10-Q 1 isco-10q_20180331.htm 10-Q isco-10q_20180331.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2018  

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission File Number: 0-51891

 

INTERNATIONAL STEM CELL CORPORATION

(Exact name of Registrant as specified in its charter)

 

 

Delaware

 

20-4494098

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

5950 Priestly Drive

Carlsbad, CA

 

92008

(Address of Principal Executive Offices)

 

(Zip Code)

(760) 940-6383

(Registrant’s telephone number)

 

Indicated by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    YES      NO  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES      NO  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 (Do not check if a smaller reporting company)

  

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the registrant elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.            

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES      NO  

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

As of May 14, 2018 the Registrant had 6,195,160 shares of Common Stock outstanding.

 

 

 

 

 


 

International Stem Cell Corporation and Subsidiaries

INDEX TO FORM 10-Q

 

 

  

Page Numbers

PART I—FINANCIAL INFORMATION

  

 

Item 1.

Financial Statements

  

3

 

Condensed Consolidated Balance Sheets

 

3

 

Condensed Consolidated Statements of Operations

 

4

 

Condensed Consolidated Statements of Changes in Stockholders’ Equity

 

5

 

Condensed Consolidated Statements of Cash Flows

 

7

 

Notes to Unaudited Condensed Consolidated Financial Statements

 

8

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

  

26

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

  

30

Item 4.

Controls and Procedures

  

30

 

PART II—OTHER INFORMATION

  

 

Item 1.

Legal Proceedings

  

31

Item 1A.

Risk Factors

  

31

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

  

45

Item 3.

Defaults Upon Senior Securities

  

45

Item 4.

Mine Safety Disclosures

  

45

Item 5.

Other Information

  

45

Item 6.

Exhibits

  

45

Exhibit 31.1

  

 

Exhibit 31.2

  

 

Exhibit 32.1

  

 

Exhibit 32.2

  

 

Exhibit 101 INSTANCE DOCUMENT

  

 

Exhibit 101 SCHEMA DOCUMENT

  

 

Exhibit 101 CALCULATION LINKBASE DOCUMENT

  

 

Exhibit 101 DEFINITION LINKBASE DOCUMENT

  

 

Exhibit 101 LABELS LINKBASE DOCUMENT

  

 

Exhibit 101 PRESENTATION LINKBASE DOCUMENT

  

 

 

 

 

2


 

PART I—FINANCIAL INFORMATION

 

Item 1. Financial Statements

International Stem Cell Corporation and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except share data)

 

 

 

March 31,

 

 

December 31,

 

 

 

2018

 

 

2017

 

Assets

 

(Unaudited)

 

 

 

 

 

Cash

 

$

447

 

 

$

304

 

Accounts receivable, net of allowance for doubtful accounts of $12

 

 

939

 

 

 

465

 

Inventory, net

 

 

1,385

 

 

 

1,307

 

Prepaid expenses and other current assets

 

 

639

 

 

 

779

 

Total current assets

 

 

3,410

 

 

 

2,855

 

Non-current inventory

 

 

719

 

 

 

692

 

Property and equipment, net

 

 

336

 

 

 

321

 

Intangible assets, net

 

 

2,928

 

 

 

2,922

 

Deposits and other assets

 

 

75

 

 

 

74

 

Total assets

 

$

7,468

 

 

$

6,864

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Accounts payable

 

$

1,612

 

 

$

830

 

Accrued liabilities

 

 

858

 

 

 

607

 

Related party payable

 

 

351

 

 

 

 

Advances

 

 

250

 

 

 

250

 

Fair value of warrant liability

 

 

2,758

 

 

 

3,113

 

Total current liabilities

 

 

5,829

 

 

 

4,800

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders' Equity

 

 

 

 

 

 

 

 

Series B Convertible Preferred stock, $0.001 par value, 5,000,000 shares authorized, 250,000

   issued and outstanding, with liquidation preferences of $399 and $396 at March 31, 2018

   and December 31, 2017, respectively

 

 

 

 

 

 

Series D Convertible Preferred stock, $0.001 par value, 50 shares authorized, 43 issued and

   outstanding, with liquidation preference of $4,320

 

 

 

 

 

 

Series G Convertible Preferred stock, $0.001 par value, 5,000,000 shares authorized,

   issued and outstanding, with liquidation preference of $5,000

 

 

5

 

 

 

5

 

Series I-1 Convertible Preferred stock, $0.001 par value, 2,000 shares authorized, 1,217 and

   1,304 issued and outstanding, with liquidation preferences of $1,217 and $1,304 at

   March 31, 2018 and December 31, 2017, respectively

 

 

 

 

 

 

Series I-2 Convertible Preferred stock, $0.001 par value, 4,310 shares authorized,

   issued and outstanding with liquidation preference of $4,310

 

 

 

 

 

 

Common stock, $0.001 par value, 120,000,000 shares authorized, 6,195,160 and 6,057,132 shares

   issued and outstanding at March 31, 2018 and December 31, 2017, respectively

 

 

6

 

 

 

6

 

Additional paid-in capital

 

 

106,990

 

 

 

106,585

 

Accumulated deficit

 

 

(105,362

)

 

 

(104,532

)

Total stockholders' equity

 

 

1,639

 

 

 

2,064

 

Total liabilities and stockholders' equity

 

$

7,468

 

 

$

6,864

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

3


 

International Stem Cell Corporation and Subsidiaries

Condensed Consolidated Statements of Operations

(in thousands, except per share data)

(Unaudited)

 

 

Three Months Ended

 

 

 

March 31,

 

 

 

2018

 

 

2017

 

 

Revenues

 

 

 

 

 

 

 

 

Product sales

$

2,633

 

 

$

2,005

 

 

Total revenues

 

2,633

 

 

 

2,005

 

 

Expenses

 

 

 

 

 

 

 

 

Cost of sales

 

825

 

 

 

553

 

 

Research and development

 

811

 

 

 

645

 

 

Selling and marketing

 

708

 

 

 

576

 

 

General and administrative

 

1,474

 

 

 

1,277

 

 

Total expenses

 

3,818

 

 

 

3,051

 

 

Loss from operations

 

(1,185

)

 

 

(1,046

)

 

Other income (expense)

 

 

 

 

 

 

 

 

Change in fair value of warrant liability

 

355

 

 

 

(2,032

)

 

Interest expense

 

(2

)

 

 

(6

)

 

Miscellaneous income

 

2

 

 

 

 

 

Total other income (expense)

 

355

 

 

 

(2,038

)

 

Loss before income taxes

 

(830

)

 

 

(3,084

)

 

Provision for income taxes

 

 

 

 

 

Net loss

$

(830

)

 

$

(3,084

)

 

Net loss applicable to common

   stockholders

$

(830

)

 

$

(3,084

)

 

Net loss per common share-basic and diluted

$

(0.14

)

 

$

(0.78

)

 

Weighted average shares-basic and diluted

 

6,136

 

 

 

3,952

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

4


 

International Stem Cell Corporation and Subsidiaries

Condensed Consolidated Statements of Changes in Stockholders’ Equity

For the Year Ended December 31, 2017 and the Three Months Ended March 31, 2018

(in thousands)

(2018 Unaudited)

 

 

 

 

 

 

 

 

 

 

 

Convertible Preferred Stock

 

 

 

Common

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock

 

 

Series B

 

 

Series D

 

 

Series G

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

Balance at December 31, 2016

 

 

3,951

 

 

 

4

 

 

 

250

 

 

 

 

 

 

 

 

 

 

 

 

5,000

 

 

 

5

 

Issuance of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for services

 

 

30

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for cash

 

 

286

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of preferred stock

 

 

215

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of debt

 

 

1,575

 

 

 

2

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the year ended

   December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2017

 

 

6,057

 

 

$

6

 

 

 

250

 

 

$

 

 

 

 

 

$

 

 

 

5,000

 

 

$

5

 

Issuance of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for services

 

 

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

from exercise of options

 

 

82

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of preferred stock

 

 

50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss for the period ended

   March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at March 31, 2018

 

 

6,195

 

 

$

6

 

 

 

250

 

 

$

 

 

 

 

 

$

 

 

 

5,000

 

 

$

5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

5


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Total

 

 

 

Series I-1

 

 

Series I-2

 

 

Paid-In

 

 

Accumulated

 

 

Stockholders'

 

 

 

Shares

 

 

Amount

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Deficit

 

 

Equity

 

Balance at December 31, 2016

 

 

2

 

 

 

 

 

 

4

 

 

 

 

 

 

101,898

 

 

 

(98,463

)

 

 

3,444

 

Issuance of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49

 

 

 

 

 

 

 

49

 

for cash

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

500

 

 

 

 

 

 

 

500

 

Conversion of preferred stock

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of debt

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,754

 

 

 

 

 

 

 

2,756

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,384

 

 

 

 

 

 

 

1,384

 

Net loss for the year ended

   December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,069

)

 

 

(6,069

)

Balance at December 31, 2017

 

 

1

 

 

$

 

 

 

4

 

 

$

 

 

$

106,585

 

 

$

(104,532

)

 

$

2,064

 

Issuance of common stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

for services

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8

 

 

 

 

 

 

 

8

 

from exercise of options

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

90

 

 

 

 

 

 

 

90

 

Conversion of preferred stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

307

 

 

 

 

 

 

 

307

 

Net loss for the period ended

   March 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(830

)

 

 

(830

)

Balance at March 31, 2018

 

 

1

 

 

$

 

 

 

4

 

 

$

 

 

$

106,990

 

 

$

(105,362

)

 

$

1,639

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

6


 

International Stem Cell Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Three

 

 

 

Months Ended March 31,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net loss

 

$

(830

)

 

$

(3,084

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

68

 

 

 

82

 

Stock-based compensation expense

 

 

307

 

 

 

254

 

Common stock issued for services

 

 

8

 

 

 

24

 

Change in fair value of warrant liability

 

 

(355

)

 

 

2,032

 

Allowance for inventory obsolescence

 

 

3

 

 

 

11

 

Interest expense on bridge loan from related party

 

 

1

 

 

 

 

Loss on disposal of property and equipment

 

 

1

 

 

 

 

Impairment of intangible assets

 

 

111

 

 

 

80

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Increase in accounts receivable

 

 

(474

)

 

 

(41

)

Increase in inventory

 

 

(105

)

 

 

(71

)

Decrease (increase) in prepaid assets and other assets

 

 

137

 

 

 

(142

)

Increase in deposits

 

 

(1

)

 

 

 

Increase (decrease) in accounts payable

 

 

782

 

 

 

(116

)

Increase in accrued liabilities

 

 

299

 

 

 

395

 

Increase in related party payable

 

 

 

 

 

5

 

Net cash used in operating activities

 

 

(48

)

 

 

(571

)

Cash flows from investing activities

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(57

)

 

 

(8

)

Payments for patent licenses and trademarks

 

 

(144

)

 

 

(155

)

Net cash used in investing activities

 

 

(201

)

 

 

(163

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from a bridge loan from a related party

 

 

350

 

 

 

1,300

 

Proceeds from exercise of stock options

 

 

90

 

 

 

 

Payments on financed insurance premiums

 

 

(48

)

 

 

 

Net cash provided by financing activities

 

 

392

 

 

 

1,300

 

Net increase in cash

 

 

143

 

 

 

566

 

Cash, beginning of period

 

 

304

 

 

 

110

 

Cash, end of period

 

$

447

 

 

$

676

 

See accompanying notes to the unaudited condensed consolidated financial statements.

 

 

 

7


 

International Stem Cell Corporation and Subsidiaries

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 the 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. LCT’s 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 133,334 shares of ISC California Common Stock and for ISC California’s assumption of LCT’s 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 cosmetic products, utilizing an extract derived from the Company’s human parthenogenetic stem cells and the Company’s proprietary small molecule technology.

Cyto Therapeutics Pty. Ltd. (“Cyto Therapeutics’) was registered in the state of Victoria, Australia, on December 19, 2014 and is a limited proprietary company and a wholly-owned subsidiary of the Company. Cyto Therapeutics is a research and development company for the Therapeutic Market, which is conducting clinical trials in Australia for the use of ISC-hpNSC® in the treatment of Parkinson’s disease.

Going Concern

The Company has sustained recurring losses and needs to raise additional working capital. The timing and degree of any future capital requirements will depend on many factors. The Company’s burn rate for the three months ended March 31, 2018 was approximately $16,000 per month, excluding capital expenditures and patent costs averaging $67,000 per month. There can be no assurance that the Company will be successful in maintaining its normal operating cash flow or raising additional funds, and that such cash flows will be sufficient to sustain the Company’s operations at least through one year after the issuance date of the Company’s condensed consolidated financial statements. Based on the above, there is substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements were prepared assuming that the Company will continue as 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.

Management’s 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.

Basis of Presentation

The Company is a biotechnology company focused on therapeutic and clinical product development with multiple long-term therapeutic opportunities and two revenue-generating subsidiaries with potential for increased future revenues.

8


 

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 to 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, 2017.

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 Company’s 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 Company’s audited consolidated financial statements for the year ended December 31, 2017 included in the Company’s 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 Company’s consolidated financial statements include the accounts of International Stem Cell Corporation and its subsidiaries after intercompany balances and transactions have been eliminated.

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 March 31, 2018 and December 31, 2017.

Inventory

Inventory is accounted for using the average cost and first-in, first-out (FIFO) method for our LCT cell culture media and reagents, average cost and specific identification methods for our LSC products, and specific identification method for our LCT products.  Inventory balances are stated at the lower of cost or net realizable value. Lab 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 period end is classified as non-current inventory on the balance sheet.

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 March 31, 2018 and December 31, 2017, the Company had an allowance for doubtful accounts totaling $12,000.

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 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 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 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 recorded at cost of $3,796,000 and $3,763,000 at March 31, 2018 and December 31, 2017, 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 March 31, 2018 and 2017 was $27,000 and $33,000, respectively.    All amortization expense

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related to intangible assets is included in general and administrative expense. Accumulated amortization as of March 31, 2018 and December 31, 2017 was $868,000 and $841,000, respectively.     

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 $111,000 and $80,000 of impairment losses on its intangible assets during the three months ended March 31, 2018 and 2017, respectively, due to abandonment of efforts to pursue certain patents or patented technologies.   

 

Revenue Recognition

 

Revenue is recognized pursuant to Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014 - 09, Revenue from Contracts with Customers (Topic 606). Accordingly, revenue is recognized at an amount that reflects the consideration to which we expect to be entitled in exchange for transferring goods or services to a customer. This principle is applied using the following 5-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

 

Under Topic 606, 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:

 

Biomedical Market:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

Three Months Ended March 31, 2017

 

    

U.S.

    

OUS*

    

Total Revenues

    

% of Total Revenues

    

U.S.

    

OUS*

    

Total Revenues

    

% of Total Revenues

Biomedical products

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   cells

 

$

243

 

$

141

 

384

 

 

18%

 

$

 281

 

$

 122

 

403

 

 

29%

   media

 

 

1,554

 

 

189

 

 

1,743

 

 

82%

 

 

810

 

 

195

 

 

1,005

 

 

71%

   other

 

 

8

 

 

-

 

 

8

 

 

-%

 

 

 -

 

 

 -

 

 

 -

 

 

-%

 Total

 

$

1,805

 

$

330

 

$

2,135

 

 

100.0%

 

$

1,091

 

$

 317

 

$

1,408

 

 

100.0%

 

*Outside the United States

 

Cosmetic Market:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2018

 

Three Months Ended March 31, 2017

 

    

Total Revenues

    

% of Total Revenues

    

Total Revenues

    

% of Total Revenues

Cosmetic sales channels

 

 

 

 

 

 

 

 

 

 

 

 

   ecommerce

 

334

 

 

67%

 

332

 

 

56%

   professional

 

 

164

 

 

33%

 

 

261

 

 

44%

   international

 

 

-

 

 

-%

 

 

 4

 

 

-%

 Total

 

$

498

 

 

100.0%

 

$

597

 

 

100.0%

 

The Company's revenue consists primarily of sales of products from its two revenue-generating operating segments, the cosmetics products and biomedical products business segments.  The cosmetic market segment markets and sells a line of luxury skincare products sold through three sales channels: ecommerce, professional, and international.  The ecommerce channel sells direct to customers through online orders, while the professional sales are to spas, salons and other skincare providers.  International sales

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are primarily through distributors. 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.

 

Product sales generally consist of a single performance obligation that the Company satisfies at a point in time.  The Company recognizes product revenue when the following events have occurred: (a) the Company has transferred physical possession of the products, (b) the Company has a present right to payment, (c) the customer has legal title to the products, and (d) the customer bears significant risks and rewards of ownership of the products.   

 

For Lifeline Skincare products ecommerce sales are primarily paid through credit card charges, while professional and international 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 cosmetic products, the Company honors a 30 days return policy, but historical returns have been minimal. The Company has estimated the historical rate of returns for the 30-day product return guarantee, which has remained consistent for the three months ended March 31, 2018 as compared to the years ended December 31, 2017 and 2016. At March 31, 2018 and December 31, 2017, the estimated allowance for sales returns for LSC was $10,000. 

 

All amounts billed to a customer in a sales transaction related to shipping and handling, if any, represent revenues earned for the goods provided. Costs related to such shipping and handling billing are classified as cost of sales.

 

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 March 31, 2018, and December 31, 2017, accounts receivable totaled $939,000 and $465,000, respectively.  For the three months ended March 31, 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.

    

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.

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Stock-Based Compensation

The Company recognized 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 our 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 March 31, 2018 (in thousands):

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants to purchase common stock

 

$

2,758

 

 

$

 

 

$

 

 

$

2,758

 

The table below sets forth a summary of the Company’s liabilities which are measured at fair value on a recurring basis as of December 31, 2017 (in thousands):

 

 

 

Total

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

LIABILITIES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Warrants to purchase common stock

 

$

3,113

 

 

$

 

 

$

 

 

$

3,113

 

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):

 

 

 

 

Warrants to purchase

 

 

 

common stock

 

Beginning balance at December 31, 2016

 

$

2,045

 

Adjustments to estimated fair value

 

 

1,068

 

Ending balance at December 31, 2017

 

$

3,113

 

Adjustments to estimated fair value

 

 

(355

)

Ending balance at March 31, 2018

 

$

2,758

 

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.

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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., warrants and stock options, as well as the Monte-Carlo valuation method for certain warrants. Actual results could differ from those estimates.