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 a 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. LCTs 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 20,000,000 shares of ISC California common stock and for ISC Californias assumption of LCTs 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 cosmeceutical products, utilizing an extract derived from our human parthenogenetic stem cell technologies.
Going Concern
The Company
continues in the development stage and as such has accumulated losses from inception and expects to incur additional losses in the near future. The Company needs to raise additional working capital. The timing and degree of any future capital
requirements will depend on many factors. Currently, the Companys burn rate is approximately $470,000 per month, excluding capital expenditures and patent costs averaging $57,000 per month. There can be no assurance that the Company will be
successful in maintaining its normal operating cash flow, and that such cash flows will be sufficient to sustain the Companys operations through the first quarter of 2014. Based on the above, there is substantial doubt about the Companys
ability to continue as a going concern. The condensed consolidated financial statements were prepared assuming that the Company is 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.
Managements 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. In the
first quarter of 2013, to obtain funding for working capital purposes, the Company sold a total of 16,325,000 shares of common stock raising net proceeds of approximately $3.3 million. In July 2013, we closed a financing transaction contemplated by
our S-1 Registration Statement on file with the U.S. Securities and Exchange Commission. We issued 20,000,000 Units in this transaction, raising net proceeds of approximately $2.4 million. Each Unit issued consists of a share of common stock and a
Series A Warrant. Each purchaser also received a Series B Warrant for each Unit purchased. During the third quarter of 2013, the Company received net proceeds of $242,000 upon the exercise of 1,700,000 Series B Warrants for 1,700,000 additional
Units. Subsequent to September 30, 2013, the Company received additional net proceeds of $2.1 million upon the exercise of 15,054,822 Series B Warrants for 15,054,822 additional Units, but prior to the expiration of the Series B Warrants on
October 24, 2013. For further discussion regarding these transactions, see Note 6, Capital Stock and Note 11, Subsequent Events.
12
Basis of Presentation
International Stem Cell Corporation was formed in June 2006. BTHC III, Inc. was a shell company that had no operations and no net assets. For accounting purposes the acquisition has been treated as a
recapitalization of BTHC III with ISC California as the accounting acquirer (reverse acquisition). The historical statements prior to June 2006 are those of Lifeline Cell Technology, LLC, the wholly-owned subsidiary of ISC California.
The Company is a development-stage company with no revenue generated from its principal operations in therapeutic and biomedical products development
through research and development efforts. To date, the Company has generated limited and unpredictable revenue to support its core therapeutic research and development efforts.
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 in 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, 2012. When used in these notes, the terms Company, we, us, or our mean
International Stem Cell Corporation and all entities included in our unaudited condensed consolidated financial statements.
In the opinion of
management, 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 Companys
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 Companys audited consolidated financial statements
for the year ended December 31, 2012 included in the Companys 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 Companys consolidated financial statements include the accounts of International Stem Cell Corporation and its subsidiaries after intercompany
balances and transactions have been eliminated.
The preparation of financial statements requires that management make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenue, and expenses, and related disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
Cash Equivalents
The Company considers
all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents.
Restricted Cash
The Company is required to maintain $50,000 in a restricted certificate of deposit account in order to fully collateralize a revolving
credit card account.
Inventories
Inventories are accounted for using the first-in, first-out (FIFO) method for LSC products, and specific identification method for LCT products. Inventory balances are stated at the lower of cost or
market. Laboratory supplies used in the research and development process are expensed as consumed. Inventory is reviewed periodically for product expiration and obsolescence and is adjusted accordingly.
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 LCTs 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
13
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, 2013 and December 31, 2012, the Company had an allowance for doubtful accounts totaling $19,000 and $4,000, 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 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. 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 patent licenses are recorded at cost of $2,531,000 and $2,083,000 at September 30, 2013 and December 31, 2012,
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, 2013 and 2012 amounted to $16,000
and $16,000, respectively, while amortization expense for the nine months ended September 30, 2013 and 2012 was $46,000 and $49,000, respectively. All amortization expense related to intangible assets is included in research and development
expense. Accumulated amortization as of September 30, 2013 and December 31, 2012 was $495,000 and $449,000, respectively. Additional information regarding patents and patent licenses is included in Note 4.
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 did not recognize material impairments on its long-lived assets during the three and nine
months ended September 30, 2013 and 2012.
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 expired. LSCs revenue accounted for 49% and 48% of total revenue during the nine months ended September 30, 2013 and 2012, respectively. LCT contributed 51% and 52% of total revenue during the nine
months ended September 30, 2013 and 2012, respectively.
Deferred Revenue
The Company recognizes revenue from LSC products when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the sellers price to the buyer is fixed or
determinable, and collectability is reasonably assured. However, LSC products sold through web-based channels have a 30-day right of return guarantee and therefore, the Company defers all revenue associated with these product sales until the 30-day
guarantee has expired. In addition, all costs associated with these product sales are reclassified against the deferred revenue account so that the net deferred revenue balance is presented. At September 30, 2013 and December 31, 2012, net
deferred revenue totaled $156,000 and $233,000, respectively.
Cost of Sales
Cost of sales consists primarily of salaries and benefits associated with employee efforts expended directly on the production of the Companys 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 Companys products will be classified as a component of cost of sales to the extent such payments become due in
the future.
14
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.
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.
Fair Value Measurements
On January 1, 2008, the Company adopted authoritative guidance for fair value measurements and fair value disclosures. 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 Companys assets and liabilities as of
September 30, 2013 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of warrant liability
|
|
$
|
4,389
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,389
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The table below sets forth a summary of the fair values of the Companys assets and liabilities as of
December 31, 2012 (in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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):
|
|
|
|
|
|
|
Fair Value of Warrant Liability
|
|
Beginning balance at December 31, 2011
|
|
$
|
38
|
|
Issuances
|
|
|
|
|
Adjustments to estimated fair value
|
|
|
(38
|
)
|
|
|
|
|
|
Ending balance at December 31, 2012
|
|
|
|
|
Issuances
|
|
|
4,635
|
|
Exercises
|
|
|
(219
|
)
|
Adjustments to estimated fair value
|
|
|
(27
|
)
|
|
|
|
|
|
Ending balance at September 30, 2013
|
|
$
|
4,389
|
|
|
|
|
|
|
15
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 and transactions using the Black-Scholes option pricing model, e.g., warrants and stock options. Actual results could differ from those estimates.
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, 2013 and December 31, 2012
approximate their fair values because of the short-term nature of those instruments.
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, 2013, there were 596,250 non-vested restricted shares, 67,395,832 shares issuable upon exercise of warrants, and 17,914,518 vested and 5,780,175 non-vested stock
options outstanding; and at September 30, 2012, there were 335,000 non-vested restricted shares, 3,530,000 warrants, and 14,397,857 vested and 9,132,615 non-vested stock options outstanding. These restricted shares, options and warrants were
not included in the diluted loss per share calculation because the effect would have been anti-dilutive.
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 loss from operations for the three and nine months ended September 30, 2013 and 2012 or the period from inception through September 30, 2013.
Recent Accounting Pronouncements
There
were no new accounting pronouncements during the nine months ended September 30, 2013, as compared to the recent accounting pronouncements described in the Annual Report on Form 10-K for the fiscal year ended December 31, 2012, that are of
significance, or potential significance, to the Company.
16
2. Inventory
Inventories are accounted for using the first-in, first-out (FIFO) method for Lifeline Skin Care products, and specific identification
method for Lifeline Cell Technology products. Lab supplies used in the research and development process are expensed as consumed. Inventory is reviewed periodically for product expiration and obsolete inventory and adjusted accordingly. The
components of inventories are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2013
|
|
|
December 31,
2012
|
|
Raw materials
|
|
$
|
141
|
|
|
$
|
276
|
|
Work in process
|
|
|
428
|
|
|
|
211
|
|
Finished goods
|
|
|
868
|
|
|
|
748
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,437
|
|
|
|
1,235
|
|
Less: allowance for inventory obsolescence
|
|
|
(77
|
)
|
|
|
(36
|
)
|
|
|
|
|
|
|
|
|
|
Inventory, net
|
|
$
|
1,360
|
|
|
$
|
1,199
|
|
|
|
|
|
|
|
|
|
|
3. Property and Equipment
Property and equipment consists of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30,
2013
|
|
|
December 31,
2012
|
|
Machinery and equipment
|
|
$
|
1,092
|
|
|
$
|
1,072
|
|
Computer equipment
|
|
|
321
|
|
|
|
347
|
|
Office equipment
|
|
|
225
|
|
|
|
225
|
|
Leasehold improvements
|
|
|
839
|
|
|
|
830
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,477
|
|
|
|
2,474
|
|
Less: accumulated depreciation and amortization
|
|
|
(1,626
|
)
|
|
|
(1,340
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
851
|
|
|
$
|
1,134
|
|
|
|
|
|
|
|
|
|
|
Depreciation expenses for the three and nine months ended September 30, 2013 were $100,000 and $301,000
respectively. During the same periods in the prior year, depreciation expenses were $106,000 and $320,000, respectively.
4. Patent Licenses
On December 31, 2003, LCT entered into an
Option to License Intellectual Property
agreement with Advanced Cell Technology,
Inc. (ACT) for patent rights and paid ACT $340,000 in option and license fees. On February 13, 2004, LCT and ACT amended the Option agreement and LCT paid ACT additional option fees of $22,500 for fees related to registering
ACTs patents in selected international countries.
On May 14, 2004, LCT amended the licensing agreement with ACT for the exclusive
worldwide patent rights for the following ACT technologies: UMass IP, ACT IP and Infigen IP, which terms are summarized below. The additional license fees aggregate a total of $400,000 and were secured by separate convertible promissory notes. The
notes bore no interest unless they were not repaid at maturity, in which event they shall thereafter bear interest at an annual rate equal to the lesser of 10% or the maximum non-usurious rate legally allowed.
The notes could be converted at the option of ACT into the first equity financing of LCT with cash proceeds in excess of $5,000,000 under the following
conditions: i) Upon the consummation of the First Equity Financing; or ii) Immediately prior to the closing of any merger, sale or other consolidation of the Company or of any sale of all or substantially all assets of the Company which occurs prior
to the First Equity Financing (an Acquisition Event). Notwithstanding the above, and only in the event that a conversion resulting from such Acquisition Event would result in a security not traded on a national stock exchange (including
NASDAQ and NASDAQ small cap), upon written notice to the Company not later than five days after the consummation of the Acquisition Event and notice of the Acquisition Event to the holder of the note, the holder may elect to receive payment in cash
of the entire outstanding principal of this Note. On February 7, 2013, the Company and ACT entered into Amended and Restated License Agreements 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 ATC and Infigens 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 ACT 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, and its 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.
17
As of September 30, 2013, the total amount capitalized related to the acquired ACT licenses was
$747,000, and $1,730,000 related to the other patent acquisition costs.
At September 30, 2013, future amortization expense related to
our intangible assets subject to amortization is expected to be as follows (in thousands):
|
|
|
|
|
|
|
Amount
|
|
2013 (remaining three months)
|
|
$
|
15
|
|
2014
|
|
|
61
|
|
2015
|
|
|
61
|
|
2016
|
|
|
61
|
|
2017
|
|
|
61
|
|
Thereafter
|
|
|
1,724
|
|
|
|
|
|
|
Total
|
|
$
|
1,983
|
|
|
|
|
|
|
5. Advances
Advance
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 Lifeline Cell Technology, a wholly-owned subsidiary of International Stem Cell Corporation, 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, 2013 no revenues were realized from
this agreement.
|
|
|
|
|
|
|
|
|
|
|
September 30,
2013
|
|
|
December 31,
2012
|
|
BioTime, Inc. (in thousands)
|
|
$
|
250
|
|
|
$
|
250
|
|
6. Capital Stock
As of December 31, 2006, the Company was authorized to issue 200,000,000 shares of common stock, $0.001 par value per share, and
20,000,000 shares of preferred stock, $0.001 par value per share. In May 2012, the Company amended its Certificate of Incorporation to increase the authorized number of shares of common stock to 300,000,000.
In October 2006, the board of directors of BTHC III approved a stock split of 4.42 shares to 1. As a result of the split, the outstanding common
stock of BTHC III increased from 500,000 to 2,209,993 shares. Pursuant to the Share Exchange Agreement, each share of International Stem Cell Corporation common stock was exchanged for one share of BTHC III common stock. All numbers in the financial
statements and notes to the financial statements have been adjusted to reflect the stock split for all periods presented.
On
December 27, 2006, the Companys Board of Directors and holders of a majority of the outstanding shares approved an increase in the authorized capital stock of the Company to 200,000,000 shares of common stock, $0.001 par value per share,
and 20,000,000 shares of preferred stock, $0.001 par value per share.
In December 2006, the Company issued 1,350,000 shares of common
stock, 350,000 of such shares in consideration for legal consulting services relating to the reverse merger and 1,000,000 shares in consideration for a contract to provide investor relations services which commenced September 1, 2006 for a
period of one year.
In January and February 2007, ISC California completed the Brookstreet financing and issued 1,370,000 shares of
common stock that was part of a private placement of securities by ISC California during the second half of 2006. The net proceeds from the sale finalized in 2007 were $1,157,000, net of cash fees and expenses. In connection with the final
settlement in 2007, the selling agent for the private placement received 274,000 additional warrants, which entitled the holder thereof to purchase through February 2012 that number of shares of common stock for $1.00 each.
Series A Preferred Stock
On
January 15, 2008, to raise funds, the Company entered into a subscription agreement with accredited investors for the sale of between 1,000,000 and 5,000,000 of Series A Preferred Stock (Series A Preferred). Series A Units consist
of one share of Series A
18
Preferred and two Warrants (Series A Warrants) to purchase common stock for each $1.00 invested. The Series A Preferred was convertible into shares of common stock at market price on
the date of the first finance closing, but not to exceed $1 per share and the Series A Warrants are exercisable at $0.50 per share. The Series A Preferred has an anti-dilution clause whereby, if the Company issues $1 million or more of equity
securities or securities convertible into equity at a price below the respective exercise prices of the Series A Preferred or the Series A Warrant, such conversion and exercise prices shall be adjusted downward to equal the price of the new
securities. The Series A Preferred has priority on any sale or liquidation of the Company equal to the purchase price of the Series A 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 A Preferred a dividend of the amount of the dividend the Series A Preferred holder would receive if the shares were converted just prior to the dividend declaration.
Each share of Series A Preferred has the same voting rights as the number of shares of common stock into which it would be convertible on the record
date. On March 30, 2012, the holder of the remaining 500,000 shares of Series A Preferred Stock converted his shares to a total of 2,000,000 shares of common stock. In May 2012, the Company filed a Certificate of Elimination for the Series A
Preferred Stock to remove the powers, designations, preferences, privileges and other rights of the Series A Preferred Stock.
Series B
Preferred Stock
On May 12, 2008, to obtain funding for working capital, the Company entered into a series of subscription agreements
with five accredited investors for the sale of a total of 400,000 Series B Units, each Series B Unit consisting of one share of Series B Preferred Stock (Series B Preferred) and two Series B Warrants (Series B Warrants) to
purchase common stock for each $1.00 invested.
The total purchase price received by the Company was $400,000. The Series B Preferred is
convertible into shares of common stock at the initial conversion ratio of two shares of common stock for each share of Series B Preferred converted (which was established based on an initial conversion price of $0.50 per share), and the Series B
Warrants were exercisable at $0.50 per share until five years from the issuance of the Series B Warrants. The Series B Warrants expired unexercised in July 2013. The Series B Preferred and Series B Warrants contained anti-dilution clauses whereby,
(subject to the exceptions contained in those instruments) if the Company issues equity securities or securities convertible into equity at a price below the respective conversion price of the Series B Preferred or the exercise price of the Series B
Warrant, such conversion and exercise prices shall be adjusted downward to equal the price of the new securities, which has been triggered and the new price of the warrants was set at $0.25. During the first quarter of 2013, the Company issued
additional shares of common stock at $0.20 per share, triggering an adjustment in the conversion price of the Series B Preferred Stock to $0.20. As a result of the 2013 S-1 Registration Offering discussed below, the conversion price for the Series B
Preferred was reduced to $0.15. The Series B Preferred has a priority (senior to the shares of common stock, but junior to the shares of Series A Preferred Stock) on any sale or liquidation of the Company equal to the purchase price of the Series B
Units, plus a liquidation premium of 6% per year. If the Company elects to declare a dividend in any year, it must first pay to the Series B Preferred holder a dividend equal to the amount of the dividend the Series B Preferred holder would
receive if the Series B Preferred were converted just prior to the dividend declaration. Each share of Series B Preferred has the same voting rights as the number of shares of common stock into which it would be convertible on the record date. As of
September 30, 2013 and December 31, 2012, the Company had 300,000 shares of the Series B Preferred Stock issued and outstanding.
Fair Value of Warrants Issued with Series A and B Preferred Stock
In accordance with the applicable authoritative guidance, the Company allocated the proceeds of the Series A and B preferred stock according to the value of the convertible preferred stock and the
warrants based on their relative fair values. Fair value of the warrants issued with the Series A and Series B were determined using the Black-Scholes valuation model using risk-free interest rates of 3% and 3.37%, volatility rates of 65.0% and
57.9%, term of five years, and exercise price of $0.50.
In connection with the Series A and B rounds of financing, each investor received a
warrant to purchase up to a number of shares of common stock for $1.00 per share. Subsequently, the exercise price for those warrants was adjusted down to $0.25 per share.
In August 2008, in accordance with the anti-dilution provisions of the securities, the conversion rates and exercise price were reduced to $0.25. Estimated adjusted fair value of the warrants was
determined using the Black-Scholes valuation model using a risk-free interest rate of 3%, volatility rate of 57.9%, term of five years, and exercise price of $0.25. For Series A and Series B, the beneficial conversion feature and warrants were
adjusted to $553,000 and $193,000, and $308,000 and $110,000, respectively.
During the second quarter of 2010, the holders of the warrants
issued to the purchasers of Series A and B Preferred Stock signed a waiver to give up their rights to the anti-dilution provisions related to the warrants and the exercise price is now fixed at $0.25. The modification to the warrants resulted in a
change in classification from a liability to equity and the warrants were revalued at the date of modification. The revaluation of the warrants resulted in a reduction in the warrant value of $5,276,000 which was recorded as a credit to income. The
adjusted value of the warrants of $804,971 was reclassified to additional paid-in capital, thus eliminating any fair value of outstanding warrant liability as of June 30, 2010.
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Series C Preferred Stock
On August 20, 2008, to obtain funding for working capital, the Company entered into a subscription agreement with an accredited investor (the Series C Investor) to sell for $3,000,000 up
to 3,000,000 shares of Series C Preferred Stock (Series C Preferred) at a price of $1.00 per Series C Preferred share. The Series C Preferred will be convertible into shares of common stock at $0.25 per share. The Series C Preferred
had an anti-dilution clause whereby, if the Company issues 250,000 shares or more of equity securities or securities convertible into equity at a price below the conversion price of the Series C Preferred, the conversion price of the Series C
Preferred shall be adjusted downward to equal the price of the new securities. The Series C Preferred shall have priority over the common stock on any sale or liquidation of the Company equal to the purchase price of the Series C Preferred Stock,
plus a liquidation premium of 6% per year, but such payment may be made only after payment in full of the liquidation preferences of the Series A and Series B Preferred Stock then outstanding. If the Company elects to declare a dividend in any
year, it must first pay to the Series C Preferred a dividend in the amount of the dividend the Series C Preferred holder would receive if converted just prior to the dividend declaration. Each share of Series C Preferred shall have the same voting
rights as the number of shares of common stock into which it would be convertible on the record date. 700,000 shares of Series C Preferred Stock were sold on August 20, 2008, and 1,300,000 shares of Series C Preferred Stock were sold on
September 23, 2008. The beneficial conversion feature for the Series C preferred stock was $720,000. All the Series C Preferred Stock was issued to X-Master Inc., which is a related party and affiliated with our Chief Executive Officer and
Co-Chairman of the Board of Directors Dr. Andrey Semechkin and Dr. Ruslan Semechkin, Chief Science Officer of International Stem Cell and a director. As of December 31, 2012, the Company had 2,000,000 shares of the Series C Preferred
Stock issued and outstanding. On January 22, 2013, the holders of Series C Preferred Stock converted all of the outstanding shares of Series C Preferred Stock into common stock at $0.25 per share, or a total of 8,000,000 shares of common stock.
On April 10, 2013, the Company filed a Certificate of Elimination for the Series C Preferred Stock. The Certificate of Elimination amended the provisions of the Certificate of Incorporation of the Company to eliminate the powers,
designations, preferences, privileges and other rights of the Series C Preferred Stock.
Series D Preferred Stock
On December 30, 2008, to obtain funding for both working capital and the eventual repayment of the outstanding obligation under the OID Senior
Secured Convertible Note with a principal amount of $1,000,000 issued in May 2008, the Company entered into a Series D Preferred Stock Purchase Agreement (the Series D Agreement) with accredited investors (the Investors) to
sell for up to $5,000,000 up to 50 shares of Series D Preferred Stock (Series D Preferred) at a price of $100,000 per Series D Preferred share. The sale of the Series D Preferred closed on the following schedule: (1) 10 shares
were sold on December 30, 2008; (2) 10 shares were sold on February 5, 2009; and (3) 10 shares were sold on each of March 20, 2009, and June 30, 2009 and 3 shares on September 30, 2009. The Company raised a total
of $4,700,000 in the Series D Preferred Stock round. The beneficial conversion feature from the Series D Preferred Stock was recognized as a deemed dividend totaling $2,480,000. Of the Series D Preferred Stock issued, 10 shares of the Series D
Preferred Stock was issued to X-Master Inc., which is a related party and affiliated with our Chief Executive Officer and Co-Chairman of the Board of Directors Dr. Andrey Semechkin and Dr. Ruslan Semechkin, Chief Science Officer of
International Stem Cell and a director and 33 shares of the Series D Preferred Stock was issued to our Chief Executive Officer and Co-Chairman of the Board of Directors Dr. Andrey Semechkin. As of September 30, 2013 and December 31,
2012, we had 43 shares of the Series D Preferred Stock issued and outstanding. Historically, the Series D Preferred Stock earned cumulative dividends at a rate of 10% per annum through December 31, 2011 and 6% per annum effective
January 1, 2012, payable 15 days after each quarter end. On October 12, 2012, the Company and the holders of all of the outstanding shares of Series D and Series G Preferred Stock entered into a Waiver Agreement (the Waiver
Agreement) pursuant to which such holders irrevocably waived their right to receive any and all accrued but unpaid dividends and interest thereon on or after September 30, 2012 on the Series D and Series G Preferred Stock. Under the
Waiver Agreement, the holders of Series D and Series G Preferred Stock are restricted from transferring any shares of Series D Preferred Stock unless the transferee agrees to be bound by the Waiver Agreement.
On December 4, 2012, the holders of all of the outstanding shares of Series D Preferred Stock executed a Waiver of Anti-Dilution Rights (the
Anti-Dilution Waiver) pursuant to which such holders waived all anti-dilution adjustment rights under the Certificate of Designation for the Series D Preferred Stock in connection with the offering of securities pursuant to the
registration statement originally filed with the Securities and Exchange Commission on October 18, 2012, including the shares issuable on exercise of all warrants registered hereunder. The Anti-Dilution Waiver applied to the financing
transaction that closed on July 24, 2013. The Anti-Dilution Waiver does not apply to any future issuances of securities which would otherwise trigger anti-dilution adjustments under the Certificate of Designation for the Series D Preferred
Stock. During the first quarter of 2013, the Company issued additional shares of common stock at $0.20 per share, triggering an adjustment in the current conversion price of the Series D Preferred Stock to $0.20.
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During the three months ended September 30, 2013 and 2012, dividends of $0 and $64,000, respectively,
were paid to the holders and for the nine months ended September 30, 2013 and 2012, dividends of $0 and $237,000, respectively, were paid to the holders. As of September 30, 2013 and December 31, 2012, no Series D Preferred Stock
dividends were accrued.
Series E Preferred Stock
On June 30, 2009, the Company entered into a definitive agreement with Optimus Capital Partners, LLC (Investor) for a $5 million investment commitment. The transaction was structured
whereby the Company could draw down funds as needed, but had no obligation to make draws or use these funds if not needed. As funds were drawn down, the Company issued Series E Preferred Stock (the Preferred Stock). The Preferred Stock
was not convertible into common stock and could be redeemed by the Company after one year. Each issue of Preferred Stock was accompanied by the issuance of five-year warrants to purchase common stock at 100% of the closing price of the
Companys common stock on the day prior to the date the Company gave notice of its election to draw funds. The total exercise value of warrants issued equaled 135% of the drawdown amount. Dividends on the Preferred Stock were payable in
additional shares of non-convertible Preferred Stock at the rate of 10% per annum. A commitment fee of $250,000, payable in shares of common stock, was made to the Investor. As part of the agreement, the Company filed a registration statement
on July 31, 2009, which was declared effective on September 30, 2009. The investment was used to fund operations and working capital needs of the Company and expand its scientific research.
On July 31, 2009, the Company filed a registration statement with the Securities and Exchange Commission as part of the Preferred Stock Purchase
Agreement the Company signed on June 30, 2009, between International Stem Cell Corporation and Optimus Capital Partners. Per the agreement, the Company was required to use its best efforts to promptly file (but in no event later than 30
days after the Effective Date) and cause to become effective as soon as possible a Registration Statement for the sale of all common shares. Each Registration Statement was required to comply when it became effective, and, as amended or
supplemented, at the time of any Tranche Notice Date, Tranche Closing Date, or issuance of any common shares, and at all times during which a prospectus was required by the Act to be delivered in connection with any sale of common shares, to comply,
in all material respects, with the requirements of the Act. The Company is and has been in compliance with all applicable requirements of that agreement.
To create the Series E Preferred sold to the Investor under the Agreement, on June 30, 2009, the Company amended its Certificate of Incorporation by filing a Certificate of Designation of
Preferences, Rights and Limitations of the Series E Preferred. The Series E Preferred had priority over the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and common stock on the proceeds
from any sale or liquidation of the Company in an amount equal to the purchase price of the Series E Preferred, plus any accrued but unpaid dividends. From the date of issuance of the Series E Preferred, dividends at the rate per annum of ten
percent (10%) of the Purchase Price per share accrued on such shares of Series E Preferred. Following the first anniversary of the issuance date, the Company had the right at its option to redeem the Series E Preferred at an amount equal
to the purchase price of the Series E Preferred, plus any accrued but unpaid dividends and plus a redemption premium that declines from 26% (for redemptions between the first and second anniversary of issuance) to zero (for redemptions after the
fourth anniversary of issuance).
During 2010, the Company drew $2.4 million of the private equity financing and issued 24 shares of the
Series E Preferred Stock, as well as issued 3.7 million warrants which were immediately exercised to purchase 3.7 million shares of the Companys common stock.
Exchange Agreement Series E Preferred Stock
On June 11, 2010, the Company entered
into an Exchange Agreement (the Optimus Exchange Agreement) with Optimus Capital Partners, LLC (Optimus) under which the Company and Optimus agreed to exchange all of the Series E Preferred Stock previously issued to Optimus
pursuant to the Preferred Stock Purchase Agreement dated June 30, 2009 (the Optimus Preferred Stock Agreement) for all of the promissory notes of Optimus (the Optimus Notes) issued to the Company in that transaction as
payment for shares of the Companys common stock. As part of the exchange transaction, the Company agreed to waive all accrued interest on the Optimus Notes and Optimus agreed to waive all accrued dividends and redemption premiums on the Series
E Preferred Stock. The exchange was completed in June 2010 and is discussed in more detail below. Following the return of all shares of Series E Preferred Stock, the Company filed a Certificate of Elimination for the Series E Preferred Stock to
remove the powers, preferences, privileges and other rights of the Series E Preferred Stock.
Series F Preferred Stock
On May 4, 2010, International Stem Cell Corporation entered into a Preferred Stock Purchase Agreement with Socius CG II, Ltd., a Bermuda exempted
company (the Investor), to sell for up to $10,000,000 up to one thousand (1,000) shares of Series F Preferred Stock (Series F Preferred) at a price of $10,000 per Series F Preferred share. The Company was entitled to
determine the time and
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amount of Series F Preferred to be purchased by the Investor, and the Company intended to sell all 1,000 shares of Series F Preferred at a single time. The Series F Preferred could not be
converted into common stock and was redeemable by the Company. Under the terms of the Agreement, the Company provided the Investor with a non-refundable fee of 250,000 shares of Company common stock (the Fee Shares) and issued the
Investor a warrant to purchase up to 7,000,000 shares of the Companys common stock, with an exercise price of $1.93 per share, subject to adjustment. The closing of the sale of the Series F Preferred took place in early June 2010.
Exchange Agreement Series F Preferred Stock
On June 11, 2010, the Company, entered into an Exchange Agreement (the Socius Exchange Agreement) with Socius CG II, Ltd. (Socius) under which the Company and Socius agreed to
exchange all of the Series F Preferred Stock previously issued to Socius pursuant to the Preferred Stock Purchase Agreement dated May 4, 2010 (the Socius Preferred Stock Agreement) for all of the promissory notes of Socius (the
Socius Notes) issued to the Company in that transaction as payment for shares of the Companys common stock and a $2.5 million note issued in partial payment for the Socius Series F Preferred Stock. As part of the exchange
transaction, the Company agreed to waive all accrued interest on the Socius Notes and Socius agreed to waive all accrued dividends and redemption premiums on the Socius Series F Preferred Stock. The exchange was completed in June 2010 and is
discussed in more detail below. Following the return of all shares of Series F Preferred Stock, the Company filed a Certificate of Elimination for the Series F Preferred Stock to remove the powers, preferences, privileges and other rights of the
Series F Preferred Stock.
Perpetual Preferred Stock
As part of the Series E financing agreement, the Company recorded a Perpetual Preferred Stock equal to the amount of financing received during the year, plus accrued dividends, and Note Receivable equal
to 135% of financing received, which represents the amount of warrant coverage per the agreement, plus accrued interest. In accordance with applicable authoritative guidance on Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity, the Company classified the Note Receivable as contra Equity (Note subscription on Perpetual Preferred Stock) and the Perpetual Preferred Stock as a liability (Long Term Perpetual Preferred Stock).
The Note Receivable accrued interest at a rate of 2% per year and the Perpetual Preferred Stock accrued a 10% dividend per year. The Company allocated the proceeds of the Series E Preferred Stock according to the value of the preferred stock
and the fair value of the warrants. The estimated adjusted fair values of the warrants were determined using the Black-Scholes valuation model with risk-free interest rates ranging from 2.40% to 2.65%, volatility rates ranging from 64.46% to 65.33%,
term of five years, and exercise prices ranging from $0.56 to $0.74.
As a result of the exchange transactions for the Series E and Series F
Preferred stock, all of the Companys obligations under the previously outstanding Series E Preferred Stock and Series F Preferred Stock, which collectively had liquidation preferences of $15 million senior to the shares of the Companys
common stock and redemption premiums that started at 26% of the liquidation preference, were retired and the Company no longer held any promissory notes of either Socius or Optimus. Because the parties to these exchange transactions determined that
the instruments and rights being exchanged were of equivalent value, neither party paid any cash to the other party in the exchange transaction. Therefore, as of June 30, 2010, the Company reversed out all of the Perpetual Preferred Stock and
the Notes Receivable related to the Perpetual Preferred Stock.
Series G Preferred Stock
On March 9, 2012, the Company entered into a Series G Preferred Stock Purchase Agreement (the Series G Agreement) with AR Partners, LLC
(the Purchaser) to sell five million (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 Companys Co-Chairman and Chief Executive Officer, and Dr. Ruslan Semechkin, Chief Science Officer of International Stem Cell and a director.
The Series G Preferred was convertible into shares of common stock at $0.40 per share, resulting in an initial conversion ratio of 2.5 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 A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and
common stock on the proceeds from any sale or liquidation of the Company in an amount equal to the purchase price of the Series G Preferred, plus any accrued but unpaid dividends, 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 Stock then outstanding. Historically, from the date of issuance of the Series G Preferred, dividends at the rate per annum of six percent (6%) of the Purchase Price
per share accrued quarterly on such shares of Series G Preferred. 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 nominees
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shall be subject to the approval of the Companys independent directors, for election by the stockholders at the Companys 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 directors or increase the authorized number of shares of Series G Preferred. At least one of the two directors nominated by holders of the Series G Preferred shares shall be independent based on the NASDAQ listing
requirements. On October 12, 2012, the Company and the holders of all of the outstanding shares of Series D and Series G Preferred Stock entered into the Waiver Agreement pursuant to which such holders irrevocably waived their right to receive
any and all accrued but unpaid dividends and interest thereon on or after September 30, 2012 on the Series D and Series G Preferred Stock. Accordingly, dividends from inception in the amount of $93,000 accreted to the carrying value of Series G
preferred stock have been reversed. Under the Waiver Agreement, the holders of Series D and Series G Preferred Stock are restricted from transferring any shares of Series D Preferred Stock or Series G Preferred Stock unless the transferee agrees to
be bound by the Waiver Agreement. No dividends were paid to the holders during the nine months ended September 30, 2013 and 2012. As of September 30, 2013 and December 31, 2012, no Series G Preferred Stock dividends were accrued.
The Company determined that the Series G convertible preferred shares have 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 is not solely within the Companys control, the convertible preferred stock has
been classified as mezzanine equity (outside of permanent equity) on the Companys condensed consolidated balance sheet. Additionally, legal costs related to the Series G financing in the amount of $59,000 were recorded in the mezzanine equity
as well.
The Company determined that as the initial conversion price at the date of close of the Series G transaction was lower than the
closing market price on that day (March 9, 2012), a beneficial conversion feature existed in the amount of $1,375,000. Such amount was recorded as a discount on the Series G convertible preferred stock with a corresponding increase in additional
paid-in capital. Based on the appropriate accounting guidance, the Company is required to recognize the discount over the period of time from the issuance of preferred shares until the convertible preferred shares can be first converted. As the
Series G convertible shares are convertible immediately following their issuance, the discount amount of $1,375,000 was recognized in March 2012 as a deemed dividend with a corresponding increase in accumulated deficit. During the first quarter of
2013, the Company issued additional shares of common stock at $0.20 per share, triggering an adjustment in the conversion price of the Series G Preferred Stock at $0.37, and the conversion ratio to 2.67 shares of common stock for every share of
Series G Preferred. As a result of the 2013 S-1 Registration Offering during the third quarter of 2013, the conversion price and the conversion ratio for the Series G Preferred were adjusted to $0.30 and 3.28, respectively.
Common Stock Purchase Agreement
On
December 9, 2010, International Stem Cell Corporation (ISCO or the Company) entered into a Common Stock Purchase Agreement (the Purchase Agreement) with Aspire Capital Fund, LLC (Aspire Capital)
which provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $25.0 million of shares of ISCO common stock (the Purchase Shares) over
the term of the Purchase Agreement. In connection with the execution of the Purchase Agreement, ISCO sold Aspire 333,333 shares of common stock for a total of $500,000. Under the Purchase Agreement, the Company also agreed to pay Aspire Capital a
commitment fee of 500,000 shares of its common stock. The Company is not obligated to pay any additional expense reimbursement or any placement agent fees in connection with the transaction.
The Purchase Agreement is intended to provide the Company with a source of capital of up to $25 million over a term of up to three years. The sales price of any shares the Company elects to sell will be
known by the Company at the time it makes the decision to sell and will be determined by a formula (described below) based on the price of the Companys stock over the preceding 12 days. As a result, the Company will be able to sell shares on
whatever schedule it believes best suits its needs and is not required to sell any shares unless it deems such sales to be beneficial to the Company.
Once the Registration Statement (referred to below) is effective, on any day on which the principal market for shares of ISCO common stock is open for trading, over the three-year term of the Purchase
Agreement, the Company has the right, in its sole discretion, to provide Aspire Capital with a purchase notice (each, a Purchase Notice) directing Aspire Capital to purchase the number of shares of ISCO common stock specified in the
Purchase Notice. The number of shares the Company may designate in the Purchase Notice varies based on the closing price of the ISCO common stock on the date of the Purchase Notice. The Company may direct Aspire Capital to purchase up to:
(1) 100,000 shares of common stock so long as the closing price is above $0.25; (2) 150,000 shares of common stock so long as the closing price is above $1.25; (3) 200,000 shares of common stock so long as the closing price is above
$1.75 and (4) 300,000 shares of common stock so long as the closing price is above $2.25. The purchase price per share (the Purchase Price) for each Purchase Notice is the lower of (i) the lowest sale price for the common stock
on the date of sale or (ii) the arithmetic average of the three lowest closing sale prices for the common stock during the 12 consecutive business days ending on the business day immediately preceding the purchase date of those securities.
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The timing and the number of shares covered by each Purchase Notice are determined in the Companys
sole discretion, and the applicable Purchase Price will be determined prior to delivery of any Purchase Notice. The Company may deliver multiple Purchase Notices to Aspire Capital from time to time during the term of the Purchase Agreement, so long
as the most recent purchase has been completed. There are no trading volume requirements or restrictions under the Purchase Agreement. Aspire Capital has no right to require any sales by the Company, but is obligated to make purchases as directed in
accordance with the Purchase Agreement. The Purchase Agreement contains customary representations, warranties, covenants, closing conditions and indemnification and termination provisions. The Purchase Agreement may be terminated by the Company at
any time, at its discretion, without any cost or penalty. Aspire Capital has agreed not to cause, or engage in any manner whatsoever, any direct or indirect short selling or hedging of ISCO common stock. The Company did not pay any additional
amounts to reimburse or otherwise compensate Aspire Capital in connection with the transaction. There are no limitations on use of proceeds, financial or business covenants, restrictions on future funding, rights of first refusal, participation
rights, penalties or liquidated damages in the Purchase Agreement.
The Companys net proceeds will depend on the Purchase Price and
volume and frequency of the Companys sales of shares to Aspire Capital; provided, however, that the maximum aggregate proceeds from sales of shares to Aspire Capital under the Purchase Agreement is $25 million. The Company anticipates that
delivery of Purchase Notices will be made subject to market conditions, in light of the Companys capital needs from time to time and under the limitations contained in the Purchase Agreement. The Company expects to use proceeds from sales of
shares to Aspire Capital for funding its research and development activities and for general corporate purposes and working capital requirements.
Registration Rights
In connection with the Purchase Agreement, the Company also entered
into a Registration Rights Agreement (the Registration Rights Agreement) with Aspire Capital, dated December 9, 2010. The Registration Rights Agreement provides, among other things, that the Company will register the resale of the
commitment fee shares and the shares that have been or may be sold to Aspire Capital (collectively, the Securities) by Aspire Capital. The Company further agreed to keep the Registration Statement effective and to indemnify Aspire
Capital for certain liabilities in connection with the sale of the Securities under the terms of the Registration Rights Agreement.
During
the three and nine months ended September 30, 2013 and 2012, the Company has issued 0, 1,200,000, 0 and 5,000,000 shares of common stock, respectively, to Aspire Capital, raising $0, $264,000, $0 and $2.1 million, respectively, which was used
to fund its operational activities.
2013 Securities Purchase Agreements for Common Stock
On January 22, 2013, to obtain funding for working capital purposes, the Company entered into a Securities Purchase Agreement (the January 2013
Purchase Agreement) with Dr. Andrey Semechkin and Dr. Simon Craw to sell a total of 10,125,000 shares of common stock at a price of $0.20 per share, for a total purchase price of $2,025,000. Dr. Andrey Semechkin is the
Companys Co-Chairman and Chief Executive Officer. Dr. Simon Craw is the Companys Executive Vice President Business Development. The sale of the shares of common stock was completed on January 22, 2013. In connection with the
sale of these shares the Company issued to each purchaser a warrant, exercisable for a period of 5 years, to purchase (at an exercise price of $0.20 per share) a number of shares of common stock equal to 50% of the shares purchased by that
purchaser, for a total of 5,062,500 shares subject to the warrants.
On March 12, 2013, to obtain funding for working capital purposes,
the Company entered into a Securities Purchase Agreement (the March 2013 Purchase Agreement) with certain investors, including Dr. Andrey Semechkin, to sell a total of 5,000,000 shares of common stock at a price of $0.20 per share,
for a total purchase price of $1,000,000. Dr. Andrey Semechkin is the Companys Co-Chairman and Chief Executive Officer and purchased $100,000 worth of common stock. Each of the other investors has had a long-standing relationship with the
Company and has closely followed the Company. The sale of the shares of common stock was completed on March 12, 2013. In connection with the sale of these shares the Company issued to each investor a warrant, exercisable for a period of five
years, to purchase (at an exercise price of $0.20 per share) a number of shares of common stock equal to 50% of the shares purchased by that investor, for a total of 2,500,000 shares subject to the warrants.
2013 S-1 Registration Offering
On
July 19, 2013, to obtain funding for working capital purposes, the Company entered into subscription agreements with certain investors (the Investors) relating to the sale by the Company of (i) 20,000,000 units (each a
Unit, and collectively, the Units), with each Unit consisting of (x) one share of common stock, par value $0.001 per share, and (y) one Series A Warrant to purchase one share of the Companys common stock at an
exercise price of $0.15 per share and (ii) 20,000,000 Series B Warrants, each to purchase one Unit, for aggregate gross proceeds of $3,000,000, before placement agent fees and other estimated offering expenses and fees (the
Offering). The Units were not issued or certificated. The Investors received only shares of common stock, Series A Warrants and Series B Warrants. The common stock, the Series A Warrants and the Series B Warrants were and may be
transferred separately
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immediately after their issuance. The Investors in the Offering received one Series B Warrant for each Unit purchased by them in the Offering. Dr. Andrey Semechkin, the Companys
Co-Chairman and Chief Executive Officer, purchased 5,998,999 Units and 5,998,999 Series B Warrants in the Offering and Ruslan Semechkin, the Companys Chief Science Officer, purchased 667,667 Units and 667,667 Series B Warrants in the offering
for an aggregate price of $1,000,000.
On July 19, 2013, the Company also entered into a placement agent agreement (the Placement
Agent Agreement) with Roth Capital Partners, LLC (the Placement Agent), pursuant to which the Placement Agent agreed to act on a reasonable best efforts basis for the Offering. The Company paid the Placement Agent a cash fee equal
to 5% of the gross proceeds from the Offering and reimbursed the Placement Agent for its reasonable out-of-pocket expenses of $75,000. The Company also issued 666,666 Placement Agent Warrants to purchase Units equal to 5% of the aggregate number of
Units issued in the Offering (other than the Units issued to Andrey Semechkin and Ruslan Semechkin). The Placement Agent Warrants have substantially the same terms as the Series B Warrants, except that the Placement Agent Warrants (i) have
an exercise price of $0.15 per Unit, subject to adjustments similar to those applicable to the Series A Warrants, (ii) have a term of five years, (iii) provide for a cashless exercise, and (iv) otherwise comply with the requirements
of the Financial Institutions Regulatory Authority, Inc. (FINRA). The Company also agreed to pay the Placement Agent a cash solicitation fee equal to 5% of the gross proceeds received by the Company upon the exercise of the Series B Warrants under
certain circumstances.
The Series A Warrants were immediately exercisable at an initial exercise price of $0.15 per share and will expire on
the fifth anniversary of the initial date of issuance. The Series A Warrants were issued separately from the common stock included in the Units, and may be transferred separately immediately thereafter. Upon full exercise of the Series B Warrants,
the Company could issue additional Series A Warrants to purchase up to an aggregate of 20,000,000 shares of the Companys common stock. All Series A Warrants have the same expiration date. See Note 8, Stock Options and Warrants,
Warrants
Issued with Common Stock
for detailed discussion of the anti-dilution provisions of the Series A Warrants and the price adjustment provisions of the Series B Warrants.
The Series B Warrants were immediately exercisable at an initial exercise price of $0.15, subject to adjustment and expire on October 24, 2013. See Note 11, Subsequent Events for further information
regarding the conclusion of the Series B Warrant transactions from October 1, 2013 to the expiration date of October 24, 2013.
The
net proceeds to the Company from the Offering, after deducting placement agent fees and cash offering expenses borne by the Company, and excluding any proceeds, from the exercise of the warrants issued in the offering, was approximately $2.4
million. The Offering closed on July 24, 2013.
During the quarter ended September 30, 2013, 1,700,000 Series B Warrants were
exercised for 1,700,000 additional Units for net proceeds of $242,000. The total additional Units consisted of 1,700,000 shares of common stock and 1,700,000 Series A Warrants.
We account for our warrants in accordance with current accounting guidance, which defines how freestanding contracts that are indexed to and potentially settled in a Companys 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 Companys common stock can be classified as equity.
As the Series A and B Warrant agreements did not meet the specific conditions for equity classification, we are 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 on July 24, 2013, at the various warrant exercise dates, and at
September 30, 2013 using the Monte-Carlo simulation model. The fair value is affected by changes in inputs to the model. The following assumptions were used as inputs to the model at September 30, 2013: stock price of $0.15 and warrant exercise
price of $0.15 as of the valuation date; the Companys historical stock price volatility of 87.7%; risk free interest rate on U.S. treasury notes of 1.33% for Series A Warrants, and .03% for Series B Warrants; a zero dividend rate; warrant
expiration of 5 years for Series A and 0.07 years for the Series B Warrants; simulated as a daily interval and anti-dilution impact if the Company had to raise capital below $0.15 per share.
The fair value of the warrant liability at the issuance date exceeded the gross proceeds received for the common shares, Series A Warrants and the Series B Warrants by $1.39 million. The Series A
Warrants, Series B Warrants, and Placement Agent Warrants had fair values of $1.72 million, $2.65 million and $115,000 at issuance, respectively. The classification and valuation of the warrants resulted in total warrant liability of $4.5 million
and $4.4 million as of the issuance date of July 24, 2013 and the revaluation date of September 30, 2013, respectively. During the three and nine months ended September 30, 2013, we recorded income of $27,000, in our consolidated
condensed statements of operations related to the change in fair value of the warrant liability due to the revaluation at September 30, 2013 and the change in fair value of the Series B Warrants at each exercise date. As a result of the fair
value of the warrant liability at issuance exceeding the total gross proceeds received, the transaction financing costs of $738,000 were recognized as additional other expense resulting in a net effect to other expense of $2.1 million for the three
months ended September 30, 2013.
25
Reserved Shares
At September 30, 2013, the Company had shares of common stock reserved for future issuance as follows:
|
|
|
|
|
Options outstanding
|
|
|
23,694,693
|
|
Options available for future grant
|
|
|
16,032,480
|
|
Convertible preferred stock
|
|
|
39,899,151
|
|
Warrants
|
|
|
67,395,832
|
|
|
|
|
|
|
|
|
|
147,022,156
|
|
|
|
|
|
|
7. Related Party Transactions
Other than with respect to the purchases of Series C, Series D, Series G Preferred Stock, 2013 Securities Purchase Agreements and the
2013 S-1 Registration offering discussed in Note 6 Capital Stock, the Companys related party transactions were for related party dividends and for a facility lease.
Dividend amounts related to Series D and Series G financing, were $0 at September 30, 2012. The Series D dividends were payable to both X-Master, Inc. and our Chief Executive Officer and Co-Chairman
of the Board of Directors, Dr. Andrey Semechkin, while Series G Preferred Stock dividends were initially cumulative and payable upon conversion of the Series G shares or upon certain Series G deemed liquidation events to AR Partners, LLC.
These amounts were paid during 2012. On October 12, 2012, the Company and the holders of all of the outstanding shares of Series D and Series G Preferred Stock entered into the Waiver Agreement pursuant to which such holders irrevocably waived
their right to receive any and all accrued but unpaid dividends and interest thereon on or after September 30, 2012 on the Series D and Series G Preferred Stock. Accordingly, the Company reversed all previously accrued and unpaid dividends
related to Series G Preferred Stock totaling $93,000. Under the Waiver Agreement, the holders of Series D and Series G Preferred Stock are restricted from transferring any shares of Series D Preferred Stock unless the transferee agrees to be bound
by the Waiver Agreement. Pursuant to the Waiver Agreement, no dividends were accrued or paid during the three or nine months ended September 30, 2013.
During the first quarter of 2011, the Company executed an operating lease for our corporate offices with S Real Estate Holdings LLC. S Real Estate Holdings LLC which is owned by Dr. Ruslan Semechkin,
the Companys Chief Science Officer and was previously owned by Dr. Andrey Semechkin, the Companys Chief Executive Officer and Co-Chairman of the Board of Directors. The lease agreement was negotiated at arms length and was
reviewed by the Companys 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, 2013 and 2012, the Company recorded $39,000 and $29,000, respectively, in rent and common area maintenance expenses that were related to the facility
lease arrangement with related parties. Additionally, during the nine months ended September 30, 2013 and 2012, the Company recorded $118,000 and $86,000, respectively, related to the same arrangement with the related party.
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 section 382 which could limit the amount of the net operating loss and tax credit carryovers that can be
used in future years. There can be no assurances that the Company will ever be able to realize the benefit of some or all of the loss and credit carryforwards either due to ongoing operating losses or due to ownership change limitations.
9. Stock Options and Warrants
Stock Options
The
Company has adopted the 2006 Equity Participation Plan (the 2006 Plan). The options granted under the 2006 Plan may be either qualified or non-qualified options. Up to 15,000,000 options may be granted to employees, directors and
consultants under this Plan. 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). The options granted under the 2010 Plan may be either
qualified or non-qualified options. Up to 18,000,000 options may be granted to employees, directors and consultants under the 2010 Plan. Options may be granted with different vesting terms and expire no later than 10 years from the date of
grant.
26
In November and December of 2009, the Company issued outside the 2006 and 2010 option plans non-qualified
stock options to purchase 10,257,593 shares of common stock to certain employees and consultants. These options vest over 50 months and expire no later than 10 years from the date of grant.
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 using 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. During the
three months ended September 30, 2013 and 2012 and the nine months ended September 30, 2013 and 2012, the Company recognized $442,000, $534,000, $1.3 million and $1.8 million, as stock-based compensation expense, respectively. Unrecognized
compensation expense related to stock options as of September 30, 2013 and 2012 was $2.3 million and $4.4 million, respectively, which is expected to be recognized over a weighted average period of approximately 1.7 years and 2.4 years,
respectively.
Stock-based compensation for stock options granted to non-employees has been determined using the estimated fair value of the
stock options issued, based on 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 consolidated statements of operations.
The fair value of options granted is estimated at the date of grant using a Black-Scholes option-pricing model with the following weighted-average
assumptions for the three and nine months ended September 30, 2013 and 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
September 30,
2013
|
|
|
Nine Months
Ended
September 30,
2013
|
|
|
Three Months
Ended
September 30,
2012
|
|
|
Nine Months
Ended
September 30,
2012
|
|
Significant assumptions (weighted-average):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Risk-free interest rate at grant date
|
|
|
0.00
|
%
|
|
|
0.95
|
%
|
|
|
0.88
|
%
|
|
|
0.94
|
%
|
Expected stock price volatility
|
|
|
000.00
|
%
|
|
|
118.34
|
%
|
|
|
124.93
|
%
|
|
|
123.63
|
%
|
Expected dividend payout
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected option life-years based on managements estimate
|
|
|
0.0 yrs
|
|
|
|
6.1 yrs
|
|
|
|
5.6 yrs
|
|
|
|
5.7 yrs
|
|
The following table summarizes options outstanding as of September 30, 2013:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable and vested
|
|
Exercise Prices
|
|
Number Outstanding
|
|
|
Weighted
Average
Remaining
Contractual Life
(Years)
|
|
|
Weighted Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted Average
Remaining
Contractual Life
(Years)
|
|
|
Weighted Average
Exercise Price
|
|
$0.22-$0.50
|
|
|
5,198,300
|
|
|
|
7.31
|
|
|
$
|
0.37
|
|
|
|
2,612,100
|
|
|
|
5.56
|
|
|
$
|
0.42
|
|
$0.51-$0.75
|
|
|
9,265,293
|
|
|
|
6.18
|
|
|
$
|
0.62
|
|
|
|
8,363,918
|
|
|
|
6.15
|
|
|
$
|
0.62
|
|
$0.76-$1.00
|
|
|
1,895,000
|
|
|
|
3.77
|
|
|
$
|
0.98
|
|
|
|
1,791,000
|
|
|
|
3.52
|
|
|
$
|
0.99
|
|
$1.01-$1.25
|
|
|
335,000
|
|
|
|
7.59
|
|
|
$
|
1.10
|
|
|
|
253,600
|
|
|
|
7.59
|
|
|
$
|
1.10
|
|
$1.26-$1.50
|
|
|
1,171,100
|
|
|
|
6.37
|
|
|
$
|
1.31
|
|
|
|
926,700
|
|
|
|
6.24
|
|
|
$
|
1.32
|
|
$1.51-$3.20
|
|
|
5,830,000
|
|
|
|
7.08
|
|
|
$
|
1.94
|
|
|
|
3,967,200
|
|
|
|
7.00
|
|
|
$
|
1.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,694,693
|
|
|
|
6.49
|
|
|
$
|
0.96
|
|
|
|
17,914,518
|
|
|
|
6.02
|
|
|
$
|
0.96
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 table summarizes the changes in options outstanding and the related exercise prices for the Companys common stock options issued:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares issued
under
2006 Plan and
2010 Plan
|
|
|
Weighted
Average Exercise
Price Per
Share
|
|
Outstanding at December 31, 2011
|
|
|
14,730,207
|
|
|
$
|
1.26
|
|
Granted
|
|
|
2,398,000
|
|
|
$
|
0.38
|
|
Exercised
|
|
|
(17,500
|
)
|
|
$
|
0.22
|
|
Canceled or expired
|
|
|
(1,987,807
|
)
|
|
$
|
0.78
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
15,122,900
|
|
|
$
|
1.18
|
|
Granted
|
|
|
1,352,500
|
|
|
$
|
0.27
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
Canceled or expired
|
|
|
(390,000
|
)
|
|
$
|
0.56
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2013
|
|
|
16,085,400
|
|
|
$
|
1.12
|
|
|
|
|
|
|
|
|
|
|
27
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares issued
outside
the Plan
|
|
|
Weighted
Average Exercise
Price Per
Share
|
|
Outstanding at December 31, 2011
|
|
|
8,254,232
|
|
|
$
|
0.65
|
|
Granted
|
|
|
|
|
|
$
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
Canceled or expired
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2012
|
|
|
8,254,232
|
|
|
$
|
0.65
|
|
Granted
|
|
|
|
|
|
$
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
Canceled or expired
|
|
|
(644,939
|
)
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
Outstanding at September 30, 2013
|
|
|
7,609,293
|
|
|
$
|
0.62
|
|
|
|
|
|
|
|
|
|
|
Warrants
Brookstreet Securities Corporation
As of
December 31, 2006, Brookstreet Securities Corporation (Brookstreet) had earned 1,976,190 warrants as partial compensation for its services as placement agent for the raising of equity capital. An additional 274,000 warrants were
earned by Brookstreet in the first quarter of 2007, for a total of 2,250,190 warrants related to the Companys private placement. In addition, 426,767 warrants were granted to a number of individuals as compensation for services rendered to the
Company. Each Warrant entitles the holder thereof to purchase the number of shares of common stock that could be purchased by the dollar amount of the Warrant being exercised at $1.00 in the case of the Brookstreet warrants and $0.80 in the case of
the individuals warrants. The Company recognized the value attributable to the individuals warrants in the amount of $222,000 and applied it to general and administrative expense. The Company recognized the value attributable to the
Brookstreet warrants in the amount of $1.2 million. The Company recognized the Brookstreet warrants as a component of additional paid-in capital with a corresponding reduction in additional paid-in capital to reflect this as a non-cash cost of the
offering. Proceeds from the private equity placement totaled $9.9 million and are offset by cash offering costs of $1.5 million as well as the non-cash offering cost of $1.2 million related to the fair value of the Brookstreet warrants. The Company
valued the Brookstreet warrants and the warrants issued to the individuals using the Black-Scholes pricing model and the following assumptions: contractual terms of 5 years and 3 years, average risk free interest rates of 4.58% and 5.13%, a dividend
yield of 0% and 0%, and volatility of 71% and 63%, respectively.
The number of warrants converted into common stock by Brookstreet was
484,675 for the completion of the Brookstreet financing and issued 1,370,000 shares of common stock that was part of a private placement of securities by ISC California during the second half of 2006. The net proceeds from the shares whose sale was
finalized in 2007 was $1.2 million net of cash fees and expenses. In connection with the final settlement in 2007, the selling agent for the private placement received 274,000 additional warrants, which entitle the holder thereof to purchase that
number of shares of common stock for $1.00 each.
During 2008, the Company raised additional capital by issuing Preferred Series A, B, C and D
stock. This issuance of the Preferred Series C triggered an anti-dilutive clause in the Brookstreet warrant agreement, where Brookstreet would receive an adjustment downward in the price it pays for converting its warrants, which resulted in a
deemed dividend of $337,000. Brookstreet earned a total of 2,250,190 warrants in 2006 and 2007 in connection with the Companys private placement. Each Warrant entitles the holder thereof to purchase one share of common stock for $1.00,
revalued to $0.56 per warrant. The Company recognized the value attributable to the warrants in the amount of $1.2 million in 2006 and $169,000 in 2007 as a component of additional paid-in capital with a corresponding reduction in additional paid-in
capital to reflect the issuance as a non-cash cost of the offering. Prior to 2009, the Company valued the Brookstreet warrants using the Black-Scholes pricing model and the following assumptions: contractual terms of
28
5 years, an average risk free interest rate of 4.58%, a dividend yield of 0%, and volatility of 70.57%. During 2009, the Company issued a total of 3,510,206 shares of common stock which
related to warrants originally issued to Brookstreet. Brookstreet converted a total of 612,267 warrants into 484,675 shares of common stock at an average cashless conversion price of $0.56 per share.
Implementation of Accounting Standards Code (ASC) 815-40-15, (formerly known as EITF 07-5 Determining Whether an Instrument (or Embedded
Feature) is Indexed to an Entitys Own Stock Price)
The Accounting Standards Code (ASC) 815-40-15, with an effective date of
December 15, 2008, should have been implemented as of January 1, 2009, and in future periods. This Issue applies to any freestanding financial instrument or embedded feature that has all the characteristics of a derivative as described in
ASC 815-10-15-83, (previously paragraphs 69 of Statement 133) for purposes of determining whether that instrument or embedded feature qualifies for the first part of the scope exception in ASC 815-10-74 (previously paragraph 11(a) of Statement
133). This Issue also applies to any freestanding financial instrument that is potentially settled in an entitys own stock, regardless of whether the instrument has all the characteristics of a derivative for purposes of determining whether
the instrument is within the scope of ASC 815-40.
During 2008, the Company issued a Series C Preferred round of financing which triggered the
anti-dilution clause in the Brookstreet warrant agreement (Brookstreet Warrants). From issuing the Series C Preferred Stock, the exercise prices of the Brookstreet Warrants were revalued down to $0.56 per warrant. Based on the
anti-dilution clause being triggered and the exercise price of the Brookstreet Warrants being revalued downward to $0.56, ASC 815-40-15 should have caused the Brookstreet Warrants to be treated and accounted for as a liability.
The anti-dilution provisions of the Brookstreet Warrants failed the criteria set by this ASC and therefore required reclassification from equity to
liability. The reclassification resulted in the requirement to revalue the Brookstreet Warrants at each reporting period with a corresponding charge or credit to the statement of operations. Valuation of the warrants was estimated using the
Monte-Carlo simulation method using the following assumptions: stock price and warrant price as of the valuation date, the Companys historical stock price, interest rate on U.S. treasury notes, dividend rate derived from the Series D Preferred
Stock, warrant expiration; simulated as a daily interval and anti-dilution impact if the Company had to raise capital below $0.25 per share. The reclassification and valuation of the warrants resulted in warrant liabilities of zero as of
September 30, 2012 and December 31, 2012. In addition, in the three and nine months ended September 30, 2013 and 2012, we recorded income of $0, $0, $0 and $38,000, respectively, in our consolidated condensed statements of operations
related to the change in the fair value of warrants.
The 1,721,629 Brookstreet Warrants outstanding as of December 31, 2011 expired on
February 14, 2012, and the Company recorded $38,000 in the nine months ending September 30, 2012 to reduce the fair market value of the warrants to zero.
Warrants issued with other financings
During 2007 and 2008, the Company entered into
various agreements to borrow working capital and as part of these agreements, the Company issued warrants to the holders to purchase common stock. The Company issued 1,400,000 warrants to YKA Partners, an affiliated company of our former Co-Chairman
of the Board with an exercise price of $0.25 per share, all of which expired unexercised in August 2013.
Warrants issued with Preferred
Stock
During 2008, in connection with the Companys fund raising efforts, two warrants to purchase shares of common stock were issued
with the purchase of one share of Series A Preferred Stock, resulting in the issuance of an additional 2,000,000 common stock warrants. In addition, two warrants to purchase shares of common stock were issued with the purchase of one share of
Series B Preferred Stock, resulting in the issuance of an additional 1,100,000 common stock warrants. As of December 31, 2010, 400,000 warrants related to the Series A Preferred Stock were converted into 800,000 common shares.
1,600,000 warrants related to the Series A Preferred Stock expired in January, 2013. As of September 30, 2013 and December 31,
2012, there were 0 and 300,000 warrants related to the Series B Preferred Stock outstanding, respectively with an exercise price of $0.20 per share. The warrants related to the Series B Preferred Stock expired unexercised in July 2013.
Warrants issued with Common Stock
In conjunction with the Companys sale of 10,125,000 shares of common stock on January 22, 2013, the Company issued warrants convertible into 5,062,500 shares of common stock at an exercise
price of $0.20 per share. The warrants have a five year term.
29
On March 12, 2013 the Company issued warrants convertible into 2,500,000 shares of common stock in
conjunction with the sale of 5,000,000 shares of common stock. These warrants have a five year term and an exercise price of $0.20 per share.
On July 24, 2013 the Company sold 20,000,000 Units, with each Unit consisting of one share of common stock and one Series A Warrant. The Series A
Warrants are convertible into 20,000,000 shares of common stock at an initial exercise price of $0.15 per share. The warrants have a five year term and were immediately exercisable. In addition, the Company issued 20,000,000 Series B Warrants each
to purchase one Unit. The Series B Warrants were immediately exercisable at an initial exercise price of $0.15 per Unit, subject to adjustment and expired on October 24, 2013. The Units issuable upon exercise of the Series B Warrants consisted
of 20,000,000 shares of common stock and 20,000,000 Series A Warrants, which are convertible into an additional 20,000,000 shares of common stock at an exercise price of $0.15 per share. All Series A Warrants expire on the fifth anniversary of the
transaction close, July 24, 2018, regardless of the date the Series A Warrants were issued.
The Series B Warrants were immediately
exercisable at an initial exercise price of $0.15, subject to adjustment. Beginning at the close of trading on the 60th trading day following the date of issuance, and effective beginning on the fifth trading day immediately preceding such 60th
trading day, the Series B Warrants were exercisable at a per unit exercise price equal to the lower of (i) the then-effective exercise price per unit and (ii) 80% of the closing bid price of the Companys common stock on such 60th
trading day. If prior to the close of trading on the 60th trading day after the date of issuance (and on any of the five trading days immediately preceding such day), a holder of the Series B Warrants had delivered one or more exercise notices to
the Company and paid all or any part of the exercise price with respect thereto, then on the first trading day immediately following such 60th trading day the Company was obligated to deliver to such holder an amount in cash equal to the positive
difference (if any) between (x) the exercise price actually paid by such holder and (y) the product of (I) the aggregate number of units elected to be purchased in such exercise notices, multiplied by (II) 80% of the closing bid price
of the Companys common stock on such 60th trading day. The Series B Warrants expired at the close of business on the 65th trading day following the date of issuance, October 24, 2013. The Series B Warrants were issued separately from the
common stock and the Series A Warrants included in the Units, and were transferable separately immediately thereafter. Series B Warrants were issued in certificated form only. Investors in the Offering received one Series B Warrant for each Unit
purchased by them in the Offering. No additional consideration was paid by Investors for the Series B Warrants.
During the third quarter of
2013, 1,700,000 Series B Warrants were exercised for net proceeds of $242,000 resulting in the issuance of 1,700,000 Units comprised of 1,700,000 shares of common stock and 1,700,000 Series A Warrants. See Note 11, Subsequent Events for further
information regarding the conclusion of the Series B Warrant transactions from October 1, 2013 to the expiration date of October 24, 2013.
The exercise price and number of shares of common stock issuable upon exercise of the Series A Warrants are subject to adjustment in the event of any stock dividends and splits, reverse stock split, stock
dividend, recapitalization, reorganization or similar transaction, as described in the Series A Warrants. The Series A Warrants also contain full ratchet anti-dilution protection upon the issuance of any common stock, securities convertible into
common stock, or certain other issuances at a price below the then existing exercise price of the Series A Warrants, with certain exceptions. The exercise price and number of Units issuable on exercise of the Series B Warrants are subject to
adjustment in the event of any stock split, reverse stock split, stock dividend, recapitalization, reorganization or similar transaction, as described in the Series B Warrants.
The Series A Warrants are exercisable on a cashless basis in certain circumstances. In addition, in the event of a fundamental transaction that is (i) an all cash or substantially all
cash transaction, (ii) a Rule 13e 3 transaction as defined in Rule 13e-3 under the Securities Exchange Act of 1934, as amended, or (iii) with certain limited exceptions, a fundamental transaction involving a person or entity
not traded on The New York Stock Exchange, Inc., The NYSE MKT, The NASDAQ Global Select Market, The NASDAQ Global Market or The NASDAQ Capital Market, then the Company or any successor entity will pay at the holders option, exercisable at any
time concurrently with or within 45 days after the consummation of the fundamental transaction, an amount of cash equal to the value of the Series A Warrant as determined in accordance with the Black Scholes option pricing model.
We account for our warrants in accordance with current accounting guidance, which defines how freestanding contracts that are indexed to and potentially
settled in a Companys 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
Companys common stock can be classified as equity. As the Series A and B Warrant agreements did not meet the specific conditions for equity classification, we are 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 September 30, 2013
using the Monte-Carlo simulation model. The fair value is affected by changes in inputs to the model. The following assumptions were used as inputs to the model: stock price of $0.15 and warrant exercise price of $0.15 as of the valuation date; the
Companys historical stock price volatility of 87.7%; risk free interest rate on U.S. treasury notes of 1.33% for Series A Warrants, and .03% for Series B Warrants; a zero dividend rate; warrant expiration of 5 years for Series A and 0.07 years
for the Series B Warrants; simulated as a daily interval and anti-dilution impact if the Company had to raise capital below $0.15 per share.
30
The fair value of the warrant liability at the issuance date exceeded the gross proceeds received for the
common shares, Series A Warrants and the Series B Warrants by $1.39 million. The Series A Warrants, Series B Warrants, and Placement Agent Warrants had fair values of $1.72 million, $2.65 million and $115,000 at issuance, respectively. The
classification and valuation of the warrants resulted in total warrant liabilities of $4.5 million and $4.4 million as of the issuance date of July 24, 2013 and the revaluation date of September 30, 2013, respectively. In addition, during
the three and nine months ended September 30, 2013, we recorded income of $27,000, in our consolidated condensed statements of operations related to the change in fair value of the warrant liability due to the revaluation at September 30,
2013 and the change in fair value of the Series B Warrants at each exercise date. The Series B Warrants expired on October 24, 2013.
Warrants issued to BioTime
During June
2008, the Company entered into an agreement with BioTime, Inc. (Bio Time). Based on the agreement, Bio Time agreed to pay the Company an advance of $250,000 to produce, make, and distribute joint products (as defined in that
agreement). As part of the agreement, the Company issued warrants for Bio Time to purchase 30,000 shares of the Companys common stock at $0.25 per share. These warrants expired in December 2012.
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 Arrangement and 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 to be issued by the Company for the benefit of the third party marketing organization for 100,000 shares each, with strike prices of $1.50 and $2.00,
respectively, vesting over four quarters, and a warrant term of five years.
Accordingly, there were warrants for 100,000 shares of common
stock at a strike price of $1.50 vested as of December 31, 2011 in connection with the agreement. In addition, as of September 30, 2012, there were 100,000 warrants vested with a strike price of $2.00. The Company valued the warrants
issued in connection with the SkinCare Marketing Agreement using the Black-Scholes pricing model and the following assumptions: contractual terms of 5 years, an average risk free interest rate of 0.94%, a dividend yield of 0%, and volatility of
134%.
31
Outstanding warrants related to warrant transactions through September 30, 2013 were as follows:
|
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Units
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Price per Warrant
|
|
|
|
Series A
|
|
|
Series B
|
|
|
Series A
|
|
|
Series B
|
|
|
Placement
Agent
|
|
|
YKA
Loan
|
|
|
BioTime
|
|
|
Bridge Loan
& non-cash
Grants
|
|
|
Brookstreet
|
|
|
Skin Care
Marketing
|
|
|
Jan 2013
Financing
|
|
|
Mar 2013
Financing
|
|
|
Total
Warrants
|
|
|
Range
|
|
|
Weighted
Average
exercise price
|
|
Outstanding, December 31, 2009
|
|
|
2,000,000
|
|
|
|
1,100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,400,000
|
|
|
|
30,000
|
|
|
|
1,629,623
|
|
|
|
3,405,929
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,565,552
|
|
|
$
|
0.25-0.80
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(400,000
|
)
|
|
|
(600,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(248,902
|
)
|
|
|
(1,645,772
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,894,674
|
)
|
|
|
0.25-0.80
|
|
|
|
0.47
|
|
Forfeited/Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2010
|
|
|
1,600,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,400,000
|
|
|
|
30,000
|
|
|
|
1,380,721
|
|
|
|
1,760,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,670,878
|
|
|
$
|
0.25-0.80
|
|
|
$
|
0.45
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
1.50-2.00
|
|
|
|
1.75
|
|
Exercised
|
|
|
|
|
|
|
(200,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(62,800
|
)
|
|
|
(38,528
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(301,328
|
)
|
|
|
0.25-0.80
|
|
|
|
0.40
|
|
Forfeited/Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2011
|
|
|
1,600,000
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,400,000
|
|
|
|
30,000
|
|
|
|
1,317,921
|
|
|
|
1,721,629
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
6,569,550
|
|
|
$
|
0.25-2.00
|
|
|
$
|
0.49
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,000
|
)
|
|
|
(1,317,921
|
)
|
|
|
(1,721,629
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,069,550
|
)
|
|
$
|
0.56-0.80
|
|
|
|
0.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2012
|
|
|
1,600,000
|
|
|
|
300,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,400,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
|
|
|
|
|
|
|
|
3,500,000
|
|
|
$
|
0.25-2.00
|
|
|
$
|
0.34
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
|
|
|
|
|
|
|
|
21,700,000
|
|
|
|
20,000,000
|
|
|
|
666,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,062,500
|
|
|
|
2,500,000
|
|
|
|
49,929,166
|
|
|
$
|
0.15-0.20
|
|
|
$
|
0.16
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,700,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,700,000
|
)
|
|
$
|
0.15
|
|
|
$
|
0.15
|
|
Forfeited/Cancelled
|
|
|
(1,600,000
|
)
|
|
|
(300,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,400,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,300,000
|
)
|
|
$
|
0.20-0.25
|
|
|
$
|
0.25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2013
|
|
|
|
|
|
|
|
|
|
|
21,700,000
|
|
|
|
18,300,000
|
|
|
|
666,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,000
|
|
|
|
5,062,500
|
|
|
|
2,500,000
|
|
|
|
48,429,166
|
|
|
$
|
0.15-2.00
|
|
|
$
|
0.16
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32
10. Commitments and Contingencies
Leases
We have
established our primary research facility in 8,215 square feet of leased office and laboratory space in Oceanside, California. Our lease for this facility expires in August 2016. Our current base rent is $8,588 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 our 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.
In March 2011, we moved into a new manufacturing facility in Frederick, Maryland which we use for laboratory and administrative purposes. Our current base rent in the new facilities is $11,644 per month.
The initial lease term expires December 31, 2015 and there is an option for an additional five years.
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 new 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 covers approximately 4,653 square feet, which was occupied on or about March 1, 2011. The lease expires on
February 29, 2016, subject to the Companys right to extend the term for up to five additional years. The Company began rent payments in March 2011 once it occupied the facilities, at an initial rate of $5,118 per month. The lease was
amended effective July 2011 and January 2013 to account for additional square footage occupied by Company personnel. As such, the initial monthly rate has increased to $11,492 per month. In addition, the monthly base rent will increase by 3%
annually on the anniversary date of the agreement. The Company is also obligated to pay a portion of the utilities for the building, CC&R fees and increases in property tax and insurance.
S Real Estate Holdings LLC is owned by Dr. Ruslan Semechkin, the Companys Chief Science Officer and was previously owned by Dr. Andrey Semechkin, the Companys Chief Executive Officer
and Co-Chairman of the Board of Directors. The Lease Agreement was negotiated at arms length and was reviewed by the Companys outside legal counsel. The terms of the lease were reviewed by a committee of independent directors, and the
Company believes that, in total, those terms are consistent with the terms that could be obtained for comparable facilities from an unaffiliated party.
Future minimum lease payments required under operating leases that have initial or remaining non-cancelable lease terms in excess of one year as of September 30, 2013, are as follows (in thousands):
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Amount
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2013 (remaining three months)
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$
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97
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2014
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386
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2015
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397
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2016
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101
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2017
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3
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Total
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$
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984
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Marketing Arrangement and Agreement
The Company signed a Term Sheet (arrangement) in late 2010 with a third party marketing organization that would serve as a consultant and assist in marketing for Lifeline Skin Care, Inc.,
(LSC) a wholly-owned subsidiary of International Stem Cell, to sell its skin care products through various proprietary mailings. As part of the arrangement, there were various phases and objectives to accomplish, one of which was the
potential formation of a joint venture in the future between the parties. Based on the arrangement, LSC paid to the marketing organization 40% of net profits (as defined in the arrangement) generated from the proprietary mailings.
In September 2011, the Company signed a Marketing Agreement (agreement) with an effective date of June 30, 2011, superseding the terms
of the arrangement with the third party marketing organization. According to the agreement, the third party marketing organization will continue to provide assistance to LSC 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 provides for two tranches of common stock warrants to be issued by
the Company for the benefit of the third
33
party marketing organization for 100,000 shares each, with strike prices of $1.50 and $2.00, respectively, with vesting over four quarters, and warrant term of five years. Subsequently in July
2012, we renegotiated the commission structure to reflect slightly lower rates, 18% on net revenues derived from direct sales and 9% on net revenues derived from referral sales. The Company recognized $0, $0, $36,000 and $73,000 in stock-based
compensation from warrants issued for services during the three and nine months ended September 30, 2013 and 2012, respectively. During the three and nine months ended September 30, 2013, LSC incurred marketing expenses of $18,000 and
$61,000, respectively, under the terms of this arrangement and agreement. For the same periods in 2012, we recorded $32,000 and $117,000, respectively, as marketing expenses related to this consultant.
Customer Concentration
During the three
and nine months ended September 30, 2013 one major customer accounted for 24% and 18% of our consolidated revenues, respectively, and another major customer accounted for 13% and 12% of our consolidated revenues, respectively. During the three
and nine months ended September 30, 2012, one major customer, accounted for 17% and 15% of our consolidated revenues, respectively, and another major customer accounted for 13% and 10% of our consolidated revenues, respectively.
11. Subsequent Events
Series B Warrant exercises
Subsequent to September 30, 2013, the Company received net proceeds of an additional $2.1 million upon the exercise of 15,054,822 of the Series B Warrants issued in July 2013 for 15,054,822
additional Units, but prior to the expiration of the Series B Warrants on October 24, 3013. The total additional Units consisted of 15,054,822 shares of common stock and 15,054,822 Series A Warrants. Of the subsequent exercises, Dr. Andrey
Semechkin, the Companys Co-Chairman and Chief Executive Officer, exercised 2,754,821 Series B Warrants, and Ruslan Semechkin, the Companys Chief Science Officer, exercised 667,667 Series B Warrants for an aggregate price of $497,000.
Series B Price adjustment
The Series B Warrants were subject to an exercise price adjustment on the
60
th
trading day following issuance in July 2013. On
October 17, 2013, the adjustment date, the adjusted exercise price was calculated at a 20% discount to the closing bid price on the adjustment date. The closing bid price on the adjustment date was $0.1815 per share, which resulted in an
adjusted exercise price of $0.1452 per Unit. This adjusted exercise price was retroactively applied to all exercises from the period of October 10
th
through to the expiration date of October 24
th
. Of the 15,054,822 Series B Warrants exercised subsequent to September 30, 2013, there were 12,304,822 subject to
the adjusted exercise price of $0.1452 per Unit for net proceeds of approximately $1.7 million. The remaining 2,750,000 were exercised prior to the adjustment date at $0.15 per Unit for net proceeds of approximately $0.4 million.
Expiration of Series B Warrants
On
October 24, 2013, the remaining 3,245,178 Series B Warrants expired unexercised. Following the expiration of the Series B Warrants, total outstanding warrants were 45,183,988, which the Company has reserved 45,850,654 shares of common stock for
future issuance. Total Series A Warrants outstanding are 36,754,822 following the total exercises of the Series B Warrants.