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IS

International Stem Cell CORP (ISCO)·Q1 2015 Earnings Summary

Executive Summary

  • Q1 2015 revenue was $1.622M, essentially flat year over year (-1.6% vs. $1.649M in Q1 2014), with EPS unchanged at $(0.01); operating loss improved slightly to $(1.966)M from $(2.065)M in Q1 2014 .
  • Segment mix shifted modestly toward Skin Care (52% of revenue) while Biomedical declined due to weaker OEM and distributor sales; cost of sales held at ~26% of revenue (vs. 27% in Q1 2014) .
  • Liquidity remains tight: cash was $0.611M, working capital deficit widened to $(3.62)M, and management disclosed substantial doubt about going-concern absent additional financing; financing inflows in the quarter were $0.431M from warrant exercises .
  • Near-term catalysts center on initiating the Phase I/IIa Parkinson’s trial in Australia and leveraging recent FDA acceptance of hpSC lines and EU IP progress; no formal numerical guidance was issued .

What Went Well and What Went Wrong

What Went Well

  • Skin Care revenue grew 5% YoY with strongest growth in professional accounts; segment operating profit increased to $129K (from $15K), reflecting improved execution in channel diversification .
  • Biomedical cost efficiency improved (cost of sales fell from 42% to 38% of sales), supporting segment operating income of $141K despite revenue softness .
  • Strategic/regulatory wins: “FDA accepted the use of parthenogenetic stem cells as a starting material for the development of human cellular therapeutics,” and management expects to start the Parkinson’s clinical trial in Australia in 2015 .

What Went Wrong

  • Biomedical revenue fell 8% YoY on weaker OEM and distributor demand, pressuring consolidated top-line growth (-1.6% YoY) .
  • Liquidity constraints and financing limits (restricted from issuing securities until May 7, 2015 and barred from Lincoln Park sales until March 2016) heighten going-concern risk; cash declined to $0.611M, working capital deficit widened to $(3.62)M .
  • R&D remained elevated ($1.118M, +17% YoY) ahead of clinical initiation, sustaining losses despite segment operating profits; warrant liability volatility remains a material below-the-line factor ($3.355M fair value at quarter end) .

Financial Results

MetricQ1 2014Q3 2014Q1 2015
Revenue ($USD Millions)$1.649 $1.963 $1.622
Net Loss ($USD Millions)$(1.435) $(2.034) $(1.287)
Operating Loss ($USD Millions)$(2.065) $(2.034) $(1.966)
Diluted EPS ($USD)$(0.01) $(0.01) $(0.01)
Cost of Sales (% of Revenue)27% 26% 26%

Segment revenue and operating income:

SegmentQ1 2014 Revenue ($000)Q1 2015 Revenue ($000)Q1 2014 Operating Income ($000)Q1 2015 Operating Income ($000)
Cosmeceutical (Skin Care)803 841 15 129
Biomedical (Cell Technology)846 781 140 141
Therapeutic (Parent)——(2,220) (2,236)
Total1,649 1,622 (2,065) (1,966)

Operating cash flow and liquidity KPIs:

KPIQ1 2014Q1 2015
Net Cash Used in Operating Activities ($USD Millions)$(2.031) $(0.764)
Cash and Equivalents ($USD Millions)$0.991 $0.611
Financing Cash Inflow ($USD Millions)$0.935 (Lincoln Park) $0.431 (Warrant exercise)
Working Capital Deficit ($USD Millions)—$(3.62)
Warrant Liability Fair Value ($USD Millions)—$3.355

Regional revenue mix:

RegionQ1 2014 ($000)Q1 2015 ($000)
North America1,349 1,300
Asia178 213
Europe109 90
Other13 19
Total1,649 1,622

Guidance Changes

MetricPeriodPrevious GuidanceCurrent GuidanceChange
RevenueFY/Q2 onwardNoneNoneMaintained (no formal guidance)
MarginsFY/Q2 onwardNoneNoneMaintained (no formal guidance)
OpEx/R&DFY/Q2 onwardNoneExpect decreased R&D in 2015 post preclinical completion Qualitative commentary
FinancingFY/Q2 onward—Restricted from Lincoln Park sales until Mar-2016; issuance blocked until May 7, 2015 New constraints (structural)

Earnings Call Themes & Trends

TopicPrevious Mentions (Q3 2014)Previous Mentions (Q4 2014 call)Current Period (Q1 2015)Trend
Parkinson’s clinical initiationPlan to submit materials by YE 2014; FDA cleared hpSC lines R&D spend increased to complete preclinical; burn rate rising with PD program Anticipate commencing Phase I in Australia in 2015 Progressing toward first-in-human
Regulatory/IPPositive EU Advocate General opinion; FDA clearance —EU ruling favorable; core IP strengthened Strengthening IP/regulatory footing
Segment strategyAdded APAC distributors for LCT; Skin Care channels expanding Subsidiaries >$1M operating income milestone in 2014 LSC growth in professional accounts; LCT OEM weakness Mixed: LSC up, LCT softer
Cost structureCost of sales stable at 26% in Q3 G&A down YoY; overall burn up with R&D CoS ~26%; G&A down 15% YoY Lean G&A; steady CoS
Liquidity/financing—$6.3M net raised in 2014; warrant-related accounting $0.611M cash; restrictions on capital raises; going concern doubt Elevated financing risk

Management Commentary

  • “We delivered on some very important milestones in the last three months of 2014… including… clearance for the clinical use of our stem cell lines from the U.S. FDA… We expect to make more progress in 2015, including starting our clinical trial in Parkinson’s disease… and to potentially report interim data before the end of 2015.” — CEO Andrey Semechkin, Ph.D. .
  • “For the first time, our subsidiaries exceeded $1 million in operating income… [they] are making more significant contributions to our bottom line and to help the therapeutic area.” — CFO remarks on 2014 performance .

Q&A Highlights

  • Focus on operating leverage: management highlighted G&A reduction and segment operating income, while acknowledging higher R&D spend tied to preclinical completion for PD .
  • Financing mechanics and warrant impacts: explained warrant liability accounting and non-cash volatility; 2014 financings provided $6.3M net, while Q1 2015 financing cash came from warrant exercises ($0.431M) .
  • Burn rate and runway: burn ~$255K/month (excluding capex/patents), underscoring urgency for new capital sources amid issuance restrictions until May 2015 and Lincoln Park limits until March 2016 .

Estimates Context

  • Wall Street consensus estimates: We attempted to retrieve Q1 2015 EPS and revenue consensus via S&P Global but the request failed due to provider constraints; consensus appears unavailable for ISCO’s Q1 2015. As a result, comparison to estimates is not possible in this recap [GetEstimates error; S&P Global].

Key Takeaways for Investors

  • Q1 2015 was operationally steady: revenue flat and EPS unchanged, with slight improvement in operating loss and continued cost discipline in G&A; Skin Care momentum offsets Biomedical softness .
  • Liquidity risk is the primary overhang: low cash, widening working capital deficit, and capital-raising constraints drive going-concern disclosure; monitor financing actions and warrant exercises for runway extension .
  • Clinical initiation is the key catalyst: FDA hpSC acceptance and EU IP progress underpin potential PD Phase I/IIa start in Australia in 2015; any interim data by year-end could be stock-moving .
  • Segment-level profitability is emerging: both Skin Care and Biomedical segments generated operating income, offering a base to support therapeutic R&D if revenue growth resumes .
  • Watch channel mix: Skin Care’s shift toward professional accounts raises cost of sales vs. e-commerce; sustaining gross margin requires disciplined pricing and mix management .
  • Asia expansion upside vs. OEM risk: APAC distributor growth supports LCT, but OEM softness remains a near-term headwind; quarterly trajectory will depend on distributor execution .
  • No formal guidance: model with conservative assumptions and emphasize liquidity events and trial milestones rather than near-term revenue acceleration .

Notes:

  • Q1 2015 earnings press release 8-K was not issued; actuals sourced from the Q1 2015 Form 10-Q. Prior quarter materials include the Q4 2014 press release (filed April 1, 2015) and the Q3 2014 press release (filed November 13, 2014) .