The following earnings call took place on Wednesday of this week. A playback of the call will be available until 11:59 pm ET on November 27, 2013. To listen, call 1-877-870-5176 within the United States or 1-858-384-5517 when calling internationally. Please use the replay pin 4648561.
Operator: Ladies and gentlemen, thank you for standing by. Welcome to the International Stem Cell Corporation Third Quarter 2013 Financial Results and Corporate Update Conference Call. At this time all participants are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session and instructions will be given at that time. If anyone has any difficulties hearing the conference, please press star, followed by zero for operator assistance at any time.
I will now turn the conference over to Ms. Sherri Franklin, Marketing Manager for QualityStocks. Please go ahead.
Sherri Franklin: Good day, ladies and gentlemen. Thank you for standing by. Welcome to the International Stem Cell Corporation Third Quarter 2013 Business Update and Earnings Call. During today’s presentation, all parties will be in a listen-only mode. Following the presentation, the conference will be open for questions. If you have a question, please press the star key, followed by one on your touchtone phone. Please press star, zero for operator assistance at any time. For participants using speaker equipment, it may be necessary to pick up your handset before making your selection. This conference is being recorded today, Wednesday, November 13th, 2013.
On the call today for International Stem Cell Corporation are the Company’s Executive Vice President, Dr. Simon Craw; and Chief Financial Officer, Mr. Jay Novak. Dr. Craw and Mr. Novak will review and comment on financial and operational results for the third quarter of 2013 and the first nine months of 2013 and will be available to answer questions after their prepared comments.
Before we begin, I would like to remind our listeners that on this call prepared remarks may contain forward-looking statements which are subject to risks and uncertainties and that management may make additional statements in response to your questions. Therefore, the Company claims the protection from the SafeHarbor for forward looking statement 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 used 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 are unable to listen to the entire call, there will be an audio replay that will be available and the call is also being webcast so you can log on via the Internet to review at a later time. All details were provided on the conference call announcement and in the press release today. You may also find more information on the Company website located at www.internationalstemcell.com.
At this time, I would like to turn the call over to Dr. Simon Craw, who will provide opening remarks. Simon, the call is yours.
Dr. Simon Craw: Thank you, Sherri, and good morning, everyone, and thank you for joining us on this morning’s business update call. As you can see from our 10-Q and press release this morning, and I see from the stock price we’ve seen a little bump up in our stock price as well, which is gratefully acknowledged. We had an extremely good third quarter of 2013 with excellent progress on our Parkinson’s disease program and outstanding growth in each of our commercial businesses, both Lifeline Cell Technology and Lifeline Skin Care. Indeed, the third quarter represents the highest revenue we’ve ever achieved as a company. I’ll come back to the commercial side in a moment, but first I’d like to make a few comments about our recent financing before discussing our scientific progress.
So we touched on this briefly last quarter that—last quarter’s update call, but just to remind listeners, in July, we’ve raised approximately $3 million, most of which came from a group of new investors, new to ISCO. The capital will be used to fund our R&D programs, primarily our Parkinson’s disease program, where we intend to start a clinical trial in 2014. As part of the offering, we also issued B warrants, which expired in October of this year, and we now have, through the execution of these B warrants, raised a total of about $5.45 million from this transaction, which along with our continued ability to manage our burn rate successfully downwards, now funds the Company well into 2014. So we consider this to be a successful outcome for the quarter. In addition, the transaction significantly improves our daily trading volume and makes our stock more attractive to new investors. I’d be happy to answer specific questions about the financing in the Q&A session.
Let me move on now to our Parkinson’s disease program and talk about that for a few minutes. We continue to proceed with our plans for an IND filing in 2014 and the subsequent clinical trial. In August, we’re very excited to announce that we signed a clinical research agreement with Duke University and the Duke Clinical Research Institute, which is actually the largest academic CRO, Clinical Research Organization, in the world, and the main purpose of the agreement was really to tap into Duke’s excellence in the fields of clinical neurology and in running early stage clinical trials, especially trials using stem cell-derived products. And it was important for us to choose a clinical research organization with significant expertise in both cell therapy and in handling stem cells. And over the years Duke has really built an international reputation in both of these areas.
Lastly, Duke also has a world-class neurological, neurosurgical unit, which is of course necessary for our cell implantation procedures, and the leader of this unit is a neurosurgeon called Dr. Dennis Turner, who’s a very well renowned neurosurgeon and he’s actually a key part of our clinical program. So Duke will help us by helping develop the clinical plan, which forms part of the IND filing, and will coordinate our Phase 1 study that we intend to begin in the middle of next year. Professor Mark Stacy, the Vice Dean of Clinical Neurology and an internationally renowned and extremely well respected neurologist and physician, will be the study’s principal investigator and we’re very excited to have Dr. Stacy join our clinical team.
And just to remind everyone on the call, we intend to treat Parkinson’s disease by implanting stem cell-derived neural stem cells into a patient’s brain. Our research builds on many years of preclinical and clinical science and has two parallel mechanisms of action: the direct cell replacement mechanism where the new cells replace dead and dying cells in a critical region of the brain and restore that region’s function; and secondly, a neuroprotective mechanism of action where the new cells provide positive benefit to the location where their implant is and may help by preventing more cells from dying and the disease, the underlying cause of the disease progressing further.
So one of the first things that the Duke team helped us with was by bringing together some of the most preeminent neurologists and neurosurgeons who’ve worked in this field of cell therapy for Parkinson’s disease together for a key opinion leading—key opinion leader meeting which we held in September of this year. Bringing such a team of clinical experts together really helped us further develop the neurosurgical implantation procedures, including the exact techniques and locations of the implants, along with the detailed design of the clinical study. Now we haven’t published this at the moment but we do intend to publish much of this information once we have had our pre-IND meeting with the FDA, which we expect to have in the next couple of months.
So at the same time as we’re working on this IND package and all that entails, we’ve continued to publish and present the results of our preclinical research, including more data from our first pilot primate study which we completed earlier this year. An example of this would be that we recently presented how our neuro stem cells can reduce the inflammatory response in the brain caused by the surgery and the importance of this to the treatment of Parkinson’s disease, and we intend to publish all of this data from the first primate study in the peer-reviewed scientific literature before the end of the year.
So, with that, that really concludes my overview of the scientific progress we’ve made, and I’d like to pass the call over to Jay, our Chief Financial Officer, to discuss our financial performance. Jay?
Jay Novak: Thank you, Simon, and good morning, everyone. Thank you for joining us this morning. I would like to provide you with a review of our financial performance for the third quarter of 2013. We filed our 10-Q this morning and issued a press release with our results. Please refer to those documents for more detailed information regarding our results.
Sales for the three months ended September 30th, 2013 were $1.7 million, up 41% from 1.2 million in the third quarter of 2012. Sales for our Lifeline Cell Technology subsidiary, or LCT, were $860,000, up 30% year-over-year, while Lifeline Skin Care, or LSC, revenues were $810,000, up 54% over the corresponding period in 2012. As part of the distribution of sales between the subsidiaries, revenues from Lifeline Cell Technologies represented 51% of our total revenues, while Lifeline Skin Care’s revenues were the remaining 49% in the third quarter of 2013. As you can see a fairly even split between the two subsidiaries.
Now moving on to the cost side. Cost of sales were $446,000 for the quarter, or approximately 27% of revenue, compared to $320,000, also 27% of revenue, consistent with the third quarter of 2012. Gross profit was approximately $1.2 million, up 41% year-over-year, while our gross profit margin was consistent at 73% with the same quarter in the prior year.
Moving on to research and development. Research and development expenses were $932,000 for the quarter, compared to 899,000 for the third quarter of 2012, representing an increase of approximately 4% over the prior year. The slight increase is due to higher stem cell line research and testing expenses incurred as well as increased consulting cost as we continue to invest in our research programs as previously was covered by Simon in more detail.
Marketing expenses during the current quarter were $633,000, up approximately 32% from 478,000 in the corresponding period in 2012. Advertising and marketing spending increased reflecting our efforts to promote and support the growth of our businesses, subsidiaries, with the primary increase coming from our Skin Care business to address their various sales channels.
General and administrative expenses were $1.4 million during the quarter, a decrease of $210,000 or 13%, compared to $1.6 million for the comparable period a year ago. This was resulting from lower personnel-related expenses and stock-based compensation expenses, as well as additional areas where we have savings.
Our loss from operations during the quarter was $1.7 million, and compared to a $2.1 million in the same period in 2012, representing a decrease of losses of about 18%, and this is consistent with the areas previously covered, higher increase in revenues then a slight increase within our operating expenses.
As far as below-the-line items, as described in detail in our 10-Q filed with the SEC this morning, the characteristics of our July financing transaction required us to record the fair value of warrants issued in excess of the proceeds we receive and the financing cost as below-the-line expenses in our income statement. Total below-the-line expenses reported related to the financing were approximately $2.1 million for the quarter.
As a side note, in future periods, increases in the fair value of the warrant liabilities will be recorded as expense and decreases will be reported as income. Regardless of whether we show income or expense from the changing warrant liabilities, this is a non-cash item.
Our bottom line net loss for the third quarter of 2013 was $3.8 million, compared to 2.1 million during the corresponding period in the prior year, representing an increase in net loss of approximately 1.7 million. This increase in net loss for the quarter is entirely due to recording in the income statement the impact of the July financing transaction that I just described. Our net loss that’s attributable to common stock on a per share basis were $0.03 in the third quarter compared to $0.02 in the same period in the last year.
Our cash and cash equivalents totaled $1.8 million at September 30, 2013 compared to 654,000 at the end of last year. We received during the year approximately $5.9 million net of financing cost from the issuance of common stock and warrants in the first three quarters of 2013.
In addition, we invested approximately $500,000 in capital and patent expenditures year-to-date, and this down slightly compared to about $630,000 in the same period in 2012.
This concludes my prepared remarks. Thank you for your time and attention. I will turn the call now back over to Simon for his closing comments. Simon?
Dr. Simon Craw: Thank you, Jay. Thanks for that summary. So everyone on the call, in summary, I think you can see that we had a truly excellent, excellent third quarter for 2013. Our revenues hit new highs, an absolute record for the Company. Our cash burn net of patent and capital items is the lowest its been in two years, and we now have an incredible new partner on the clinical side who brings complementary expertise to our own internal skills and will help us achieve this very ambitious scientific and clinical goals that we’ve set ourselves for 2014. I think it’s a very exciting time for International Stem Cells. And thank you. We’ll open the call up for questions.
Operator: Thank you. Ladies and gentlemen, we will now conduct a question-and-answer session. If you have a question, please press the star, followed by the one on your touchtone phone. You will a hear a tone acknowledging your request. Your questions will be polled in the order they are received. Please ensure you lift the handset if you’re using a speakerphone before pressing any keys.
Once again, ladies and gentlemen, if you’d like to ask a question, please press star, one at this time.
Your first question comes from the line of Heidi Marie Flyntas (ph), Private Investor. Please go ahead.
Heidi Marie Flyntas: Hi there. Thanks for everything you guys have been doing this year. But on your Phase 1 trial, how long do you anticipate it to last? What’s the trial length?
Dr. Simon Craw: Well, good morning, Heidi Marie, and thank you for the question. We expect it to be a 12-month trial. We’ll be publishing the sort of—in broad brush strokes the details of the protocol probably early next year but we expect it to be a 12-month trial with a two-year follow-up period.
Operator: Your next question comes from the line of Donald Sumor (ph), Private Investor. Please go ahead.
Donald Sumor: I’ve enjoyed the presentation so far. I have one question. What is the progress on the corneal transplants?
Dr. Simon Craw: Well that’s a great question, Donald. Thank you very much. We don’t have anything that we can report on the cornea program at the moment. As you probably know, the program is still in the research and development phase where we are optimizing the mechanical and optical properties of the cornea. We had hoped to have already partnered this program with some partners in India. That is of course now proving to be much more difficult than initially anticipated. And we don’t have a scientific update on the progress this quarter.
Operator: Ladies and gentlemen, if there are any additional questions at this time, please press the star, followed by the one. As a reminder, if you’re using a speakerphone, please lift the handset before pressing the key. Once, if you would like to ask a question, please press star, one at this time.
Next, we have a follow-up question from Heidi Marie Fuentes, Private Investor. Please go ahead.
Heidi Marie Flyntas: Hi there. During the Phase 1 trial, how will we get updates—or will we get updates during the trial as to progress or will we be waiting until the trial is done? And who is in charge of those updates? Will that be up to the Company or Duke?
Dr. Simon Craw: Thank you, Heidi Marie. Let me just—before I answer that question, let me just go back to the cornea and to answer Don’s—Donald’s question more completely. We are now looking for additional partners for our cornea program and we have had contact with several companies who have expressed interest in looking at the program. So we are continuing to try to partner that program and out-license that technology.
Now, to answer Heidi Marie’s call, ISCO is the sponsor of the clinical trial, so ISCO has control over the data flow and—although, you know, we’re in partnership with Duke University so we wouldn’t be doing anything that would compromise that partnership, but we will be responsible for communicating progress on that clinical trial and we fully intend to provide interim update as and when they become available in terms of, you know, we’ll obviously communicate when we’ve had our first patient in and when the first subjects have been treated and as we move forward with the various cohorts in the study.
Operator: And there are no further questions at this time. Please continue.
Dr. Simon Craw: Okay. Well if there’s no further questions, I’d like to thank everyone for joining us on this morning’s call. And once again, I’d like to reiterate that I think we’ve had an outstanding quarter with just truly excellent revenue growth from both of our commercial businesses and tremendous progress from our R&D organization, and I look forward to having a—talking about the full year progress when we file our 10-K next year and looking back on a banner year for International Stem Cells.
Operator: Ladies and gentlemen, this concludes the conference call for today. Thanks for participating. You may now disconnect your line.
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