See accompanying notes to the unaudited condensed consolidated financial statements.
For the Year Ended December 31, 2015 and the Nine months ended September 30, 2016
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 cosmetic products, utilizing an extract derived from the Company’s human parthenogenetic stem cells and the Company’s proprietary small molecule technology.
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 human parthenogenetic stem cells (hpSCs) in the treatment of Parkinson’s disease.
Reverse Stock Split
Effective July 29, 2015 and pursuant to the reverse stock split approved by the Company’s Board of Directors, each 150 shares of issued and outstanding common stock were combined into and became one share of common stock and no fractional shares were issued. The accompanying financial statements and related disclosures give retroactive effect to the reverse stock split for all periods presented.
Going Concern
The Company needs to raise additional working capital. The timing and degree of any future capital requirements will depend on many factors. Currently, the Company’s burn rate is approximately $362,000 per month, excluding capital expenditures and patent costs averaging $84,000 per month. There can be no assurance that the Company will be successful in maintaining its normal operating cash flow and raising additional funds, and that such cash flows will be sufficient to sustain the Company’s operations at least through September 30, 2017. 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. The condensed 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 its cash flow, the proper timing of its capital expenditures, and raising additional capital or financing in the future.
8
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.
These financial statements 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 consolidated financial statements included in the annual report on Form 10-K of International Stem Cell Corporation and Subsidiaries for the year ended December 31, 2015.
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, 2015 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.
Inventories
Inventories are accounted for using the first-in, first-out (FIFO) method for our Lifeline Cell Technology (“LCT”) cell culture media and reagents, average cost and specific identification methods for our Lifeline Skin Care (“LSC”) products, and specific identification method for our LCT products. Inventory balances are stated at the lower of cost or market. Lab 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 period end is classified as non-current inventory on the balance sheet.
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 September 30, 2016 and December 31, 2015, the Company had an allowance for doubtful accounts totaling $12,000 and $20,000, respectively.
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 over 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 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
9
intangible assets are recorded at cost of $4,155,000 and $3,894,000 at September 30, 20
16 and December 31, 2015, 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.
Long-Lived 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 $294,000 and $0 of impairments on its long-lived assets during the three months ended September 30, 2016 and 2015, respectively. The Company recognized $306,000 and $99,000 of impairments on its long-lived assets during the nine months ended September 30, 2016 and 2015, respectively.
Product Sales
The Company recognizes revenue from product sales at the time of shipment to the customer, provided no significant obligations remain and collection of the receivable is reasonably assured. If the customer has a right of return, the Company recognizes product revenues upon shipment, provided that future returns can be reasonably estimated. In the case where returns cannot be reasonably estimated, revenue will be deferred until such estimates can be made or the right of return has lapsed.
Allowance for Sales Returns
The Company recognizes revenue from product sales when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price to the buyer is fixed or determinable, and collectability is reasonably assured. However, the LSC products have a 30-day product return guarantee for website sales. The Company has estimated the historical rate of returns for the 30-day product return guarantee, which has remained consistent for the nine months ended September 30, 2016 as compared to the years ended December 31, 2015 and 2014. At September 30, 2016 and December 31, 2015, the estimated allowance for sales returns for LSC was $10,000.
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.
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 our common stock on the date of grant.
10
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 fair values of the Company’s liabilities as of September 30, 2016 (in thousands):
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock
|
|
$
|
5,419
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,419
|
|
The table below sets forth a summary of the fair values of the Company’s liabilities as of December 31, 2015 (in thousands):
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants to purchase common stock
|
|
$
|
239
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
239
|
|
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
|
|
Beginning balance at December 31, 2014
|
|
$
|
4,216
|
|
Exercise of warrants
|
|
|
(1,997
|
)
|
Adjustments to estimated fair value
|
|
|
(1,980
|
)
|
Ending balance at December 31, 2015
|
|
|
239
|
|
Issuances of warrants
|
|
|
16,747
|
|
Exercise of warrants
|
|
|
(294
|
)
|
Adjustments to estimated fair value
|
|
|
(11,273
|
)
|
Ending balance at September 30, 2016
|
|
$
|
5,419
|
|
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.
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.
11
Fair Value of Financial Instruments
The Company believes that the carrying value of its cash and cash equivalents, receivables, accounts payable and accrued liabilities as of September 30, 2016 and December 31, 2015 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 September 30, 2016, there were 0 non-vested restricted stock awards, 226,629 vested and 1,306,159 non-vested stock options outstanding, and 7,607,182 warrants outstanding; and at September 30, 2015, there were 0 non-vested restricted stock awards, 473,130 warrants outstanding, and 178,887 vested and 72,652 non-vested stock options outstanding. These stock options and warrants, other than certain in-the-money stock options at September 30, 2015 and certain in-the-money warrants at September 30, 2016, were not included in the diluted loss per share calculation because the effect would have been anti-dilutive. Warrants exercisable into approximately 3.6 million common shares were considered dilutive for the three and nine months ended September 30, 2016 and included in the diluted income (loss) per share. Warrants exercisable into 421,379 common shares were considered dilutive at September 30, 2015 and were included in the diluted loss per share calculation.
Comprehensive Income
Comprehensive income or loss includes all changes in 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 income or loss from operations for the nine months ended September 30, 2016 and 2015.
Registration Payment Arrangements
In accordance with applicable authoritative guidance, the Company is required to separately recognize and measure registration payment arrangements, whether issued as a separate agreement or included as a provision of a financial instrument or other agreement. Such payments include penalties for failure to effect a registration of securities.
Recent Accounting Pronouncements
In August 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU No. 2014-15,
Presentation of Financial Statements – Going Concern
(Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, which is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. The ASU provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. The amendments are effective for annual periods ending after December 15, 2016, and interim periods within annual periods beginning after December 15, 2016. Early adoption is permitted for annual or interim reporting periods for which the financial statements have not previously been issued. The Company does not intend to early adopt this standard. The Company is still evaluating what effect the adoption of this standard will have on the financial condition of the Company.
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers
, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. ASU 2014-09 was amended by ASU 2015-14 to delay the effective date. The new standard is effective for the Company on January 1, 2018. Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. The standard permits the use of either the retrospective or cumulative effect transition method. The Company is currently evaluating the effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
In July 2015, the FASB issued ASU No. 2015-11,
Simplifying the Measurement of Inventory
, which states that an entity should measure inventory within the scope of this Update at the lower of cost and net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. Subsequent measurement is unchanged for inventory measured using LIFO or the retail inventory method. ASU No. 2015-11 will be effective for annual reporting periods beginning after December 15, 2016, including interim periods within those fiscal years, which for the Company will be its 2017 fiscal first quarter. The amendments in this Update should be applied prospectively with earlier
12
application permitted as of the beginning of an interim or annual reporting period. The Company is evaluating the effect that ASU 2015-11 will have on its consolidated financial statements
and related disclosures. The Company has not yet determined the effect of the standard on its ongoing financial reporting.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842), which requires lessees to recognize “right of use” assets and liabilities for all leases with lease terms of more than 12 months. The ASU 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. The effective date will be the first quarter of fiscal year 2019. The Company is currently evaluating the impact of the adoption of this accounting standard update on its consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers
(Topic 606), which requires an entity to
recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this Update do not change the core principle of the guidance. The amendments clarify the implementation guidance on principal versus agent considerations. ASU No. 2016-08 was amended by ASU No. 2016-10 to identify performance obligations and licensing. These amendments should be adopted concurrent with adoption of ASU 2014-09. The
Company has not yet determined the effect of the standard on its ongoing financial reporting.
In March 2016, the FASB issued ASU No. 2016-09, “
Improvements to Employee Share-Based Payment Accounting
”, which is designed to simplify several aspects of accounting for share-based payment award transactions, including income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. ASU No. 2016-09 is effective for annual reporting periods, and interim periods within those periods, beginning after December 15, 2016, with early adoption permitted. The Company is currently evaluating the impact of ASU No. 2016-09 on its consolidated financial statements.
2. Inventory
The components of inventories are as follows (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Raw materials
|
|
$
|
251
|
|
|
$
|
245
|
|
Work in process
|
|
|
611
|
|
|
|
533
|
|
Finished goods
|
|
|
1,070
|
|
|
|
1,149
|
|
Total
|
|
|
1,932
|
|
|
|
1,927
|
|
Less: allowance for inventory obsolescence
|
|
|
(109
|
)
|
|
|
(90
|
)
|
Inventory, net
|
|
$
|
1,823
|
|
|
$
|
1,837
|
|
3. Property and Equipment
Property and equipment consists of the following (in thousands):
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Machinery and equipment
|
|
$
|
1,375
|
|
|
$
|
1,354
|
|
Computer equipment and software
|
|
|
419
|
|
|
|
310
|
|
Office equipment
|
|
|
208
|
|
|
|
202
|
|
Leasehold improvements
|
|
|
767
|
|
|
|
757
|
|
Construction in progress
|
|
|
28
|
|
|
|
—
|
|
|
|
|
2,797
|
|
|
|
2,623
|
|
Less: accumulated depreciation and amortization
|
|
|
(2,385
|
)
|
|
|
(2,248
|
)
|
Property and equipment, net
|
|
$
|
412
|
|
|
$
|
375
|
|
Depreciation expenses for the three and nine months ended September 30, 2016 were $51,000 and $156,000, respectively. During the same periods in the prior year, depreciation expenses were $93,000 and $287,000, 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. (“Ocata”) for patent rights and paid Ocata $340,000 in option and license fees. On
13
February 13, 2004, LCT and Ocata amended the Option agreement and LCT paid Ocata additional option fees of $22,500 for fees related to registering Ocata’s patents in selected int
ernational countries.
On May 14, 2004, LCT amended the licensing agreement with Ocata for the exclusive worldwide patent rights for the following Ocata technologies: UMass IP, ACT IP and Infigen IP. The additional license fees paid were $400,000.
On February 7, 2013, the Company and Ocata entered into Amended and Restated License 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 from Ocata 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 Ocata 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 Ocata. As of September 30, 2016, the total amount capitalized related to the acquired Ocata licenses was $747,000 and $3,337,000 related to the other patent acquisition costs.
Patents and other intangible assets were recorded at cost of $4,155,000 and $3,894,000 at September 30, 2016 and December 31, 2015, respectively. Amortization expense for the three and nine months ended September 30, 2016 was $30,000 and $90,000 , respectively. Amortization expense for the three and nine months ended September 30, 2015 was $21,000 and $73,000 , respectively. All amortization expense related to intangible assets is included in general and administrative expense. Accumulated amortization as of September 30, 2016 and December 31, 2015 was $761,000 and $671,000, respectively.
At September 30, 2016, future amortization expense related to intangible assets subject to amortization is expected to be as follows (in thousands):
|
|
Amount
|
|
2016 (remaining three months)
|
|
$
|
31
|
|
2017
|
|
|
122
|
|
2018
|
|
|
122
|
|
2019
|
|
|
88
|
|
2020
|
|
|
72
|
|
Thereafter
|
|
|
2,889
|
|
Total
|
|
$
|
3,324
|
|
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 September 30, 2016, no revenues were realized from this agreement.
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
BioTime, Inc. (in thousands)
|
|
$
|
250
|
|
|
$
|
250
|
|
6. Capital Stock
As of September 30, 2016, 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.
14
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 th
e 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 Pr
eferred, 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 p
urchase 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 Preferre
d holder would receive if the Series B Preferred were converted just prior to the dividend declaration. Each share of Series B Preferred has the same voting rights as the number of shares of common stock into which it would be convertible on the record dat
e. In 2015, 50,000 shares of the Series B Preferred Stock were converted to 27,881 shares of common stock at a conversion price of $1.79. As of September 30, 2016 and December 31, 2015, there were 250,000 shares of the Series B Preferred issued and outstan
ding.
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 B Preferred to $1.75.
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 47 shares of Series D Preferred Stock (“Series D Preferred”) for total proceeds of $4,700,000 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 September 30, 2016 and December 31, 2015, 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, 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 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
15
of shares of Seri
es 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.
The Company determined that the Series G Preferred had a contingent redemption feature allowing redemption by the holder under only some very limited circumstances (“deemed liquidation events”). As the event that may trigger the redemption of the convertible preferred stock was not solely within the Company’s control, the convertible preferred stock was classified as mezzanine equity (outside of permanent equity) on the Company’s condensed consolidated balance sheet upon issuance. Additionally, legal costs related to the Series G Preferred financing in the amount of $59,000 were recorded in the mezzanine equity as well. On December 31, 2014, the Company entered into a Waiver Agreement with all of the holders of its Series G Preferred Stock, whereby the holders irrevocably and unconditionally waived all rights they held to require the Company to redeem any or all shares of the Series G Preferred Stock and to receive any payments and any other rights accruing to them by reason of the failure of the Company to redeem shares of Series G Preferred Stock, pursuant to the terms of the Series G Certificate of Designation. Holders of Series G Preferred Stock are Dr. Andrey Semechkin and Dr. Russell Kern, each of whom is a director and executive officer of the Company, and affiliated entities of Dr. Andrey Semechkin and Dr. Russell Kern. Subsequent to the signing of the Waiver Agreement, the Series G Preferred Stock is classified within permanent equity on the Company’s condensed consolidated balance sheet.
As of September 30, 2016 and December 31, 2015, there were 5,000,000 shares of the Series G Preferred issued and outstanding.
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 conversion price and conversion ratio of the Series G Preferred to $8.43 per share and 0.1186 shares, respectively. In May 2016, the Company’s registration statement on Form S-1 became effective, which triggered the exercise price reset of the Series A Warrants and the Placement Agent Warrants issued in March 2016 from $3.64 to $2.60. Accordingly, the conversion price and conversion ratio of the Series G Preferred were further adjusted to $7.39 and 0.1352, respectively. In September 2016, the remaining outstanding Series B Warrants issued as a part of the Company’s Series I Preferred Stock Financing referred to above, for approximately 3.0 million shares expired unexercised. In accordance to the Series G Certificate of Designation, expiration of such warrants triggered further adjustment in the conversion price and conversion ratio of the Series G Preferred Stock to $10.93 per share and 0.0915 shares, respectively, as of September 30, 2016.
Series H Preferred Stock
On October 14, 2014, pursuant to a securities purchase agreement (the “Series H Agreement”), dated as of October 7, 2014, with Sabby Healthcare Volatility Master Fund, Ltd., Sabby Volatility Warrant Master Fund, Ltd., and Andrey and Russell Kern, the Company’s Chief Executive Officer and Co-Chairman and Executive Vice President and Chief Scientific Officer and Director, respectively, (together, the “Purchasers”), the Company sold in a private placement (the “Private Placement”) (i) 2,000 shares of Series H-1 and 500 shares of Series H-2 Convertible Preferred Stock, par value $0.001 with a stated value of $1,000 per share (the “Series H Preferred Stock”), convertible into 258,519 shares of common stock at an initial conversion price of $9.6705, (ii) Series A warrants (the “Series A Warrants”) to purchase up to 258,519 shares of common stock for an initial exercise price of $13.8150 per share exercisable immediately and having a term of 5.5 years, (iii) Series B warrants (the “Series B Warrants”) to purchase up to 258,519 shares of common stock for an initial exercise price of $9.6705 per share exercisable immediately and having a term of 6 months, (iv) Series C warrants (the “Series C Warrants”, together with the Series A Warrants and the Series B Warrants, collectively, the “Warrants”) to purchase up to 258,519 shares of common stock for an initial exercise price of $9.6705 per share exercisable immediately and having a term of 12 months. The aggregate initial gross proceeds received from this transaction were $2.5 million. On June 20, 2015, the remaining unexercised Series B Warrants then outstanding expired unexercised.
As of October 20, 2015, all remaining Series C Warrants were fully exercised.
The number of shares issuable upon exercise of the Series A and Placement Agent Warrants are adjustable in the event of stock splits, stock dividends, combinations of shares and similar transactions, and pursuant to anti-dilution provisions. In addition, Purchasers have been granted rights of participation in future offerings of our securities for eighteen months from the date of the offering.
As of December 31, 2015, all of Series H Preferred Stock have been converted to common stock, all of the Series B Warrants have been exercised or expired unexercised, and all of the Series C Warrants have been exercised.
Subject to certain ownership limitations with respect to the Series H-1 Preferred Stock, the Series H Preferred Stock is convertible at any time into shares of Common Stock at an initial conversion price of $9.6705 per share. The Series H 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 Series H Preferred Stock shall have preferential liquidation rights over the Common Stock. Other than the Series H-1 Preferred Stock having a beneficial ownership limitation, the Series H-1 Preferred Stock and Series H-2 Preferred Stock are substantially identical. The conversion price of the Series H Preferred Stock is subject to certain resets as set forth in the Certificates of Designation, including the date of the amendment to the 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 Closing Date.
All Series
16
H Preferred Stock was converted to common stock by November 24, 2015 and accordingly the Company filed Certificates of Elimination with the State of Delaware in December 2015 for both Series H-1 and
Series H-2 Preferred Stock.
The Warrants were immediately exercisable. As noted earlier above, on June 20, 2015, the remaining unexercised Series B Warrants then outstanding expired unexercised.
At October 20, 2015, all Series C Warrants were exercised.
The exercise price of the Series A and Placement Agent Warrants is subject to certain reset adjustments as set forth in the 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. Pursuant to the terms of the Series H Agreement, the Company may not sell shares to Lincoln Park under the Purchase Agreement with Lincoln Park, or otherwise enter into a variable rate transaction, until March 2016. Additionally, pursuant to the terms of the Series H Agreement, the Company was unable to issue any of its securities until May 7, 2015 (the 90th day following the effective date of the last registration statement on Form S-1 registering all Registrable Securities (as defined in the registration rights agreement, as amended, entered into in connection with the Series H Agreement)). However, the Company may still issue securities in certain circumstances, including issuing shares in private placements to its officers, directors and employees at market prices and issuing securities pursuant to the Company’s equity incentive plans.
H.C. Wainwright & Co. (the “Placement Agent”) acted as the exclusive placement agent for the Series H Agreement pursuant to a placement agency engagement letter, dated as of September 23, 2014, by and between the Placement Agent and the Company (the “Engagement Letter”). Upon the closing of the Series H Agreement, pursuant to the Engagement Letter, the Placement Agent received a placement agent fee of $200,000 and a warrant to purchase approximately 62,045 shares of common stock, as well as the reimbursement of fees and expenses up to $50,000. Similar to the Series A Warrant, the placement agent warrant will have an initial exercise price of $13.815 per share, be immediately exercisable and will terminate 5.5 years after the date of issuance. In addition, the Placement Agent Warrants have the same down-round protection as the Series A 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 registering 200% of the shares of Common Stock issuable upon conversion of the Series H Preferred Stock.
Pursuant to the terms of the Series H Agreement, the conversion price of the Series H Preferred Stock and the exercise price of the Series A and Placement Agent Warrants was reset at $1.79 per share. During the year ended December 31, 2015, the investors converted 1,981.60 shares of Series H Preferred Stock into approximately 643,000 shares of our common stock. As of September 30, 2016, there were no shares of Series H Preferred Stock outstanding.
See Note 9, Stock Options and Warrants,
Warrants Issued with Series H Preferred Stock
for detailed discussion of the anti-dilution provisions of the Series A, B and C Warrants.
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.
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 will ha
ve an initial exercise price of $3.64 per share, be 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
17
entitled to dividends in the event that dividends are paid on the Common Stock, and will not hav
e 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 an
d 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 in
corporation with respect to a reverse stock split, the effectiveness dates of the registration statements and, in certain instances, the six and twelve month anniversaries of the Closing Date. During the nine months ended September 30, 2016, the investors
converted 285 shares of the Series I Preferred Stock into 162,857 shares of our common stock. As of September 30, 2016, there were 6,025 shares of Series I Preferred Stock outstanding.
See Note 9, Stock Options and Warrants,
Warrants Issued with Series I Preferred Stock
for detailed discussion of the anti-dilution provisions of the Series A, B and C Warrants.
Reserved Shares
At September 30, 2016, the Company had shares of common stock reserved for future issuance as follows:
Options outstanding
|
|
|
1,532,788
|
|
Options available for future grant
|
|
|
2,231,583
|
|
Convertible preferred stock
|
|
|
6,500,401
|
|
Warrants
|
|
|
7,607,182
|
|
|
|
|
17,871,954
|
|
7. Related Party Transactions
Other than with respect to the purchases of Series D Preferred, Series G Preferred, Series H Preferred, and Series I Preferred transactions discussed above, the Company’s related party transactions were for a facility lease and working capital bridge loan.
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 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 at least as favorable to the Company as could be obtained for comparable facilities from an unaffiliated party. For the three months ended September 30, 2016 and 2015, the Company recorded $38,000 and $35,000, respectively, in rent expense that was related to the facility lease arrangement with related parties. For the nine months ended September 30, 2016 and 2015, the Company recorded $111,000 and $104,000, respectively, related to the same arrangement with the related party.
Between May 6, 2015 and March 9, 2016, to obtain funding for working capital purposes and to refinance the indebtedness incurred from multiple notes during this time frame, the Company borrowed a total of $3,810,000 from Dr. Andrey Semechkin, the Company’s Chief Executive Officer and Co-Chairman of the Board of Directors, and issued an unsecured, non-convertible promissory note in the principal amount of $3,810,000 (the “Note”) to Dr. Andrey Semechkin. The principal amount under the Note accrued interest at a rate of One Half of One Percent (0.50%) per annum. The Note was due and payable April 10, 2016. On March 15, 2016, the entire principal amount of the promissory note issued on March 9, 2016, was converted to 3,810 shares of Series I-2 Preferred Stock, pursuant to the Series I Agreement, dated as of March 9, 2016.
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 IRC Code 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 Code 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.
18
9. Stock Options and Warrants
Stock Options
The Company adopted the 2006 Equity Participation Plan (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.
In April 2010, the Company adopted the 2010 Equity Participation Plan (the “2010 Plan”), which provides for the grant of stock options, restricted stock and other equity based awards. Awards for up to 3,700,000 shares may be granted to employees, directors and consultants under the 2010 Plan, as amended. 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.
Total stock-based compensation expense for the three and nine months ended September 30, 2016 and 2015 was comprised of the following (in thousands):
|
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Cost of sales
|
|
$
|
9
|
|
|
$
|
6
|
|
|
$
|
23
|
|
|
$
|
20
|
|
Research and development
|
|
|
128
|
|
|
|
30
|
|
|
|
304
|
|
|
|
121
|
|
Selling and marketing
|
|
|
12
|
|
|
|
8
|
|
|
|
39
|
|
|
|
25
|
|
General and administrative
|
|
|
146
|
|
|
|
114
|
|
|
|
319
|
|
|
|
334
|
|
|
|
$
|
295
|
|
|
$
|
158
|
|
|
$
|
685
|
|
|
$
|
500
|
|
Unrecognized compensation expense related to stock options as of September 30, 2016 was $2.8 million, which is expected to be recognized over a weighted average period of approximately 3.2 years.
In accordance with applicable authoritative guidance, the Company is required to establish assumptions and estimates of the weighted-average 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. Stock-based compensation for stock options granted to non-employees has been determined using the Black-Scholes option pricing model. These options are revalued at each reporting period until fully vested, with any change in fair value recognized in the condensed consolidated statements of operations.
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 and nine months ended
September 30, 2016
and 2015:
|
Three Months Ended
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
Nine Months Ended
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
September 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Significant assumptions (weighted average):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate at grant date
|
|
0.00
|
%
|
|
|
1.53
|
%
|
|
|
1.52
|
%
|
|
|
1.56
|
%
|
Expected stock price volatility
|
|
0.00
|
%
|
|
|
93.85
|
%
|
|
|
100.00
|
%
|
|
|
93.81
|
%
|
Expected dividend payout
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected option life based on management's estimate
|
0.0 years
|
|
|
5.14 years
|
|
|
6.02 years
|
|
|
5.26 years
|
|
19
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, 2014
|
|
|
142,244
|
|
|
$
|
128.47
|
|
|
|
|
|
|
|
Granted
|
|
|
76,271
|
|
|
$
|
3.66
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
(17,606
|
)
|
|
$
|
105.46
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
200,909
|
|
|
$
|
83.10
|
|
|
|
|
|
|
|
Granted
|
|
|
1,346,800
|
|
|
$
|
3.41
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
(65,651
|
)
|
|
$
|
5.67
|
|
|
|
|
|
|
|
Outstanding at September 30, 2016
|
|
|
1,482,058
|
|
|
$
|
14.11
|
|
|
9.08 years
|
|
$
|
—
|
|
Vested and expected to vest at September 30, 2016
|
|
|
1,291,669
|
|
|
$
|
15.66
|
|
|
9.02 years
|
|
$
|
—
|
|
Exercisable at September 30, 2016
|
|
|
175,899
|
|
|
$
|
92.01
|
|
|
6.05 years
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Number of
|
|
|
Weighted
|
|
|
Average
|
|
Aggregate
|
|
|
|
Options Issued
|
|
|
Average Exercise
|
|
|
Remaining
|
|
Intrinsic
|
|
|
|
Outside
|
|
|
Price Per
|
|
|
Contractual
|
|
Value
|
|
|
|
the Plan
|
|
|
Share
|
|
|
Term
|
|
(in thousands)
|
|
Outstanding at December 31, 2014
|
|
|
50,730
|
|
|
$
|
92.31
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
50,730
|
|
|
$
|
92.31
|
|
|
|
|
|
|
|
Granted
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Exercised
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Canceled or expired
|
|
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Outstanding, vested and exercisable at September 30, 2016
|
|
|
50,730
|
|
|
$
|
92.31
|
|
|
3.11 years
|
|
$
|
—
|
|
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. Beginning in 2013, additional annual grants of restricted stock awards have been made to the non-employee members of the board of directors as partial compensation for their services. These awards vest quarterly at the end of each quarter. In addition, the Company has made restricted stock awards to non-employee consultants for their services, which generally vest in one year or less.
20
The following table summarizes the changes in restricted stock award activity and the related weighted average exercise prices
for the Company’s awards issued:
|
|
Restricted
|
|
|
|
|
|
|
|
Stock Issued
|
|
|
|
|
|
|
|
from the
|
|
|
Weighted
|
|
|
|
2006
Plan and
|
|
|
Average Grant Date
|
|
|
|
2010 Plan
|
|
|
Fair Value
|
|
Unvested at December 31, 2014
|
|
|
968
|
|
|
$
|
24.00
|
|
Granted
|
|
|
19,547
|
|
|
$
|
4.95
|
|
Vested
|
|
|
(20,515
|
)
|
|
$
|
5.81
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
Unvested at December 31, 2015
|
|
|
—
|
|
|
$
|
—
|
|
Granted
|
|
|
31,611
|
|
|
$
|
2.31
|
|
Vested
|
|
|
(31,611
|
)
|
|
$
|
2.31
|
|
Forfeited
|
|
|
—
|
|
|
$
|
—
|
|
Unvested at September 30, 2016
|
|
$
|
—
|
|
|
$
|
—
|
|
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 nine months ended September 30, 2016 and 2015 was approximately $73,000 and $95,000, respectively. The Company recognized approximately $24,000 and $25,000 of stock-based compensation expense related to the restricted stock awards for the three months ended September 30, 2016 and 2015, respectively. Additionally, during the nine months ended September 30, 2016 and 2015,the Company recognized approximately $73,000 and $80,000 of stock-based compensation expense related to the restricted stock awards, respectively. As of September 30, 2016, total unrecognized compensation costs related to unvested awards was $0.
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, at December 31, 2015 and September 30, 2016 using the Monte-Carlo simulation model.
The following assumptions were used as inputs to the model at September 30, 2016: for the Placement Agent Warrants, stock price of $1.85 and warrant exercise price of $1.75 as of the valuation date; the Company’s historical stock price volatility of 87.7%; risk free interest rate on U.S. treasury notes of 0.95%; warrant expiration of 3.54 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 and nine months ended September 30, 2016, the Company recorded a net change in fair value of warrant liability gain of $0 and $70,000, respectively, in the condensed consolidated statements of operations related to the warrants from the October 2014 financing.
Series B Warrant Exercises
- During the year ended December 31, 2015, the Company received net proceeds of $83,388 upon the exercise of 12,409 of the Series B Warrants by, Dr. Russell Kern, the Company’s Executive Vice President and Chief Scientific Officer and director. On June 20, 2015, the remaining unexercised outstanding Series B Warrants for 206,815 shares expired.
Series C Warrant Exercises
- During the year ended December 31, 2015, the Company received net proceeds of $681,000 upon the exercise of 258,518 of the Series C Warrants by Dr. Andrey Semechkin and Dr. Russell Kern, the Company’s Co-Chairman and Chief Executive Officer and Executive Vice President and Chief Scientific Officer and director, respectively, and other holders of the Series C Warrants. At October 20, 2015, all Series C Warrants were exercised.
Series A Warrant Exercises
- During the year ended December 31, 2015, the Company received net proceeds of $404,000 upon the exercise of 246,108 of the Series A Warrants by Dr. Andrey Semechkin, the Company’s Co-Chairman and Chief Executive Officer
21
and other holders of the Series A Warrants. On June 29, 2016, the Company received net proceeds of approximately $22,000 upon the exercise of 12,408 of t
he Series A Warrants by Dr. Russell Kern, the Company’s Executive Vice President and Chief Scientific Officer. At June 29, 2016, all Series A Warrants were exercised.
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 Series I Agreement, the exercise price of the Placement Agent Warrants was reset at $1.75 per share. In April 2016, 59,564 of the Placement Agent Warrants were exercised and 33,935 shares of the Company’s common stock was issued upon such warrant exercises. At September 30, 2016, 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. Valuation of the Warrants was estimated at issuance and September 30, 2016 using the Monte-Carlo simulation model.
The following assumptions were used as inputs to the model at September 30, 2016 for Series A Warrants and the Placement Agent Warrants, stock price of $1.85 and warrant exercise price of $2.60 as of the valuation date; the Company’s historical stock price volatility of 87.7%; risk free interest rate on U.S. treasury notes of 1.06%; warrant expiration of 4.46 years; and a zero dividend rate, for Series C Warrants, stock price of $1.85 and warrant exercise price of $1.75 as of the valuation date; the Company’s historical stock price volatility of 87.7%; risk free interest rate on U.S. treasury notes of 0.45%; warrant expiration of 0.45 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.
The fair value of the warrant liability at the issuance date exceeded the gross proceeds received for the Series I Preferred shares, Series A, Series B and Series C Warrants by $9,902,000. The Series A Warrants, Series B Warrants, Series C Warrants and Placement Agent Warrants had fair values of approximately $5,627,000, $5,658,000, $4,927,000 and $535,000 at issuance, respectively. The classification and valuation of the warrants resulted in total warrant liabilities of $16,747,000 at issuance. During the three and nine months ended September 30, 2016, the Company recorded a net change in fair value of warrant liability gain of $1.7 million and $11.2 million in the condensed consolidated statements of operations related to the warrants from the March 2016 financing, respectively.
From June 29, 2016 to September 14, 2016, the Company received net proceeds of approximately $996,000 upon the exercise of a total of 569,285 of the Series B Warrants by, Dr. Andrey Semechkin, the Company’s Co-Chairman and Chief Executive Officer. On September 15, 2016, the remaining unexercised outstanding Series B Warrants for approximately 3.0 million shares expired.
Series A, C 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. The Company’s registration statement on Form S-1 filed on April 20, 2016 with the SEC became effective on May 9, 2016. Pursuant to the terms of the respective warrant agreements, the exercise price of the Series A Warrants and the Placement Agent Warrants were reset at $2.60 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.
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.
22
Warrants Issued in Connection with SkinCare Marketing Agreement
In September 2011, the Company signed a Marketing Agreement (“agreement”) with an effective date of June 30, 2011, with a third party marketing organization. According to the terms of the agreement as described in Note 10 below, Commitments and Contingencies, under Marketing Agreement, the third party marketing organization would provide assistance to LSC to sell its skin care products through various specific proprietary mailings. The agreement provides for two tranches of common stock warrants issued by the Company for the benefit of the third party marketing organization for 667 shares each, with strike prices of $225.00 and $300.00, respectively, vesting over four quarters, and a warrant term of five years. As of September 30, 2016 and December 31, 2015, there were 0 and 1,334 warrants outstanding, respectively. These warrants expired unexercised in September 2016.
23
Share data related to warrant transactions through
September
30, 2016 were as follows:
|
|
Common Stock
|
|
|
Common Stock
|
|
|
Common Stock
|
|
|
|
|
|
|
Price per Warrant
|
|
|
|
March 2016 Financing
|
|
|
October 2014 Financing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Placement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Placement
|
|
|
Skin Care
|
|
|
Jan 2013
|
|
|
Mar 2013
|
|
|
Total
|
|
|
|
|
|
Average
|
|
|
|
Series A
|
|
|
Series B
|
|
|
Series C
|
|
|
Agent
|
|
|
Series A
|
|
|
Series B
|
|
|
Series C
|
|
|
Agent
|
|
|
Marketing
|
|
|
Financing
|
|
|
Financing
|
|
|
Warrants
|
|
|
Range
|
|
|
Exercise Price
|
|
Outstanding,
December 31, 2014
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
258,519
|
|
|
|
219,224
|
|
|
|
258,519
|
|
|
|
62,045
|
|
|
|
1,334
|
|
|
|
33,750
|
|
|
|
16,667
|
|
|
|
850,058
|
|
|
$
|
8.64-300.00
|
|
|
$
|
|
10.31
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
—
|
|
|
$
|
|
—
|
|
|
$
|
|
—
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(246,108
|
)
|
|
|
(12,409
|
)
|
|
|
(258,518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(517,035
|
)
|
|
$
|
1.79-6.72
|
|
|
$
|
|
2.40
|
|
Forfeited/Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(206,815
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(206,815
|
)
|
|
$
|
|
11.25
|
|
|
$
|
|
11.25
|
|
Rounding due to July 29,
2015 reverse stock split
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3
|
)
|
|
|
|
|
|
|
(1
|
)
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2
|
)
|
|
|
|
—
|
|
|
|
|
—
|
|
Outstanding,
December 31, 2015
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
12,408
|
|
|
|
—
|
|
|
|
—
|
|
|
|
62,047
|
|
|
|
1,334
|
|
|
|
33,750
|
|
|
|
16,667
|
|
|
|
126,206
|
|
|
$
|
1.79-300.00
|
|
|
$
|
|
15.82
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
3,605,713
|
|
|
|
3,605,713
|
|
|
|
3,605,713
|
|
|
|
342,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,159,995
|
|
|
$
|
1.75-3.64
|
|
|
$
|
|
2.42
|
|
Exercised
|
|
|
|
|
|
|
(569,285
|
)
|
|
|
|
|
|
|
|
|
|
|
(12,408
|
)
|
|
|
|
|
|
|
|
|
|
|
(59,564
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(641,257
|
)
|
|
$
|
|
1.75
|
|
|
$
|
|
1.75
|
|
Forfeited/Cancelled
|
|
|
|
|
|
|
(3,036,428
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,334
|
)
|
|
|
|
|
|
|
|
|
|
|
(3,037,762
|
)
|
|
$
|
1.75-300.00
|
|
|
$
|
|
1.86
|
|
Outstanding,
September 30, 2016
|
|
|
3,605,713
|
|
|
|
—
|
|
|
|
3,605,713
|
|
|
|
342,856
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,483
|
|
|
|
—
|
|
|
|
33,750
|
|
|
|
16,667
|
|
|
|
7,607,182
|
|
|
$
|
1.75-30.00
|
|
|
$
|
|
2.43
|
|
24
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 (“Oceanside Facility”). The current lease for the Oceanside Facility expires in February 2021, with an option to terminate the lease on January 1, 2020 upon a six month advanced notice. The current base rent is approximately $9,000 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 8,280 square foot manufacturing facility in Frederick, Maryland, which is used for laboratory and administrative purposes. As of September 30, 2016, the base rent was approximately $10,000 per month. The initial term of the lease expired in December 2015 and the Company renewed the lease for an additional seven years. The administration space is used to support sales, marketing and accounting. The laboratory is used to develop and manufacture the Company’s research products. clean rooms, water purification systems, temperature controlled storage, labeling equipment and other standard manufacturing equipment to manufacture, package, test, store, and distribute cell culture products.
On February 25, 2011, the Company 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 could 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. 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. The current 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 tax 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.
The Company incurred rent expense of $82,000 and $73,000 for the three months ended September 30, 2016 and 2015, respectively. For the nine months ended September 30, 2016 and 2015, the Company incurred rent expense of $227,000 and $215,000, respectively.
Future minimum lease payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of September 30, 2016, are as follows (in thousands):
|
|
Amount
|
|
2016 (remaining three months)
|
|
$
|
101
|
|
2017
|
|
|
272
|
|
2018
|
|
|
248
|
|
2019
|
|
|
252
|
|
2020
|
|
|
259
|
|
Thereafter
|
|
|
496
|
|
Total
|
|
$
|
1,628
|
|
Marketing Agreement
In September 2011, the Company signed a Marketing Agreement (“agreement”) with an effective date of June 30, 2011, superseding the terms of a previous arrangement with a third party marketing organization. According to the agreement, the third party marketing organization will continue to provide assistance to Lifeline Skin Care, Inc., (“LSC”) a wholly-owned subsidiary of International Stem Cell, to sell skin care products through various specific proprietary mailings. In exchange for such services, the Company will pay 20% of net revenues for Direct Sales (as defined in the agreement) generated from the proprietary mailings. In addition, the Company agreed to pay 10% of net revenues for Referral Sales. The agreement specifies that the parties do not intend to create a joint venture, and that either party may terminate the agreement upon 30-day written notice. In addition, the agreement provided for two tranches of common stock warrants issued by the Company for the benefit of the third party marketing organization for 667 shares each, with strike prices of $225.00 and $300.00, respectively, with vesting over four quarters, and warrant term of five years. Subsequently in
25
July 2012, the Company renegotiated the commission structure to refle
ct slightly lower rates, 18% on net revenues derived from direct sales and 9% on net revenues derived from referral sales. LSC incurred $0 and $2,000 as commission expenses during the three months ended September 30, 2016 and 2015, respectively, under the
terms of this agreement. For the nine months ended September 30, 2016 and 2015, the commission expenses incurred under this agreement were $4,000 and $10,000, respectively.
Customer Concentration
During the three and nine months ended September 30, 2016 for the Biomedical market segment, one customer accounted for 39% and 32% of consolidated revenues, respectively. During the three and nine months ended September 30, 2015 for the Biomedical market segment, one customer accounted for 28% and 22% of consolidated revenues, respectively. No other single customer accounted for more than 10% of revenues for any period presented.
Vendor Concentration
During the three and nine months ended
September 30
, 2016 no single vendor accounted for more than 10% of consolidated purchases. During the three and nine months ended
September 30
, 2015 for the Cosmetic market segment, one vendor accounted for 10% and 15% of consolidated purchases, respectively. No other single vendor accounted for more than 10% of purchases for any period presented.
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 its 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 corneal blindness 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 Cosmetic Market, which develops, manufactures and markets a category of 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, which develops, manufactures and commercializes primary human cell research products including over 160 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
|
|
|
For the Nine Months Ended
|
|
|
Ended September 30,
|
|
|
Ended September 30,
|
|
|
2016
|
|
|
2015
|
|
|
2016
|
|
|
2015
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cosmetic market
|
$
|
646
|
|
|
$
|
923
|
|
|
$
|
2,133
|
|
|
$
|
2,648
|
|
Biomedical market
|
|
1,297
|
|
|
|
1,213
|
|
|
|
3,342
|
|
|
|
2,925
|
|
Total revenues
|
|
1,943
|
|
|
|
2,136
|
|
|
|
5,475
|
|
|
|
5,573
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Therapeutic market
|
|
1,639
|
|
|
|
1,180
|
|
|
|
4,702
|
|
|
|
4,732
|
|
Cosmetic market
|
|
662
|
|
|
|
872
|
|
|
|
2,129
|
|
|
|
2,361
|
|
Biomedical market
|
|
904
|
|
|
|
706
|
|
|
|
2,322
|
|
|
|
2,005
|
|
Total operating expenses
|
|
3,205
|
|
|
|
2,758
|
|
|
|
9,153
|
|
|
|
9,098
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Therapeutic market
|
|
(1,639
|
)
|
|
|
(1,180
|
)
|
|
|
(4,702
|
)
|
|
|
(4,732
|
)
|
Cosmetic market
|
|
(16
|
)
|
|
|
51
|
|
|
|
4
|
|
|
|
287
|
|
Biomedical market
|
|
393
|
|
|
|
507
|
|
|
|
1,020
|
|
|
|
920
|
|
Total operating loss
|
$
|
(1,262
|
)
|
|
$
|
(622
|
)
|
|
$
|
(3,678
|
)
|
|
$
|
(3,525
|
)
|
26
Geographic Information
The Company’s wholly-owned subsidiaries are located in Maryland, California, and Victoria, 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
|
|
|
|
For the Nine Months Ended
|
|
|
September 30,
|
|
|
|
September 30,
|
|
|
2016
|
|
|
2015
|
|
|
|
2016
|
|
|
2015
|
|
North America
|
$
|
1,672
|
|
|
$
|
1,674
|
|
|
|
$
|
4,616
|
|
|
$
|
4,444
|
|
Asia
|
|
181
|
|
|
|
362
|
|
|
|
|
544
|
|
|
|
844
|
|
Europe
|
|
78
|
|
|
|
91
|
|
|
|
|
285
|
|
|
|
251
|
|
All other regions
|
|
12
|
|
|
|
9
|
|
|
|
|
30
|
|
|
|
34
|
|
Total
|
$
|
1,943
|
|
|
$
|
2,136
|
|
|
|
$
|
5,475
|
|
|
$
|
5,573
|
|
12. Subsequent Events
None.
27