INTERNATIONAL STEM CELL CORP Management’s Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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The following discussion of our financial condition and results of operations
should be read in conjunction with our unaudited condensed consolidated
financial statements and related notes and other financial information included
elsewhere herein. This information should also be read in conjunction with our
audited historical consolidated financial statements which are included in our
Form 10-K for the fiscal year ended December 31, 2021 (“Form 10-K”). The
discussion contains forward-looking statements, such as our plans, expectations
and intentions (including those related to clinical trials and business and
expense trends), that are based upon current expectations and that involve risks
and uncertainties. Our actual results may differ significantly from management’s
expectations. The factors that could affect these forward-looking statements are
discussed in the Risk Factors included in our Form 10-K. This discussion should
not be construed to imply that the results discussed herein will necessarily
continue into the future, or that any expectations expressed herein will
necessarily be indicative of actual operating results in the future. Such
discussion represents only the best assessment by our management.

Business Overview

We are a clinical stage biotechnology company devoted to discovering and
developing innovative therapies using human parthenogenetic stem cells to treat
severe diseases of the central nervous system, joints and liver. Our lead
product candidate, ISC-hpNSC is designed to treat Parkinson’s Disease, traumatic
brain injury and ischemic stroke. ISC-hpNSC-based therapy is in phase I clinical
trials for Parkinson’s disease, while therapies for traumatic brain injury and
ischemic stroke are in preclinical stages. We have additional product candidates
in development for osteoarthritis and metabolic liver diseases. We currently
intend to commercialize our products directly or through collaborations. None of
our product candidates have been approved for sale in the United States or
elsewhere.

Our products are based on multi-decade experience with human cell culture and a
proprietary type of pluripotent stem cells, human parthenogenetic stem cells
(“hpSCs”). Our hpSCs are comparable to human embryonic stem cells (“hESCs”) in
that they have the potential to be differentiated into many different cells in
the human body. However, the derivation of hpSCs does not require the use of
fertilized eggs or the destruction of viable human embryos and also offers the
potential for the creation of immune-matched cells and tissues that are less
likely to be rejected following transplantation. Our collection of hpSCs, known
as UniStemCell™, currently consists of 15 stem cell lines. We have facilities
and manufacturing protocols that comply with the requirements of Good
Manufacturing Practice (GMP) standards as promulgated by the U.S. Code of
Federal Regulations and enforced by the United States Food and Drug
Administration
(“FDA”).

We have generated aggregate product sales revenues from our Biomedical and
Anti-aging commercial businesses of $2.0 million and $1.7 million for the three
months ended March 31, 2022 and 2021, respectively. We currently have no revenue
generated from our principal operations in the therapeutic market and we do not
expect to generate any revenue in this market unless and until we successfully
complete clinical product development and obtain regulatory approval for our
product candidates.

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COVID-19 Pandemic
The impact of the COVID-19 pandemic has been and will likely continue to be
extensive in many aspects of society, which has resulted in and will likely
continue to result in significant disruptions to the global economy, as well as
businesses and capital markets around the world. Impacts to our business have
included reduced occupancy of portions of our manufacturing facilities, and
disruptions or restrictions on our employee’s ability to travel to such
manufacturing facilities which caused minor delays in manufacturing. Our
manufacturing facilities continue to operate as they are deemed essential
suppliers in accordance with laws applicable to California and Maryland. We have
taken precautionary measures to better ensure the health and safety of our
workers, including staggering employees’ shifts and isolating at-risk employees.
The scope and duration of these delays and disruptions, and the ultimate impacts
of COVID-19 on our operations, are currently unknown. We are continuing to
actively monitor the situation and may take further precautionary and preemptive
actions as may be required by federal, state or local authorities or that we
determine are in the best interests of public health and safety. We cannot
predict the effects that such actions, or the impact of COVID-19 on global
business operations and economic conditions, may continue to have on our
business, strategy, collaborations, or financial and operating results.
Market Opportunity and Growth Strategy

Therapeutic Market – Clinical Applications of hpSCs for Disease Treatments

With respect to therapeutic research and product candidates, we focus on
applications where cell and tissue therapy is already proven but where there is
an insufficient supply of safe and functional cells or tissue. We believe that
the most promising potential clinical applications of our technology are
Parkinson’s disease (“PD”) traumatic brain injury (“TBI”) and stroke. Using our
proprietary technologies and know-how, we are creating neural stem cells from
hpSCs as a potential treatment of PD, TBI and stroke.

Our most advanced project is the neural stem cell program for the treatment of
Parkinson’s disease. In 2013 we published in Nature Scientific Reports the basis
for our patent on a new method of manufacturing neural stem cells which is used
to produce the clinical-grade cells necessary for future clinical studies and
commercialization. In 2014 we completed the majority of the preclinical research
establishing the safety profile of NSC in various animal species including
non-human primates. In June 2016 we published the results of a 12-month
pre-clinical non-human primate study, which demonstrated the safety, efficacy
and mechanism of action of the ISC- hpNSC®. In 2017 we dosed four patients in
our Phase I trial of ISC-hpNSC®, human parthenogenetic stem cell-derived neural
stem cells for the treatment of Parkinson’s disease. We reported 12-month
results from the first cohort and 6-month interim results of the second cohort
at the Society for Neuroscience annual meeting (Neuroscience 2018) in November
2018
. In April 2019, we announced the completion of subject enrollment, with the
12th subject receiving a transplantation of the highest dose of cells. There
have been no safety signals or serious adverse effects seen to date as related
to the transplanted ISC-hpNSC® cells.

We announced successful completion of the dose escalating phase 1 clinical trial
in June 2021. In terms of preliminary efficacy, where scores are compared
against baseline before transplantation, we observed a potential dose-dependent
response, with an apparent peak effectiveness at our middle dose. The %
OFF-Time, which is the time during the day when levodopa medication is not
performing optimally and PD symptoms return, decreases an average 47% from the
baseline at 12 months post transplantation in cohort 2. This trend continued
through 24 months where the % OFF-Time in the second cohort dropped by 55% from
the initial reading. The same was true for % ON-Time without dyskinesia, which
is the time during the day when levodopa medication is performing optimally
without dyskinesia. The % ON-Time increased an average of 42% above the initial
evaluation at 12 months post-transplantation in the second cohort.

In August 2014 we announced the launch of a stroke program, evaluating the use
of ISC-hpNSC® transplantation for the treatment of ischemic stroke using a
rodent model of the disease. The Company has a considerable amount of safety
data on ISC-hpNSC® from the Parkinson’s disease program and, as there is
evidence that transplantation of ISC-hpNSC® may improve patient outcomes as an
adjunctive therapeutic strategy in stroke, having a second program that can use
this safety dataset is therefore a logical extension. In 2015 the Company
together with Tulane University demonstrated that NSC can significantly reduce
neurological dysfunction after a stroke in animal models.

In October 2016 we announced the results of the pre-clinical rodent study,
evaluating the use of ISC-hpNSC® transplantation for the treatment of TBI. The
study was conducted at the University of South Florida Morsani College of
Medicine
. We demonstrated that animals receiving injections of ISC-hpNSC®
displayed the highest levels of improvements in cognitive performance and motor
coordination compared to vehicle control treated animals. In February 2019, we
published the results of the pre-clinical study in Theranostics, a prestigious
peer-reviewed medical journal. The publication titled, “Human parthenogenetic
neural stem cell grafts promote multiple regenerative processes in a traumatic
brain injury model,” demonstrated that the clinical-grade neural stem cells used

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in our Parkinson’s disease clinical trial, ISC-hpNSC®, significantly improved
TBI-associated motor, neurological, and cognitive deficits without any safety
issues.

Anti-Aging Cosmetic Market – Skin Care Products

Our wholly-owned subsidiary LSC develops, manufactures and sells anti-aging skin
care products based on two core technologies: encapsulated extract derived from
hpSC and specially selected targeted small molecules. LSC’s products include:

ProPlus Advanced Defense ComplexProPlus Advanced Recovery ComplexProPlus Eye Firming ComplexProPlus Neck Firming Complex


  • ProPlus Advanced Aquoues Treatment


  • ProPlus Collagen Booster (Advanced Molecular Serum)


  • ProPlus Elastin Booster


  • ProPlus Brightening Toner

LSC’s products are regulated as cosmetics. LSC’s products are sold domestically
through a branded website, Amazon, and ecommerce partners.

Biomedical Market – Primary Human Cell Research Products

Our wholly-owned subsidiary LCT develops, manufactures and commercializes
approximately 200 human cell culture products, including frozen human “primary”
cells and the reagents (called “media”) needed to grow, maintain and
differentiate the cells. LCT’s scientists have used a standardized, methodical,
scientific approach to basal medium optimization to systematically produce
optimized products designed to culture specific human cell types and to elicit
specific cellular behaviors. These techniques can also be used to produce
products that do not contain non-human animal proteins, a feature desirable to
the research and therapeutic markets. Each LCT cell product is quality tested
for the expression of specific markers (to assure the cells are the correct
type), proliferation rate, viability, morphology and absence of pathogens. Each
cell system also contains associated donor information and all informed consent
requirements are strictly followed. LCT’s research products are marketed and
sold by its internal sales force, OEM partners and LCT brand distributors in
Europe and Asia.

Results of Operations

Comparison of the Three Months Ended March 31, 2022 and 2021

The following table summarizes our results of operations for the three months
ended March 31, 2022 and 2021:

                                        Three Months Ended March 31,
                                2022        2021        $ Change      % Change
                                            (dollar in thousands)
Product sales, net            $  2,020     $ 1,658     $      362            22 %
Cost of sales                      725         615            110            18 %
As a % of revenues                  36 %        37 %
Research and development           137         215            (78 )         -36 %
Selling and marketing              301         347            (46 )         -13 %
General and administrative         832       1,048           (216 )         -21 %
Other expense - related party      (34 )       (32 )           (2 )           6 %
Net loss                      $     (9 )   $  (599 )   $      590           -98 %
As a % of revenues                   0 %       -36 %


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Product Sales, net

Product sales revenue for the three months ended March 31, 2022 was
$2.0 million, compared to $1.7 million for the three months ended March
31, 2021
. The increase of $362 thousand, or 22%, was primarily attributable to
an increase of $343 thousand in product sales in our biomedical segment for the
three months ended March 31, 2022 as compared to 2021. This increase in sales is
primarily due to the restrictions of COVID easing and therefore allowing for a
general return to the types of research that these products are used in.

Cost of Sales

Cost of sales for the three months ended March 31, 2022 was $725 thousand,
compared to $615 thousand for the three months ended March 31, 2021. The
increase of $110 thousand, or 18%, was primarily attributable to a $163 thousand
increase in costs as a result of an increase in product sales, a $47 thousand
increase for inventory purchases, offset by an approximately $100 thousand
decrease in unfavorable manufacturing variances and absorption due to increased
customer demand for the three months ended March 31, 2022 as compared to 2021.
Profit margins have deteriorated slightly for the three months ended March 31,
2022
, as compared to the three months ended March 31, 2021. This is largely as a
result of rising raw materials and labor related costs as well as scarcity of
certain materials, principally plastics. In response to this we increased our
supply of raw materials on hand and have, where possible, sourced materials from
alternative vendors.

Cost of sales consists primarily of salaries and benefits associated with
employee efforts expended directly on the production of the Company’s products,
as well as related direct materials, general laboratory supplies and an
allocation of overhead. We aim to continue refining our manufacturing processes
and supply chain management to improve the cost of sales as a percentage of
revenue for both LCT and LSC.

Research and Development Expenses

Research and development expenses for the three months ended March 31, 2022 was
$137 thousand, compared to $215 thousand for the three months ended March
31, 2021
. The decrease of $78 thousand, or 36%, was primarily attributable to a
$34 thousand decrease in personnel-related costs and stock-based compensation as
a result of a decrease in headcount with the remaining decrease pertaining to
decreases in material and supplies as well as facilities related expenses.

Selling and Marketing Expenses

Selling and marketing expenses for the three months ended March 31, 2022 was
$301 thousand, compared to $347 thousand for the three months ended March
31, 2021
. The decrease of $46 thousand, or 13%, was primarily attributable to a
$44 thousand decrease in personnel-related costs, including temporary services,
sales commissions and stock-based compensation primarily as a result of
headcount reductions.

General and Administrative Expenses

General and administrative expenses for the three months ended March 31, 2022
was $832 thousand, compared to $1.0 million for the three months ended March
31, 2021
. The decrease of $216 thousand, or 21%, was primarily attributable to a
decrease in personnel-related costs and stock-based compensation of $177
thousand
, a $30 thousand decrease in building related expenses, with the
remaining decrease primarily due to a decrease in public relations and insurance
expense.

Liquidity and Capital Resources

The Company enters into contracts in the normal course of business with various
third-party consultants and contract research organizations (“CRO”) for
preclinical research, clinical trials and manufacturing activities. These
contracts generally provide for termination upon notice. Actual expenses
associated with these arrangements may be higher or lower due to various
reasons, including but not limited to, progress of our development products,
enrollment in clinical trials, and product and personnel delays due to COVID.
Other short-term and long terms commitments that would affect liquidity include
lease obligations as well as related party debt repayments.

As of March 31, 2022, we had an accumulated deficit of approximately
$110.0 million and have, on an annual basis, incurred net losses and negative
operating cash flows since inception. Substantially all of our operating losses
have resulted from the funding of our research and development programs and
general and administrative expenses associated with our operations. We incurred
net losses of $9 thousand and $599 thousand for the three months ended March
31, 2022
and 2021, respectively. As of March 31, 2022,

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we had cash of approximately $398 thousand, compared to $171 thousand as of
December 31, 2021. Our primary use of cash is to continue to fund our research
and development programs while maintaining and growing our revenue generating
businesses.

Licensed patents

The Company has a minimum annual license fee of $75 thousand payable in two
installments per year to Astellas Pharma pursuant to the amended UMass IP
license agreement. The license agreement with Astellas Pharma may be terminated
by the Company at any time with a 30-day notice. We do not anticipate any
short-term liquidity effect from this obligation.

Cash Flows

Comparison of the Three Months Ended March 31, 2022 and 2021

The following table provides information regarding our cash flows for the three
months ended March 31, 2022 and 2021 (in thousands):

                                              Three Months Ended March 31,
                                              2022                  2021

Net cash used in operating activities $ (23 ) $ (394 )
Net cash used in investing activities

                -                      (2 )
Net cash provided by financing activities          250                     824
Net increase in cash                      $        227         $           428


Operating Cash Flows

For the three months ended March 31, 2022, net cash used in operating activities
was $23 thousand, resulting primarily from our net loss of $9 thousand and net
changes in operating assets and liabilities of $226 thousand, consisting
primarily of increases in accounts receivable of $58 thousand, inventory, net of
$156 thousand, prepaid expenses and other current assets of $203 thousand and a
decrease in the operating lease liability of $37 thousand. These are offset
partially by increases in accounts payable, accrued liabilities and deposits of
$228 thousand. These net decreases were partially offset by net non-cash
adjustments of $212 thousand consisting primarily of stock-based compensations
expense of $91 thousand, operating lease expense of $33 thousand and
depreciation and amortization of $56 thousand.

For the three months ended March 31, 2021, net cash used in operating activities
was $394 thousand, resulting primarily from our net loss of $599 thousand and
net changes in operating assets and liabilities of $191 thousand, partially
offset by non-cash adjustments of stock-based compensation expense of $234
thousand
, operating lease expense of $69 thousand, and depreciation and
amortization of $66 thousand.

Investing Cash Flows

Net cash used in investing activities for the three months ended March 31, 2022
was $0, compared to $2 thousand for the three months ended March 31, 2021. The
decrease was attributable to a decrease in payments for patent licenses
year-over-year.

Financing Cash Flows

Net cash provided by financing activities for the three months ended March
31, 2022
was $250 thousand, compared to $824 thousand for the three months ended
March 31, 2021. The decrease was attributable to proceeds from a note payable
from a related party of $250 thousand in the current year, compared to proceeds
of $474 thousand from our Second Draw Loan under the Paycheck Protection Program
and proceeds from a note payable from a related party of $350 thousand in the
prior year.

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Funding Requirements

Management continues to evaluate various financing sources and options to raise
working capital to help fund our current research and development programs and
operations. We will need to obtain significant additional capital from equity
and/or debt financings, license arrangements, grants and/or collaborative
research arrangements to sustain our operations and develop products. Unless we
obtain additional financing, we do not have sufficient cash on hand to sustain
our operations at least through one year after the issuance date. The timing and
degree of any future capital requirements will depend on many factors,
including:

  • the accuracy of the assumptions underlying our estimates for capital needs;


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


  • scientific progress in our research and development programs;


   •  the magnitude and scope of our research and development programs and our
      ability to establish, enforce and maintain strategic arrangements for
      research, development, clinical testing, manufacturing and marketing;


  • our progress with preclinical development and clinical trials;


   •  the extent to which third party interest in Company's research and
      commercial products can be realized through effective partnerships;


  • the time and costs involved in obtaining regulatory approvals;


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


  • the number and type of product candidates that we pursue; and


   •  the development of major public health concerns, including COVID-19 or other
      pandemics arising globally, and the current and future impact that such
      concerns may have on our operations and funding requirements.

Our failure to raise capital or enter into applicable arrangements when needed
would have a negative impact on our financial condition. Additional debt
financing may be expensive and require us 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 us to relinquish
rights to some of its technologies, product candidates or products that we would
otherwise seek to develop and commercialize on its own. If sufficient capital is
not available, we may be required to delay, reduce the scope of or eliminate one
or more of its product initiatives.

We currently have no revenue generated from our principal operations in
therapeutic and clinical product development through research and development
efforts. There can be no assurance that we will be successful in maintaining our
normal operating cash flow and obtaining additional funds and that the timing of
our capital raising or future financing will result in cash flow sufficient to
sustain our operations at least through one year after the issuance date.

Based on the factors above, there is substantial doubt about our ability to
continue as a going concern. The consolidated financial statements were prepared
assuming that we will continue to operate as a going concern. The consolidated
financial statements do not include any adjustments to reflect the possible
future effects on the recoverability and classification of assets or the amounts
and classification of liabilities that may result from the outcome of this
uncertainty. Management’s plans in regard to these matters are focused on
managing our cash flow, the proper timing of our capital expenditures, and
raising additional capital or financing in the future.

Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results
of operations are based on our condensed consolidated financial statements,
which have been prepared in accordance with generally accepted accounting
principles in the United States of America and the rules and regulations of the
Securities and Exchange Commission. The preparation of these condensed
consolidated financial statements requires us to make judgements and estimates
that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the condensed consolidated
financial statement, and the reported amounts of revenues, costs and expenses
during the reporting periods.

Our estimates are based on our historical experience, known trends and events,
and on various other factors that we believe are reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities and amount of expense recognized
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions. We evaluate our
estimates and assumptions on an ongoing basis. The effects of

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material revisions in estimates, if any, will be reflected in the consolidated
financial statements prospectively from the date of the change in estimates.

There have been no material changes to our critical accounting policies and
estimates during the three months ended March 31, 2022 from those disclosed in
“Part II – Item 7. Management’s Discussion and Analysis of Financial Condition
and Results of Operations” included in our Annual Report on Form 10-K.

Recently Issued Accounting Pronouncements

A description of recently issued accounting pronouncements that may potentially
impact our financial position and results of operations is disclosed in Note 1
to our condensed consolidated financial statements appearing elsewhere in this
Quarterly Report on Form 10-Q.

Contractual Obligations and Commitments

There have been no material changes to our contractual obligations and
commitments outside the ordinary course of business during the three months
ended March 31, 2022 from those disclosed in “Part II – Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included in our Annual Report on Form 10-K.

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