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Executives

Mark McPartland

John Simon Craw - Executive Vice President of Business Development and Investor Relations

Linh T. Nguyen - Chief Financial Officer, Principal Accounting Officer and Secretary

International Stem Cell (OTCQB:ISCO) Q3 2012 Earnings Call November 9, 2012 11:00 AM ET

Operator

Good morning, and welcome to the International Stem Cell Corporation Third Quarter Financial Results Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mr. Mark McPartland. Please go ahead, sir.

Mark McPartland

Thank you, operator, and good morning, everyone. Joining us today for International Stem Cell's third quarter 2012 financial results conference call are the company's Executive Vice President, Dr. Simon Craw; Chief Financial Officer, Ms. Linh Nguyen. Dr. Craw and Ms. Nguyen will review and comment on the financial and operating results for the third quarter and will be available for questions and answers after the prepared comments.

Now before we begin, I'd like to remind our listeners that on this call, prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties that management may take additional statements in response to your questions. Therefore, the company claims the protection from the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Forward-looking statements related to the business of International Stem Cell Corporation and its subsidiaries can be identified by common use of forward-looking terminology, and those statements involve unknown risks and uncertainties, including all business-related risks that are more detailed in the company's filings on Form 10-K, 10-Q and 8-K with the SEC. For those who aren't able to listen to the entire call today, there will be an audio replay available, and the call is also being webcast, so you can log in via the Internet to review at a later time. All details were provided on the conference call announcement and in the press release earlier today. You may also find more information on the company's website located at internationalstemcell.com.

At this time, I'd like to turn the call over to Dr. Simon Craw, who will provide opening remarks. Simon, the floor is yours.

John Simon Craw

Thank you, Mark, and good morning, everyone, and thank you for joining International Stem Cell's third quarter 2012 earnings conference call.

We are pleased with the progress we have made in our therapeutic programs and in our subsidiaries during the last 3 months. I would, firstly, like to discuss the important progress our research and development team have made in the liver and Parkinson's disease programs.

In our liver disease program, we significantly improved our manufacturing methods, allowing us to produce liver cells at lower cost. We have also initiated efficacy studies in rats, designed to demonstrate that our stem cell-derived liver cells can be as efficient as primary human liver cells in treating metabolic disease called Crigler-Najjar syndrome.

In addition, in the third quarter, we were granted a new patent for a method of generating definitive endoderm, the precursor of both liver and pancreas cells. The patent is important, it covers creating such cells from all types of human pluripotent stem cells and offers a new efficient and scalable approach.

In our Parkinson's disease, we commenced a new rodent study to measure the efficacy of parthenogenetic-derived neuronal cells for the treatment of the disease. We plan to announce the results towards the end of the first quarter next year.

I'm also pleased to say that we have started our first non-human primate study in our Parkinson's disease program earlier than anticipated. This study is important as monkeys provide the best non-human model for Parkinson's disease and will help us understand how our stem cell derived neuronal cells perform in the brain.

Now I would like to discuss the performance of our subsidiaries. As we announced this morning, revenues in Lifeline Cell Technology grew 37%, and in Lifeline Skin Care, by 46%. In the third quarter, we adjusted the strategy and corresponding organizational structure of Lifeline Cell Technology to be more sales and market-driven. This has already resulted in improved sales.

In September, we announced that Lifeline Cell Technology began selling its primary human cells and optimized media products through Fischer Scientific's e-catalog as an Encompass Preferred Supplier. This is important as it provides us direct access to a group of potential customers and large pharmaceutical companies who may not have been able to purchase products from us before.

Lifeline Skin Care continues to diversify its source of revenue during the third quarter, by way of example, had a promotional campaign in the USA Today aimed primarily at building greater brand awareness.

The Skin Care team has also signed up a number of new professional SPAR accounts, increasing the number of locations where our products can be purchased.

Last but not least, in the third quarter, Lifeline Skin Care signed a distribution agreement to sell its anti-aging products through the extended clinical network of one of the largest pharmaceutical companies in China, Sinopharm Group.

We believe that these achievement, along with the new products that we have in our pipelines, will continue the positive sales momentum of both subsidiaries.

On the operational side, we continue to make good progress to further improve our efficiencies in cash usage. Our vigilant control over every non-essential cost has resulted in a 26% reduction of our general and administrative expenses compared to the third quarter of 2011.

In summary, our research programs are progressing well and our subsidiaries are showing continued sales growth. Thank you for your interest in International Stem Cell Corporation.

Our Chief Financial Officer, Linh Nguyen, will now discuss our financial results for the third quarter 2012. I will be available to answer questions after Lihn finishes her prepared comments. Thank you. Over to you, Lihn.

Linh T. Nguyen

Thank you, Simon, and good morning, everyone. Thank you for joining us this morning. I'd like to provide you with a review of our financial performance for the third quarter of 2012.

We filed our 10-Q report yesterday, and issued a press release with our results this morning. Please refer to that filing for more detailed information on our financial results for the first 9 months of 2012.

Reporting on the revenue stream for the third quarter of 2012, both of our Skin Care and Cell Technology businesses provided important funds to help support our core therapeutic programs. Specifically, we generated approximately $1.2 million in sales compared to $842,000 in the same period last year. This represented a 41% increase year-over-year.

Sales for Lifeline Cell Technology was $663,000, reflecting an increase of 37% over last year. The primary drivers for the strong sales generated by Lifeline Cell Technology in the third quarter was due to increases in sales to our OEM customers and, to a lesser degree, custom products to our distributors.

Sales of our Lifeline Skin Care products were $525,000, an increase of 46% from the same period in 2011, reflecting our continuing efforts to focus on diversifying and expanding our sales channels.

Cost of sales for the third quarter of 2012 was $320,000 or 27% of revenue compared to $361,000 or 43% of revenue for the same period in 2011. The significant year-over-year improvement in our cost of sales was primarily attributable to our continuing efforts to increase efficiency and effectiveness in the manufacturing and management of supply chain, related to both Skin Care and Cell Technology businesses.

With respect to our therapeutic development programs, research and development expenses were $900,000 for the third quarter of 2012 compared to $1.1 million in the same period in 2011. We incurred lower stock-based compensation expense and lower personnel and consulting-related spending. However, we incurred higher research and testing expenses related to our stem cell line derivation program and higher laboratory materials expense, related to our Parkinson's disease program. The increases reflect our continuing efforts to achieve our next scientific milestone with the Parkinson's disease program and to expand our stem cell bank.

We made targeted investments, primarily in Lifeline Skin Care during the third quarter. Marketing expenses for the 3 months ended 2012 were $477,000, representing an increase of $112,000 from the same period in 2011.

The increase was primarily driven by investments in advertising, marketing and promoting our Skin Care products. We believe that the changes we have made in the mix of our advertising and promotional programs have helped promote and build brand awareness for our skin care products.

We continue to monitor our marketing spending closely in order to further optimize each dollar spent. As Simon mentioned earlier, general and administrative spending for the third quarter of 2012 were $1.6 million, down 26% compared to the same period in 2011, as a result of ongoing operational efficiency initiatives and our effort to reduce cash burn.

We further reduced our corporate support and overhead expenses, as well as consulting and professional accounting fees. While we believe the bulk of the cost-savings has been realized, we will continue to monitor our expenses closely.

We ended the third quarter with cash and cash equivalents totaling $2.4 million compared to $1.3 million, as of December 31, 2011. The significant increase resulted primarily from 2 financing transactions, totaling approximately $7 million completed in the first quarter of 2012, partially offset by working capital needs to fund our therapeutic research and developments and our operations.

We had working capital of $2.2 million at the end of the third quarter [indiscernible] as of December 31, 2011.

Our focus and commitment continues to be centered around 3 primary objectives: Firstly, achieving scientific milestone for our therapeutic programs; secondly, optimizing revenues for both Skin Care and Cell Technology businesses; and thirdly, streamlining our cost structure.

That concludes my prepared remarks, and I thank you for your time and attention. I'd like to turn the call back to Simon for closing comments.

John Simon Craw

Thank you, Lihn. This concludes the formal part of our call. As we wrap up for the final [indiscernible] solid foundation for further progress in the years ahead. Thank you for your time and attention. We are now happy to answer any questions you may have. Operator, you may open the lines for questions.

Question-and-Answer Session

Operator

[Operator Instructions] You have a question from Douglas Bane, [ph] an individual investor.

Unknown Shareholder

Simon. Lihn. I have a couple of questions. First of all, you appear to be going through cash at the rate of about $2 million a quarter, net. Do you have any plans for additional capital raising in the next 3 or 4 months?

John Simon Craw

Douglas, this is Simon. I can refer you to the registration filing that we made on October 18 of this quarter, S-1 registration document with the SEC. The SEC actually limits what we can say about that document, but you're welcome to read the prospectus. It's available through EDGAR and through our website.

Unknown Shareholder

The second question is relative to the Lifeline Skin Care business. Obviously, you're operating there in an extremely competitive field, in terms of skincare cosmetics, et cetera. Have you considered any tie-ups with established cosmetics companies, or much larger companies in this area, to provide technology to those companies for -- to try to boost your sales in that area. Has that ever been considered?

John Simon Craw

It has been considered, and is being considered. Douglas, there is a number of opportunities that are available to us, not including the sale of our branded products. But we could look at selling our ingredients as a raw material or supplying that raw material to other cosmetics or pharmaceutical companies, and those are programs that we are actively looking at. I don't have anything that I can tell you on the call today. It's -- I can tell you it's a good idea and it's one that we have thought of.

Operator

[Operator Instructions] Our next question will come from Bill Goldsmith, [ph] another private investor.

Unknown Shareholder

I apologize, my question's already been answered.

Operator

[Operator Instructions] I'm showing no additional questions in the question queue. I will turn the call back over to Dr. Simon Craw for any closing comments.

John Simon Craw

Well, I just want to -- remains for me to say thank you everybody for attending and taking the time to join us on the call today. And I'd like to wish you a very good day. Thank you.

Operator

Ladies and gentlemen, the conference has now concluded. We thank you for attending today's presentation. You may now disconnect.

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