International Stem Cell CORP 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and accompanying notes to those consolidated financial statements and other financial information included elsewhere in this Annual Report on 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 in Part I, Item 1A. Risk Factors of this report. 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 present assessment by our management. Business Overview We have generated aggregate product revenues from our two commercial businesses of $9.1 million and $9.1 million for the years ended December 31, 2025 and 2024, respectively. We currently have no revenue generated from our principal operations in therapeutic and clinical product development. 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 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). Market Opportunity and Growth Strategy Therapeutic Market – Clinical Applications of hpSCs for Disease Treatments 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. PD : 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 1 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 a 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, decreased 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. We expect to announce the full Phase 1 clinical trial results in the second half of 2026. Stroke : 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 29 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. TBI : 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 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 Lifeline Skin Care, Inc. (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 Complex • ProPlus Advanced Recovery Complex • ProPlus Eye Firming Complex • ProPlus Neck Firming Complex • ProPlus Advanced Aqueous 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 (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. 30 Results of Operations Comparison of the Years Ended December 31, 2025 and 2024 The following table summarizes our results of operations for the years ended December 31, 2025 and 2024, together with the dollar and percent change in those items (in thousands): Year Ended December 31, 2025 2024 $ Change % Change Product sales $ 9,100 $ 9,085 $ 15 0 % Cost of sales 4,033 3,764 269 7 % Profit margin 5,067 5,321 (254 ) -5 % As a % of revenues 56 % 59 % General and administrative 3,532 3,516 16 0 % Selling and marketing 1,118 1,216 (98 ) (8 %) Research and development 684 657 27 4 % Other expense, net (151 ) (141 ) (10 ) 7 % Net loss $ (418 ) $ (209 ) $ (209 ) 100 % As a % of revenues (5 %) (2 %) Product Sales Product sales revenue for the year ended December 31, 2025 was $9,100 thousand, compared to $9,085 thousand for the year ended December 31, 2024. The increase of $15 thousand, or less than 1%, was attributable to an increase of $359 thousand in cells product sales offset by a decrease of $147 thousand in media product sales within our biomedical market segment (a net increase of $212 thousand), primarily due to increases in OEM sales. This increase in our biomedical market product sales was partially offset by a decrease of $197 thousand in sales of our skin care products in our anti-aging market segment during 2025 compared to 2024 due to a decrease in demand. Our OEM sales in our biomedical market segment have increased year-over-year and accounted for approximately 64% of biomedical product sales in 2025 as compared to 63% in 2024. The mix of media and cell product sales has changed slightly with media product sales accounting for approximately 68% of biomedical product sales, down from 72% in 2024. The increase in biomedical product sales was therefore primarily driven by the increase in cell product sales. The slight overall increase in biomedical product sales is the result of normalization of OEM planning systems and lead time measurement and is expected to remain a key component of our biomedical business. Our anti-aging product line is sold to consumers exclusively through our ecommerce channel with less marketing expenditures contributing to the decrease in product sales. Cost of Sales Cost of sales for the year ended December 31, 2025 was $4,033 thousand, compared to $3,764 thousand for the year ended December 31, 2024. The increase of $269 thousand, or 7%, was primarily attributable to an increase in biomedical product sales resulting in higher costs of direct materials of $182 thousand, combined with net increases in manufacturing variances, shipping costs, and inventory transactions including expired inventory write-offs of approximately $212 thousand. The net increase in cost of sales was partially offset by an overall decrease in cost of sales in our anti-aging market segment of $126 thousand as a result of a decrease in product sales. Profit margin was 56% versus 59% for the years ended December 31, 2025 and 2024, respectively. Margins were slightly affected by higher OEM sales as a percentage of biomedical sales in total. Cost of sales consists 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. General and Administrative Expenses General and administrative expenses for the year ended December 31, 2025 was $3,532 thousand, compared to $3,516 thousand for the year ended December 31, 2024. The increase of $16 thousand, or less than 1%, was primarily attributable to increases of $56 thousand in consulting expenses, $43 thousand in legal expenses, $13 thousand in filing fees, and $13 thousand in rent and building expenses related to the reallocation of space and costs in 2025 in response to the amendment to the Company’s co-tenant agreement 31 (refer to Note 9 – Related Party Transactions to the consolidated financial statements for further discussion). These increases were mostly offset by decreases in audit fees of $38 thousand, temporary services of $21 thousand, foreign currency gain due to favorable exchange rates of $15 thousand, D&O and general liability insurance expense of $21 thousand, and personnel-related costs including travel expenses of $14 thousand. In addition, there was a decrease in write off of bad debt of $4 thousand and patent impairment from abandonment of $2 thousand in other general and administrative expenses. Our general and administrative expenses consist primarily of employee-related expenses including salaries, bonuses, benefits, and stock-based compensation. Other significant costs include facility costs not otherwise included in or allocated to other departments, corporate legal fees not relating to patents, and fees for accounting and consulting services. Selling and Marketing Expenses Selling and marketing expenses for the year ended December 31, 2025 was $1,118 thousand, compared to $1,216 thousand for the year ended December 31, 2024. The decrease of $98 thousand, or 8%, was primarily attributable to decreases in advertising costs, including creative and web service fees, of $73 thousand, temporary service fees of $34 thousand, and consulting costs of $22 thousand. These decreases were partially offset by increases in personnel-related costs of $16 thousand, license fees of $8 thousand, bank and merchant fees of $6 thousand, and rent of $3 thousand. The overall change in expense year-over-year is primarily attributable to a decrease in selling and marketing expenses attributable to our anti-aging market segment. Our sales and marketing expenses consist primarily of personnel-related expenses, such as salaries, benefits, and stock-based compensation, facility costs not otherwise included in or allocated to other departments, as well as marketing material costs, permits and licenses for ecommerce, and other advertising type expenses. Research and Development Expenses Research and development expenses for the year ended December 31, 2025 was $684 thousand, compared to $657 thousand for the year ended December 31, 2024. The increase of $27 thousand, or 4%, was primarily attributable to increases in depreciation expense of $11 thousand and rent of $72 thousand related to the change in expense allocation resulting from the 2025 amendment to the Company’s co-tenant agreement (refer to Note 9 – Related Party Transactions to the consolidated financial statements for further discussion), combined with a decrease in the Australian research and development tax credit for qualified expenditures incurred by our Australian subsidiary, Cyto Therapeutics, of $42 thousand. These increases were partially offset by decreases in personnel-related costs, including salaries and stock-based compensation expense, of $66 thousand combined with a decrease in consulting expense of $32 thousand. Our research and development efforts are primarily focused on the development of treatments for Parkinson’s disease, traumatic brain injury, liver diseases, stroke, and the creation of new GMP grade human parthenogenetic stem cell lines. These projects are long-term investments that involve developing both new stem cell lines and new differentiation techniques that can provide higher purity populations of functional cells. Research and development expenses are expensed as incurred and are accounted for on a project-by-project basis. However, much of our research has potential applicability to each of our projects. Other Expense, Net Other expense, net for the year ended December 31, 2025 was $151 thousand, compared to other expense, net of $141 thousand for the year ended December 31, 2024. The increase in other expense, net of $10 thousand, or 7%, was primarily attributable to interest expense on our related party note payable (refer to Note 9 – Related Party Transactions to the consolidated financial statements for further discussion). 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 and enrollment in clinical trials. Other short-term and long-term commitments that would affect liquidity include lease obligations as well as related party debt repayments. At December 31, 2025, we had an accumulated deficit of approximately $111.1 million and have, on an annual basis, incurred net losses 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. At December 31, 2025, operating cash flows were positive and we had cash of $993 thousand, compared to $1,230 thousand at December 31, 2024. 32 Licensed Patents The Company had a minimum annual license fee of $75 thousand payable in two installments per year to Astellas pursuant to the amended UMass IP license agreement. The patents, along with the license agreement, expired at the end of July 2022. These patents were fully impaired in prior years and therefore the expiration did not result in any additional impairment for the year ended December 31, 2022. The Company does not anticipate any short-term liquidity effects from this obligation as we will no longer be liable for the annual licensing fee. Cash Flows Comparison of the Years Ended December 31, 2025 and 2024 The following table provides information regarding our cash flows for the years ended December 31, 2025 and 2024 (in thousands): Year Ended December 31, 2025 2024 Net cash provided by operating activities $ 8 $ 13 Net cash used in investing activities (45 ) (171 ) Net cash used in financing activities (200 ) (200 ) Net decrease in cash $ (237 ) $ (358 ) Operating Cash Flows For the year ended December 31, 2025, net cash provided by operating activities was $8 thousand, resulting primarily from our net loss of $418 thousand and net changes in operating assets and liabilities of $581 thousand, consisting of increases in inventories of $387 thousand and prepaid expenses and other current assets of $58 thousand, and decreases in accounts receivable of $335 thousand, operating lease liabilities of $354 thousand, accounts payable of $18 thousand, and accrued liabilities of $99 thousand. The decrease in cash is offset by non-cash adjustments to net loss of $1,007 thousand pertaining to stock-based compensation expense, depreciation and amortization expense, non-cash operating lease expense, interest expense on our related party note payable, and changes in inventory reserve. For the year ended December 31, 2024, net cash provided by operating activities was $13 thousand, resulting primarily from our net loss of $209 thousand and changes in operating assets and liabilities of $809 thousand, offset by recurring non-cash adjustments to net loss of $1,031 thousand, including stock-based compensation expense, depreciation and amortization expense, non-cash operating lease expense, interest expense on our related party note payable, changes in inventory reserve, and impairment of intangible assets. Investing Cash Flows Net cash used in investing activities for the year ended December 31, 2025 was $45 thousand, compared to $171 thousand for the year ended December 31, 2024. The decrease in cash used in investing activities was primarily attributable to purchases of property and equipment of $43 thousand including lab and manufacturing equipment and leasehold improvements as compared to $166 thousand for purchases of property and equipment in 2024. There were also payments for patent licenses of $2 thousand during the year ended December 31, 2025 versus $5 thousand during the year ended December 31, 2024. Financing Cash Flows Net cash used in financing activities for the both years ended December 31, 2025 and December 31, 2024 were $200 thousand. Cash used in financing activities was wholly attributable to the partial repayment of principal on our related party note payable in both 2025 and 2024 (refer to Note 9 – Related Party Transactions to the consolidated financial statements for further discussion). Going Concern 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 sources including exercise of outstanding warrants, 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 the estimates for capital needs in 2026 and beyond; 33 • 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 pre-clinical 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 or other pandemics arising globally, natural catastrophes, cyber-attacks or other crises and their impact on our business 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 our assets. Further, if additional funds are obtained through arrangements with collaborative partners, these arrangements may require us to relinquish rights to some of our technologies, product candidates, or products that we would otherwise seek to develop and commercialize on our own. If sufficient capital is not available, we may be required to delay, reduce the scope of, or eliminate one or more of our 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 flows, the proper timing of our capital expenditures, and raising additional capital or financing in the future. Critical Accounting Estimates Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. On an on-going basis, we evaluate our estimates and assumptions, and we base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions and conditions. Our significant accounting policies are more fully described in Note 1 – Description of Business and Summary of Significant Accounting Policies to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. Our most critical accounting estimates include current and non-current inventories. We review our estimates and assumptions periodically and reflect the effects of revisions in the period in which they are deemed to be necessary. We believe that the following accounting policies are critical to the judgments and estimates used in preparation of our consolidated financial statements. Allowance for Excess and Obsolete Inventory Our inventories, particularly within our biomedical market, consist of certain products that have a long or, when frozen, indefinite shelf life. In addition, future demand for our products is uncertain. Accordingly, at each reporting period, we estimate a reserve for allowance for excess and obsolete inventory. This estimate is computed using historical sales data and inventory turnover rates, which are subjective in nature and fluctuate between periods. The establishment of a reserve for excess and obsolete inventory establishes a new cost basis in the inventory with a corresponding adjustment to cost of sales. If we are able to sell such inventory, any related reserves 34 are reduced in the period of sale. The Company’s allowance for excess and obsolete inventory was $781 thousand and $736 thousand at December 31, 2025 and 2024, respectively. A 10% change in our reserve estimate in total at December 31, 2025 would result in a change in reserve of approximately $78 thousand. Our reserves are estimates which could vary significantly, either favorably or unfavorably, from actual results if future economic conditions, consumer demand, and competitive environments differ from our expectations. 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 – Description of Business and Summary of Significant Accounting Policies to our consolidated financial statements included in this Annual Report on Form 10-K. 35 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not required. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this Item is set forth in our consolidated financial statements and accompanying notes thereto beginning at Page F-1 of this Annual Report on Form 10-K. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None.