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Executives

Martin McGlynn – President and CEO

Rodney Young – CFO and VP, Finance and Administration

Analysts

Stephen Dunn – LifeTech Capital

Joe Pantginis – ROTH Capital Partners

Jason Kolbert – Maxim Securities

Luca Pancratov – ROTH Capital Partners

StemCells, Inc. (STEM) Q2 2012 Earnings Call August 2, 2012 4:30 PM ET

Operator

Welcome to the Q2 2012 StemCells, Inc. Earnings Conference Call. My name is Monica and I will be your operator for today’s call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session. Please note that this conference is being recorded.

I will now turn the call over to Martin McGlynn, President and Chief Executive Officer. You may begin.

Martin McGlynn

Thank you, Monica. Welcome everybody and thank you for joining us today. On the call with me is Rodney Young, our Chief Financial Officer and he and I will deliver some prepared remarks. Rodney’s remarks will include a discussion on the financial results for the second quarter of this year, and then I will follow up with the discussion of some of the exciting activities going on at our company. And then as usual, we will open the lines for question-and-answer period.

So to begin, I’d like to hand over to Rodney Young, our Chief Financial Officer.

Rodney Young

Thank you, Martin. Before we proceed, I would like to remind everyone again, that during the call today, 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 SEC and at the end of today’s press release and we encourage you to consult and review them.

So to the numbers, in the second quarter for 2012, we continue to make good progress in our clinical development efforts, while keeping tight control of our expenses and cash burn rate. Importantly, we have strengthened our balance sheet giving us additional capital resources to pursue our clinical development program. The highlights for the quarter include our operating expenses were down 24% year-over-year. Our revenue from our SC product, SC Proven line of business was up 14% year-over-year. Cash used in operations or our cash burn rate was $5.1 million in Q2 and $10.7 million for the first six months of the year.

We continue to anticipate our 2012 cash burn rate will be in the range of $18 million to $20 million, so we remain on track for that. Our pro forma cash balance was $18.2 million and that includes $9.2 million from the exercise of warrants and the sale of shares subsequent to the end of the quarter.

And lastly, last week, the California Institute for Regenerative Medicine approved a $20 million award to the company and our collaborators. So a little bit more detail on our financials starting with the top line, revenue from product sales increased 14% to $211,000 in the quarter compared to the quarter, second quarter of 2011.

For the six months period of 2012 product revenues are up 44% compared to the same period last year. This solid growth in our SC Proven business is primarily driven by higher unit volumes and only modestly by price increases. We expect continued growth in the SC Proven business via the combination of increased unit sales of existing products and the launch of a number of new products, which is planned for the second half of this year.

Our operating expenses declined 24% to $5.5 million in the second quarter of 2012 compared to $7.3 million in second quarter of 2011.

R&D expenses were 26% lower and SG&A expenses were 16% lower, all compared against 2011. These numbers reflect the actions we undertook last year to reduce our cash burn rate including a reduction in force and the relocation of our corporate headquarters. Overall, then our loss from operations declined 25% to $5.3 million in the quarter compared to $7.1 million in Q2 of last year.

This quarter we reported $6.2 million in other income. This is almost entirely due to a decrease in the fair value of our warrant liability. And under warrant liability accounting, deceases in the liability are passed through the statement of operations as income. So, you’ll recall that $5.3 million Series B Warrants expired unexercised on May 2 and the elimination of the Series B Warrants accounted for about $4.7 million of the $6.2 million decrease in the warrant liability. So as a result, we reported net income of $0.03 per share for the quarter or $834,000. This compares with a net loss of $0.29 per share or $4 million in the second quarter of 2011.

On a cash flow basis, cash used in operating activities was $5.1 million in Q2 and for the first six months was $10.7 million. We continue to anticipate our cash burn, will be $18 million to $20 million this year, and we remain on target for that. With respect to our cash balance, we considerably strengthened our position. Our cash balance at June 30, 2012, was $18.2 million on a pro forma basis. As I said this includes $9.2 million in net proceeds received subsequent to the end of the quarter from the exercise of warrants and from the sale of shares.

And lastly, last week the California Institute for Regenerative Medicine or CIRM approved a $20 million award to help fund our efforts in developing our HuCNS-SC cell for cervical spinal cord injury. Specifically the goal is to fund preclinical development and IND enabling activities needed to file an IND for cervical spinal cord injury within four years.

We and CIRM have begun the due diligence and documentation processes required before actual funding can occur, but we anticipate accessing these funds sometime next quarter. So very exciting quarter financially and I’ll turn the call back to Martin.

Martin McGlynn

Thanks Rodney. Well, this has been good quarter for StemCells, Inc.. We’ve continued to make progress in our HuCNS-SC clinical development program. Let me walk you through some of the significant achievements we’ve recently announced.

On March 31, we announced top line results from our Phase I PMD trial and let me remind you of what we saw. So, PMD patients have a genetic effect, which makes them incapable of normal myelination. They have hypo-myelinated axons, which impairs their neurological function and ultimately they succumb to the disease usually in the first decade of life. Following transplantation of our HuCNS-SC cells, there was evidence of progressive and durable de novo myelination in all four patients that were transplanted with our cells. There was measurable gains in motor and their cognitive functions in three of the four patients and the fourth patient remained clinically stable.

In the context of the natural history of the disease, these are very encouraging results and they provided the first demonstration of a biological effect of our cells in the human patient population.

I’m pleased to report today that we have submitted a manuscript containing the complete trial data and that the manuscript is currently under active review at a top tier scientific journal. And we anticipate the manuscript to be accepted for publications shortly.

We continue to pursue plans for a controlled Phase II study in PMD including preliminary conversations with the FDA and we have ongoing discussions with outside clinical experts. In May, we reported interim safety data from our Phase I/II chronic spinal cord injury trial, which is underway in Zurich, Switzerland. Dr. Armin Curt, the principal investigator presented data from the first patient cohort, which showed that the cells, the procedure and the immunosuppression regimen have all been well tolerated.

Interestingly, he also noted that changes in sensitivity to touch were observed in two of the three patients in the cohort. Dr. Curt plans to present the six-month data for the first cohort at the upcoming 51st International Spinal Cord Society meeting otherwise known as ISCS, which will be held in London September 3 to the 5, approximately one month from today. We continue to evaluate patients for enrollment in the second cohort and are actively engaged in that endeavor.

In June, we initiated our Phase I/II trial in dry age-related macular degeneration at the Anderson Vision Research Center of the Retina Foundation of the Southwest. This center, which is located in Dallas, Texas, is one of the leading independent vision research centers in the country and it sees a high numbers of AMD patients each year. Screening is underway and we look forward to dosing our first patients in this trial to the very near future. We’re also planning to add an additional clinical trial site to the study and we are in active discussions to do so.

In July, we presented preclinical data demonstrating that our human CNS-SC cells restored memory in two animal models relevant to Alzheimer’s disease. Now what is particularly striking about this data is that the results did not require a reduction in beta-amyloid or tau burden that are the hallmarks of Alzheimer’s disease pathology. This suggests that our neural stem cells may represent a novel therapeutic approach for this devastating disease.

And just to follow up on Rodney’s comments about CIRM. So last week’s decision by CIRM to improve our Disease Team Awards in cervical spinal cord injury is of course very welcome for the financial support that it brings. We were the only company to receive a Disease Team Award and we view this position by CIRM as a vote of confidence in our technology, in our program and very importantly in our people.

Moreover, I am pleased that the CIRM took the decision to take another look at our Disease Team Application for up to $20 million in funding for the IND enabling activities that are necessary for an IND approval and a precursor to initiation of the world’s first neural stem cell clinical trial in Alzheimer’s disease.

We have always been off to believe that the best strategy for creating shareholder value is to generate meaningful clinical evidence of safety and clinical benefit and to do so in a cash efficient manner. With CIRM funding, careful management of our burn, and the additional cash resources that Rodney spoke off, we are now much better positioned to execute this strategy.

So I thank you for your indulgence and I would like to throw the conference open to questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) Our first question comes from Stephen Dunn of LifeTech Capital. Please go ahead.

Stephen Dunn – LifeTech Capital

Good afternoon, everyone, and congratulations for another great quarter. Just a couple of questions here, some are timing, Martin you had mentioned you’re in discussions for the Phase II of the PMD trial, should we look through the design to be somewhat similar than the first one except obviously in the phase slightly healthier patient population?

Martin McGlynn

It’s difficult at this stage to be definitive about study design but I can say that the first study was focused on recruiting exclusively those patients with the connatal form of the disease and our discussion with the FDA with the excellent safety profile in these patients. We will of course be speaking with them about broadening the patient enrollment criteria to include patients who have only had the classic form but – who have the connatal form but also the classic form of PMD.

Stephen Dunn – LifeTech Capital

A question on the Phase I/II for Dry AMD – that’s – you’re looking to enroll your first patient relatively soon, because it’s an open label trial. Will we be seeing data from the cohorts over time and are we expecting I guess according to filing, final data is expected by the end of 2013. Are we going to see some interim data between now and then?

Martin McGlynn

Yeah, we’ll probably pursue the same approach that we have with our spinal cord injury study where we reported interim data on the first cohort, already.

Stephen Dunn – LifeTech Capital

All right, and I guess in the 2013, does that include the data conch or is that just the last follow-up data point of the patient?

Martin McGlynn

Well, there’s a 12-month follow-on period and so the study, the study can’t close, you can’t have a data lock up to 12 months after the last patient has been dosed. So, it’s all depending upon when the last patient is dosed when you have a 12-month follow-up period before you could do a data lock.

Stephen Dunn – LifeTech Capital

Good. The thinking on the cervical spinal cord indication, obviously that’s high up on the spine there. Are you looking to do more of that work in the U.S. or keep it all at Switzerland, like it is today?

Martin McGlynn

Well, the specific award from the CIRM is to fund IND enabling activities, and to file an IND within four years. So, the goal of that particular program on that funding award would be to fund the submission of an IND here in the U.S. with the FDA.

Stephen Dunn – LifeTech Capital

I guess the question was is most of the preclinical work going still be done in the United States or you’re going to have some preclinical down in Switzerland where the trials currently enrolling?

Martin McGlynn

The preclinical work will be done in collaboration with our partners at UC Irvine with whom we collaborated to do the preclinical work that led to the existing spinal cord injury trial and thoracic spinal cord injury.

Stephen Dunn – LifeTech Capital

Two, quickly, just on Alzheimer’s, do you have I guess an appeal to CIRM, where they’ll be hearing around September 6, I believe. If there is no CIRM funding, is there still a future for the Alzheimer’s program to continue or what do you foresee there?

Martin McGlynn

Well, quite honestly Steve, I don’t want to speculate on that right now.

Stephen Dunn – LifeTech Capital

Fair enough.

Martin McGlynn

We’ll wait till we see what the final outcome is with CIRM, and then we’ll address that specific question.

Stephen Dunn – LifeTech Capital

Okay, final one here. You had mentioned, you had issued a press release that you’re granted a keystone patent in Japan, and I was wondering do you have – what’s your strategy in Japan, are you looking to be in programs there as well?

Martin McGlynn

Well, at this stage, we don’t have any plans to conduct clinical trials in Japan. We have our hands full quite honestly at this stage with the trials that are underway here in the U.S. and in Europe, as well as those that are contemplated. The Japanese market has its own specific requirements including clinical trial data from Japan and or bridging studies that would involve data that could be used for submission and approval in Japan, but we have no immediate plans to initiate trials in Japan.

Stephen Dunn – LifeTech Capital

Okay, thanks so much. You got a lot of balls in the air and again congratulations on a great quarter.

Martin McGlynn

Thanks Steve.

Operator

Our next question comes from Joe Pantginis of ROTH Capital Partners. Please go ahead.

Joe Pantginis – ROTH Capital Partners

Hi, guys. Good afternoon, and congratulations on getting the CIRM grant. A couple of questions please. First, Rodney or Martin, could you be able to drill down with regard to the CIRM grant regarding funds flow, you have a certain say work plan, will you be like conducting the experiments and then billing CIRM, how should we view the repeat of funds?

Rodney Young

Joe, its Rodney. We don’t know for sure, because the CIRM has done things differently in the past. What – if you use the Geron example, what we think maybe a way it will work is, obviously there was a budget compiled that we and they will review and so you have an expected spend rate under the Geron example, it looks – it looked like, they were allowed to take an initial draw at some point either quarterly or six months apart versus what the budget says. And then again at regular intervals either quarterly or six months something like that, you kind of square up again and see what progress you’ve been making. So our anticipation is that it’s going to be something like that, but we don’t know for sure.

Joe Pantginis – ROTH Capital Partners

That’s fair and how would you look to recognize that revenue?

Rodney Young

From an accounting perspective, I’m not sure it will be a revenue. It’ll depend on how the award is structured.

Joe Pantginis – ROTH Capital Partners

R&D revenue or something along those lines?

Rodney Young

Yeah, I mean that – to be honest, it’s not something that we’ve looked at in detail yet.

Joe Pantginis – ROTH Capital Partners

Okay, that’s fair enough. And then, I guess since a lot of these studies are all preclinical and they are geared towards the IND in the U.S., I guess it’s too early to sort of project the timing of the potential IND since this is a four year plan here.

Rodney Young

Yeah, I mean the goal of the award is to file an IND within the four year time period. So, we will be working to that goal or better.

Joe Pantginis – ROTH Capital Partners

Okay. And then just on your current revenue with regard to SC Proven, obviously you’re still bringing in a – for these types of reagents a decent amount of revenue. Just wanted to see if there were any changes in efforts or initiatives on the program – on the overall program for SC Proven and any future plans because I know, you were looking at the potential options in the past about what to do with that platform.

Martin McGlynn

Well, we’re always looking at – we’re always keeping our options open, Joe. Quite frankly, the very strong growth that we’re experiencing is very welcome and we also have some plans in place to launch a series of new products. So we are very, very happy with the progress we are making in the business and the growth and we anticipate that there will be continued growth from the business as Rodney has earlier stated, but you never know, we always keep our options open.

Joe Pantginis – ROTH Capital Partners

Okay. That’s great. And then just lastly I know you do talk about the plans for the controlled PMD study, could you just reiterate. I’m not sure if you had mentioned potential timing for the initiation of that study?

Martin McGlynn

Well, it’s a stepwise process. We’ve already begun discussions with scientific experts as well as clinicians who are expert in the field. We’ve already begun that process. The next step will be to file the complete study report with the FDA and formally request a meeting to discuss the design of the Phase II study.

Joe Pantginis – ROTH Capital Partners

Okay.

Martin McGlynn

And, that’s on our agenda for this year.

Joe Pantginis – ROTH Capital Partners

Okay, great. Thanks a lot guys.

Martin McGlynn

Thanks, Jim.

Operator

Our next question comes from Jason Kolbert of Maxim Securities. Please go ahead.

Jason Kolbert – Maxim Securities

Hi Martin, and Rodney, yes, it’s me back on the sell side.

Martin McGlynn

Hey, Jason.

Jason Kolbert – Maxim Securities

Hi, how are you guys? You’ve – certainly have a lot going on and I’m a little bit confused. So, I just want a – want a backup a little bit, taking the CIRM grant out of it, at about a $5 million a quarter burn rate, $18 million in cash, and you’re going to take on a Phase II PMD trial, Phase I Dry AMD trial and remind me what is still going to be happening on the spinal trial going forward? How do those program, it seems like there’s an awful lot of programs to be running?

Martin McGlynn

So, the spinal cord injury trial is already up and running, and with no plans to change course of direction with that trial.

Jason Kolbert – Maxim Securities

What does it take for that trial to finish though, help me understand kind of how far in you are and what it means that there was a sensitivity assessment and what kind of data we might see in September and how that program will evolve?

Martin McGlynn

So, we are one-third away through in the sense that we dosed the first cohort. The some costs and the investment in getting the study up and running is already been taken to the P&L. So we’ve already occurred those expenses. The incremental marginal cost of dosing additional patients is not a material or significant item. What was the other question?

Jason Kolbert – Maxim Securities

And, help me understand as you move forward in terms of data. You mention that some of the clinicians have reported anecdotal data of sensitivity improvement. Help me understand how the first cohort that’s dosed and how many, remind me how many patients are in that versus what we should expect for the second cohort, and how many additional cohorts and what the enrollment rate of these cohorts, whether that might change.

Martin McGlynn

All right Jason, we will get you cut off.

Jason Kolbert – Maxim Securities

Sorry, I’m little behind. Thanks, guys.

Martin McGlynn

Okay, so it’s a the 12 patient study, three cohorts, ASIA, B, and C. ASIA A, three patient, ASIA B is 4, and ASIA C is 5.

Jason Kolbert – Maxim Securities

Got it.

Martin McGlynn

We reported in May in Vancouver the preliminary safety data, which was three month interim luck, and in September the PI, Dr. Armin Curt plans to present interim data on the study for the three ASIA A patients who were dosed in the first cohort, which will be at a six month timeframe.

Jason Kolbert – Maxim Securities

Got it. I mean that sounds really exciting, why not really focus on this trial and I’m a little bit confused as to how to read a $20 million four-year CIRM grant that gets you to a U.S. IND when you’re seeing much more advanced than that in this trial?

Martin McGlynn

Yes, well of course we are but this trial is focused on thoracic spinal cord injury and the majority of spinal cord injuries occur in the cervical region of the spine which is further up the spine and that’s where the highest incidents is in cervical spinal cord injury. The paradigm has always been for therapies that they will first have to demonstrate the safety profile in thoracic spinal cord injury before moving further up the spinal cord, which comes with additional potential risk from the safety point of view. So the paradigm..

Jason Kolbert – Maxim Securities

It seems like four years is a long gap for safety assessment to make a move from thoracic to cervical?

Martin McGlynn

Well, that is the regulatory paradigm here in the United States and in order to file an IND to initiate a trial in a particular targeted condition, you do need to have all of the preclinical work done and the GLP safety and tox package done in the area of the spinal cord that you intend to pursue. So the initial preclinical data that was generated in collaboration with UC Irvine that was into thoracic spinal cord region and that’s what led to the approval to open up the trial in thoracic spinal cord injury.

Jason Kolbert – Maxim Securities

Right. So why not – why not drive towards expanding that trial or maybe jumping that trial into the U.S.?

Martin McGlynn

We’re not precluding any of our options in terms of what we do in Europe. That is always an open proposition and data is transportable provided data meets the GCP requirements and the GLP requirements that are in the rack. So preclinical data that we might acquire here in United States in the cervical spinal cord models, could well be transportable into other jurisdictions and human clinical data that we generate in Switzerland similarly would be transportable into other jurisdictions including the U.S.

Jason Kolbert – Maxim Securities

Thanks Martin. And I realize I’m a little bit behind, I will reach out to you in the next couple of weeks and really catch up. It sounds exciting.

Martin McGlynn

You’re welcome Jason.

Operator

Our next question comes from Luca Pancratov of ROTH Capital Partners. Please go ahead.

Luca Pancratov – ROTH Capital Partners

Hi, guys. Thank you very much for taking the question and congratulations once again for the CIRM grant. I was wondering for the PMD patients that were treated in the Phase I study, can we expect to see a presentation of clinical data for the longer term safety follow-up?

Martin McGlynn

I’m sorry, Luca. I am not quite too sure I understand your question.

Luca Pancratov – ROTH Capital Partners

For the patients that were treated in the phase I PMD study, do we expect to see the presentation of the longer term safety follow-up?

Martin McGlynn

Yeah. So, we’re following these patients in a separate long-term follow-up study, which is a four-year observational study. And, we will continue to provide updates at various checkpoints along the way, yes.

Luca Pancratov – ROTH Capital Partners

Great. That’s very helpful. And then, just moving on to the other Disease Team Therapy Award for Alzheimer’s, so – one of the concerns that the reviewers had was the use of a localized injection to treat a diffuse disease, but I think some of the data that you gathered today actually speaks to the mechanism of actions of the transplanted neural cells. Maybe can you summarize for us some of the evidence that these cells have the ability to migrate?

Martin McGlynn

Yeah. So, I mean the kind of generic question that exist is, the strategy of addressing a diffuse disorder of the brain with localized injections into a specific region, and in this case, into the hippocampus. And so, that’s the generic question, okay. Now, StemCells Inc. has a considerable body of data in animals and as well as in humans that our neural stem cells not only transplant in graft, et cetera, but they also migrate throughout the brain.

Luca Pancratov – ROTH Capital Partners

Great.

Martin McGlynn

Now, so then the question comes back to migration from the hippocampus into other regions of the brain in an Alzheimer disease model. Okay?

Luca Pancratov – ROTH Capital Partners

That’s right..

Martin McGlynn

And, our collaborator has indicated that a paper has been submitted, which shows the migration of most neural cells or stem cells out of the hippocampus in an Alzheimer’s rather than model. So that is – that manuscript is under active review and he informs us that he expects to have a publication from that top tier journal in the not too distant future.

Luca Pancratov – ROTH Capital Partners

Great, I will be looking forward to seeing that. Thank you very much.

Martin McGlynn

You’re welcome.

Operator

(Operator Instructions). I’m showing no further questions in queue. I will now turn the call back over to Martin McGlynn for any closing remarks.

Martin McGlynn

So, thank you Monica and thank you everybody for taking the time to speak with us today. It’s a very exciting juncture for the company and we look forward to talking to you, discussing our progress for Q3 and we look forward to that. Thank you again.

Operator

Thank you for participating on the Q2 2012 StemCells, Incorporated Earnings Conference Call. This concludes today’s conference. You may now disconnect.

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