INTERNATIONAL STEM CELL CORPORATION The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes and other financial information included elsewhere in this Annual Report on Form 10-K. The discussion contains forward-looking statements, such as our plans, expectations and intentions (including those related to clinical trials and business and expense trends), that are based upon current expectations and that involve risks and uncertainties. Our actual results may differ significantly from management's expectations. The factors that could affect these forward-looking statements are in Item 1A of Part I of this report. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any expectations expressed herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment by our management.
Business Overview
We have generated aggregate product revenues from our two commercial businesses
of
Our products are based on multi-decade experience with human cell culture and a
proprietary type of pluripotent stem cells, human parthenogenetic stem cells
("hpSCs"). Our hpSCs are comparable to human embryonic stem cells ("hESCs") in
that they have the potential to be differentiated into many different cells in
the human body. However, the derivation of hpSCs does not require the use of
fertilized eggs or the destruction of viable human embryos and also offers the
potential for the creation of immune-matched cells and tissues that are less
likely to be rejected following transplantation. Our collection of hpSCs, known
as UniStemCell™, currently consists of 15 stem cell lines. We have facilities
and manufacturing protocols that comply with the requirements of Good
Manufacturing Practice (GMP) standards as promulgated by the
COVID-19 Pandemic
The impact of the COVID-19 pandemic has been and will likely continue to be extensive in many aspects of society, which has resulted in and will likely continue to result in significant disruptions to the global economy, as well as businesses and capital markets around the world. Impacts to our business have included a reduction in sales volume primarily from media sales in our biomedical market segment and professional channel sales in our anti-aging market segment, temporary or reduced occupancy of portions of our manufacturing facilities, and disruptions or restrictions on our employee's ability to travel to such manufacturing facilities which caused minor delays in manufacturing. We have taken precautionary measures to better ensure the health and safety of our workers.
The scope and duration of these delays and disruptions, and the ultimate impacts of COVID-19 on our operations, are currently unknown. We are continuing to actively monitor the situation and may take further precautionary and preemptive actions as may be required by federal, state or local authorities or that we determine are in the best interests of public health and safety. We cannot predict the effects that such actions, or the impact of COVID-19 on global business operations and economic conditions, may continue to have on our business, strategy, collaborations, or financial and operating results.
Market Opportunity and Growth Strategy
Therapeutic Market - Clinical Applications of hpSCs for Disease Treatments
We believe that the most promising potential clinical applications of our technology are Parkinson's disease ("PD"), traumatic brain injury ("TBI"), and stroke. Using our proprietary technologies and know-how, we are creating neural stem cells from hpSCs as a potential treatment of PD, TBI, and stroke.
PD: Our most advanced project is the neural stem cell program for the treatment
of Parkinson's disease. In 2013, we published in Nature Scientific Reports the
basis for our patent on a new method of manufacturing neural stem cells, which
is used to produce the clinical-grade cells necessary for future clinical
studies and commercialization. In 2014, we completed the majority of the
preclinical research, establishing the safety profile of NSC in various animal
species, including non-human primates. In
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the completion of subject enrollment, with the 12th subject receiving a transplantation of the highest dose of cells. There have been no safety signals or serious adverse effects seen to date as related to the transplanted ISC-hpNSC® cells.
We announced a successful completion of the dose escalating phase 1 clinical
trial in
Stroke: In
TBI: In
Anti-Aging Cosmetic Market - Skin Care Products
Our wholly owned subsidiary
•
•
•ProPlus Eye Firming Complex •ProPlus Neck Firming Complex •
ProPlus Advanced Aqueous Treatment
•
ProPlus Collagen Booster (Advanced Molecular Serum)
• ProPlus Elastin Booster • ProPlus Brightening Toner
LSC's products are regulated as cosmetics. LSC's products are sold domestically through a branded website, Amazon, and ecommerce partners.
Biomedical Market - Primary Human Cell Research Products
Our wholly-owned subsidiary LCT develops, manufactures and commercializes approximately 200 human cell culture products, including frozen human "primary" cells and the reagents (called "media") needed to grow, maintain and differentiate the cells. LCT's scientists have used a standardized, methodical, scientific approach to basal medium optimization to systematically produce optimized products designed to culture specific human cell types and to elicit specific cellular behaviors. These techniques can also be used to produce products that do not contain non-human animal proteins, a feature desirable to the research and therapeutic markets. Each LCT cell product is quality tested for the expression of specific markers (to assure the cells are the correct type), proliferation rate, viability, morphology and absence of pathogens. Each cell system also contains associated donor information and all informed consent
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requirements are strictly followed. LCT's research products are marketed and
sold by its internal sales force, OEM partners and LCT brand distributors in
Results of Operations
Comparison of the Years Ended
The following table summarizes our results of operations for the years endedDecember 31, 2022 and 2021, together with the dollar and percent change in those items (in thousands): Years Ended December 31, 2022 2021 $ Change % Change Product sales$ 8,180 $ 7,176 $ 1,004 14 % Cost of sales 3,269 2,935 334 11 % As a % of revenues 40 % 41 %
General and administrative 3,357 4,084 (727 ) -18 % Selling and marketing 1,245 1,383 (138 ) -10 % Research and development 492 695 (203 ) -29 % Other income (expense), net (148 ) 1,022 (1,170 ) -114 % Net loss
$ (331 ) $ (899 ) $ 568 -63 % As a % of revenues -4 % -13 % Product Sales
Product sales revenue for the year ended
Our biomedical product sales continue to recover from the impacts of COVID-19 as purchasing activity from our original equipment manufacturer customers account for approximately 86% of the increase in this market segment.
Our professional line of anti-aging products was discontinued starting in 2022
resulting in only one product line and less demand. The products that were
largely marketed to medical professionals and spas that offered walk-up retail,
experienced a significant decline in customer demand due to COVID-19 and the
related restrictions during the year ended
Cost of Sales
Cost of sales for the year ended
Cost of sales consists primarily of salaries and benefits associated with employee efforts expended directly on the production of the Company's products, as well as related direct materials, general laboratory supplies and an allocation of overhead. We aim to continue refining our manufacturing processes and supply chain management to improve the cost of sales as a percentage of revenue for both LCT and LSC.
General and Administrative Expenses
General and administrative expenses for the year ended
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and
Our general and administrative expenses consist primarily of employee-related expenses including salaries, bonuses, benefits and share-based compensation. Other significant costs include facility costs not otherwise included in or allocated to other departments, legal fees not relating to patents and corporate matters, and fees for accounting and consulting services.
Selling and Marketing Expenses
Selling and marketing expenses for the year ended
Our sales and marketing expenses consist primarily of employee-related expenses including salaries, bonuses, benefits, and share-based compensation for our Biomedical and Anti-aging cosmetic businesses. Other significant costs include facility costs not otherwise included in or allocated to other departments as well as marketing material costs, permits and licenses for ecommerce, and other advertising type expenses.
Research and Development Expenses
Research and development expenses for the year ended
Our research and development efforts are primarily focused on the development of treatments for Parkinson's disease, traumatic brain injury, liver diseases, stroke, and the creation of new GMP grade human parthenogenetic stem cell lines. These projects are long-term investments that involve developing both new stem cell lines and new differentiation techniques that can provide higher purity populations of functional cells. Research and development expenses are expensed as incurred and are accounted for on a project-by-project basis. However, much of our research has potential applicability to each of our projects.
Other Income (Expense), Net
Other income, net, for the year ended
Liquidity and Capital Resources
The Company enters into contracts in the normal course of business with various third-party consultants and contract research organizations ("CRO") for preclinical research, clinical trials and manufacturing activities. These contracts generally provide for termination upon notice. Actual expenses associated with these arrangements may be higher or lower due to various reasons, including but not limited to, progress of our development products, enrollment in clinical trials, and product and personnel delays due to COVID. Other short-term and long terms commitments that would affect liquidity include lease obligations as well as related party debt repayments.
As of
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Licensed Patents
The Company had a minimum annual license fee of
Cash Flows
Comparison of the Years Ended
The following table provides information regarding our cash flows for the years
ended
Years Ended December 31,
2022 2021
Net cash provided by (used in) operating activities
(11 ) (45 )
Net cash provided by financing activities 250 824
Net increase (decrease) in cash $ 571 $ (518 )
Operating Cash Flows
For the year ended
Investing Cash Flows
Net cash used in investing activities for the year ended
Financing Cash Flows
Net cash provided by financing activities for year ended
Liquidity and Going Concern
Management continues to evaluate various financing sources and options to raise working capital to help fund our current research and development programs and operations. We will need to obtain significant additional capital from sources including exercise of outstanding warrants, equity and/or debt financings, license arrangements, grants and/or collaborative research arrangements to sustain our operations and develop products. Unless we obtain additional financing, we do not have sufficient cash on hand to sustain our operations at least through one year after the issuance date. The timing and degree of any future capital requirements will depend on many factors, including:
•
the accuracy of the assumptions underlying the estimates for capital needs in 2023 and beyond;
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•
the extent that revenues from sales of LSC and LCT products cover the related costs and provide capital;
•
scientific progress in our research and development programs;
•
the magnitude and scope of our research and development programs and our ability to establish, enforce and maintain strategic arrangements for research, development, clinical testing, manufacturing and marketing;
•
our progress with pre-clinical development and clinical trials;
•
the extent to which third party interest in Company's research and commercial products can be realized through effective partnerships;
•
the time and costs involved in obtaining regulatory approvals;
•
the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims;
•
the number and type of product candidates that we pursue; and
•
the development of major public health concerns, including the novel coronavirus outbreak or other pandemics arising globally, and the current and future impact of it and COVID-19 on our business operations and funding requirements.
Our failure to raise capital or enter into applicable arrangements when needed would have a negative impact on our financial condition. Additional debt financing may be expensive and require us to pledge all or a substantial portion of its assets. Further, if additional funds are obtained through arrangements with collaborative partners, these arrangements may require us to relinquish rights to some of its technologies, product candidates or products that we would otherwise seek to develop and commercialize on its own. If sufficient capital is not available, we may be required to delay, reduce the scope of or eliminate one or more of its product initiatives.
We currently have no revenue generated from our principal operations in therapeutic and clinical product development through research and development efforts. There can be no assurance that we will be successful in maintaining our normal operating cash flow and obtaining additional funds and that the timing of our capital raising or future financing will result in cash flow sufficient to sustain our operations at least through one year after the issuance date.
Based on the factors above, there is substantial doubt about our ability to continue as a going concern. The consolidated financial statements were prepared assuming that we will continue to operate as a going concern. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty. Management's plans in regard to these matters are focused on managing our cash flow, the proper timing of our capital expenditures, and raising additional capital or financing in the future.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations
is based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in
Our significant accounting policies are more fully described in Note 1 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Our most critical accounting estimates include current and non-current inventory, intangible assets, and stock-based compensation. We review our estimates and assumptions periodically and reflect the effects of revisions in the period in which they are deemed to be necessary. We believe that the following accounting policies are critical to the judgments and estimates used in preparation of our consolidated financial statements.
Allowance for Excess and Obsolete Inventory
Our inventory, particularly within our biomedical market, consists of certain products that have a long or, when frozen, indefinite shelf life. In addition, future demand for our products is uncertain. Accordingly, at each reporting period, we estimate a reserve for allowance for excess and obsolete inventory. This estimate is computed using historical sales data and inventory turnover rates, which are subjective in nature and fluctuate between periods. The establishment of a reserve for excess and obsolete inventory establishes a new cost basis in the inventory with a corresponding adjustment to cost of sales. If we are able to sell such inventory, any related reserves
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are reduced in the period of sale. The Company's allowance for excess and
obsolete inventory was
Stock-Based Compensation
We are required to measure and recognize compensation expense for all stock-based payment awards made to employees and consultants based on estimated fair value. We estimate the fair value of stock options granted using the Black-Scholes option-pricing model.
The determination of fair value of stock-based awards using the Black-Scholes option-pricing model requires the use of certain estimates and subjective assumptions that affect the amount of stock-based compensation expense recognized in our consolidated statements of operations. These include estimates of the expected volatility of our stock price, expected option life, expected dividends and the risk-free interest rate. Estimated volatility is a measure of the amount by which our stock price is expected to fluctuate each year during the expected life of the award. The expected option life is calculated using the Simplified Method as prescribed by accounting guidance for stock-based compensation. We determined expected dividend yield to be 0% given that we have never declared or paid any cash dividends on our common stock, and we currently do not anticipate paying such cash dividends. The risk-free interest rate is based upon United States Treasury securities with remaining terms similar to the expected term of the share-based awards. If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation expense may differ materially from what we have recorded in the current period.
Recently Issued Accounting Pronouncements
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 1 to our consolidated financial statements included in this Annual Report on Form 10-K.
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