Good afternoon, ladies and gentlemen. Welcome to Cytori Therapeutics Second Quarter Earnings Results Call. (Operator Instructions) Before we begin, we want to advise you that over the course of the call and question-and-answer session, forward-looking statements will be made regarding events, trends and business prospects, which may affect Cytori's future operating results and financial position. Some of these risks and uncertainties are described under the Risk Factors section in the Cytori's Securities and Exchange Commission filings, which Cytori advises you to review. Cytori assumes no responsibility to update or revise any forward-looking statements to reflect events, trends or circumstances after the date they are made. It is now my pleasure to turn the floor over to Dr. Marc Hedrick, Cytori's President and Chief Executive Officer. Sir, you may now begin.

Good afternoon. Thank you, Susan, and welcome to our second quarter 2014 conference call. I'm Marc Hedrick, President and CEO. Joining me is Mark Saad and also Ken Kleinhenz, Our VP of Regulatory and Quality. Our press release was issued today and it's been posted on our website and also a copy of this transcript can be found there as well. The agenda today on the call is that I will review recent announcements. Mark will then review the financials. And then I'll follow up with a review of our strategy, key programs and update you on our pipeline development activities. I'll then provide an outlook for the remainder of the year. And then we'll have time for Q&A. And I have asked Ken to sit in on the Q&A session and he can discuss any questions regarding the Regenerative Medicine Law in Japan. So first of all, have some bittersweet news to report that after 10 years, my good friend, Mark Saad, has been offered and accepted a great opportunity in a promotion with the local biotechnology company. As you know, Mark has contributed significantly over the years to the advancement of Cytori and its technology as our CFO. I will greatly miss Mark personally as well as professionally, but we're extremely happy to have identified and brought forth a worthy replacement who we expect to be joining us officially early September as our VP of Finance and our CFO. By mutual agreement with his current company and the sensitivity related to his departure and in order to give them time to contact their global team over the summer, his appointment will officially be released next week in terms of a press release or 8-K. But I wanted to give our shareholders a heads up today on the call.…

Thank you, Marc. In the second quarter, we recognized $1.3 million in product and contract revenues compared with $2.3 million in the second quarter of 2013. Product revenues were $0.9 million during the quarter, due in part to our revised and more conservative recognition policy, compared with $1.4 million in Q2 of last year. As we disclosed several times previously, we've implemented a new policy on the revenue side, where revenues are recognized in a given quarter either in the case of existing customers who established good credit with us or new customers where we've delivered product and for which we've received full payment. At the end of Q2, we have an additional $3.6 million in unrecognized orders from prior quarters consisting of both products that have been shipped and other committed purchase orders which we anticipate recognizing later in the year. The cumulative demand in product orders through June 30 is in line with our expectations at this point of the year. For 2014, both product and contract revenues are anticipated to be heavily weighted in the second half. Product revenues are driven mostly by research sales, as we've discussed, of solution equipment and have been heavily reliant on the Japan market. And as we discussed, the Japanese government is in the process of finalizing new regulations for the regenerative medicine field that are to go in effect in November. We believe that these regulations will provide clarity to our potential customers and could further facilitate the sales process. Contract revenues are driven by activities with BARDA where we've received nearly all the $4.7 million under the original proof-of-concept period. As has been previously announced, we completed the proof-of-concept objectives and recently received written notice of BARDA's preliminary intent to extend and expand the funding of the contract. We…

Thanks, Mark. As I mentioned in the last call, I've been conducting a strategic review of the company's activities as the CEO. And although the analysis is not fully complete, I can share with you my top goals and objectives thus far. And as we've mentioned and maybe you can infer, I've acted on already many of these. First of all, my number one goal is to strengthen the company's balance sheet through both additional capital, but in as shareholder-friendly manner as possible, and simultaneously lowering our cash burn. On the capital front, our recent raise last quarter and implementation of the $40 million ATM, we're in part one of that plan. And currently we are working on part two, and Mark discussed that a moment ago. On the expense and cash management side, we have made substantial reductions in expenses via reducing certain projects outside services, the number of employees and I actually believe there is more we can do on this in the future. In terms of cash flow management, we are evaluating uses of our working capital and inventories and other areas in which we can improve in this area. And I think we've got some areas for an opportunity for improvement there as well. Secondly, it initially deals more with the geographic and commercial aspects of the business. We intend to prioritize highly our focus on Japan. There're many reasons in my mind to focus on Japan. We've been there for a decade. Our presence there has made us a clear leader in that market. We have an experienced and talented team that has enabled us to have a significant brand identification there in that market with physicians and potential partners. We hold all the four commercial group of medical license that allows us to operate…

(Operator Instructions) Our first question comes from the line of Joe Pantginis from ROTH Capital Partners.

Maybe three or so related questions around the ATHENA studies, it certainly is interesting to know that these patients were both on the controlled arm as well. So with that said, I want to do a little historical background first. Out of four or five prior studies that you've done so far, what would you say is the total number of patients that have received therapy in cardiovascular?

We've enrolled approximately 90 patients in those trials. And I think on average, I would say about two-thirds of those have received cells and a third of those have received placebo.

When you said since there're a at least one patient one the controlled arm and you said the evidence right now is not pointing to the cells or the device as part of the cause, I would ask the question in two parts. Can you speculate some potential causes for these events that have been seen? What would represent evidence that either the cells or the device were responsible?

I believe that this is likely what we've seen in other trials that we've done that the issue is multi-factoral. So you got sick patients that are at risk or show somehow atrial fibrillation. Most if not all of them are on a variety of anticoagulants, platelet blockers and Coumadin and so forth. And then we're bringing them in the hospital and they have a very long procedure day. They have small liposuction. They have a cardiovascular mapping and cell delivery. And the ability of physicians to do this depends on their amount of expertise and so forth. So patients are sitting around the hospital. They can get dehydrated. They miss their medications and they miss their anticoagulation medication that particularly could be a bad thing in the context of what we're discussing. And then depending on the degree of the length of the heart mapping and so forth, that could be part of it and the liposuction. So I think it's a combination of all of those. I can't rule out that it's not the cells. But I think the fact that there is a mix of placebo and cells are suggestive that that's not the primary cause. It could play a role, but it doesn't seem to be the case. It hasn't come out in any of our other cardiovascular or other studies. We put a reagent in the cells right before they're injected, specifically geared to ensure that there's no aggregation. And that's something we worked out many years ago. It's been a lot of time in trouble, making sure the cells go into single cell suspension and so this is not an issue. We ultimately can't prove a negative. But I think if we can look at all the data, figure out where are the areas that we can focus on in terms of protocol, strengthening, then I think we have a good chance of getting the study back up and running in not too distant future.

Well, I guess it was part of a lot of background issues there. But I guess what evidence would point to, and again strictly speculation, that it was the cells or the device related, like is there something in particular that would point to those?

Well, I think number one is if the issue was related to only patients that received cells, that would point in that direction, although it's a relatively small number of patients treated in this trial. And we have several other trials, where this has not been an issue. We've gone back and looked at our in-house testing. We've looked at all the various products involved and we can't see any evidence that it's related to the product, the cells, the agents that are used with the cells, one of which is particularly geared towards this issue. Those all seem to be working well. We even at the last step put a filter in into the injection of 70 microns, very small, just so we can make sure that anything going on in can point to what it can find. So while we can't prove it, we don't see any evidence of it. I think it's going to be hard to prove a negative. So we're going to focus on some things that we can change and I mentioned those before.

If I can just switch to the new Japanese law, obviously as you mentioned, this is a work in progress and I'm glad you have Ken there too. I guess would ask as you are awaiting to see whether you're going to be viewed as a device or not and you gave some reasons as to why, I guess I would ask what level of direct discussions have you had, say, with the Japanese government or consultants that might give you comfort to point in that direction?

We have put together initial public comments that were submitted to the MHLW regarding the return of this in law. And we specifically asked them to clarify that autologous same surgical procedures were not part of the regulatory scheme for the new Regenerative Medicine Law. So the MHLW has published all five of the comments and all five of their responses to these comments. And their response to the Cytori autologous same surgical procedure comment was essentially, yeah, we recognize that there is no safety issues. We've soft formal guidance on that and we're relatively comfortable with it. So that's kind of direct relationship in speaking with the MHLW. But the information is available on their website, specifically to the Cytori comments.

Your next question comes from the line of Keay Nakae with Ascendiant Capital.

Just wondering if you can go over some of the assumptions for operating expense again in the back half of the year both for R&D and sales and marketing more specifically.

R&D can really vary a lot based on the final number determination that comes from the BARDA award. We believe based on the preliminary notification and the dialog that we've had that the prospect is for there to be a significant increase in contract revenue associated with that arrangement. It's not final until it's final of course. So when you think about the first half of the year, about $9 million of R&D expense. In fact, that number can go up in the second half assuming the BARDA award comes in as contemplated. If not, we'd expect that number to come down somewhat. So that's the R&D side. Obviously we're not enrolling on ATHENA, then any ATHENA enrollment cost, which is the most significant part of that program, would be deferred. So I think in general, the ATHENA related costs would come down. There may be an alternative indication that could emerge if it's a cost effective determination to do that. And then you have the BARDA determination, which will have the most significant effect. One of the cost we've had this year that we likely would not have a lot in the second half of next year. Of course, last year was the advancement of the next-generation solution system, which is a smaller, faster product that we believe is optimally geared for both the market as well as importantly what we're doing with BARDA. To the extent that we're successful with BARDA in the development and they want to procure, they would rather purchase smaller to achieve faster devices, which coincidentally is of course what we'd like to bring to the marketplace. There's been a significant amount of development cost associated with advancement of that. And that's been incurred in the first six months of this year. We're going…

Your next question comes from the line of Jason Kolbert with Maxim Group.

Jason McCarthy for Jason Kolbert, and I have a couple of questions. And the first thing I wanted to talk about was the scleroderma study. And was interested if you can walk us through what the size of the market is and the primary endpoint and maybe where you see that program going?

The data that came up today represents roughly a small number of patients, but as you will find when you review the data, the data is quite strong in an uncontrolled single arm study. The number of patients that have scleroderma in the US that have hand-related condition is on the order of about 70,000 patients. If you distill that down to those that have hyperdisease that can likely be treated, it's likely the majority of that group of patients. So when we're talking about different sizes of markets, it's not one of your biggest size of markets. However, the treatments for the (technical difficulty) train running downhill under steam of autoimmune disease that creates incapacitation of the digits and near complete loss of hand function. And it really is an unmet medical need. There're not good treatments for it. And there're even some autoimmune therapies that run up over $100,000 for extreme cases. So furthermore, there is the opportunity to extrapolate the data to a broader group of patients that have something called Raynaud's phenomena where the hands change color largely related to cold and they have disability of pain related to that. So just to sum it all up, the core disease is not big. The ability to penetrate that not so big market though is good, because it's an unmet medical need. And then there're opportunities to expand beyond that specific indication.

And just turning back to Japan really quick, assuming you do get approved as a medical device, are there any thoughts about moving into the BPH market, as it is relatively large in Japan?

It is complicated and you got all these different regulatory approvals all around the world and there is a lot of flux. But currently in Japan, we are approved. We have a Class 1 approval. The challenge has been that there's been something called the stem cell guidelines that's been superimposed over the market, which is now gone, but it really clouded our ability to sell into that market despite our approval, because we had to do six to nine months of paperwork and get different approvals in the Japanese government, so like a Meg IRB to be able to treat even one patient. And that's really over the last years diminished our ability to sell. That's now gone. The new Regenerative Medicine Law is meant to substitute it for that. But we do have an approval as a device. And our goal ideally is that after the Regenerative Medicine Law, we are still regulated as a device, but we've lost that overhang of the stem cell guideline where we had to do this lengthy process to treat even one patient.

Your next question comes from the line of Yale Jen with Laidlaw & Company. Yale Jen - Laidlaw & Company: The first one is up for the ATHENA study. As you mentioned that the procedure seems to take a longer time and that could be one of the reasons there. So would that be the possibility that going forward, you might shorten the procedure and maybe that's one possible options to mitigate that potential problem?

Yes, it is. I can't say time is not necessarily proportional to problems, but what happens during that time is. And so even though the bad harvest may be very brief, you could have a very long procedure in terms of heart mapping in NOGA and then delivery. Patients can get dehydrated. Their fluid management is tough on these patients anyway. Plus they're in a lot of mediations. They can miss a dose. Puts stress on a patient, changes their catacolone level and so forth. And so the aggregate of all that stuff that goes on during that day can just create stress for the patient and predispose them to different complications. So are there ways that we can lower the time, improve the medical management, tighten the protocol up in terms of their anticoagulation medications? We do have a pretty tight protocol there, but we can't control specifically doctors and what they do or don't do. They can sometimes not follow the protocol. So there're things we can do to tighten that up. And then can we provide opportunities within the protocol to ensure that the patients are fully hydrated, that they're getting their medications? And more of this can (inaudible) often time you take for granted a trial like this. We are not. We're going to focus on those kinds of things. And I think that will help strengthen the trial and make the procedure safer overall. Yale Jen - Laidlaw & Company: So potentially modifying the procedure or the process a little bit to some extent, would that affect for example the data to be read going forward with the patient that the patients already complete a study with different protocol changes? Would that have an impact on the data per se? And also, given you partially unblended the data, would that impact the statistical powering?

In this case, it was a limited unblind. And we know very little about the patients rather than the things I mentioned to you. So that won't affect the powering of the study in the alpha. So regarding the ability of the data once it's unblinded or if we were to make changes in the protocol, should it make any different whatsoever? Patients are going to get the same therapy, same randomization. They're going to get the same studies pre-op and post-op and it shouldn't affect the ability whatsoever. Yale Jen - Laidlaw & Company: The $3.6 million recognized revenue, would that potentially booked in the third quarter or could be spread in the two quarters for the remainder of the year?

I would look at that more spread out over the year. I think there's pressure on some of these companies or on interested customers to wait for the Regenerative Medicine Law. So some of these can wait till the end of the year. And I think some of these could go ahead and be in the third quarter rev rec customers. Yale Jen - Laidlaw & Company: It looks like that this quarter, the margin was a little bit steep compared to prior quarters. Would that be more like a one-time near-term event or that's something that could have a little bit longer term impact in terms of margin?

The gross margin does vary based on product mix and it's only where we sell through the (inaudible). However there is a critical mass factor. And just by adding the manufacturing infrastructure with the labor, a bit of a hurdle. Any facility we have with people that are experts in making this technology, you can't bring them in, they're there, they're fixed. And you really do need to have a certain amount of manufacturing to get the natural efficiency and the scale that you could normally seek to have. So at the levels that we're at, we're not benefiting from any of that scale. You're really just covering the base cost of the fixed overhead. Now as mentioned, we're looking to reduce the future overhead hurdle rate. And I think some facility opportunities will be in play over the next year. But as of now and consistent with the past, we really need to see the revenues get to $1 million, $1.5 million and $1.75 million to really see more of the traditional margin. And then when we have headquarters where we've had more, you see the gross margin go up quite a bit and we've 70% gross margin quarters when we do get a bit of a taste of that figure number. But when you're down at this level, you're just basically covering the fixed overhead and you're not seeing the gross margin as you would upon achievement of the revenue that the company is seeking.

Your next question comes from the line of Graham Tanaka with Tanaka Capital.

Just on the ATHENA trials, what amount of time will be needed to rectify or adjust either the protocol or what you'd have to do to make sure you can get re-enrolled properly, how many months are we talking about, cost and what could it be in terms of the changed protocols?

I alluded to a little bit in my comments. And in terms of modeling this out, trying to project that's important. We received some questions back, good points that the FDA made in terms of looking at some of the things we've been talking about today. I think we can get answers back in two to four weeks. And then if we're happy with that information, we can go ahead and submit back to the FDA. They have a 30-day turnaround. And then if they take that, then we can go back to our IRB right way. Some IRBs can be very quick. Some can take a couple of months of six weeks, something like that. So that can give you the timeframe to being back up and running. The problem with this is you lose momentum when you start and stop a trial like this. But there is no way around it in something like this when you do have to work out additions like these trials come up. You have to do it in the pilot phase. You don't want to do it in pivotal. So you have to fight the bullet on that. So I would guess kind of a reasonable case scenario that assuming we can get back up and running very quickly, there is a lot of interest in the investigators to get back up and running. It might take about six months then to complete ATHENA I.

And just out of curiously, what in terms of probability in the near similar trials or similar studies with different therapies in this field, what kind of probabilities are there that there would be these adverse events similar to the kinds you saw?

Well, I won't say 100%. But it's very high. And it kind of depends on what's the physiology of these patients and what their comorbidities are and so forth. But it does so happen that in this trial, they're stroke prone, they're sick, they've got a bad heart, they're on multiple medications. And it is expected complication that's in the protocol. It's in the inform consent that these patients can have cerebrovascular issues, worsening of their heart failure and renal failure, whole complement of different things. And these patients die at 20% per year anyway by virtue of just being six cardiovascular patients. It's a little bit higher in some of these patients that have atrial fibrillation that are on Coumadin. And then you have to bridge them from an IV medication to oral and so forth, or oral to IV during the procedure. And so there're subsegments within this that have a higher tendency to have problems like this than other patients. But in the aggregate, it's high and it's expected. I think the question is when you see them or when you see two and you have a third that's a little suspicious, you're obligated to stop, look and make sure that your therapeutic is not causing the problem.

What was the total number of patients that were tested?

ATHENA I and II in total were 31 patients. And in aggregate, I believe it's about 90 patients with cardiovascular disease that we've treated over the course of several feasibility and Phase II trials.

You're saying it's unblended, so you don't know what pool they're in, these three?

We did a limited unblinding through our VMC and unblended the ones that had this particular adverse event. And it was a mixture of patients that had cells and placebo. So it wasn't one of the other. And if we break down, I'm told it was roughly the same as the patient allocation, two to one. So we do know in a limited way unblinding, but we have an unblended to study generally.

So what is the risk of, based on what you're seeing that this could slow down any other trials or efforts you have in a sense that you may want to have to pause and just put on hold any of the other studies? Or is this totally separated?

I would say it's totally separate from a biologic perspective. This is very unique, the sick population. Some ways, we haven't had any safety related issues other than things are out delivery and integrating the overall procedure and years. And so we've kind of come to take that for granted frankly. Not that we're not always looking at it and it's not first we kind of take it for granted and lo and behold we do have an issue. I think that we just want to make sure that our other studies, other trials, other partners understand that this is very specific to this issue. We don't see any of these issues in other trials or other clinical experience, which is now several thousand patients and we would absolutely know about this if there was a general issue.

Our last question comes from the line of Dan Trang with Stonegate Securities.

All my questions have been answered. Thank you.

First of all, just thanks to everyone for being on the call, taking time this afternoon and this evening, for thoughtful questions and interest in the company and technology. We really do. Since the last quarter, our focus has narrowed further. Our expenses have been reduced and are being reduced. And we have several important forthcoming milestones ahead of us over the next couple of quarters. I can tell you that our team, although smaller, is high there and more fully committed to creating a path for shareholder value than they've ever been. And my goal is to continue to work with the team and create that sense that we're not only here to help patients, but we're here to drive shareholder value. We got a lot of work ahead of us, but we're willing to work hard and make that a reality. And I'll do my best to communicate as frequently and as clearly as I'm able along the way. So once again, thanks for your support and have a good evening.

Thank you. This does conclude today's teleconference. Please disconnect your lines at this time and have a wonderful day.