who will provide opening remarks. Dr. Simon, the call is yours.
John Simon Craw
Thank you, Mark, and good morning, everyone, and thank you for joining us to discuss International Stem Cell's fourth quarter and full year 2012 financial results and business update.
2012 was a very productive year for International Stem Cell's. Our R&D team has delivered a number of significant achievements over the course of the year. And while I don't propose to go through them all, I would like to highlight a few.
Firstly, in our Parkinson's disease program. We've looked at toxicology and pharmacology of our neuronal cells in rodent to non-human primate models of the disease, and it's an important achievement to demonstrate the potential medical benefit of what we believe to be a [ph] clinical product. This preclinical data was announced at the recent Annual Meeting of the American Academy of Neurology and was the subject at the Sanford Conference Call that many of you may have participated in last week. A summary of the presentation can be downloaded from our website.
Importantly, the primate study was done in collaboration with Professor Evan Snyder, the world-renowned Neurobiologist and Director of Stem Cell and Regenerative Medicine at the Sanford Burnham Medical Research Institute. Professor Snyder is also Head of the FDA's Advisory Committee, the Cellular, Tissue and Gene Therapy, and so in an excellent position to give us advice on how we navigate the FDA's approval process. This will become increasingly important in 2013 as our interactions with the FDA increases.
I believe we are now ready to move our Parkinson's disease program through to IND and into Phase I clinical trials over the next 1 to 2 years. And once we have safety data in humans, many other areas open up for us, for example, stroke or traumatic brain injury. If we are successful here, in 12 months, we will be a very different company to what we are today.
In 2012, we successfully completed the first phase of our stem cell banking program, setting up the IVF clinics, the GMP processes, recruiting a pool of donors and generating new clinical grade human parthenogenetic stem cell lines to use in future clinical trials. We also made important advances in our liver program, showing how our liver-like cells can treat congenital liver diseases using rodent models of such diseases, and received a patent protecting our method of creating liver and pancreas cell precursors. And in our eye care program, we showed how to create endothelial-like cells, an essential component of the 3D corneal structures, and we continue our collaboration with the Sankara network of hospitals in India.
The last achievement from our scientific group that I want to discuss is a new method we have developed of producing iPS cells. Our method should be safer than current approaches that rely on viruses. So let's talk about iPS for a minute for what it is. Induced pluripotent stem cells, or iPS, are becoming increasingly popular in regenerative medicine, and the inventor of the technology, Professor Yamanaka, was awarded last year's Nobel Prize in Physiology or Medicine. And many biotech companies are now adopting iPS cells as a platform. However, there are 2 serious issues with this technology: firstly, the safety of the sales, a primary concern of the FDA, is open to question and a potential roadblock primarily because of the use of viruses; secondly, the majority of the intellectual property around iPS cells is controlled by a very few organizations, making it very difficult and expensive to commercialize a therapeutic product based on this technology. We believe that our newly developed iPS technology solves both of these problems. Our method does not rely on viruses, nor does it rely on other people's intellectual property. Further developing these safe iPS cells will be one of the focus areas of our R&D group in 2013.
I hope you appreciate the progress we've made. Now I'm going to switch gears and talk about our commercial organizations. So at first glance, the flat sales we reported for the corporation overall may be slightly disappointing. But in actual fact, they hide a number of successes. Lifeline Cell Technology grew by 14% compared to 2011, while at the same time, controlling costs more effectively than previously, and we expect to see this trend continue in 2013. Although skin care sales were down 11% on 2012, remember, in the first half of 2012, we significantly altered our sales and marketing strategies, moving away from our closed coupled agreements that we previously have and rebalancing sales with a greater focus on professional channels, such as dermatologists, med spas and day spas. And although skin care sales in dollar terms were slightly down, sales volume, the actual number of sales, was up significantly by over 40% in fact, with like-for-like sales volume, up by 1/3. We can also see the effects of our expanded marketing effort as sales for the fourth quarter, helped by the launch of our new eye serum product, grew by about 38% on top of the 46% growth that we saw in the third quarter.
Lastly, I want to briefly touch upon our cash burn. Now Linh will talk about this in more details in her presentation. But even though we already had one of the lowest burn rates in the industry for a company of our size and type, we have managed to reduce it further, and done this without comprising on our very significant R&D objectives and achievements. This diligence is an outstanding achievement and something that we are very proud of.
With that, I'll pass over to our Chief Financial Officer, Linh Nguyen, who will provide additional details regarding our financial statement. I'll be available to answer questions after Linh finishes her presentation. Thank you.
Linh T. Nguyen
Thank you, Simon, and good morning, everyone. Thank you for joining us this morning. I'd like to provide you with a review of our financial performance for the full year of 2012. As you may be aware, we filed our 10-K and issue a press release with our results within the last few days. Please refer to that filing for more detailed information.
I'd like to begin the financial report by reflecting back on 2012. It was certainly a year of exciting challenges and achievement for the company. As Simon mentioned earlier, we made good progress in our core research and development activities.
For the skin care business, we continue to expand our sales and marketing initiative to better penetrate the market. We launched a new eye cream in November, which has a [indiscernible], a meaningful addition to our product portfolio.
For the cell technology business, not only did we focus on expanding sales, we implemented initiatives to better our manufacturing method and processes, which evidently resulted in improvements in both sales and cost of sales. The incidental revenue we generated from the 2 businesses help support our primary therapeutic program, and we hope it will bring us closer to achieving our core mission.
So for the 12 months ended December 31, 2012, sales were $4.6 million compared to $4.5 million in 2011. Lifeline Cell Technology sales were approximately $2.4 million, up 14% from 2011, representing 52% of total revenue in 2012. The increased sales for 2012 -- for LCT resulted from higher demands from our OEM, customers and distributors.
Sales from Lifeline Cell -- Skin Care were approximately $2.2 million compared to $2.5 million in 2011, down 11% from 2011, representing 48% of total revenue in 2012. The decrease was due to higher discount granted to certain sales channels as part of our continuing strategic effort to expand our sources of revenue.
Next I will take you through the components of our development expenses. Cost of sales was $1.3 million or 28% of revenue compared to $1.6 million or 36% of revenue in 2011. We achieved favorable reductions in cost of sales due to efficiencies in our manufacturing and supply chain management for both LSC and LCT. Research and development expenses were $3.6 million in 2012 compared to $4.4 million in 2011, representing a decrease of 19%. As we progress closer to human clinical trials, we reduced our investment in basic research but increased spending in preclinical development. We incurred marketing expenses of $2.1 million in 2012, reflecting an increase of 40% from $1.5 million in 2011. This is due largely to increases in advertising spending, logistics and expenses related to the expansion of sales and marketing infrastructure for skin care. We believe the investments in advertising, marketing and promotion for our skin care products help build and promote awareness and strengthen our brands as evidenced by the upward trend in sales for skin care for the second half of 2012. At the same time, we continue to monitor and optimize our marketing spending.
General and administrative expenses in 2012 were $7.4 million, reflecting a decrease of 11% compared to $8.4 million in 2011. This is result -- this has resulted primarily from our effort to streamline the operating cost structure. The decrease was partially offset by an increase in legal fees of 303 -- $343,000 relating to capital raising activities and corporate matters and other expenses related to corporate governance.
Net loss for development activities was $9.8 million compared to $11.4 million in 2011, reflecting a substantial reduction of $1.6 million or 14%. The substantial improvement was driven by favorable reductions in cost of sales, research and development and general and administrative expenses.
Fiscal ended the year with approximately $0.7 million in cash and cash equivalents. As you may recall, for working capital purposes, we raised approximately $7 million in the first quarter of 2012. Of this amount, $5 million was raised from the issuance of 5 million shares of preferred stock and the remaining $2 million from the issuance of 5 million shares of common stock. We paid dividends of $237 to our preferred stockholders in 2012. I am pleased to report that in October of 2012, to help reduce our cash burn, the holders of all of the outstanding shares of Series D and Series G preferred stock irrevocably waived their right to receive any and all accrued but unpaid dividends on and after September 30, 2012 on the Series D and Series G preferred stock. Our cash used for operation was $6.7 million for the 12 months ended December 31, 2012, which represent a slight improvement compared to the prior year.
Looking ahead, let me emphasize that our goal and commitment continues to be centered around 3 primary objectives: firstly, achieving scientific milestones for our therapeutic program; secondly, optimizing revenue for both skin care and stem technology businesses to help support our therapeutic research efforts; and lastly, managing our cash burn and streamlining our cost structure effectively. I believe that focusing on these priorities will help bring us closer to achieving our core mission.
That completes my review of our financial results. And with that, I'd like to turn the call over to Simon for closing comments.
John Simon Craw
Thank you, Linh. I'd like to conclude by saying that I believe 2012 has been one of the most productive years for ISCO, both in terms of R&D and operational achievements, many of which we've discussed above. I think 2013 will bring a lot of benefit as well as some new challenges, but I'm excited and look forward to delivering on the goals that we've set ourselves.
Thank you for your time and attention. We're now happy to answer any questions you may have. Operator, you may open the lines for questions, please.
[Operator Instructions] And our first question comes from the line of Douglas Baine [ph] with -- private investor.
My question relates to your ongoing funding efforts for 2013. Do you plan any additional capital raising efforts for the next 3 months?
John Simon Craw
Douglas, thank you for your question. Let me just say, because we have an S-1 registration document on file and prevented from talking about the details of our financing via SEC regulations. However, I can say that we've successfully raised about $3 million so far this year from a group of existing shareholders. But as we all know, biotechnology is a highly capital intensive process, and both management and the board continue to evaluate fundraising opportunities.
[Operator Instructions] Our next question comes from the line of George Carpenter [ph] with Westward Capital [ph].
Just a quick question here. I have been told in the past that your development of the stem cell bank could probably be done with no more than 50, 5-0, lines of parthenogenetic stem cells. Having gotten to 15, is your belief still that 50 will do it, or might you be able to do it with fewer lines or might you need more lines of parthenogenetic stem cells to do the immune system matching of most of the people on the planet?
John Simon Craw
That's a great question, and it's actually a little bit difficult to answer because the more lines that we have in the bank, the greater the coverage that we are paying. But it's somewhat a process of diminishing returns. And I believe once we have 25 lines of the correct HLA types, then we can cover approximately 35% of the U.S. population. And as we increase the number of lines, we increase the level of population coverage. But it is nowhere near linear and it does tail off above 50 lines where it becomes really unproductive to get those -- to attempt to collect those rare HLA types in the population. So I think to answer your question, is 50 a good number to stop? I think, yes. Could it be less than that? I think, yes, also.
And our next question comes from the line of Stephen Bennick [ph] with MCS Newport Coast [ph].
Mr. Bennick [ph], your line is open.
I just have one question. Can you comment on the stock price at all? Do you have any feel for what's going on there?
John Simon Craw
Stephen, [ph] this is Simon. Obviously, I don't think I can comment directly. It's -- the volatility in the stock prices is obvious but hard to predict, and I'm not even going to try and attempt to explain it unfortunately. All we can do as a corporation is focus on our scientific and business objectives and executing on our plan and communicating our plan effectively into costs such as this, and believe that the market will eventually recognize our successes and reward us in terms of our stock price.
I have one more question to follow-up here. Given -- with the convertible stock and everything, how many shares do you have outstanding?
John Simon Craw
I'm going to pass up to Linh, please, could you answer that?
Linh T. Nguyen
So as of today, we have over 111 million shares on a fully diluted basis.
And that includes convertibles that -- convertible notes that are -- have not been converted?
Linh T. Nguyen
That is correct.
[Operator Instructions] Dr. Craw, there are no -- there appears to be no additional questions at this time.
John Simon Craw
Okay. Well, let me just conclude by thanking everyone for joining us this morning, and I look forward to the -- speaking with everyone again on the next call. Thank you.
Ladies and gentlemen, this concludes our conference for today. Thank you for your participation. You may now disconnect.
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