MBOT - NASDAQ

Gregory T. Schiffman – CFO and EVP Martin M. McGlynn – President and CEO Stephen Huhn – VP of Clinical Research and CMO

Christopher James - Brinson Patrick Securities Jason H. Kolbert – Maxim Group LLC Keay Nakae - Asciendiant Capital

Good day ladies and gentleman and welcome to the StemCells’ Second Quarter 2014 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder this conference call maybe recorded. I would now like to hand the conference over to Mr. Greg Schiffman, Chief Financial Officer. Sir, you may begin.

Thank you. Welcome everybody and thank you for joining us today. With me today are Martin McGlynn, our President and Chief Executive Officer and Dr. Stephen Huhn, our Vice President of Clinical Research and Chief Medical Officer. Before we proceed, I would like to remind everyone that during today’s call, we will be making some forward-looking statements which reflect our current views and are based upon certain assumptions that may or may not ultimately prove valid. We assume no obligation to update these forward-looking statements anytime in the future and our actual results may differ materially from anything projected during today’s call, due to risks and uncertainties to which we are subject. These risks and uncertainties are described in our public filings with the Securities and Exchange Commission and at the end of our earning release, which you’re encouraged to consult. Now with that, I will turn the call over to Martin.

Well thanks Greg. This has been a remarkably busy and productive quarter for our company. On the finance side, we opportunistically strengthened the balance sheet via a $20 million equity financing gross proceeds with two institutional investors. On the legal front, you may recall that StemCells has been engaged in a longstanding patent infringement suit against Neuralstem, Richard Garr, and Karl Johe. Our suit alleges infringement of six patents owned by StemCells claiming populations of human neural stem cells, their proliferation, and their use. Inventions arising from the ground breaking work of Dr. Samuel Weiss and Brent Reynolds, while at the University of Calgary. I am pleased to say that recently the judge in the case denied Neuralstem's motion for summary judgment and moved us one step closer to a final resolution in the case by scheduling the first part of the trial to begin this December. It is certainly welcome news that our case will finally have its day in court. In light of the judge's rulings, we can anticipate trial on the merits next year, and I sincerely hope a speedy and final resolution of our various patent and business tort claims against Neuralstem. Now that said, I would like to take a moment to remind you why we filed this law suit in the first place. Over the years, StemCells has made a considerable investment in its patent portfolio, which now consists of dozens of issued patents worldwide. Both the company's Reynolds and Weiss patents and its other patents whether owned or exclusively licensed by StemCells have been licensed out on a non-exclusive basis to several companies for sizeable licensing revenues in return for freedom to operate. For additional information on these, you can refer to our SEC filings which describe the patents and our licensing activities in detail. The company's proprietary cells, the HuCNS-SC cells, are protected by multiple patent families held by the company. This law suit is not about StemCells’ freedom to operate. That is to say there are no claims of infringement against StemCells, Inc. But it is challenging Neuralstem's freedom to operate, and we seek injunctive relief and substantial damages from them. We contend that Neuralstem has willfully infringed our intellectual property, and we owe it to our shareholders to do everything in our power to protect the investments we have made on their behalf in this ground breaking neural stem cell technology. So, we look forward with great enthusiasm for the prospect of presenting our evidence and our arguments to judge and jury and will of course provide an update on the status of the litigation as appropriate. This quarter, we also strengthened our management team. We hired three new senior executives into newly created positions, including Dr. Joel Naor as Vice President, Clinical Development, Ophthalmology; Naymisha Patel, Vice President, Quality Systems; and Dr. Mohammad El-Kalay, as Vice President, Process Development. In addition, we promoted Dr. Stephen Huhn to the newly created position of Vice President, Clinical Research and Chief Medical Officer. Joel will be leading the clinical program for dry AMD. He brings a wealth of experience and knowledge to the company pertaining to the development of therapeutics for conditions affecting the back of the eye including AMD, and he is already having a substantial impact on our preparations for the planned Phase II controlled study, which should begin to enroll patients later this year. Naymisha brings strong leadership skills and very relevant experience to the company in quality control, clinical QA, product QA, and compliance, as we scale up clinical trials and production of cells for use in those trials in our own cGMP facility. Now, as we look down the road beyond the Phase II trials, towards registration studies and commercialization, our Board has recognized that we need to invest in the development of robust, fully integrated, and scalable state-of-the-art manufacturing processes that meet the regulatory requirements and quality standards that are appropriate for such advanced stages of development. So, Mohammad brings a very deep understanding of the challenges associated with such endeavors gained over a period of 25 years in process and product development with such companies as Applied Immune Sciences, SyStemix, Osiris, MorphoGen, Telos, and MicroIslet. In addition, we have strengthened our Board with the appointment of Dr. Alan Trounson . Alan has a diverse background including ground breaking academic research in both in-vitro fertilization and stem cell science, and experience as the founder of a number of successful businesses. He has also held several Australian government appointments, including as Director of the Australian Special Research Council and has served as a member of the Prime Minister's Science, Engineering, and Innovation Council Working Group as well. Alan most recently served as President of the California Institute of Regenerative Medicine for over six years. So as you can see, we continue to build a leadership team that has the experience and skills needed to help transition the company from its roots in ground breaking science towards accomplishment of its mission to bring desperately needed breakthrough medicine to patients and their families. Finally and most importantly, we achieved several important clinical milestones this quarter. We completed the enrolment in our thoracic spinal cord injury trial in April. I would like to point out that this is the first spinal cord clinical trial evaluating stem cells as a therapeutic agent to have successfully completed enrolment. I want to remind you that thoracic spinal cord injury was chosen as the indication in this first trial primarily to demonstrate safety. This patient population represents a form of spinal cord injury that has historically defied responses to experimental therapies and is associated with a very high hurdle to demonstrate any measurable clinical change. We reported additional interim data from this study in May. In total, we have now reported on 8 of the 12 subjects enrolled in the study. First, we have not seen any safety issues associated with the cells. In addition, we are seeing multi-segmental sensory gains and a return of function in the cord in half of the patients reported to-date. This indicates that something that was not working in the spinal cord now appears to be working following transplantation. This is even more significant because of the time that has elapsed from the date of injury which ranges from 4 months to 24 months across the subjects with sensory gains. We plan to initiate a controlled Phase II study with spinal cord injury in the cervical or neck region later this year. The cervical cord directly controls motor function of the upper extremities thus these patients may represent a population in which regaining or enhancing upper extremity motor function, maybe more readily anticipated. Even a gain of one to two motor segments in the cervical spinal cord could allow for additional function in the upper extremities. Now in our dry age related macular degeneration trial, we initiated enrollment in the second quarter with cohorts of patients late May and announced completion of enrollment and study in late June. As a reminder this second cohort of patients has better visual acuity than the patients in the first cohort. In addition we released the first interim results from this study in June at the International Society for Stem Cell Research in Vancouver, Canada. Again we did not see any safety issues associated with the subs. We were also looking of course for preliminary science of efficacy. And one of the primary efficacy metrics we looked at was the rate of geographic atrophy. Geographic atrophy is the progressive loss of two important retinal tissue layers, the photo receptors and the retinal pigmented epithelium. Degeneration of the macular is the cause of vision loss and dry AMD. We showed a 70% reduction in the rate of geographic atrophy compared to the control of untreated eye. This is a very promising sign of efficacy. The interim results also indicate improvements in visual function as measured by the ability to distinguish shades of light versus dark. This is also referred to as contrast sensitivity. Contrast sensitivity was improved in four of the seven patients and it remains stable in the other three. These results surpassed our expectations and based on the strength of the safety and efficacy data, we closed enrollment in the study having enrolled 15 of the 16 total planned patients so that we could focus all of our efforts on moving this program forward. And I've said before, we now plan to initiate the Phase II control study later this year. Turning now to the rest of 2014, we should look to the company to do the following. Number one, initiative Phase II control proof of efficacy studies in both cervical and spinal cord injury and dry AMD. Number two, to host an R&D Analyst Day in Q4. Among other things like this event, we will go into some of the details of the design for Phase II clinical trials. We will also plan to release additional data from our ongoing Phase I-II clinical trials in spinal cord injury and dry AMD. And by the way, we look forward to having the full study results available from both of these Phase I trials mid next year. So I would just like to close with a few additional thoughts, in my letter to shareholders at the beginning of the year, I said that we would work to improve communication and visibility of our clinical efforts and our organizational capabilities. Some of the activities we have already taken include number one, participating in more investor and scientific forums this year than in previous years. Two, sending out semiannual letters to shareholders, communicating my views on the industry, our company and our strategies and progress towards bringing breakthrough therapies to markets. Three, making more effective use of social media. In that regard we went live on Twitter about six weeks ago, so we urge to follow us on Twitter at StemCells Inc. And by the way we are now live on LinkedIn. And finally, we held a webcast of senior management and the principal investigator on our dry AMD trial to discuss the exiting interim results from this study. In my shareholder letter, I also outlined several important milestones for the company and I indicated that we were poised to make a significant difference in the practice of medicine and in the lives of millions of patients and their families. I want to let you know that we are on track to achieve all of these milestones that are laid out in my letter to shareholders at the start of the year. We know that clinical data is what drives the success of companies like ours that provide insights into how the therapy works, safety of the therapy. And the level of clinical being delivered to the patient. By year-end we will have released more clinical data in just this year than we have in the history of the company. This is the beginning of our transformation. Next year we will be running our first Phase II control studies. We will be transplanting at 20 to 30 sites and we will enroll far more subjects next year than we have this year. To remind you we expect to transplant as many subjects this year as we have in the history of our company. So you can see we are rapidly driving this technology forward, we are very encouraged by the strength of the preliminary clinical results observed today. So with that I will turn the call over to Greg to discuss our financial results for the quarter.

Thank you, Martin. As Martin indicated we executed an equity financing transaction this quarter. This transaction was executed with two institutional investors and generated approximately $18.8 million net of operating expenses and placement agent fee. This transaction was structured with a short-term warrant wearing a strike price of $2.17. Should the warrants be exercised, the company would receive approximately $20 million in additional funds by mid August next year. The funds from the initial transaction along with the funds from the warrants should they be exercised would provide sufficient capital to finance our projected 2015 operating expenditures. If the warrants are not exercised, the warrant over hang will be eliminated next year prior to the release of any data from the Phase II studies. We believe that this was a very effective financing for the company and provides us with a strong balance sheet enabling us to move our clinical programs forward. Now let me quickly go over our financial results for the quarter. Q2 2014 total revenue was down slightly to Q2 2013 total revenue, approximately $39,000. SC Proven sales were down slightly Q2 2014 compared to Q2 2013, approximately $31,000, but up for the six months ended June 30, 2014 compared to June 30, 2013 about approximately $75,000 or 16%. We see opportunities for the SC Proven business and expect to continue to see -- expect to see continued growth in their revenues. Licensing and other revenue in the second quarter of 2014 was not significant. Operating expenses for the quarter were approximately $8.3 million. This is an increase of approximately $1.8 million compared to Q2 2013. This increase primarily reflects costs associated with the increased enrollment in the ongoing Phase I, II trials and activities taking place as we prepare to initiate the two Phase II efficacy proof-of-concept studies later this year. Similarly loss from operations increased by approximately $1.9 million driven by the $1.8 million growth in operating expenses. These spending levels are consistent with the cash usage guidance we provided at the beginning of the year. For Q2 2014 we reported approximately $4 million of net other expense of which the majority $3.7 million is associated with the change in the fair value of our warrant liability. This is a non-cash item driven by a change in the value of our stock price. Just a reminder under warrant liability accounting changes in warrant liability or passive statement of operations is either income or expense, depending on the direction of the stock price movement. In addition to the warrant liability we had approximately $340,000 of interest expense. We reported a net loss of $0.22 per share this quarter or an aggregate net loss of $12.1 million. In 2013 we reported a net loss of $0.15 per share or $5.9 million. Approximately 70% of the net loss increased this quarter was associated with the non-cash change in the fair value of our warrant liability driven by the change in our share price. Our net cash usage for the second quarter was approximately $8.6 million. For the first six months of the year our net cash usage has been approximately $12.7 million. We are on track with our guidance provided at the start of the year where we indicated that we expected to see net cash usage which includes capital cost, serum funding for Alzheimers Research and Debt Servicing costs, in the range of $30 million to $34 million. Our cash and cash equivalent at the end of the quarter were approximately $17.8 million. On a pro forma basis, including the net proceeds received from the equity financing and exercise of warrants received in July, our cash balance at the end of Q2 was approximately $37.8 million which puts us at the higher end of the range for cash compared with most publicly traded companies in the cell therapy space and enables us to continue to drive our clinical translation agenda forward. Let me now turn the call back to Martin for some final closing comments.

Thanks Greg. Well as previously stated, this is a transformational year for StemCells. We are making great strides towards achieving our goal of bringing breakthrough therapies to market based on our proprietary HuCNS-SC human neural stem cell technology. Just to remind you again this quarter we strengthened our balance sheet, strengthened our management team and our Board, made progress in our ongoing litigation and most importantly released a lot of exciting new clinical data which for investors on this call translates into better insight into the capabilities of the technology. Over the next couple of years we will have final results from our controlled Phase II proof-of-concept efficacy studies and on top of this we are working towards the goal of filing an IND for Alzheimer's in 2016. This agenda and a relatively short time horizon, underpins our excitement and our enthusiasm. So with that, I would now like to open up the call for questions. Thank you.

Thank you, sir. (Operator Instructions). And our first question comes from Christopher James from Brinson Patrick Securities. Your line is open. Please go ahead.

Hi, good afternoon and thanks for taking my questions and congratulations on our recent progress this quarter. My first question is regarding the AMD Phase II design and path to approval. In the next study, the control study, do you expect to use contralateral eye data with each patient serving as their own control or do you think you are going to have a designated control group in this study?

So, hi this is Dr. Huhn, great question. There are a number of different ways to think about the control element of a proof-of-concept study in AMD. At this point in time, we are learning a lot from our Phase I/II study, and I think that's going to inform the design and ultimately the control elements for the Phase II study that we are qualifying as a proof-of-concept. So, I think there will be more to come in terms of the structure and the design of that trial later this year.

Great, got it, and I guess as you sort of look at the data, what can you tell us about the correlation between the three different measurements you used; visual acuity, contrast sensitivity, GA rate, and are you really noticing the correlation effect on a biological level with the more functional measures?

So, if you think about the anatomic measures and the functional measures, the rate of the atrophy is an anatomic and objective measure. The contrast sensitivity is a functional measure. Best corrected visual acuity is also a functional measure. We know going into this trial that the first cohort of patients have such poor vision, those are the patients, the first A patients in Cohort 1 that there are so many confounding variables that impact our ability to look at their visual acuity, their best corrective visual acuity, and we saw the typical practice effects in other variables that makes that data difficult to interpret because they have such poor vision to begin with. What's important though is that when you look at other visual elements of functions, such as contrast sensitivity and as Martin said contrast sensitivity, you need that to drive at night, to look downstairs, to step off a curb safely. We did see changes in seven of the patients in whom we have six-month data and there were gains in contrast sensitivity. If you add to that, the fact that we now see also changes in the rate of geographic atrophy in those subjects in whom we had 12 months data on, that our sizeable reductions and meaningful we think from a clinical perspective it does start to add up. So, (technical difficulty) and the change of a gain in functional measure as the contrast sensitivity. The question about correlation in terms of additional data and more patients, I think we will gain a lot more information as we continue to assess the accruing follow-up data and the remaining subjects on the trail.

Great that's helpful. And then moving on to the cervical study, I noticed that and correct me if I am wrong, you plan to enroll patients with C5 through C7 injury levels, why those levels specifically, and what degree of motor function do you expect these patients to have at base line?

So depending upon the nature of the level of whether injury has manifested in the cord, they will have a spectrum of upper extremity motor function depending upon the individual patient. It's a long answer but in short, patients who have injuries above C5 involved sensitive areas of the cervical cord that control respiration, and we feel from a safety perspective that we don't need to transplant that region now until we gain additional safety data with patients with lower cervical injury. The reason that you don't go into patients with lower cervical injury is because from a motor standpoint they have already fairly intact upper extremity motor function and you would have a ceiling effect, in terms of your ability to detect additional gains in those patients who already are fairly intact in terms of their upper extremity functions. So, in another words they might just have weak hands or weak fingers. So we are really looking at the patients who have the mid range of injury in the cervical cord and in fact statistically that's where most of the patients with cervical injury are mostly injuries that occur between C5 and C7.

Got it, that is helpful. Thanks again and I look forward to your R&D Day.

Thanks.

Thank you. Our next question comes from Jason Kolbert from Maxim. Your line is open, please go ahead.

Congratulations on all the progress. It is exciting to approach an inflection point, can you take a little bit of time with me and just walk me through where you are at in terms of planning and really beginning the Phase II clinical trial, are you going to be contracting with CROs, how many sites, can you walk us through a little bit of the statistics of the patient enrollment plan and give us some idea of when that trial -- how long that trial might take to enroll and what the last -- after the last patient is enrolled when we could expect top line data? Thanks.

So, Jason, all great questions and we plan to address those in considerable detail in Q4. This is a very competitive space now, so please understand that as I walk my way through the various questions that you have asked. So let me start with enrolment, we expect that we will be -- the trial will be conducted in about a dozen or so clinical centers focused in North America. Secondly, we anticipate that we will probably complete enrollment in about a year from the time that we dose the first patient. In terms of planning and putting all of the moving pieces in place, we are pretty far advanced and we would anticipate that we would initiate the trial in Q3 of this year.

Well that's great news and I am excited to hear Q3. So, I mean Q3 is pretty much on top of us so you are talking about initiating sites in September your -- I guess you are very far advanced in terms of CRO selection, IRBs, how many of the existing sites will be part of the Phase II trial.

I am not -- quite honestly I don't have that data but it's something that we can get to you offline Jason.

Okay, well can you talk with me just a little bit about something that I always struggled with on the existing dataset. I understand the importance of geographic atrophy and I also understand the importance of lie detection, but visual -- how do you deal with visual acuity in the control group and the fact that these patients kind of train themselves and so it ends up with a higher placebo response than you might otherwise gathered. There are ways you can plan and adjust for that in the next trial that you can enrich the statistics on your side of getting a better result between active and control.

So, I will have Steven address that Jason, but you know you touched on a very, very important point there because others who have been engaged in studies in this field have walked right into that trap, the learning effect and perhaps have gone out prematurely with the data but I will let Steven answer your question directly.

Yeah, so you touched on a subject as Martin indicated that is very central to how you develop a clinical translation program that's trying to target dry AMD and we are not the only researchers, the only company to have this challenge and when we looked at this through a number of different lenses, if you will excuse the metaphor, the most incremental step that gives us the most objective proof-of-concept data that we have an impact on the underlying pathology of the disease is to first establish a change in geographic atrophy. And to try to marry that to a functional change that reflects quality of life for a patient and this is very much an area that the FDA and other regulatory bodies are understanding as complex, that BCVA is really not perhaps best metric in which to measure a therapeutic for something like dry AMD. So, it is very much evolving field but our strategy is one that we have based on first establishing that we can impact a feature of the underlying disease and then to move on to the complex question of how you associate that with a meaningful visual metric. And again this -- I think this is very much a work in progress not only for us but for everyone else pursuing the same goal. And I look to see progress from a regulatory standpoint and a clinical perspective about which visual metric and which objective metric, the combination of which will allow therapeutic to be approved. It is a complex question but we think we see a pathway.

Alright guys, thank you so much for the update. Congratulations on all the progress.

Thank you, our next question comes from Keay Nakae from Asciendiant. Your line is open, please go ahead.

Yeah, thank you. Marty, just wanted to have a point of clarification in your answer to Jason's first question about the timing of when you are going to start the clinical trial. When you said Q3, are you referring to the cervical spine or the AMD study?

I was referring to cervical spinal cord injury. Our plan is to initiate that study in Q3. On AMD it will be a quarter later.

Okay, and then just specifically with AMD, you know, given all the comments today, it seems like the more data you have, the better informed your trial design can be. So, do we need to wait until you get the data from the next cohort to proceed there in the most conservative way or how are you guys thinking about that?

Well, essentially its yes and no and that sounds an odd answer but as we evaluate the data and we dig deeper into the data that we already have in our possession, some of which we have reported on publicly and some of which we haven’t. We are getting a much better sense of what is viable and what is doable. What the target patient population might be, what the visual acuity targets might be, and as you know there was very, very extreme range of visual acuity in the first Phase I, II study. So -- but at the end of the day we are satisfied based on the data that we have seen to be public about our plans to initiate the Phase II study. We will announce in greater detail what the protocol design will be, what the patient enrolment criteria will be, etc. as we get closer to the fourth quarter of this year.

And I can just add to that. When you think about the design for something like dry AMD and you consider the spectrum of end points that we might incorporate, you try to balance those end points with well-known established metrics of the disease with ones that are now evolving and being viewed as a more innovative way to look at the progress or response in dry AMD so that we capture all if you will, T0he potential outcomes in the trial which ultimately will inform the final design of the pivotal study. So, we tried it very much to take account the various endpoints and options that we can consider incorporating in the Phase II.

Okay, thanks for that and then for Greg I guess, if we think about the litigation starting to increase in activity, what should we be thinking about in terms of your expense to support your systems in the study there or they quit the litigation there?

I would say for this year we provided a cash guidance that we think covers all of the expenses and from that standpoint, as this thing moves forward, give a better idea what if any impact it may have next year. But I think for this year the guidance we have provided up $30 million to $34 million net cash usage should cover any expenses including our charges associated with litigation.

Okay, that's all I have. Thanks.

Thank you and I am showing no further questions at this time gentlemen.

Well thank you and again I would just like to thank those of you who have joined us today, for taking the time to dial-in and enter the quarterly call and I look forward to updating you on our clinical progress as the year progresses. Again thank you all and thank you very much and we will see you in another quarter. Thank you.