Quarterly Report (10-q)

Date : 11/14/2018 @ 10:01PM
Source : Edgar (US Regulatory)
Stock : International Stem Cell Corp. (QB) (ISCO)
Quote : 0.5  0.0 (0.00%) @ 12:41PM

Quarterly Report (10-q)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018  

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 0-51891

 

INTERNATIONAL STEM CELL CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

Delaware

 

20-4494098

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

5950 Priestly Drive

Carlsbad, CA

 

92008

(Address of Principal Executive Offices)

 

(Zip Code)

(760) 940-6383

(Registrant’s telephone number)

 

Indicated by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES       NO  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    YES       NO  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

  

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.            

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES       NO  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of November 9, 2018 the Registrant had 6,771,425 shares of Common Stock outstanding.

 

 

 

 

 


 

International Stem Cell Corporation and Subsidiaries

INDEX TO FORM 10-Q

 

 

  

Page Numbers

PART I—FINANCIAL INFORMATION

  

 

Item 1.

Financial Statements

  

3

 

Condensed Consolidated Balance Sheets

 

3

 

Condensed Consolidated Statements of Operations

 

4

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity

 

5

 

Condensed Consolidated Statements of Cash Flows

 

7

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

27

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

  

31

Item 4.

Controls and Procedures

  

31

 

PART II—OTHER INFORMATION

  

 

Item 1.

Legal Proceedings

  

33

Item 1A.

Risk Factors

  

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

  

47

Item 3.

Defaults Upon Senior Securities

  

47

Item 4.

Mine Safety Disclosures

  

47

Item 5.

Other Information

  

47

Item 6.

Exhibits

  

47

Exhibit 31.1

  

 

Exhibit 31.2

  

 

Exhibit 32.1

  

 

Exhibit 32.2

  

 

Exhibit 101 INSTANCE DOCUMENT

  

 

Exhibit 101 SCHEMA DOCUMENT

  

 

Exhibit 101 CALCULATION LINKBASE DOCUMENT

  

 

Exhibit 101 DEFINITION LINKBASE DOCUMENT

  

 

Exhibit 101 LABELS LINKBASE DOCUMENT

  

 

Exhibit 101 PRESENTATION LINKBASE DOCUMENT

  

 

 

 

 

2


 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

International Stem Cell Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share data)

 

 

 

September 30,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

(Unaudited)

 

 

 

 

 

Cash

 

$

1,161

 

 

$

304

 

Accounts receivable, net of allowance for doubtful accounts of $12

 

 

1,545

 

 

 

465

 

Inventory, net

 

 

1,474

 

 

 

1,307

 

Prepaid expenses and other current assets

 

 

512

 

 

 

779

 

Total current assets

 

 

4,692

 

 

 

2,855

 

Non-current inventory

 

 

774

 

 

 

692

 

Property and equipment, net

 

 

347

 

 

 

321

 

Intangible assets, net

 

 

2,848

 

 

 

2,922

 

Deposits and other assets

 

 

64

 

 

 

74

 

Total assets

 

$

8,725

 

 

$

6,864

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Accounts payable

 

$

799

 

 

$

830

 

Accrued liabilities

 

 

844

 

 

 

607

 

Related party payable

 

 

2,025

 

 

 

 

Advances

 

 

250

 

 

 

250

 

Fair value of warrant liability

 

 

2,021

 

 

 

3,113

 

Total current liabilities

 

 

5,939

 

 

 

4,800

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

Series B Convertible Preferred stock, $0.001 par value, 5,000,000 shares authorized, 250,000

   issued and outstanding, with liquidation preferences of $405 and $396 at September 30, 2018

   and December 31, 2017, respectively

 

 

 

 

 

 

Series D Convertible Preferred stock, $0.001 par value, 50 shares authorized, 43 issued and

   outstanding, with liquidation preference of $4,320

 

 

 

 

 

 

Series G Convertible Preferred stock, $0.001 par value, 5,000,000 shares authorized,

   issued and outstanding, with liquidation preference of $5,000

 

 

5

 

 

 

5

 

Series I-1 Convertible Preferred stock, $0.001 par value, 2,000 shares authorized, 1,094 and

   1,304 issued and outstanding, with liquidation preferences of $1,094 and $1,304 at

   September 30, 2018 and December 31, 2017, respectively

 

 

 

 

 

 

Series I-2 Convertible Preferred stock, $0.001 par value, 4,310 shares authorized,

   issued and outstanding with liquidation preference of $4,310

 

 

 

 

 

 

Common stock, $0.001 par value, 120,000,000 shares authorized, 6,599,739 and 6,057,132

  shares issued and outstanding at September 30, 2018 and December 31, 2017, respectively

 

 

7

 

 

 

6

 

Additional paid-in capital

 

 

108,409

 

 

 

106,585

 

Accumulated deficit

 

 

(105,635

)

 

 

(104,532

)

Total stockholders' equity

 

 

2,786

 

 

 

2,064

 

Total liabilities and stockholders' equity

 

$

8,725

 

 

$

6,864

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

3


 

International Stem Cell Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Product sales

$

3,195

 

 

$

1,847

 

 

$

8,866

 

 

$

5,614

 

Total revenues

 

3,195

 

 

 

1,847

 

 

 

8,866

 

 

 

5,614

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of sales

 

1,315

 

 

 

474

 

 

 

3,235

 

 

 

1,498

 

Research and development

 

616

 

 

 

670

 

 

 

1,879

 

 

 

2,054

 

Selling and marketing

 

608

 

 

 

657

 

 

 

1,940

 

 

 

1,790

 

General and administrative

 

1,319

 

 

 

1,016

 

 

 

4,026

 

 

 

3,290

 

Total expenses

 

3,858

 

 

 

2,817

 

 

 

11,080

 

 

 

8,632

 

Loss from operations

 

(663

)

 

 

(970

)

 

 

(2,214

)

 

 

(3,018

)

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in fair value of warrant liability

 

758

 

 

 

(1,174

)

 

 

1,092

 

 

 

(1,622

)

Interest expense

 

(17

)

 

 

(20

)

 

 

(26

)

 

 

(40

)

Miscellaneous income

 

43

 

 

 

 

 

 

45

 

 

 

 

Total other income (expense)

 

784

 

 

 

(1,194

)

 

 

1,111

 

 

 

(1,662

)

Income (loss) before income taxes

 

121

 

 

 

(2,164

)

 

 

(1,103

)

 

 

(4,680

)

Provision for income taxes

 

 

 

 

 

 

 

 

 

Net income (loss)

$

121

 

 

$

(2,164

)

 

$

(1,103

)

 

$

(4,680

)

Net income (loss) applicable to common stockholders

$

121

 

 

$

(2,164

)

 

$

(1,103

)

 

$

(4,680

)

Net income (loss) per common share-basic

$

0.02

 

 

$

(0.54

)

 

$

(0.18

)

 

$

(1.17

)

Net income (loss) per common share-diluted

$

0.02

 

 

$

(0.54

)

 

$

(0.18

)

 

$

(1.17

)

Weighted average shares-basic

 

6,337

 

 

 

4,020

 

 

 

6,233

 

 

 

3,989

 

Weighted average shares-diluted

 

6,404

 

 

 

4,020

 

 

 

6,233

 

 

 

3,989

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

4


 

International Stem Cell Corporation and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the Year Ended December 31, 2017 and the Nine Months Ended September 30, 2018

(in thousands)

(2018 Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Convertible Preferred Stock

 

 

 

Common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock

 

 

Series B

 

 

Series D

 

 

Series G

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

Balance at December 31, 2016

 

 

3,951

 

 

 

4

 

 

 

250

 

 

 

 

 

 

 

 

 

 

 

 

5,000

 

 

 

5

 

Issuance of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for services

 

 

30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for cash

 

 

286

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of preferred stock

 

 

215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of debt

 

 

1,575

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year ended

   December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

6,057

 

 

$

6

 

 

 

250

 

 

$

 

 

 

 

 

$

 

 

 

5,000

 

 

$

5

 

Issuance of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for services

 

 

10

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for cash

 

 

286

 

 

 

1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

from exercise of options

 

 

127

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of preferred stock

 

 

120

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the period ended

   September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at September 30, 2018

 

 

6,600

 

 

$

7

 

 

 

250

 

 

$

 

 

 

 

 

$

 

 

 

5,000

 

 

$

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

5


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Series I-1

 

 

Series I-2

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2016

 

 

2

 

 

 

 

 

 

4

 

 

 

 

 

 

101,898

 

 

 

(98,463

)

 

 

3,444

 

Issuance of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49

 

 

 

 

 

 

 

49

 

for cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

500

 

 

 

 

 

 

 

500

 

Conversion of preferred stock

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,754

 

 

 

 

 

 

 

2,756

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,384

 

 

 

 

 

 

 

1,384

 

Net loss for the year ended

   December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,069

)

 

 

(6,069

)

Balance at December 31, 2017

 

 

1

 

 

$

 

 

 

4

 

 

$

 

 

$

106,585

 

 

$

(104,532

)

 

$

2,064

 

Issuance of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

15

 

 

 

 

 

 

 

15

 

for cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

499

 

 

 

 

 

 

 

500

 

from exercise of options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

145

 

 

 

 

 

 

 

145

 

Conversion of preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,165

 

 

 

 

 

 

 

1,165

 

Net loss for the period ended

   September 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,103

)

 

 

(1,103

)

Balance at September 30, 2018

 

 

1

 

 

$

 

 

 

4

 

 

$

 

 

$

108,409

 

 

$

(105,635

)

 

$

2,786

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

6


 

International Stem Cell Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Nine

 

 

 

Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(1,103

)

 

$

(4,680

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

215

 

 

 

248

 

Stock-based compensation expense

 

 

1,165

 

 

 

1,010

 

Common stock issued for services

 

 

15

 

 

 

40

 

Change in fair value of warrant liability

 

 

(1,092

)

 

 

1,622

 

Gain on settlement of trade payables

 

 

(32

)

 

 

 

Allowance for inventory obsolescence

 

 

62

 

 

 

36

 

Interest expense on bridge loan from related party

 

 

25

 

 

 

 

Loss on disposal of property and equipment

 

 

1

 

 

 

 

Impairment of intangible assets

 

 

361

 

 

 

238

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Increase in accounts receivable

 

 

(1,080

)

 

 

(110

)

Increase in inventory

 

 

(311

)

 

 

(84

)

Decrease (increase) in prepaid assets and other assets

 

 

267

 

 

 

(169

)

Decrease (increase) in deposits

 

 

10

 

 

 

(16

)

Increase in accounts payable

 

 

249

 

 

 

7

 

Increase in accrued liabilities

 

 

132

 

 

 

159

 

Increase in related party payable

 

 

 

 

 

50

 

Net cash used in operating activities

 

 

(1,116

)

 

 

(1,649

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(157

)

 

 

(89

)

Payments for patent licenses and trademarks

 

 

(372

)

 

 

(562

)

Net cash used in investing activities

 

 

(529

)

 

 

(651

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from a bridge loan from a related party

 

 

2,000

 

 

 

2,700

 

Proceeds from sale of common stock

 

 

500

 

 

 

 

Proceeds from exercise of stock options

 

 

145

 

 

 

 

Payments on financed insurance premiums

 

 

(143

)

 

 

 

Net cash provided by financing activities

 

 

2,502

 

 

 

2,700

 

Net increase in cash

 

 

857

 

 

 

400

 

Cash, beginning of period

 

 

304

 

 

 

110

 

Cash, end of period

 

$

1,161

 

 

$

510

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

7


 

International Stem Cell Corporation and Subsidiaries

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 targeted 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 trial 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 nine months ended September 30, 2018 was approximately $124,000 per month, excluding capital expenditures and patent costs averaging $59,000 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. 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.

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.

8


 

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, 2017.

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, 2017 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 and 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 September 30, 2018 and December 31, 2017.

Inventory

Inventory is accounted for using the average cost and first-in, first-out (FIFO) method for the Company’s LCT cell culture media and reagents, average cost and specific identification methods for the Company’s LSC products, and specific identification method for the Company’s LCT products.  Inventory balances are stated at the lower of cost or net realizable value. 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, 2018 and December 31, 2017, 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 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 intangible assets are recorded at cost of $3,774,000 and $3,763,000 at September 30, 2018 and December 31, 2017, 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 September 30, 2018 and 2017 was $30,000 and $35,000, respectively.  Amortization expense for the nine months ended September 30, 2018 and 2017 was $85,000 and $102,000, respectively.  All amortization expense

9


 

related to intangible assets is included in general and administrative expense. Accumulated amortization as of Septembe r 30 , 201 8 and December 31, 201 7 was $ 926 ,000 and $ 841,000 , respectively.     

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 $157,000 and $158,000 of impairment losses on its intangible assets during the three months ended September 30, 2018 and 2017, respectively.  The Company recognized $361,000 and $238,000 of impairment losses on its intangible assets during the nine months ended September 30, 2018 and 2017, respectively, due to abandonment of efforts to pursue certain patents or patented technologies. 

 

Revenue Recognition

 

Revenue is recognized pursuant to Financial Accounting Standards Board (“ FASB”) issued Accounting Standards Update (“ASU”) No. 2014 - 09, Revenue from Contracts with Customers (Topic 606) . Accordingly, 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 5-step process: