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Organization and Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2019

Organization Consolidation And Presentation Of Financial Statements [Abstract]

International Stem Cell Corporation (the “Company”) was organized in Delaware in June 2005 and is publicly traded in OTC QX. The Company is a research and development company, for the therapeutic market, which has focused on advancing potential clinical applications of human parthenogenetic stem cells (“hpSCs”) for the treatment of various diseases of the central nervous system and liver diseases. The Company has the following wholly-owned subsidiaries:

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Lifeline Cell Technology, LLC ("LCT”) – for the biomedical market, develops, manufactures and commercializes primary human cell research products including over 208 human cell culture products, including frozen human “primary” cells and the reagents (called “media”) needed to grow, maintain and differentiate the cells;

•

Lifeline Skin Care, Inc. ("LSC”) – for the anti-aging cosmetic market, develops, manufactures and markets a category of anti-aging cosmetic skin care products based on the Company’s proprietary parthenogenetic stem cell technology and small molecule technology;

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Cyto Therapeutics Pty. Ltd. ("Cyto Therapeutics”) – performs research and development for the Therapeutic Market and is currently conducting clinical trials in Australia for the use of ISC-hpNSC® in the treatment of Parkinson’s disease.

Basis of Presentation

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with GAAP and the rules and regulations of the Securities and Exchange Commission (“SEC”) related to a quarterly report on Form 10-Q. Certain information and note disclosures normally included in annual financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to those rules and regulations. The unaudited interim condensed consolidated financial statements reflect all adjustments consisting of normal recurring adjustments which, in the opinion of management, are necessary for a fair statement of the Company’s financial position and the results of its operations and cash flows for the periods presented. The unaudited condensed balance sheet at December 31, 2018 has been derived from the audited financial statements at that date but does not include all of the information and disclosures required by GAAP for annual financial statements. The operating results presented in these unaudited interim condensed consolidated financial statements are not necessarily indicative of the results that may be expected for any future periods. These unaudited interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto for the year ended December 31, 2018 included in the Company’s annual report on Form 10-K filed with the SEC on April 19, 2019.

Principles of Consolidation

The consolidated financial statements include the accounts of International Stem Cell Corporation and its subsidiaries after intercompany balances and transactions have been eliminated.

Liquidity and Going Concern

The accompanying financial statements have been prepared under the assumption that the Company will continue as a going concern, which assumes that the Company will realize its assets and satisfy its liabilities in the normal course of business. The accompanying financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the outcome of the uncertainty concerning the Company’s ability to continue as a going concern.

The Company has an accumulated deficit of approximately $103,700,000 as of September 30, 2019 and has incurred net losses and has had negative operating cash flows since inception. The Company has had no revenue from its principal operations in therapeutic and clinical product development through research and development efforts. Based on cash on-hand at September 30, 2019 of $463,000 and anticipated cash burn, the Company estimates it has existing resources to fund the Company’s principal operations into the first quarter of 2020. There can be no assurance that the Company will be successful in maintaining normal operating cash flow or obtaining additional funding. These circumstances raise substantial doubt about the Company’s ability to continue as a going concern. For the foreseeable future, the Company’s ability to continue its operations is dependent upon its ability to obtain additional capital.

The Company continues to evaluate various financing sources and options to raise working capital to help fund current research and development programs and operations. The Company will need to obtain significant additional capital from sources including the exercise of outstanding warrants, equity and/or debt financings, license arrangements, grants and/or collaborative research arrangements to sustain its operations and develop products.

The timing and degree of any future capital requirements will depend on many factors, including:

•

the accuracy of the assumptions underlying the estimates for capital needs in 2019 and beyond;

•

the extent that revenues from sales of LSC and LCT products cover the related costs and provide capital;

•

scientific progress in research and development programs;

•

the magnitude and scope of the Company’s research and development programs and its ability to establish, enforce and maintain strategic arrangements for research, development, clinical testing, manufacturing and marketing;

•

the progress with preclinical development and clinical trials;

•

the time and costs involved in obtaining regulatory approvals;

•

the costs involved in preparing, filing, prosecuting, maintaining, defending and enforcing patent claims; and

•

the number and type of product candidates that the Company decides to pursue.

Additional financing through strategic collaborations, public or private equity financings or other financing sources may not be available on acceptable terms, or at all. Additional equity financing could result in significant dilution to stockholders. Additional debt financing may be expensive and require the Company to pledge all or a substantial portion of its assets. Further, if additional funds are obtained through arrangements with collaborative partners, these arrangements may require the Company to relinquish rights to some of its technologies, product candidates or products that the Company would otherwise seek to develop and commercialize on its own. If sufficient capital is not available, the Company may be required to delay, reduce the scope of or eliminate one or more of its product initiatives.

Cash Equivalents

The Company considers all highly liquid investments with original maturities of three months or less when purchased to be cash equivalents. There were no cash equivalents as of September 30, 2019 and December 31, 2018.

Inventory

Inventory is accounted for using the average cost and first-in, first-out (FIFO) methods for LCT cell culture media and reagents, average cost and specific identification methods for LSC products, and specific identification method for LCT products. Inventory balances are stated at the lower of cost or net realizable value. 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. The value of the inventory that is not expected to be sold within twelve months of the current reporting period is classified as non-current inventory on the condensed consolidated balance sheets.

Accounts Receivable

Trade accounts receivable are recorded at the net invoice value and are not interest bearing. Accounts receivable primarily consist of trade accounts receivable from the sales of LCT’s products, timing of cash receipts by the Company related to LSC credit card sales to customers, as well as LSC trade receivable amounts related to spa and distributor sales. The Company considers receivables past due based on the contractual payment terms. The Company reviews its exposure to accounts receivable and reserves specific amounts if collectability is no longer reasonably assured. As of September 30, 2019 and December 31, 2018, the Company had an allowance for doubtful accounts totaling $12,000.

Advances

On June 18, 2008, the Company entered into an agreement with BioTime, Inc. (“BioTime”), where BioTime paid an advance of $250,000 to LCT to produce, make, and distribute Joint Products. The $250,000 advance will be paid down with the first $250,000 of net revenues that otherwise would be allocated to LCT under the agreement. As of September 30, 2019, no revenues were realized from this agreement.

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 three to five years. The costs of major remodeling and leasehold improvements are capitalized and amortized over the shorter of the remaining term of the lease or the estimated life of the asset.

Intangible Assets

Intangible assets consist of acquired patent licenses and capitalized legal fees related to the acquisition, filing, maintenance, and defense of patents and trademarks. Patent or patent license amortization only begins once a patent license is acquired or a patent is issued by the appropriate authoritative bodies. In the period in which a patent application is rejected or efforts to pursue the patent are abandoned, all the related accumulated costs are expensed. Patents and other intangible assets are amortized on a straight-line basis over the shorter of the lives of the underlying patents or the useful life of the license. All amortization expense related to intangible assets is included in general and administrative expense.

Long-Lived Asset Impairment

The Company reviews long-lived assets for impairment when events or changes in business conditions indicate that their carrying value may not be recovered, and at least annually. The Company considers assets to be impaired and writes them down to fair value if expected associated undiscounted cash flows are less than the carrying amounts. Fair value is the present value of the associated cash flows. The Company recognized $145,000 and $157,000 of impairment losses on its intangible assets during the three months ended September 30, 2019 and 2018. The Company recognized $145,000 of impairment losses on its intangible assets during the nine months ended September 30, 2019 and $361,000 of impairment losses on its intangible assets during the nine months ended September 30, 2018 due to abandonment of efforts to pursue certain patents or patented technologies.

Revenue Recognition

Revenue is recognized at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring goods or services to a customer. This principle is applied using the following five-step process:


	1.	Identify the contract with the customer
	2.	Identify the performance obligations in the contract
	3.	Determine the transaction price
	4.	Allocate the transaction price to the performance obligations in the contract
	5.	Recognize revenue when (or as) each performance obligation is satisfied

The Company recognizes revenue when it satisfies a performance obligation by transferring control of the promised goods or services to its customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

The following table presents the Company's revenue disaggregated by segment, product and geography, based on management's assessment of available data (in thousands):

Biomedical Market:
	Three Months Ended September 30, 2019									Three Month Ended September 30, 2018
	U.S.		OUS*		Total Revenues		% of Total Revenues			U.S.		OUS*		Total Revenues		% of Total Revenues
Biomedical products
Cells	$	179	$	102	$	281		18	%	$	326	$	84	$	410		15	%
Media		1,262		111		1,373		82	%		2,337		83		2,420		85	%
Other		16		—		16		0	%		5		—		5		0	%
Total	$	1,457	$	213	$	1,670		100	%	$	2,668	$	167	$	2,835		100	%


	Nine Months Ended September 30, 2019									Nine Months Ended September 30, 2018
	U.S.		OUS*		Total Revenues		% of Total Revenues			U.S.		OUS*		Total Revenues		% of Total Revenues
Biomedical products
Cells	$	635	$	288	$	923		18	%	$	873	$	288	$	1,161		15	%
Media		4,020		348		4,368		82	%		6,055		387		6,442		85	%
Other		19		—		19		0	%		18		—		18		0	%
Total	$	4,674	$	636	$	5,310		100	%	$	6,946	$	675	$	7,621		100	%

*Outside the United States

Cosmetic Market:
	Three Months Ended September 30, 2019					Three Month Ended September 30, 2018
	Total Revenues		% of Total Revenues			Total Revenues		% of Total Revenues
Cosmetic sales channels
Ecommerce	$	230		54	%	$	200		56	%
Professional		196		46	%		160		44	%
Total	$	426		100	%	$	360		100	%


	Nine Months Ended September 30, 2019					Nine Months Ended September 30, 2018
	Total Revenues		% of Total Revenues			Total Revenues		% of Total Revenues
Cosmetic sales channels
Ecommerce	$	670		51	%	$	771		62	%
Professional		655		49	%		474		38	%
Total	$	1,325		100	%	$	1,245		100	%

The Company's revenue consists primarily of sales of products from its two revenue-generating operating segments, the biomedical products and anti-aging cosmetics products business segments. The cosmetic market segment markets and sells a line of luxury skincare products sold through two sales channels: ecommerce and professional. The ecommerce channel sells direct to customers through online orders, while the professional sales are to spas, salons and other skincare providers. The biomedical market segment markets and sells primary human cell research products with two product categories, cells and media, sold both within and outside the United States.

Contract terms for unit price, quantity, shipping and payment are governed by sales agreements, invoices or online order forms which the Company considers to be a customer's contract in all cases. The unit price is considered the observable stand-alone selling price for the arrangements. Any promotional or volume sales discounts are applied evenly to the units sold for purposes of calculating standalone selling price.

The Company recognizes revenue when its customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects to receive in exchange for those goods or services. Product sales generally consist of a single performance obligation that the Company satisfies at a point in time.

For LSC products, ecommerce sales are primarily paid through credit card charges, while professional sales are invoiced. The professional sales and biomedical products' standard payment terms for its customers are generally 30 days after the Company satisfies the performance obligations. For anti-aging cosmetic products, the Company honors a 30-day return policy, but historical returns have been minimal and as such, no estimated allowance for sales returns was recorded as of September 30, 2019 and December 31, 2018.

The Company elects to account for shipping and handling as activities to fulfill the promise to transfer the goods. As a result, no consideration is allocated to shipping and handling. Rather, the Company accrues the cost of shipping and handling upon shipment of the product, and all contract revenue is recognized at the same time.

Variable Consideration

The Company records revenue from customers in an amount that reflects the transaction price it expects to be entitled to after transferring control of those goods or services. From time to time, the Company offers sales promotions on its skincare products such as discounts and free product offers. Variable consideration is estimated at contract inception only to the extent that it is probable that a significant reversal of revenue will not occur, and updated at the end of each reporting period as additional information becomes available.

Contract Balances

The Company records a receivable when it has an unconditional right to receive consideration after the performance obligations are satisfied. As of September 30, 2019 and December 31, 2018, accounts receivable totaled $1,080,000 and $651,000, respectively. For the nine months ended September 30, 2019 and 2018, the Company did not incur material impairment losses with respect to its receivables.

Practical Expedients

The Company has elected the practical expedient not to determine whether contacts with customers contain significant financing components. The Company pays commissions on certain sales for its biomedical and cosmetic market(s) once the customer payment has been received, which are accrued at the time of the sale. The Company generally expenses sales commissions when incurred because the amortization period would have been one year or less. These costs are recorded within sales and marketing expenses. In addition, the Company has elected to exclude sales taxes in consideration of the transaction price.

Allowance for Sales Returns

The Company’s cosmetic products have a 30-day product return guarantee and based on historical rate of returns, the Company determined that there is a low probability that returns will occur. The returns that have historically occurred have not been significant and have been recognized as they occur as a reduction of revenue that is recognized as performance obligations are met. As of September 30, 2019 and December 31, 2018, the Company recorded no allowance for sales returns.

Cost of Sales

Cost of sales consists primarily of salaries and benefits associated with employee efforts expended directly on the production of the Company’s products and include related direct materials, general laboratory supplies and allocation of overhead. Certain of the agreements under which the Company has licensed technology will require the payment of royalties based on the sale of its future products. Such royalties will be recorded as a component of cost of sales. Additionally, the amortization of license fees or milestone payments related to developed technologies used in the Company’s products will be classified as a component of cost of sales to the extent such payments become due in the future.

Research and Development Costs

Research and development costs, which are expensed as incurred, are primarily comprised of costs and expenses for salaries and benefits associated with research and development personnel, overhead and occupancy, contract services, and amortization of license costs for technology used in research and development with alternative future uses.

Stock-Based Compensation

The Company recognizes stock-based compensation expense associated with stock options and other stock-based awards in accordance with the authoritative guidance for stock-based compensation. The cost of a stock-based award is measured at the grant date based on the estimated fair value of the award, and is recognized as expense on a straight-line basis, net of estimated forfeitures over the requisite service period of the award. The fair value of stock options is estimated using the Black-Scholes option valuation model, which requires the input of subjective assumptions, including price volatility of the underlying stock, risk-free interest rate, dividend yield, and expected life of the option. The fair value of restricted stock awards is based on the market value of the Company’s common stock on the date of grant.

Fair Value Measurements

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. Assets and liabilities that are measured at fair value are reported using a three-level fair value hierarchy that prioritizes the inputs used to measure fair value. This hierarchy maximizes the use of observable inputs and minimizes the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:

Level 1

Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

Level 2

Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and

Level 3

Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

The table below sets forth a summary of the Company’s liabilities which are measured at fair value on a recurring basis as of September 30, 2019 (in thousands):

	Total		Level 1		Level 2		Level 3
Warrant Liabilities
Balance as of September 30, 2019	$	—	$	—	$	—	$	—
Balance as of December 31, 2018		1,745		—		—		1,745

The following table displays the rollforward activity of liabilities with inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity) (in thousands):

	Warrant
	Liability
Ending balance at December 31, 2018	$	1,745
Adjustments to estimated fair value		(1,745	)
Ending balance at September 30, 2019	$	—

Warrant Liability

The Company is required to recognize warrant agreements as a liability since they did not meet the specific conditions for equity classification and therefore need to be recognized at its fair value. The fair value of the warrant liability is calculated using the Monte-Carlo simulation model, which requires the use of certain estimates. The fair value of these warrants is re-measured at each financial reporting period with any changes in fair value being recognized as a component of other income (expense) in the accompanying condensed consolidated statements of operations. The following assumptions were used as inputs to the model:


	Nine Months Ended September 30,
	2019	2018
Significant assumptions:
Risk-free interest rate	1.70% - 2.09%	2.70% - 2.84%
Volatility	73.4%	88.5%
Term to expiration	0.54 - 1.46 years	1.54 - 2.46 years
Subsequent financing	100%	90%

Income Taxes

The Company accounts for income taxes in accordance with applicable authoritative guidance, which requires the Company to provide a net deferred tax asset/liability equal to the expected future tax benefit/expense of temporary reporting differences between book and tax accounting methods and any available operating loss or tax credit carryforwards.

Use of Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements. Significant estimates include patent life (remaining legal life versus remaining useful life), inventory carrying values, allowance for excess and obsolete inventories, allowance for sales returns and doubtful accounts, and transactions using the Black-Scholes option pricing model, e.g., stock options, as well as the Monte-Carlo valuation method for warrants. Actual results could differ from those estimates.

Fair Value of Financial Instruments

The Company believes that the carrying value of its cash, receivables, accounts payable, accrued liabilities and related party note payable as of September 30, 2019 and December 31, 2018 approximate their fair values because of the short-term nature of those instruments. The fair value of warrants was determined at each issuance and quarterly reporting date as necessary using the Monte-Carlo valuation method.

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 conversion of convertible preferred stock and exercise of stock options and warrants outstanding using the treasury stock method and the average market price per share during the period.

For the periods below, these stock options, warrants, and convertible preferred stock were not included in the diluted loss per share calculation because the effect would have been anti-dilutive.


	Nine Months Ended September 30,
	2019		2018
Options outstanding		5,427,557		4,492,689
Convertible preferred stock		6,132,278		6,277,626
Warrants outstanding		3,951,052		3,951,052

Comprehensive Income

Comprehensive income or loss includes all changes in stockholders’ 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 nine months ended September 30, 2019 and 2018.

Recently Issued Accounting Pronouncements

Accounting Pronouncements Adopted

In June 2018, the FASB issued ASU 2018-07, “Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting.” ASU 2018-07 makes nonemployee share-based payments to be consistent with the accounting for employee share-based payment awards, which measures the fair value of the payment based on grant date and considers the probability of satisfying performance conditions when nonemployee share-based payment awards contain such conditions. The updated standard is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The adoption of ASU 2018-07 on January 1, 2019 did not result in a material impact on the Company’s balance sheet or statement of operations.

In July 2017, the FASB issued ASU No. 2017-11, "Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815)" ("ASU 2017-11") effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. ASU 2017-11 changes the classification analysis of certain equity-linked financial instruments (or embedded features) with down round features. The amendments require entities that present earnings per share ("EPS") in accordance with Topic 260 to recognize the effect of the down round feature when triggered with the effect treated as a dividend and as a reduction of income available to common shareholders in basic EPS. The adoption of ASU 2017-11 on January 1, 2019 did not result in a material impact on the Company’s balance sheet or statement of operations.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to recognize “right-of-use” assets and a lease liability for all leases with lease terms of more than 12 months. The Company elected the exception from applying the new guidance for any short-term leases or leases with terms less than or equal to 12 months. Topic 842 requires additional quantitative and qualitative financial statement footnote disclosures about the leases, significant judgments made in accounting for those leases and amounts recognized in the financial statements about those leases. In 2018 and 2019, the FASB has issued and incorporated several additional ASUs to provide clarifying guidance associated with the application of certain principles within Topic 842. The effective date will be the first quarter of fiscal year 2019. The Company elected the “package of practical expedients,” which allowed the Company to not reassess under the new guidance, the Company’s prior conclusions about lease identification, classification, and treatment of initial direct costs as well as electing the modified retrospective approach effective January 1, 2019. At adoption, total right-of-use assets and operating lease liabilities were approximately $1,180,000 and $1,389,000 respectively. All operating lease expense is recognized on a straight-line basis over the lease term.

Accounting Pronouncements Being Evaluated

In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-13, Fair Value Measurement (Topic 820), “Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”). ASU 2018-13 removes the valuation processes for Level 3 fair value measurements and adds the disclosure for the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The updated standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact of the adoption of this accounting standard update.

In June 2016, the Financial Accounting Standards Board (FASB) issued ASU No. 2016-13, Financial Instruments— Credit Losses (Topic 326). The ASU introduced a new credit loss methodology, the Current Expected Credit Losses (CECL) methodology, which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. The CECL methodology utilizes a lifetime “expected credit loss” measurement objective for the recognition of credit losses for loans, held-to-maturity debt securities, trade receivables and other receivables measured at amortized cost at the time the financial asset is originated or acquired. The Company is currently evaluating the impact of the adoption of this ASU, which will be effective for the Company as of January 1, 2020.