See accompanying notes to the unaudited condensed consolidated financial statements.
See accompanying notes to the unaudited condensed consolidated financial statements.
See accompanying notes to the unaudited condensed consolidated financial statements.
See accompanying notes to the unaudited condensed consolidated financial statements.
See accompanying notes to the unaudited condensed consolidated financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Organization and Significant Accounting Policies
Business Combination and Corporate Restructure
BTHC III, Inc. (“BTHC III” or the “Company”) was organized in Delaware in June 2005 as a shell company to effect the reincorporation of BTHC III, LLC, a Texas limited liability company. On December 28, 2006, the Company effected a Share Exchange pursuant to which it acquired all of the stock of International Stem Cell Corporation, a California corporation (“ISC California”). After giving effect to the Share Exchange, the stockholders of ISC California owned 93.7% of issued and outstanding shares of common stock. As a result of the Share Exchange, ISC California is now the wholly-owned subsidiary, though for accounting purposes it was deemed to have been the acquirer in a “reverse merger.” In the reverse merger, BTHC III is considered the legal acquirer and ISC California is considered the accounting acquirer. On January 29, 2007, the Company changed its name from BTHC III, Inc. to International Stem Cell Corporation.
Lifeline Cell Technology, LLC (“LCT”) was formed in the State of California on August 17, 2001. LCT is in the business of developing and manufacturing purified primary human cells and optimized reagents for cell culture. LCT’s scientists have used a technology, called basal medium optimization, to systematically produce products designed to culture specific human cell types and to elicit specific cellular behaviors. These techniques also produce products that do not contain non-human animal proteins, a feature desirable to the research and therapeutic markets. LCT distinguishes itself in the industry by having in place scientific and manufacturing staff with the experience and knowledge to set up systems and facilities to produce a source of consistent, standardized, non-human animal protein free cell products, some of which are suitable for FDA approval.
On July 1, 2006, LCT entered into an agreement among LCT, ISC California and the holders of membership units and warrants. Pursuant to the terms of the agreement, all the membership units in LCT were exchanged for 133,334 shares of ISC California Common Stock and for ISC California’s assumption of LCT’s obligations under the warrants. LCT became a wholly-owned subsidiary of ISC California.
Lifeline Skin Care, Inc. (“LSC”) was formed in the State of California on June 5, 2009 and is a wholly-owned subsidiary of ISC California. LSC develops, manufactures and markets anti-aging cosmetic products, utilizing an extract derived from the Company’s human parthenogenetic stem cells and the Company’s proprietary small molecule technology.
Cyto Therapeutics Pty. Ltd. (“Cyto Therapeutics”) was registered in the state of Victoria, Australia, on December 19, 2014 and is a limited proprietary company and a wholly-owned subsidiary of the Company. Cyto Therapeutics is a research and development company for the Therapeutic Market, which is conducting clinical trials in Australia for the use of ISC-hpNSC
®
in the treatment of Parkinson’s disease.
Going Concern
The Company has sustained recurring losses and needs to raise additional working capital. The timing and degree of any future capital requirements will depend on many factors. The Company’s burn rate for the three months ended March 31, 2019 was approximately $96,000 per month, excluding capital expenditures and patent costs averaging $40,000 per month. There can be no assurance that the Company will be successful in maintaining its normal operating cash flow or raising additional funds, and that such cash flows will be sufficient to sustain the Company’s operations at least through one year after the issuance date of the Company’s condensed consolidated financial statements. Based on the above, there is substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements were prepared assuming that the Company will continue as a going concern and they 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 its cash flow, the proper timing of its capital expenditures, and raising additional capital or financing in the future.
Basis of Presentation
The Company is a biotechnology company focused on therapeutic and clinical product development with multiple long-term therapeutic opportunities and two revenue-generating subsidiaries with potential for increased future revenues.
The accompanying unaudited condensed consolidated financial statements included herein have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q.
8
These financial st
atements do not include all information and notes required by generally accepted accounting principles for complete financial statements. However, except as disclosed herein, there has been no material change to the information disclosed in the notes to co
nsolidated financial statements included in the annual report on Form 10-K of International Stem Cell Corporation and Subsidiaries for the year ended December 31, 201
8
.
The unaudited condensed consolidated financial information for the interim periods presented reflects all adjustments, consisting of only normal and recurring adjustments, necessary for a fair presentation of the Company’s consolidated results of operations, financial position and cash flows. The unaudited condensed consolidated financial statements and the related notes should be read in conjunction with the Company’s audited consolidated financial statements for the year ended December 31, 2018 included in the Company’s annual report on Form 10-K. Operating results for interim periods are not necessarily indicative of the operating results for any other interim period or an entire year.
Principles of Consolidation
The Company’s consolidated financial statements include the accounts of International Stem Cell Corporation and its subsidiaries after intercompany balances and transactions have been eliminated.
Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. There were no cash equivalents as of March 31, 2019 and December 31, 2018.
Inventory
Inventory is accounted for using the average cost and first-in, first-out (FIFO) methods for LCT cell culture media and reagents, average cost and specific identification methods for LSC products, and specific identification method for LCT products. Inventory balances are stated at the lower of cost or net realizable value. Laboratory supplies used in the research and development process are expensed as consumed. Inventory is reviewed periodically for product expiration and obsolescence and is adjusted accordingly. The value of the inventory that is not expected to be sold within twelve months of the current reporting period is classified as non-current inventory on the condensed consolidated balance sheets.
Accounts Receivable
Trade accounts receivable are recorded at the net invoice value and are not interest bearing. Accounts receivable primarily consist of trade accounts receivable from the sales of LCT’s products, timing of cash receipts by the Company related to LSC credit card sales to customers, as well as LSC trade receivable amounts related to spa and distributor sales. The Company considers receivables past due based on the contractual payment terms. The Company reviews its exposure to accounts receivable and reserves specific amounts if collectability is no longer reasonably assured. As of March 31, 2019 and December 31, 2018, the Company had an allowance for doubtful accounts totaling $12,000.
Property and Equipment
Property and equipment are stated at cost. The provision for depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, generally three to five years. The costs of major remodeling and leasehold improvements are capitalized and amortized over the shorter of the remaining term of the lease or the estimated life of the asset.
Intangible Assets
Intangible assets consist of acquired research and development rights used in research and development, and capitalized legal fees related to the acquisition, filing, maintenance, and defense of patents and trademarks. Patent or patent license amortization only begins once a patent license is acquired or a patent is issued by the appropriate authoritative bodies. In the period in which a patent application is rejected or efforts to pursue the patent are abandoned, all the related accumulated costs are expensed. Patents and other intangible assets are recorded at cost of $3,692,000 and $3,632,000 at March 31, 2019 and December 31, 2018, respectively, and are amortized on a straight-line basis over the shorter of the lives of the underlying patents or the useful life of the license. Amortization expense for the three months ended March 31, 2019 and 2018 was $35,000 and $27,000, respectively. All amortization expense related to intangible assets is included in general and administrative expense. Accumulated amortization as of March 31, 2019 and December 31, 2018 was $992,000 and $958,000, respectively.
9
Long-Live
d Asset Impairment
The Company reviews long-lived assets for impairment when events or changes in business conditions indicate that their carrying value may not be recovered, and at least annually. The Company considers assets to be impaired and writes them down to fair value if expected associated undiscounted cash flows are less than the carrying amounts. Fair value is the present value of the associated cash flows. The Company recognized none and $111,000 of impairment losses on its intangible assets during the three months ended March 31, 2019 and 2018, respectively, due to abandonment of efforts to pursue certain patents or patented technologies.
Revenue Recognition
Revenue is recognized at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. This principle is applied using the following five-step process:
|
|
|
|
1.
|
Identify the contract with the customer
|
|
2.
|
Identify the performance obligations in the contract
|
|
3.
|
Determine the transaction price
|
|
4.
|
Allocate the transaction price to the performance obligations in the contract
|
|
5.
|
Recognize revenue when (or as) each performance obligation is satisfied
|
The Company recognizes revenue when it satisfies a performance obligation by transferring control of the promised goods or services to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.
The following table presents the Company's revenue disaggregated by segment, product and geography, based on management's assessment of available data (in thousands):
Biomedical Market:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
Three Months Ended March 31, 2018
|
|
|
U.S.
|
|
|
OUS*
|
|
|
Total Revenues
|
|
|
% of Total Revenues
|
|
|
U.S.
|
|
|
OUS*
|
|
|
Total Revenues
|
|
|
% of Total Revenues
|
|
Biomedical products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cells
|
$
|
172
|
|
|
$
|
100
|
|
|
$
|
272
|
|
|
|
15
|
%
|
|
$
|
243
|
|
|
$
|
141
|
|
|
$
|
384
|
|
|
|
18
|
%
|
Media
|
|
1,401
|
|
|
|
117
|
|
|
|
1,518
|
|
|
|
85
|
%
|
|
|
1,554
|
|
|
|
189
|
|
|
|
1,743
|
|
|
|
82
|
%
|
Other
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
8
|
|
|
|
—
|
|
|
|
8
|
|
|
|
0
|
%
|
Total
|
$
|
1,573
|
|
|
$
|
217
|
|
|
$
|
1,790
|
|
|
|
100
|
%
|
|
$
|
1,805
|
|
|
$
|
330
|
|
|
$
|
2,135
|
|
|
|
100
|
%
|
*Outside the United States
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cosmetic Market:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2019
|
|
|
Three Months Ended March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenues
|
|
|
% of Total Revenues
|
|
|
Total Revenues
|
|
|
% of Total Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cosmetic sales channels
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ecommerce
|
$
|
215
|
|
|
|
50
|
%
|
|
$
|
291
|
|
|
|
58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional
|
|
213
|
|
|
|
50
|
%
|
|
|
207
|
|
|
|
42
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
$
|
428
|
|
|
|
100
|
%
|
|
$
|
498
|
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company's revenue consists primarily of sales of products from its two revenue-generating operating segments, the anti-aging cosmetics products and biomedical products business segments. The cosmetic market segment markets and sells a line of luxury skincare products sold through two sales channels: ecommerce and professional. The ecommerce channel sells direct to customers through online orders, while the professional sales are to spas, salons and other skincare providers. The biomedical market segment markets and sells primary human cell research products with two product categories, cells and media, sold both within and outside the United States.
Contract terms for unit price, quantity, shipping and payment are governed by sales agreements, invoices or online order forms which the Company considers to be a customer's contract in all cases. The unit price is considered the observable stand-alone selling price for the arrangements. Any promotional or volume sales discounts are applied evenly to the units sold for purposes of calculating standalone selling price.
10
Product sales
generally
consist of a single performance obligation that the Company satisfies at a point in time. The Company recognizes product revenue when the following events have
occurred: (a) the Company has transferred physical possession of the products, (b) the Company has a present right to payment, (c) the customer has legal title to the products, and (d) the customer bears significant risks and rewards of ownership of the pr
oducts.
For LSC products, ecommerce sales are primarily paid through credit card charges, while professional sales are invoiced. The professional sales and biomedical products' standard payment terms for its customers are generally 30 days after the Company satisfies the performance obligations. For anti-aging cosmetic products, the Company honors a 30-day return policy, but historical returns have been minimal and as such, no estimated allowance for sales returns was recorded as of March 31, 2019 and December 31, 2018.
The Company elects to account for shipping and handling as activities to fulfill the promise to transfer the goods. As a result, no consideration is allocated to shipping and handling. Rather, the Company accrues the cost of shipping and handling upon shipment of the product, and all contract revenue is recognized at the same time.
Variable Consideration
The Company records revenue from customers in an amount that reflects the transaction price it expects to be entitled to after transferring control of those goods or services. From time to time, the Company offers sales promotions on its skincare products such as discounts and free product offers. Variable consideration is estimated at contract inception only to the extent that it is probable that a significant reversal of revenue will not occur, and updated at the end of each reporting period as additional information becomes available.
Contract Balances
The Company records a receivable when it has an unconditional right to receive consideration after the performance obligations are satisfied. As of March 31, 2019, and December 31, 2018, accounts receivable totaled $957,000 and $651,000, respectively. For the three months ended March 31, 2019 and 2018, the Company did not incur material impairment losses with respect to its receivables.
Practical Expedients
The Company has elected the practical expedient not to determine whether contacts with customers contain significant financing components.
The Company pays commissions on certain sales for its biomedical and cosmetic market(s) once the customer payment has been received, which are accrued at the time of the sale. The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses. In addition, the Company has elected to exclude sales taxes in consideration of the transaction price.
Allowance for Sales Returns
The Company’s cosmetic products have a 30-day product return guarantee and based on historical rate of returns from the years ended December 31, 2015 through 2018, the Company determined that there is a low probability that returns will occur. The returns that have historically occurred have not been significant and have been recognized as they occur as a reduction of revenue that is recognized as performance obligations are met. As of March 31, 2019 and December 31, 2018, the Company has recorded no allowance for sales returns.
Cost of Sales
Cost of sales consists primarily of salaries and benefits associated with employee efforts expended directly on the production of the Company’s products and include related direct materials, general laboratory supplies and allocation of overhead. Certain of the agreements under which the Company has licensed technology will require the payment of royalties based on the sale of its future products. Such royalties will be recorded as a component of cost of sales. Additionally, the amortization of license fees or milestone payments related to developed technologies used in the Company’s products will be classified as a component of cost of sales to the extent such payments become due in the future.
Research and Development Costs
Research and development costs, which are expensed as incurred, are primarily comprised of costs and expenses for salaries and benefits associated with research and development personnel, overhead and occupancy, contract services, and amortization of license costs for technology used in research and development with alternative future uses.
11
Stock-Based Compensation
The Company recognized stock-based compensation expense associated with stock options and other stock-based awards in accordance with the authoritative guidance for stock-based compensation. The cost of a stock-based award is measured at the grant date based on the estimated fair value of the award, and is recognized as expense on a straight-line basis, net of estimated forfeitures over the requisite service period of the award. The fair value of stock options is estimated using the Black-Scholes option valuation model, which requires the input of subjective assumptions, including price volatility of the underlying stock, risk-free interest rate, dividend yield, and expected life of the option. The fair value of restricted stock awards is based on the market value of the Company’s common stock on the date of grant.
Fair Value Measurements
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Assets and liabilities that are measured at fair value are reported using a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1
|
|
Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
|
Level 2
|
|
Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
|
Level 3
|
|
Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).
|
Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.
The table below sets forth a summary of the Company’s liabilities which are measured at fair value on a recurring basis as of March 31, 2019 (in thousands):
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock
|
|
$
|
1,148
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,148
|
|
The table below sets forth a summary of the Company’s liabilities which are measured at fair value on a recurring basis as of December 31, 2018 (in thousands):
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock
|
|
$
|
1,745
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,745
|
|
The following table displays the rollforward activity of liabilities with inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity) (in thousands):
|
|
Warrants
to purchase
|
|
|
|
common stock
|
|
Ending balance at December 31, 2017
|
|
$
|
3,113
|
|
Adjustments to estimated fair value
|
|
|
(1,368
|
)
|
Ending balance at December 31, 2018
|
|
$
|
1,745
|
|
Adjustments to estimated fair value
|
|
$
|
(597
|
)
|
Ending balance at March 31, 2019
|
|
$
|
1,148
|
|
Income Taxes
The Company accounts for income taxes in accordance with applicable authoritative guidance, which requires the Company to provide a net deferred tax asset/liability equal to the expected future tax benefit/expense of temporary reporting differences between book and tax accounting methods and any available operating loss or tax credit carryforwards.
12
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements. Significant estimates include patent life (remaining legal life versus remaining useful life), inventory carrying values, allowance for excess and obsolete inventories, allowance for sales returns and doubtful accounts, and transactions using the Black-Scholes option pricing model, e.g., warrants and stock options, as well as the Monte-Carlo valuation method for certain warrants. Actual results could differ from those estimates.
Fair Value of Financial Instruments
The Company believes that the carrying value of its cash, receivables, accounts payable, accrued liabilities and related party note payable as of March 31, 2019 and December 31, 2018 approximate their fair values because of the short-term nature of those instruments. The fair value of certain warrants was determined at each issuance and quarterly reporting date as necessary using the Monte-Carlo valuation methodology.
Income (Loss) Per Common Share
The computation of net loss per common share is based on the weighted average number of shares outstanding during each period. The computation of diluted earnings per common share is based on the weighted average number of shares outstanding during the period plus the common stock equivalents, which would arise from the exercise of stock options and warrants outstanding using the treasury stock method and the average market price per share during the period. At March 31, 2019, there were no non-vested shares of restricted stock, 2,140,156 vested and 3,339,031 non-vested stock options outstanding, and 3,951,052 warrants outstanding; and at March 31, 2018, there were no non-vested shares of restricted stock, 1,054,230 vested and 2,040,596 non-vested stock options outstanding, and 3,951,052 warrants outstanding. These stock options, warrants, and convertible preferred stock were not included in the diluted loss per share calculation because the effect would have been anti-dilutive. Refer to Note 6 for convertible preferred stock.
Comprehensive Income
Comprehensive income or loss includes all changes in stockholders’ equity except those resulting from investments by owners and distributions to owners. The Company did not have any items of comprehensive income or loss other than net loss from operations for the three months ended March 31, 2019 and 2018.
Recently Issued Accounting Pronouncements
Accounting Pronouncements Adopted
In June 2018, the FASB issued ASU 2018-07,
“Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting.”
ASU 2018-07 makes nonemployee share-based payments to be consistent with the accounting for employee share-based payment awards, which measures the fair value of the payment based on grant date and considers the probability of satisfying performance conditions when nonemployee share-based payment awards contain such conditions. The updated standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year.
The adoption of ASU 2018-07 on January 1, 2019 did not result in a material impact on the Company’s balance sheet or statement of operations
.
I
n July 2017, the
FASB
issued ASU No. 2017-11,
"Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815)"
("ASU 2017-11") effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2017-11 changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. The amendments require entities that present earnings per share ("EPS") in accordance with Topic 260 to recognize the effect of the down round feature when triggered with the effect treated as a dividend and as a reduction of income available to common shareholders in basic EPS. The adoption of ASU 2017-11 on January 1, 2019 did not result in a material impact on the Company’s balance sheet or statement of operations.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize “right-of-use” assets and a lease liability for all leases with lease terms of more than 12 months. The Company elected the exception from applying the new guidance for any short-term leases or leases with terms less than or equal to 12 months. Topic 842 requires additional quantitative and qualitative financial statement footnote disclosures about the leases, significant judgments made in accounting for those leases and amounts recognized in the financial statements about those leases. In 2018 and 2019, the FASB has issued and incorporated several additional ASUs to provide clarifying guidance associated with the application of certain principles within Topic
13
842. The effective date will be the first qua
rter of fiscal year 2019. The Company elect
ed
the “package of practical expedients,” which allow
ed
the Company
to
not reassess under the new guidance, the Company’s prior conclusions about lease identification, classification, and treatment of initial dire
ct costs as well as electing the modified retrospective approach effective January 1, 2019.
As of March 31, 2019, total right-of-use assets and operating lease liabilities were approximately $
93
3,000
and $1
,
3
05,000
respectively. All operating lease expense is recognized on a straight-li
ne basis over the lease term.
Accounting Pronouncements Being Evaluated
In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-13,
Fair Value Measurement (Topic 820), “Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement”
(“ASU 2018-13”). ASU 2018-13 removes the valuation processes for Level 3 fair value measurements and adds the disclosure for the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The updated standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact of the adoption of this accounting standard update.
2. Inventory
The components of inventories are as follows (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Raw materials
|
|
$
|
670
|
|
|
$
|
656
|
|
Work in process
|
|
|
583
|
|
|
|
590
|
|
Finished goods
|
|
|
1,218
|
|
|
|
1,276
|
|
Total
|
|
|
2,471
|
|
|
|
2,522
|
|
Less: allowance for inventory excess and obsolescence
|
|
|
(219
|
)
|
|
|
(216
|
)
|
Inventory, net
|
|
$
|
2,252
|
|
|
$
|
2,306
|
|
3. Property and Equipment
Property and equipment consist of the following (in thousands):
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Machinery and equipment
|
|
$
|
1,599
|
|
|
$
|
1,614
|
|
Computer equipment and software
|
|
|
256
|
|
|
|
251
|
|
Office equipment
|
|
|
222
|
|
|
|
215
|
|
Leasehold improvements
|
|
|
996
|
|
|
|
996
|
|
Construction in progress
|
|
|
244
|
|
|
|
45
|
|
|
|
|
3,317
|
|
|
|
3,121
|
|
Less: accumulated depreciation and amortization
|
|
|
(2,665
|
)
|
|
|
(2,652
|
)
|
Property and equipment, net
|
|
$
|
652
|
|
|
$
|
469
|
|
Depreciation expense for the three months ended March 31, 2019 and 2018 was $37,000 and $41,000, respectively.
4. Patent Licenses
On December 31, 2003, LCT entered into an
Option to License Intellectual Property
agreement with Advanced Cell Technology, Inc., which changed its name to Ocata Therapeutics, Inc. and was subsequently acquired by Astellas Pharma Inc. (“Astellas"), for patent rights and paid Astellas $340,000 in option and license fees. On February 13, 2004, LCT and Astellas amended the Option agreement and LCT paid Astellas additional option fees of $22,500 for fees related to registering Astellas’ patents in selected international countries.
On May 14, 2004, LCT amended the licensing agreement with Astellas for the exclusive worldwide patent rights for the following Astellas technologies: UMass IP, ACT IP and Infigen IP. The additional license fees paid were $400,000.
14
On February 7, 2013, the Company and
Astellas
entered into Amended and Restated Licen
se Agreements (the “Amendment”) for the purpose of completely amending and restating the terms of the license agreements. Under the terms of the Amendment, the Company acquired exclusive world-wide rights to all human therapeutic uses and cosmetic uses fro
m
Astellas
and Infigen’s early work on parthenogenic-derived embryonic stem cells, as well as certain rights to patents covering Single Blastomere technology.
Pursuant to the Amendment, all minimum R&D requirements and all milestone payments due to Astellas under the Exclusive License Agreement have been eliminated. The Company will no longer pay any royalties under the ACT IP Agreement and Infigen IP Agreement. The obligation to pay royalties that ranged from 6%-12% under the UMass IP Agreement has been reduced to 0.25% of the net sales of products using technology covered by the UMass IP Agreement; and the obligation to pay a minimum annual license fee of $150,000 has been reduced to $75,000 annually,
payable in two installments to Astellas.
As of March 31, 2019, the total amounts capitalized related to the acquired Astellas licenses were $747,000, and $2,945,000 related to the other patent acquisition costs and trademarks.
At March 31, 2019, future amortization expense related to intangible assets subject to amortization is expected to be as follows (in thousands):
|
|
Amount
|
|
2019 (Remaining nine months)
|
|
|
72
|
|
2020
|
|
|
91
|
|
2021
|
|
|
91
|
|
2022
|
|
|
91
|
|
2023
|
|
|
91
|
|
Thereafter
|
|
|
2,181
|
|
Total
|
|
$
|
2,617
|
|
5. Advances
On June 18, 2008, the Company entered into an agreement with BioTime, Inc. (“Bio Time”), where Bio Time will pay an advance of $250,000 to LCT to produce, make, and distribute Joint Products. The $250,000 advance will be paid down with the first $250,000 of net revenues that otherwise would be allocated to LCT under the agreement. As of March 31, 2019, no revenues were realized from this agreement.
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
BioTime, Inc. (in thousands)
|
|
$
|
250
|
|
|
$
|
250
|
|
6. Capital Stock
As of March 31, 2019, the Company is authorized to issue 120,000,000 shares of common stock, $0.001 par value per share, and 20,000,000 shares of preferred stock, $0.001 par value per share.
Capital Transactions
Series B Preferred Stock
On May 12, 2008, to obtain funding for working capital, the Company entered into a series of subscription agreements with five accredited investors for the sale of a total of 400,000 Series B Units, each Series B Unit consisting of one share of Series B Preferred Stock (“Series B Preferred”) and two Series B Warrants (“Series B Warrants”) to purchase common stock for each $1.00 invested.
The total purchase price received by the Company was $400,000. The Series B Preferred is convertible into shares of common stock at the initial conversion ratio of 0.0134 shares of common stock for each share of Series B Preferred converted (which was established based on an initial conversion price of $75.00 per share), and the Series B Warrants were exercisable at $75.00 per share until five years from the issuance of the Series B Warrants, which expired unexercised in May 2013. The Series B Preferred contain anti-dilution clauses whereby, if the Company issues equity securities or securities convertible into equity at a price below the conversion price of the Series B Preferred, such conversion price shall be adjusted downward to equal the price of the new securities. The Series B Preferred has a priority (senior to the shares of common stock and Series I Preferred) on any sale or liquidation of the Company equal to the purchase price of the Series B Units, plus a liquidation premium of 6% per year. If the Company elects to declare a dividend in any year, it must first pay to the Series B Preferred holder a dividend equal to the amount of the dividend the Series B Preferred holder would receive if the Series B Preferred were converted just prior to the dividend declaration. Each share of Series B
15
Preferred has the same voting rights as the number of
shares of common stock into which it would be convertible on the record date. As of
March 31
, 201
9
and December 31, 201
8
, there were 250,000 shares of the Series B Preferred issued and outstanding.
In December 2016, the Company issued Restricted Stock to its non-employee directors at a price of $1.08. Accordingly, such transactions triggered adjustments in the current conversion price of the Series B Preferred to $1.08.
Series D Preferred Stock
On December 30, 2008, the Company entered into a Series D Preferred Stock Purchase Agreement (the “Series D Agreement”) with accredited investors (the “Investors”) and sold 43 shares of Series D Preferred Stock (“Series D Preferred”) at a price of $100,000 per Series D Preferred share.
Ten shares of the Series D Preferred were issued to X-Master Inc., which is a related party and affiliated with the Company’s Chief Executive Officer and Co-Chairman of the Board of Directors, Dr. Andrey Semechkin and Dr. Russell Kern, Executive Vice President and Chief Scientific Officer and a director; and 33 shares of the Series D Preferred were issued to Dr. Andrey Semechkin. As of March 31, 2019 and December 31, 2018, there were 43 shares of the Series D Preferred issued and outstanding.
The Series D Preferred was initially convertible into shares of common stock at $37.50 per share, resulting in an initial conversion ratio of 2,667 shares of common stock for every share of Series D Preferred. The Series D Preferred has an anti-dilution clause whereby, if the Company issues equity securities or securities convertible into equity at a price below the conversion price of the Series D Preferred, the conversion price of the Series D Preferred shall be adjusted downward to equal the price of the new securities. The Series D Preferred has priority over the Series B Preferred Stock, Series G Preferred Stock, Series I-1 Preferred Stock, Series I-2 Preferred Stock and common stock on the proceeds from any sale or liquidation of the Company in an amount equal to the purchase price of the Series D Preferred.
In March 2016, the Company issued Series I Preferred Stock which had an initial conversion price of $1.75, as well as three series of warrants. Accordingly, such transaction triggered an adjustment in the current conversion price of the Series D Preferred to $1.75.
Series G Preferred Stock
On March 9, 2012, the Company entered into a Series G Preferred Stock Purchase Agreement with AR Partners, LLC (the “Purchaser”) to sell 5,000,000 shares of Series G Preferred Stock (“Series G Preferred”) at a price of $1.00 per Series G Preferred share, for a total purchase price of $5,000,000. The Purchaser is an affiliate of Dr. Andrey Semechkin, the Company’s Co-Chairman and Chief Executive Officer, and Dr. Russell Kern, Executive Vice President and Chief Scientific Officer and a director.
The Series G Preferred was initially convertible into shares of common stock at $60.00 per share, resulting in an initial conversion ratio of 0.0167 shares of common stock for every share of Series G Preferred. The conversion price may be adjusted for stock splits and other combinations, dividends and distributions, recapitalizations and reclassifications, exchanges or substitutions and is subject to a weighted-average adjustment in the event of the issuance of additional shares of common stock below the conversion price.
The Series G Preferred shares have priority over the Series B Preferred, Series I-1 Preferred, Series I-2 Preferred and common stock on the proceeds from any sale or liquidation of the Company in an amount equal to the purchase price of the Series G Preferred, but such payment may be made only after payment in full of the liquidation preferences payable to holders of any shares of Series D Preferred then outstanding. Each share of Series G Preferred has the same voting rights as the number of shares of common stock into which it would be convertible on the record date. As long as there are at least 1,000,000 shares of Series G Preferred outstanding, the holders of Series G Preferred have (i) the initial right to propose the nomination of two members of the Board, at least one of which such nominees shall be subject to the approval of the Company’s independent directors, for election by the stockholder’s at the Company’s next annual meeting of stockholders, or, elected by the full board of directors to fill a vacancy, as the case may be, and (ii) the right to approve any amendment to the certificate of incorporation, certificates of designation or bylaws, in manner adverse to the Series G Preferred, alter the percentage of board seats held by the Series G Preferred directors or increase the authorized number of shares of Series G Preferred. At least one of the two directors nominated by holders of the Series G Preferred shall be independent based on the NASDAQ listing requirements.
As of March 31, 2019 and December 31, 2018, there were 5,000,000 shares of the Series G Preferred issued and outstanding. On January 21, 2019, the Company issued 599,222 shares of common stock upon conversion of a portion of the Company’s outstanding indebtedness with a principal amount of $1,000,000 and accrued and unpaid interest on the principal of $49
,000. In accordance with the Series G Certificate of Designation, the issuance of Common Shares at the conversion price of $1.75 per share triggered further adjustment in the conversion price and conversion ratio of the Series G Preferred Stock to $9.70 per share and 0.1031 shares, respectively.
16
Series I Preferred Stock
On March 9, 2016, the Company, entered into a Securities Purchase Agreement (the “Series I Agreement”) with three investors, which included two institutional investors and Andrey Semechkin, the Company’s Chief Executive Officer and Co-Chairman providing for the issuance (the “Offering”) of (i) 2,000 shares of Series I-1 convertible preferred stock (the “Series I-1 Preferred Stock”) issuable to the institutional investors at a price of $1,000 per share, (ii) 4,310 shares of Series I-2 convertible preferred stock (the “Series I-2 Preferred Stock”, and together with the Series I-1 Preferred Stock, the “Preferred Stock”) issuable to Andrey Semechkin at a price of $1,000 per share, (iii) Series A Warrants (the “Series A Warrants”) to purchase up to approximately 3.6 million shares of common stock at an initial exercise price of $3.64 per share with a term of five years, (iv) Series B Warrants (the “Series B Warrants”) to purchase up to approximately 3.6 million shares of common stock at an initial exercise price of $1.75 per share with a term of six months and (v) Series C Warrants (the “Series C Warrants”, together with the Series A Warrants and the Series B Warrants, collectively, the “Investor Warrants”) to purchase up to approximately 3.6 million shares of common stock at an initial exercise price of $1.75 per share with a term of twelve months. The closing of the Offering occurred on March 15, 2016 (the “Closing Date”). The Series I Agreement also contains representations, warranties, indemnification and other provisions customary for transactions of this nature. The Company received cash proceeds of $2.5 million on the closing date. On September 15, 2016, the remaining unexercised Series B Warrants then outstanding expired unexercised. On March 15, 2017, the remaining unexercised Series C Warrants then outstanding expired unexercised.
Rodman & Renshaw, a unit of H.C. Wainwright & Co., LLC. (the “Placement Agent”) acted as the exclusive placement agent for the Offering pursuant to a placement agency engagement letter, dated as of March 9, 2016, by and between the Placement Agent and the Company (the “Engagement Letter”). Upon the closing of the Offering, pursuant to the Engagement Letter, the Placement Agent received a placement agent fee of $200,000 and a warrant to purchase approximately 343,000 shares of common stock (the “Placement Agent Warrant”, together with the Investor Warrants, the “Warrants”) as well as the reimbursement of fees and expenses up to $50,000. Similar to the Series A Warrant, the Placement Warrant has an initial exercise price of $3.64 per share, and is immediately exercisable and will terminate on five years after the date of issuance.
Subject to certain ownership limitations with respect to the Series I-1 Preferred Stock, the Series I Preferred Stock is convertible at any time into shares of Common Stock at an initial conversion price of $1.75 per share. The Series I Preferred Stock is non-voting, is only entitled to dividends in the event that dividends are paid on the Common Stock, and will not have any preferences over the Common Stock, except that the Preferred Stock shall have preferential liquidation rights over the Common Stock. Other than the Series I-1 Preferred Stock having a beneficial ownership limitation, the Series I-1 Preferred Stock and Series I-2 Preferred Stock are substantially identical. The conversion price of the Series I Preferred Stock is subject to certain resets as set forth in the Certificates of Designation, including the date of any future amendment to the certificate of incorporation with respect to a reverse stock split and the effectiveness dates of the registration statements.
As of March 31, 2019 and December 31, 2018, there were 5,124 shares of Series I Preferred Stock outstanding.
See Note 9, Stock Options and Warrants for detailed discussion of the anti-dilution provisions of the Series A Warrants and Placement Agent Warrants.
Reserved Shares
At March 31, 2019, the Company had shares of common stock reserved for future issuance as follows:
Options outstanding
|
|
|
5,479,187
|
|
Options available for future grant
|
|
|
3,971,056
|
|
Convertible preferred stock
|
|
|
6,132,276
|
|
Warrants
|
|
|
3,951,052
|
|
|
|
|
19,533,571
|
|
7. Related Party Transactions
Other than with respect to the purchases of Series D Preferred, Series G Preferred and Series I Preferred Stock transactions discussed above, the Company’s related party transactions were for a facility lease and working capital bridge loans.
17
During the first quarter of 2011, the Company executed an operating lease for its corporate offices with S Real Estate Holdings LLC. S Real Estate Holdings LLC is owned by Dr. Russell Kern, the Company’s Executive Vice President and Chief Scientific Office
r and a director and was previously owned by Dr. Andrey Semechkin, the Company’s Chief Executive Officer and Co-Chairman of the Board of Directors. The lease agreement was negotiated at arm’s length and was reviewed by the Company’s outside legal counsel.
The terms of the lease were reviewed by a committee of independent directors, and the Company believes that, in total, those terms are at least as favorable to the Company as could be obtained for comparable facilities from an unaffiliated party.
In March
2017 the Company signed an amendment to the lease agreement to extend the term of the lease until 20
20
and include annual adjustments to the monthly lease payments.
For the three months ended
March 31
, 201
9
and 201
8
, the Company recorded
$
40,000
, in rent
expense that was related to the facility lease arrangement with related parties.
Between March 6, 2018 and August 8, 2018, to obtain funding for working capital purposes, the Company borrowed a total of $2,000,000 from Dr. Andrey Semechkin and issued an unsecured non-convertible promissory note in the principal amount of $2,000,000 (the “Note”) to Dr. Semechkin (the “Noteholder”). The outstanding principal amount under the Note accrued interest at a rate of four percent (4%) per annum. The Note was due and payable November 1, 2018 and on November 12, 2018, to satisfy the indebtedness incurred on the Note, an amendment to the Note was entered into extending the due date to January 15, 2019.
On January 21, 2019, the Company entered into a Note Conversion Agreement with Dr. Andrey Semechkin, the Company’s Co-Chairman and Chief Executive Officer (the “Conversion Agreement”). The Conversion Agreement provides for the conversion of a total of $1,049,000 (representing $1,000,000 of principal and $49,000 of accrued interest, representing all accrued interest on the amount owed to Dr. Semechkin through January 21, 2019) under the promissory note issued to Dr. Semechkin on August 8, 2018 into a total of 599,222 shares of the Company’s common stock, representing a conversion price of $1.75 per share. Under the Conversion Agreement, the remaining $1,000,000 owed to Dr. Semechkin under the Note has been reflected in a new unsecured, non-convertible promissory note in the principal amount of $1,000,000 (the “New Note”). The outstanding principal amount under the New Note accrues interest at a rate of four and one-half percent (4.5%) per annum. The New Note is due and payable on January 15, 2020, but may be pre-paid by the Company without penalty at any time. See Note 12, Subsequent Events.
8. Income Taxes
The Company estimated Federal and state tax losses for the current year and recorded a full valuation allowance against all net deferred tax assets. As such, no income tax provision has been recorded for the current period. The Company may be subject to Internal Revenue Code (IRC) Sections 382 and 383, which could limit the amount of the net operating loss and tax credit carryovers that can be used in future years. The Company has not completed a study to assess whether an ownership change has occurred, as defined by IRC Sections 382 and 383, or whether there have been ownership changes since the Company’s formation due to the complexity and cost associated with such a study, and the fact that there may be additional such ownership changes in the future. The Company estimates that if such a change did occur, the federal and state net operating loss carryforwards and research and development credit carryforwards that can be utilized in the future will be significantly limited. There can be no assurances that the Company will ever be able to realize the benefit of some or all of the federal and state loss carryforwards or the credit carryforwards, either due to ongoing operating losses or due to ownership changes, which limit the usefulness of the carryforwards.
9. Stock Options and Warrants
Stock Options
The Company adopted the 2006 Equity Participation Plan (as amended the “2006 Plan”), which provides for the grant of stock options, restricted stock and other equity-based awards. Awards for up to 100,000 shares may be granted to employees, directors and consultants under this Plan. The options granted under the 2006 Plan may be either qualified or non-qualified options. Options may be granted with different vesting terms and expire no later than 10 years from the date of grant. The 2006 Plan expired on November 16, 2016. Options and other equity based awards granted prior to the expiration of the 2006 Plan will continue in effect until the option or award is exercised or terminates pursuant to its terms. No new awards may be granted under the 2006 Plan following its expiration.
In April 2010, the Company adopted the 2010 Equity Participation Plan (as amended the “2010 Plan”), which provides for the grant of stock options, restricted stock and other equity-based awards. Awards for up to 9,700,000 shares may be granted to employees, directors and consultants under the 2010 Plan. The options granted under the 2010 Plan may be either qualified or non-qualified options. Options may be granted with different vesting terms and expire no later than 10 years from the date of grant.
In November and December of 2009, the Company issued non-qualified stock options to purchase 68,384 shares of common stock outside the 2006 and 2010 option plans to certain employees and consultants. These options vest over 50 months and expire no later than 10 years from the date of grant. As of March 31, 2019, 12,634 options remain outstanding and a total of 55,750 options were exercised, canceled, or expired.
18
Total stock-based compensation expense for the three months ended
March 31
, 201
9
and 201
8
was comprised of the following (in thousands):
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Cost of sales
|
|
$
|
24
|
|
|
$
|
6
|
|
Research and development
|
|
|
156
|
|
|
|
124
|
|
Selling and marketing
|
|
|
23
|
|
|
|
7
|
|
General and administrative
|
|
|
303
|
|
|
|
170
|
|
|
|
$
|
506
|
|
|
$
|
307
|
|
Unrecognized compensation expense related to stock options as of March 31, 2019 was $3,450,000, which is expected to be recognized over a weighted average period of approximately 2.0 years.
In accordance with applicable authoritative guidance, the Company is required to establish assumptions and estimates of the fair value of stock options granted, as well as use a valuation model to calculate the fair value of stock-based awards. The Company uses the Black-Scholes option-pricing model to determine the fair-value of stock-based awards. All options are amortized over the requisite service periods.
The fair value of options granted is estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted average assumptions for the three months ended March 31, 2019 and 2018:
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Significant assumptions (weighted average):
|
|
|
|
|
|
|
|
|
Risk-free interest rate at grant date
|
|
|
2.55
|
%
|
|
|
2.68
|
%
|
Expected stock price volatility
|
|
|
84.80
|
%
|
|
|
95.61
|
%
|
Expected dividend payout
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected option life based on management's estimate
|
|
5.77 years
|
|
|
5.76 years
|
|
Transactions involving stock options issued to employees, directors and consultants under the 2006 Plan, the 2010 Plan and outside the plans are summarized below. Options issued have a maximum life of 10 years. The following tables summarize the changes in options outstanding and the related exercise prices for the Company’s common stock options issued:
|
|
Number of
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Options
Issued
|
|
|
Weighted
|
|
|
Average
|
|
Aggregate
|
|
|
|
Under
|
|
|
Average
Exercise
|
|
|
Remaining
|
|
Intrinsic
|
|
|
|
2006 Plan and
|
|
|
Price Per
|
|
|
Contractual
|
|
Value
|
|
|
|
2010 Plan
|
|
|
Share
|
|
|
Term
|
|
(in thousands)
|
|
Outstanding at December 31, 2018
|
|
|
4,354,708
|
|
|
$
|
3.95
|
|
|
|
|
|
|
|
Granted
|
|
|
1,142,000
|
|
|
$
|
1.51
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
(30,155
|
)
|
|
$
|
1.78
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
5,466,553
|
|
|
$
|
3.45
|
|
|
8.69 years
|
|
|
16
|
|
Vested and expected to vest at March 31, 2019
|
|
|
5,065,661
|
|
|
$
|
3.60
|
|
|
8.64 years
|
|
$
|
16
|
|
Exercisable at March 31, 2019
|
|
|
2,127,522
|
|
|
$
|
6.29
|
|
|
7.88 years
|
|
$
|
10
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
Average
|
|
Aggregate
|
|
|
|
Options Issued
|
|
|
Average Exercise
|
|
|
Remaining
|
|
Intrinsic
|
|
|
|
Outside
|
|
|
Price Per
|
|
|
Contractual
|
|
Value
|
|
|
|
the Plan
|
|
|
Share
|
|
|
Term
|
|
(in thousands)
|
|
Outstanding, vested and exercisable at December 31, 2018
|
|
|
12,634
|
|
|
$
|
90.23
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Outstanding, vested and exercisable at March 31, 2019
|
|
|
12,634
|
|
|
$
|
90.23
|
|
|
0.66 years
|
|
$
|
—
|
|
19
Restricted Stock Awards
Restricted stock awards are grants that entitle the holder to acquire shares of common stock at zero or a fixed price, which is typically nominal. The Company accounts for the restricted stock awards as issued and outstanding common stock, even though the shares covered by a restricted stock award cannot be sold, pledged, or otherwise disposed of until the award vests and any unvested shares may be reacquired by the Company for the original purchase price following the awardee’s termination of service.
No restricted stock was awarded for the three months ended March 31, 2019. For the three months ended March 31, 2018 there were 5,527 shares of restricted stock awarded and fully vested at a weighted average grant date fair value of $1.47 per share.
The fair value of the restricted stock awards is based on the market value of the common stock on the date of grant. The total grant-date fair value of restricted stock awards vested during the three months ended March 31, 2019 and 2018, was none and approximately $8,000, respectively. The Company recognized none and approximately $8,000 of stock-based compensation expense related to the restricted stock awards for the three months ended March 31, 2019 and 2018, respectively. As of March 31, 2019, there was no unrecognized compensation costs related to unvested awards.
Warrants
Warrants Issued with Preferred Stock
Warrants issued in connection with the October 2014 Financing
The Company has accounted for the warrants in accordance with current accounting guidance, which defines how freestanding contracts that are indexed to and potentially settled in a Company’s own stock should be measured and classified. The authoritative accounting guidance prescribes that only warrants issued under contracts that cannot be net-cash settled and are both indexed to and settled in the Company’s common stock can be classified as equity. As the Series A, Series B and Series C Warrants and Placement Agent Warrant agreements did not meet the specific conditions for equity classification, the Company was required to classify the fair value of the warrants issued as a liability, with subsequent changes in fair value to be recorded as income (loss) in the statement of operations upon revaluation of the fair value of warrant liability at each reporting period. Valuation of the Warrants was estimated at issuance and each reporting date using the Monte-Carlo simulation model. As of December 31, 2016, all Series A, B and C Warrants were exercised or expired unexercised.
The following assumptions were used as inputs to the model at March 31, 2019: for the Placement Agent Warrants, stock price of $1.12 and warrant exercise price of $1.75 as of the valuation date; the Company’s historical stock price volatility of 77.2%; risk free interest rate on U.S. treasury notes of 2.40%; warrant expiration of 1.04 years; and a zero dividend rate; simulated as a daily interval and anti-dilution impact if the Company had to raise capital below $1.75 per share.
During the three months ended March 31, 2019 and 2018, the Company recorded no material expense or income related to the change in the fair value of warrant liability in the condensed consolidated statements of operations related to the warrants from the October 2014 financing.
Placement Agent Warrants Price Adjustment -
The Warrants are immediately exercisable and the exercise price of the Warrants is subject to certain reset adjustments as set forth in the forms of Warrant, including the date of the amendment to the Company’s certificate of incorporation with respect to the reverse stock split, the effectiveness dates of the registration statements and the six and twelve month anniversaries of the date of issuance of the Warrants. The Company’s registration statement on Form S-1 filed on November 3, 2014 with the SEC became effective after amendment on November 25, 2014. Pursuant to the terms of the respective warrant agreements, the exercise price of the Placement Agent Warrants were reset at $1.75 per share. At March 31, 2019, 2,483 of the Placement Agent Warrants remained outstanding.
Warrants issued in connection with the March 2016 Financing
The Company has accounted for the warrants in accordance with current accounting guidance, which defines how freestanding contracts that are indexed to and potentially settled in a Company’s own stock should be measured and classified. The authoritative accounting guidance prescribes that only warrants issued under contracts that cannot be net-cash settled and are both indexed to and settled in the Company’s common stock can be classified as equity. As the Series A, Series B and Series C Warrants and Placement Agent Warrant agreements did not meet the specific conditions for equity classification, the Company was required to classify the fair value of the warrants issued as a liability, with subsequent changes in fair value to be recorded as income (loss) in the statement of operations upon revaluation of the fair value of warrant liability at each reporting period. Unexercised portions of the Series B and C Warrants expired unexercised as of March 31, 2019. Valuation of the Warrants was estimated at issuance and each reporting date using the Monte-Carlo simulation model.
20
The following assumptions were used as inputs to the model at
March 31
, 201
9
for Series A Warrants and the Placement Agent Warrants, stock price of $
1.12
and warrant exercise price of $
1.75
as of the valuation date; the Company’s historical stock price volatility of
77.2
%; risk free interest rate on U.S. treasury notes of
2.27
%; warrant expiration of
1.96 years
; and a
zero
dividend rate, simulated as a daily interval and anti-dilution impact
if the Company had to raise capital below $1.75 per share.
During the three months ended March 31, 2019 and 2018, the Company recorded a net change in fair value of warrant liability income of $597,000 and $355,000, respectively in the condensed consolidated statements of operations related to the warrants from the March 2016 financing.
Series A, and Placement Agent Warrants Price Adjustment -
The Warrants are immediately exercisable and the exercise price of the Warrants is subject to certain reset adjustments as set forth in the forms of Warrant, including the date of the amendment to the Company’s certificate of incorporation with respect to any reverse stock split, the effectiveness dates of the registration statements and (in certain events) upon the six and twelve month anniversaries of the date of issuance of the Warrants. Pursuant to the terms a note conversion and stock purchase agreement in December 2017 with Dr. Andrey Semechkin, the exercise price of the Series A Warrants and the Placement Agent Warrants were reset at $1.75 per share.
Warrants Issued with Common Stock
2013 Securities Purchase Agreements for Common Stock
In conjunction with the Company’s sale of 67,500 shares of common stock on January 22, 2013, the Company issued warrants convertible into 33,750 shares of common stock at an exercise price of $30.00 per share. The warrants have a five-year term. These warrants are held by Dr. Andrey Semechkin and Dr. Simon Craw, the Company’s Co-Chairman and Chief Executive Officer and the Company’s former Executive Vice President Business Development, respectively. These warrants expired unexercised in January 2018.
On March 12, 2013 the Company issued warrants convertible into 16,667 shares of common stock in conjunction with the sale of 33,334 shares of common stock. These warrants have a five-year term and an exercise price of $30.00 per share. Dr. Andrey Semechkin, the Company’s Co-Chairman and Chief Executive Officer is the holder of 1,667 of these warrants. These warrants expired unexercised in March 2018.
Share data related to warrant transactions through March 31, 2019 were as follows:
|
|
Common Stock
|
|
|
Common Stock
|
|
|
|
|
|
|
Price per Warrant
|
|
|
|
March 2016 Financing
|
|
|
October 2014 Financing
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Placement
|
|
|
Placement
|
|
|
Total
|
|
|
|
|
Average
|
|
|
|
Series A
|
|
|
Agent
|
|
|
Agent
|
|
|
Warrants
|
|
|
Range
|
|
Exercise Price
|
|
Outstanding, December 31, 2018
|
|
|
3,605,713
|
|
|
|
342,856
|
|
|
|
2,483
|
|
|
|
3,951,052
|
|
|
$
|
1.75
|
|
$
|
|
1.75
|
|
Forfeited/Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
$
|
|
|
$
|
|
|
|
Outstanding, March 31, 2019
|
|
|
3,605,713
|
|
|
|
342,856
|
|
|
|
2,483
|
|
|
|
3,951,052
|
|
|
$
|
1.75
|
|
$
|
|
1.75
|
|
10. Commitments and Contingencies
Leases
The Company has established its primary research facility in 8,215 square feet of leased office and laboratory space in Oceanside, California. The current lease for this facility expires in December 2021, with the Company’s option to terminate the lease on January 1, 2020 upon a six-month advanced notice. The current base rent is approximately $10,000 per month. The facility has leasehold improvements which include cGMP (current Good Manufacturing Practices) level clean rooms designed for the derivation of clinical-grade stem cells and their differentiated derivatives, research laboratories for the Company’s stem cell differentiation studies and segregated rooms for biohazard control and containment of human donor tissue. The monthly base rent will increase by 3% annually on the anniversary date of the agreement.
The Company leases a 13,320 square foot manufacturing facility in Frederick, Maryland, which is used for laboratory and administrative purposes. As of March 31, 2019, the base rent was approximately $17,000 per month. The lease was amended in October 2018 to increase the square footage from 8,280 square feet to 13,320 for an additional 5,040 square feet. In addition, the Company extended the lease to expire in November 2025. The administration space is used to support sales, marketing and accounting. The laboratory is being used to develop and manufacture the Company’s research products. The manufacturing laboratory space has clean rooms and is fitted with the necessary water purification systems, temperature-controlled storage, labeling equipment and other standard manufacturing equipment to manufacture, package, test, store, and distribute cell culture products.
21
On February 25, 2011, the Compan
y entered into a lease agreement (the “Lease Agreement”) with S Real Estate Holdings LLC to allow the Company to expand into new corporate offices located at 5950 Priestly Drive, Carlsbad, California. The building is used for administrative purposes, but c
ould also be used for research and development purposes if such space is needed in the future. The lease initially covered approximately 4,653 square feet, starting on March 1, 2011, and was amended to cover approximately 8,199 square feet effective July 1
, 2011, and to cover approximately 9,848 square feet effective January 1, 2013. The lease expired on February 29, 2016, and the Company extended the term of the lease for one year. On February 22, 2017, the Company extended the term of the lease for an add
itional three years. The Company began paying rent at an initial rate of approximately $5,000 per month and the rate was amended effective July 1, 2011 and January 1, 2013 to account for additional square footage occupied by the Company. As of
March 31
, 20
1
9
, the base rent is approximately $13,000 per month. The monthly base rent will increase by 3% annually on the anniversary date of the agreement. The Company is also obligated to pay a portion of the utilities for the building and increases in property ta
x and insurance.
S Real Estate Holdings LLC is owned by Dr. Russell Kern, the Company’s Executive Vice President and Chief Scientific Officer and a director, and was previously owned by Dr. Andrey Semechkin, the Company’s Chief Executive Officer and Co-Chairman of the Board of Directors. The Lease Agreement was negotiated at arm’s length and was reviewed by the Company’s outside legal counsel. The terms of the lease were reviewed by a committee of independent directors, and the Company believes that, in total, those terms are consistent with the terms that could be obtained for comparable facilities from an unaffiliated party.
These operating leases are included in "right-of-use asset" on the Company's March 31, 2019 balance sheet and represent the Company’s right to use the underlying asset for the lease term. The Company’s obligation to make lease payments is included in ”operating lease liabilities, current” and “operating lease liabilities, net of current portion” on the Company's March 31, 2019 balance sheet. Operating lease right-of-use assets and liabilities commencing after January 1, 2019 are recognized at commencement date based on the present value of lease payments over the lease term. As of March 31, 2019, total right-of-use assets and operating lease liabilities were approximately $933,000 and $1,305,000, respectively. All operating lease expense is recognized on a straight-line basis over the lease term.
Because the rate implicit in each lease is not readily determinable, the Company uses its incremental borrowing rate to determine the present value of the lease payments.
Information related to the Company's right-of-use assets and related lease liabilities were as follows (in thousands):
|
|
Three months ended March 31, 2019
|
|
Cash paid for operating lease liabilities
|
|
$
|
119
|
|
Right-of-use assets obtained in exchange for new operating lease obligations
|
|
$
|
933
|
|
Weighted-average remaining lease term (years)
|
|
|
5.16
|
|
Weighted average discount rate
|
|
|
17.38
|
%
|
Maturities of lease liabilities as of March 31, 2019 were as follows :
|
|
|
|
|
2019 (remaining months)
|
|
$
|
372
|
|
2020
|
|
|
369
|
|
2021
|
|
|
347
|
|
2022
|
|
|
220
|
|
2023
|
|
|
227
|
|
Thereafter
|
|
|
454
|
|
|
|
|
1,989
|
|
Less: present value adjustments
|
|
|
(684
|
)
|
Total lease liabilities
|
|
$
|
1,305
|
|
|
|
|
|
|
Current operating lease liabilities
|
|
$
|
294
|
|
Non-current operating lease liabilities
|
|
|
1,011
|
|
Total operating lease liabilities
|
|
$
|
1,305
|
|
The Company incurred rent expense of $140,000 and $87,000 for the three months ended March 31, 2019 and 2018, respectively.
Customer Concentration
22
During the three months ended
March 31
, 201
9 and 2018
, for the b
iomedical market segment, one customer accounted for
42
% and
37
%
of consolidated revenues, respectively
.
No other single customer accounted for more than 10% of revenues for any period presented.
Vendor Concentration
During the three months ended March 31, 2019 and 2018, no single vendor accounted for more than 10% of consolidated purchases.
11. Segments and Geographic Information
The Company’s chief operating decision-maker reviews financial information presented on a consolidated basis, accompanied by disaggregated information by each reportable company’s statement of operations. The Company operates the business on the basis of three reporting segments, the parent company and two business units:
International Stem Cell Corporation, incorporated in Delaware, is a research and development company, for the therapeutic market, which advances clinical applications of hpSCs for the treatment of various diseases of the central nervous system, liver diseases and is currently conducting clinical trials in Australia for the use of hpSCs in the treatment of Parkinson’s disease through its wholly-owned subsidiary, Cyto Therapeutics;
Lifeline Skin Care, Inc. for the anti-aging cosmetic market, develops, manufactures and markets a category of anti-aging cosmetic skin care products based on the Company’s proprietary parthenogenetic stem cell technology and small molecule technology;
Lifeline Cell Technology, LLC for the biomedical market, develops, manufactures and commercializes primary human cell research products including over 201 human cell culture products, including frozen human “primary” cells and the reagents (called “media”) needed to grow, maintain and differentiate the cells.
Revenues, Expenses and Operating Income (loss)
The Company does not measure the performance of its segments on any asset-based metrics. Therefore, segment information is presented only for operating income (loss). Revenues, expenses and operating income (loss) by market segment were as follows (in thousands):
|
For the Three Months Ended
|
|
|
March 31,
|
|
|
2019
|
|
|
2018
|
|
Revenues:
|
|
|
|
|
|
|
|
Anti-aging cosmetic market
|
$
|
428
|
|
|
$
|
498
|
|
Biomedical market
|
|
1,790
|
|
|
|
2,135
|
|
Total revenues
|
|
2,218
|
|
|
|
2,633
|
|
Operating expenses:
|
|
|
|
|
|
|
|
Therapeutic market
|
|
1,658
|
|
|
|
1,816
|
|
Anti-aging cosmetic market
|
|
603
|
|
|
|
704
|
|
Biomedical market
|
|
1,446
|
|
|
|
1,298
|
|
Total operating expenses
|
|
3,707
|
|
|
|
3,818
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
Therapeutic market
|
|
(1,658
|
)
|
|
|
(1,816
|
)
|
Anti-aging cosmetic market
|
|
(175
|
)
|
|
|
(206
|
)
|
Biomedical market
|
|
344
|
|
|
|
837
|
|
Total operating loss
|
$
|
(1,489
|
)
|
|
$
|
(1,185
|
)
|
23
Geographic Information
The Company’s wholly-owned subsidiaries are located in Maryland, California, and Melbourne, Australia and have customer and vendor relationships worldwide. Significant revenues in the following regions are those that are attributable to the individual countries within the region to which the product was shipped (in thousands):
|
For the Three Months Ended
|
|
|
March 31,
|
|
|
2019
|
|
|
2018
|
|
North America
|
$
|
1,997
|
|
|
$
|
2,303
|
|
Asia
|
|
129
|
|
|
|
238
|
|
Europe
|
|
89
|
|
|
|
86
|
|
All other regions
|
|
3
|
|
|
|
6
|
|
Total
|
$
|
2,218
|
|
|
$
|
2,633
|
|
12. Subsequent Events
On April 17, 2019 to obtain funding for working capital purposes, the Company issued an unsecured, non-convertible promissory note in the amount of $1,800,000 to Dr. Andrey Semechkin, the Company’s Chief Executive Officer and Co-Chairman of the Board of Directors. Dr. Andrey Semechkin surrendered a promissory note from the Company for $1,000,000 and provided an additional $800,000 of funds to the Company. The outstanding principal amount accrues interest at a rate of four and a half Percent (4.5%) per annum and is due and payable January 15, 2020 but may be pre-paid by the Company without penalty at any time.
24