Executive Summary

Revenue grew 9.0% year over year to $1.59M, but declined 3.7% sequentially; gross margin was approximately 74% (vs. ~77% y/y, ~73% in Q1) as product mix shifted; net loss widened to $(4.41)M driven by a $3.45M warrant exchange inducement expense .
Subsidiary revenue remained resilient: Lifeline Cell Technology (LCT) +13% y/y and Lifeline Skin Care (LSC) +5% y/y; management highlighted continued multi-quarter top-line momentum .
Liquidity tightened (cash $0.75M), though working capital turned positive ($1.17M) after eliminating the warrant liability via exchange; management is actively evaluating financing options .
R&D advanced: completion of hpNSC acute toxicity study and six‑month primate data with behavioral improvements; a Rohto research agreement was signed in July as a precursor to a potential license .

What Went Well and What Went Wrong

What Went Well

R&D progress toward IND: “another important step forward…completing the acute toxicity study,” and “encouraging…behavioral improvements after six months” in primates; management expects a more complete Parkinson’s update before quarter end .
Commercial subsidiaries executed: LCT revenue rose to $0.84M (+13% y/y); LSC revenue rose to $0.75M (+5% y/y) on broader channel expansion; management noted eight consecutive quarters of y/y revenue growth at the time .
Operating discipline: G&A declined 20% y/y in Q2 to $1.33M, aiding opex mix while R&D increased to support clinical progress .

What Went Wrong

Bottom line pressure: net loss widened to $(4.41)M (from $(2.20)M y/y) primarily due to a $(3.45)M warrant exchange inducement expense; operating loss was $(2.24)M vs. $(2.19)M y/y .
Gross margin compression y/y: cost of sales rose to 26% of revenue vs. 23% y/y (mix shift toward lower‑margin products and less e‑commerce weight), partially offset by sequential stability .
Liquidity and funding needs: cash fell to $0.75M; management emphasized the need for significant additional capital to fund R&D and operations and is exploring equity/debt, licenses, grants, or collaborations .

Financial Results

Metric	Q2 2013	Q1 2014	Q2 2014
Revenue ($USD Millions)	$1.457	$1.649	$1.588
Cost of Sales ($USD Millions)	$0.329	$0.439	$0.409
Cost of Sales (% of Revenue)	22.6%	26.6%	25.8%
Gross Margin (%)	~77.4% (calc from cost %)	73.0%	~74.2% (calc from cost %)
Operating Income (Loss) ($USD Millions)	$(2.190)	$(2.065)	$(2.243)
Change in FV of Warrant Liability ($USD Millions)	—	$0.623	$1.271
Warrant Exchange Inducement Expense ($USD Millions)	—	—	$(3.445)
Net Income (Loss) ($USD Millions)	$(2.200)	$(1.435)	$(4.410)
Diluted EPS ($)	$(0.02)	$(0.01)	$(0.03)
Notes: Q2 2014 and Q2 2013 gross margin are computed as 1 – cost of sales %; Q1 2014 gross margin is as disclosed .

Segment revenue contributions

Segment ($USD Millions)	Q2 2013	Q1 2014	Q2 2014
Lifeline Cell Technology (LCT)	$0.748	$0.846	$0.842
Lifeline Skin Care (LSC)	$0.709	$0.803	$0.746

Operating expense and liquidity KPIs

KPI	Q2 2013	Q1 2014	Q2 2014
R&D Expense ($USD Millions)	$0.974	$0.958	$1.411
Selling & Marketing ($USD Millions)	$0.679	$0.669	$0.679
G&A ($USD Millions)	$1.665	$1.648	$1.332
Cash & Equivalents ($USD Millions)	—	$0.991	$0.748
Working Capital ($USD Millions)	$(2.400) at 12/31/2013	—	$1.170 at 6/30/2014

Six-month context (1H)

Metric	1H 2013	1H 2014
Revenue ($USD Millions)	$2.742	$3.237
Cost of Sales ($USD Millions)	$0.663	$0.848
Operating Loss ($USD Millions)	$(3.904)	$(4.308)
Net Loss ($USD Millions)	$(3.913)	$(5.845)

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Parkinson’s IND path	FY2014	Pre‑IND completed; completing FDA‑required studies by end‑2014, file IND shortly thereafter (stated in Mar-2014)	“Expect to give a more complete update on our Parkinson’s disease program before the end of this quarter” (Aug-2014)	Maintained timeline emphasis; near‑term update flagged
Cash burn	FY2014	“Expect our cash burn to increase compared with last year” (May-2014)	“Cash burn…as anticipated reflecting…increased R&D spending” (Aug-2014)	Maintained (higher vs prior year)
Financial metrics (revenue/margins)	FY/Qtr	None provided	None provided	—

No formal quantitative revenue/margin guidance was provided in Q2 2014 materials .

Earnings Call Themes & Trends

Topic	Previous Mentions (Q4 2013, Q1 2014)	Current Period (Q2 2014)	Trend
R&D execution (Parkinson’s hpNSC)	Pre‑IND FDA meeting; plan to complete FDA‑required studies by end‑2014 and file IND thereafter	Acute toxicity study completed; six‑month primate study shows behavioral improvements; more update before quarter end	Positive progression toward IND
Regulatory interactions	FDA clarity reduced risk of unforeseen issues; building feedback into plans	Continued IND‑enabling work; toxicity data supportive	Steady, de‑risking
Partnerships/licensing	—	Entered research agreement with Rohto to evaluate hpSC‑derived cells as precursor to a potential license	Expanding external validation
Commercial execution (LCT/LSC)	Subsidiary growth; gross margin 73% in Q1	LCT +13% y/y; LSC +5% y/y; Mexico distribution for LSC referenced	Sustained growth with channel expansion
Liquidity/financing	Ended 2013 cash $2.24M	Cash $0.75M; exploring financing routes; working capital improved via warrant liability removal	Heightened near‑term funding need

Management Commentary

“We’ve taken another important step forward in our Parkinson’s Disease program in completing the acute toxicity study… encouraging are the signs of behavioral improvements after six months in the primate study… pivotal to a successful IND submission.” — Dr. Andrey Semechkin, CEO .
“Our revenues have continued with the eighth consecutive quarter of growth on a year over year basis… I recognize that our cash position remains challenging, but I continue to be committed to supporting the company until such a time as we can bring in additional investment on appropriate terms.” — Dr. Andrey Semechkin .
“Obtaining clarity from the FDA on our Parkinson’s Disease program allows us to substantially lower the risk of unforeseen regulatory issues… we will be able to prepare a stronger IND submission.” — Dr. Andrey Semechkin (Q1) .

Q&A Highlights

The company hosted an earnings call on Aug 12, 2014 at 11:00 a.m. ET; a webcast and replay were provided . A transcript is hosted externally .
Detailed Q&A content was not available in the documents repository; themes above reflect prepared remarks and company press materials .

Estimates Context

We did not identify published Wall Street consensus estimates for Q2 2014 revenue or EPS for ISCO in the available S&P Global dataset during this review. As a result, no beat/miss determination vs. consensus can be made at this time. Values would be retrieved from S&P Global if available.

Key Takeaways for Investors

Clinical momentum is building toward an IND in Parkinson’s (acute tox complete; primate signal improving), which is the primary medium‑term catalyst; investors should watch for the “more complete update” indicated for later in the quarter .
Subsidiary revenue growth remains a stabilizer (LCT +13% y/y; LSC +5% y/y), demonstrating execution in commercial lines amid heightened R&D spend .
The widened net loss was largely driven by a one‑time warrant exchange inducement expense; excluding this, underlying operating trajectory is more stable, though still loss‑making .
Gross margin compressed y/y on mix but remained stable sequentially; monitoring mix (OEM vs. e‑commerce) is key for near‑term margin outcomes .
Liquidity is a near‑term risk (cash $0.75M); financing overhang and potential equity issuance/dilution are key trading considerations until funding visibility improves .
The Rohto research agreement provides external validation and potential licensing optionality; positive pre‑clinical results could catalyze a definitive agreement over time .
Working capital improved due to removal of the warrant liability post‑exchange, aiding balance sheet optics despite low cash; however, sustainable funding remains essential .

Supporting documents used:

Q2 2014 8‑K/press release with financials and highlights .
Q1 2014 8‑K/press release for trend and margin context .
Q4 2013 8‑K/press release for prior context and IND timeline .
Rohto agreement press release (July 2014) .

If you want, I can append beat/miss analysis once S&P Global consensus for ISCO’s Q2 2014 is confirmed (if coverage exists).

International Stem Cell CORP (ISCO)·Q2 2014 Earnings Summary