Martin M. McGlynn - Chief Executive Officer, President, Director, Member of Strategic Transactions Committee, Chief Executive Officer of StemCells California Inc and President of StemCells California Inc Rodney K. B. Young - Chief Financial Officer and Vice President of Finance & Administration

Stephen M. Dunn - LifeTech Capital, Research Division Kaey T. Nakae - Ascendiant Capital Markets LLC, Research Division

Good day, ladies and gentlemen, and welcome to the Q1 2013 StemCells Inc. Conference Call. My name is Sue and I will be your operator for today. [Operator Instructions] As a reminder, this call is being recorded for replay purposes. I would like to turn the call over to Mr. Martin McGlynn, President and CEO. Please go ahead, sir. Martin M. McGlynn: Thanks, Sue. Welcome, everybody, and thank you for joining us today. On our call today, Rodney Young, our Chief Financial Officer, and I will deliver some prepared remarks. Rodney's remarks will include a discussion on the financial results for the first quarter of this year and then I will follow with a discussion of the very exciting activities that are going on at the company. And then of course, we will open the lines for a question-and-answer period. Rodney K. B. Young: Okay, thank you, Martin. And as usual, before we proceed, I would like to remind everyone 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 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 also at the end of today's earnings release. And we encourage you to consult those. So we just issued our Q1 2013 press release, about a half an hour ago. And I'd like to just give you the highlights for the quarter. So we reported -- this quarter we continue to report data and continue to make progress in our trials, clinical trials, and financially, we remained focused on prioritizing and controlling our expenses and we strengthened our balance sheet. So to the numbers, starting with the top line. Total revenue in the quarter was $284,000 compared to $644,000 in Q1 of 2012. This roughly $360,000 decline was primarily the result of a licensing fee that we received in Q1 2012. Product sales, SC Proven, sales totaled $208,000 which was down 23% compared to the $271,000 we reported in Q1 of 2012. Unit volumes were down in Q1 of '13 but as you know, SC Proven sales can be a bit lumpy. And for example, there were some large orders last year in Q1 2012 that were not repeated. Our order backlog, however, was strong in April. So the second quarter looks to be off to a positive start. So on the expense side, operating expenses increased by about $600,000 or 10% in Q1 of '13. Totaling $6.5 million compared to $5.9 million in Q1 of 2012. All of this increase was in R&D expenses, as we focused our activities to accelerate and execute our clinical development agenda. And SG&A expenses were flat at $1.9 million, which was essentially what we had in Q1 of 2012. So the loss from operations increased in Q1 2013 to $6.3 million compared to $5.3 million in 2012. So looking below the operating line, net other expenses totaled an expense of $159,000 in Q1 2013. This was substantially lower than the $4.9 million in net expense we saw in Q1 of 2012. The difference was due primarily to how we account for the fair value of our warrant liability. In Q1 of 2012, we had $4.9 million in other expense due to the increase in the warrant liability. While in Q1 of this year, the change in the liability was very small and, hence, resulted in very small expense. Again, as a reminder, under warrant liability accounting changes in the fair value of the liability do pass through the income statement as an income or expense, but these are non-cash items. So the bottom line in Q1 of 2013, we reported a net loss per share of $0.17 or an aggregate net loss of $6.4 million. And this compares to a net loss of $0.45 per share or $10.2 million in Q1 of 2012. On a cash flow basis, our cash used in operating activities was $6.6 million in Q1 of 2013. So with respect to cash balance, as of March 31, 2013, we reported just over $17 million. However, we announced last month that we received $9.9 million in net proceeds from a loan we entered into with Silicon Valley Bank. So on a pro forma basis, we had about $27 million at the end of the quarter. We also announced last month that we had entered into an agreement with the California Institute for Regenerative Medicine, or CIRM, for $19.3 million to help fund our IND-enabling activities for Alzheimer's disease. With the goal here being to file an IND within 4 years. This funding is in the form of a forgivable loan, meaning that the loan will not have to be repaid if our HuCNS-SC cells are not successful as a treatment for Alzheimer's disease. So we expect to draw the funds from CIRM, periodically over the project period, subject to meeting various financial and scientific milestones. So those were the numbers and I'll turn the call back over to Martin. Martin M. McGlynn: Thanks, Rodney. So I guess I would characterize the first quarter as a continuation of a very eventful 2012 in which we reported encouraging results of our Phase I PMD trial, clinical data from our Phase I/II spinal cord injury trial and preclinical data for AMD and Alzheimer's disease. So first, let me summarize the results of our clinical trial for PMD. This is a rare leukodystrophy that's characterized by imperfect growth of the myelin sheath surrounding nerve fibers in the brain. Firstly, evidence of progressive and durable donor-derived myelin in all 4 patients transplanted with the cells. Gains in motor and/or cognitive function in 3 of the 4 patients, while the fourth patient remained clinically stable. Now given the natural history of the disease, the gains observed in neurological function were unexpected and they provide the first demonstration of a biological effect of our cells in humans. As I've previously stated, each patient has been enrolled in a separate 4-year observation study. So we will be in a position to provide additional information on their progress. And we plan to provide an update later this quarter on their status at the 2 year time point. We also plan to meet with the FDA to discuss possible pathways to registration and to obtain their feedback on our proposed design for a multi-center Phase II study. Second, with respect to spinal cord injury. We announced in September, interim 6 months data from the first patient cohort which showed multi-segment gains in sensory function in 2 of the 3 patients. Now given that these were patients who's injuries were classified as complete injuries, the gains observed were unexpected. In February of this year, at the BIO CEO & Investor Conference in New York, we announced that the first patient cohort had completed the trial and that the multi-segmental gains in sensory function, first observed at the 6 month time point, had persisted to the 12-month time point. In addition to that, we also announced that one of the 2 patients have converted from a complete injury to an incomplete injury, i.e., from an ASIA A to an ASIA B classification. Third, in January of last year, we published the preclinical data that underlaid the IND for our ongoing Phase I/II trial in dry AMD, which showed that the HuCNS-SC cells preserve vision in animals that would otherwise go blind. To date, we have dosed 3 patients at the Retina Foundation of the Southwest in Dallas in Texas. And we expect enrollment to accelerate now that we have added a second study site at the Byers Eye Institute at Stanford. And we're also continuing to work at adding more sites for this trial. Fourth, in July of last year, we presented preclinical data demonstrating that our cells restored memory in 2 animal models with relevance to Alzheimer's disease, would suggest our neural stem cells may represent a novel therapeutic approach for memory enhancement. As Rodney has already mentioned, in April of this year, we entered into an agreement with CIRM for a $19.3 million forgivable loan to help fund our preclinical and IND-enabling activities for Alzheimer's. So in summary, with regards to the clinical data and progress to date, while still too early to be definitive, the clinical data that's emerging from Batten's trial, the PMD study and the spinal cord injury trials, are starting to confirm the exciting results that we have previously reported in the various animal models. So this gives us confidence that we're on the right track. So our focus now is on accelerating patient enrollment in our ongoing trials and then to report out the data. So before finishing up, I just want to mention that on the last call, I indicated that we will be able to provide some color behind our decision-making process regarding the CIRM awards. So specifically, you will recall that we declined CIRM funding for our cervical spinal cord injury program, but accepted it for Alzheimer's disease. As you probably know, when CIRM offers to fund a program, they essentially share some of the risks and rewards with the company. So if a CIRM funded program turns out to be commercially successful, the awardee is obligated to pay CIRM what they call risk premium payments, which are essentially success milestones. So in the case of StemCells Inc. these payments will be payable only if HuCNS-SC cells were successful for the relevant indication, example, in Alzheimer's disease or spinal cord injury. But in any case, would be capped at 5x the loan principal or $200 million, if we borrowed the $40 million for both programs. So given the huge market potential for an effective therapeutic for memory enhancement on Alzheimer's, we were happy with the prospect of paying the risk premium payments if we were successful. Conversely, if we were not successful, we would not have to repay the loan. CIRM funding, therefore, for Alzheimer's disease is a free option and given the high-risk, high-reward nature of pursuing therapeutics for Alzheimer's disease, on balance, accepting the CIRM loan is a good deal for our shareholders. We arrived at a different conclusion, however, for cervical spinal cord injury due to the very different risk reward profile associated with that program. So for starters, the potential market for spinal cord injury is considerably smaller than for Alzheimer's disease, but the risk premium payments required by CIRM were the same multiples. Moreover, we were already well underway with our spinal cord injury program and had an actively enrolling Phase I study in Switzerland generating encouraging clinical data, albeit, in thoracic spinal cord injury. CIRM, however, indicated to us that it expected to expand obligations under the loan to our entire spinal cord injury program, not just for cervical injuries. So in our view, it was not on our stockholders' best interest to become obligated for potential risk premium payments based on the success of our entire spinal cord injury program in order to borrow money from CIRM to help fund preclinical studies in cervical spinal cord injury, particularly, since to date, we have self-funded and bourne all the risk of our spinal cord injury program. So for these financial and programmatic reasons, we decided the Alzheimer's loan was in our stockholders' best interest, but that the cervical spinal cord injury loan was not. So I thank you for your attention, and we'll now open the call up for questions.

[Operator Instructions] And your first question comes from the line of Stephen Dunn, LifeTech Capital. Stephen M. Dunn - LifeTech Capital, Research Division: First item, we've taken a $10 million loan and then you have a, it's roughly $20 million forgivable loan from CIRM, and if I recall that's a matching loan, correct? Martin M. McGlynn: Well, what do you mean by a matching loan, Steve? Stephen M. Dunn - LifeTech Capital, Research Division: Well, I'm not sure. I thought if they gave you $10 million, you would have $10 million put to the program as well, is that wrong? Martin M. McGlynn: Well, the way I would describe is that, that the funding that we will borrow from CIRM under the Alzheimer's project will fund some of the cost of the program, program will cost an awful lot more than the $19.3 million that we're going to borrow from CIRM. But recognizing that we have cost within the company that are leverageable on any of the programs that we undertake. Stephen M. Dunn - LifeTech Capital, Research Division: Okay, so I guess what's -- to look back into is, of the $10 million loan you just took, how much of that do you figure would be going to the Alzheimer's program? Rodney K. B. Young: Well, quite frankly, the monies that we've received from Silicon Valley Bank are co-mingled with the rest of the cash in the company and will be used for general corporate purposes. We haven't earmarked any of the monies that we're receiving from SVB for any particular program. Stephen M. Dunn - LifeTech Capital, Research Division: Okay. And the program is going to continue on with Dr. LaFerla? Martin M. McGlynn: Yes. Stephen M. Dunn - LifeTech Capital, Research Division: Okay. And then one final housekeeping question, more for the benefit of the listening audience. If you're successful in the Alzheimer's, the $200 million figure 5x maximum loan, that's not a lump sum milestone payment, that's the payment over the course of the royalty terms, is that correct? Martin M. McGlynn: Okay, Steve. So I'll have Rodney address most of the answers to your question, but I just want to clarify something. It's 5x the loan amount if, for example, you borrow $20 million then you're obligated to pay $200 million in the success milestones. So it's $200 million per program. Rodney K. B. Young: Sorry, it's $100 million per program. $200 million if we took both loans, Steve. Martin M. McGlynn: Right, right. Rodney K. B. Young: So if we borrowed $20 million for Alzheimer and $20 million for cervical, potentially, it would've been 5 times $20 million plus 5 times $20 million. Martin M. McGlynn: Yes, I apologize, Steve, for the adding some confusion. Thanks for clarifying that, Rodney. Rodney K. B. Young: So it's -- let's use the real numbers, right, $19.3 million times 5 is theoretically the maximum risk premium payments, assuming we borrowed all $19.3 million. And you are correct, Steve, that the risk premium payments are essentially tied to the degree of future success. Meaning, they are tied to future commercial sales. So at a certain level of sales, you pay a certain amount of that premium and as your sales continue to grow and you continue to have sales, you would pay more of that premium. But it is capped, it will be capped at 5x the principal amount that you borrowed. Stephen M. Dunn - LifeTech Capital, Research Division: Right. But the important point is once you get, let's say, theoretically, FDA approval, you do not have to write $100 million check of lump sum, right? Rodney K. B. Young: That is correct.

Your next question is from the line of Kaey Nakae, Ascendiant. Kaey T. Nakae - Ascendiant Capital Markets LLC, Research Division: First up, Marty, what is the first initiative that you'll be working on in Alzheimer's now that you've got this additional funding? Martin M. McGlynn: Well, essentially, we will be doing additional preclinical work in the Alzheimer's models with the sales that we would plan to bring into a clinical trial. That's essentially the major aspect of the IND-enabling work. Kaey T. Nakae - Ascendiant Capital Markets LLC, Research Division: Right. And maybe more specifically, given the work that's already been -- preclinical work that's already been done, how will the next bit of experimentation differ in terms of what it's trying to prove out? Martin M. McGlynn: Well, the major difference is that the preclinical work that was done in collaboration with Dr. LaFerla, was not conducted under what you will call GLP. And so there is a whole different set of rules that -- and restrictions that apply to doing studies in the animals and under GLP conditions. And also secondly, the cells that you use in these studies are cells that can be taken into the clinical trials. Unlike the original work that was done in Dr. LaFerla's, which were research-grade cells and we're not produced under GLP -- or GMP, sorry, GMP. Kaey T. Nakae - Ascendiant Capital Markets LLC, Research Division: Okay, that's helpful. And then for Rodney, how should we think about the CIRM funding being received by the company? What timeframe do you expect to see the first tranche of that and should we be thinking about either a quarter of that over -- each of 4 years and in that quarter and multiple payments be that twice a year or how should we think about that from a modeling perspective? Rodney K. B. Young: Yes. So Kaey, I think we'd like to get the program going this year. What we have been talking about with CIRM is we anticipate, both we and I, anticipate sort of twice a year draw, roughly every 2 quarters, and you do the first one, you work for the 2 quarters and you kind of review how things are going and assuming they're going well, you take the next draw. So that's essentially how we foresee this happening. So the draw should be over the project period. I wouldn't necessarily say if it's going to be straight lined, but that's probably a reasonable assumption to make. Kaey T. Nakae - Ascendiant Capital Markets LLC, Research Division: Okay. So the first bit of that maybe in Q3 is reasonable to expect? Rodney K. B. Young: Yes. Yes.

[Operator Instructions] And your next question comes from the line of Jason Kolbert, Maxim Group.

The this Dr. [indiscernible] calling for Jason Kolbert. So I actually have like 2 questions. I'm going to start off with dry AMD and then talk a little bit about the spinal cord and PMD as well. In dry AMD trial, how many patients have you actually treated in the first cohort? I know that you were planning on treating 8 patients. Have you already treated those 8 patients or not? Martin M. McGlynn: No. So we've dosed 3 patients at the -- in Texas at the Retina Foundation Center, we plan to -- we have actually added another site, the Byers Eye Institute, Stanford. And so we anticipate that we will be accelerating patient enrollment going forward. And as I mentioned in my prepared remarks, we're also working hard to add additional sites in addition to the 2 that I've mentioned. So we dosed 3 patients to date. Total enrollment goal is 12. And we -- I'm sorry, total enrollment to 16 and we dosed 3 to date.

And just a little bit of scientific question, I'm not sure whether one of you could be able to answer now, but let me just sort of try. So my understanding is that this is a onetime injection of the cells. But in your preclinical studies, you saw that the cells only gave protection up to 240 days in the RSC rats, so do you expect that you might have to do multiple dosages or that's something you would look at after you determined safety? Martin M. McGlynn: So the procedure, the dosing regimen in the preclinical work was a one-time intervention. The number of days really is a function of the lifespan of the animals, that's about as far you can go with those animals. In the clinical trial, it's also a one-time intervention. The cells are transplanted into the subretinal space in an outpatient setting. And the procedure takes approximately 60 minutes from incision to closure. So it's a pretty efficient process for transplanting the cells.

All right. Let me move on to the spinal cord. How are your progress -- how are you making progress with enrollment of ASIA B patients, the incomplete patients? I remember in your last, you guys were having slightly some trouble recruiting those patients? Martin M. McGlynn: Yes, so the first 3 patients were in the ASIA A cohort, which is the worst of the worst patients. The study design is a progressive study design where we move from ASIA As to Bs, to Cs going down the severity ladder, if you will. And we have taken steps to, again, to accelerate enrollment. This is now a very competitive space and so we're reluctant to be very specific in terms of what steps we have taken. But the results of those steps will become apparent over time.

Also for these patients, the 3 patients, have you seen true remyelination of the nerves in these patients, somehow, because I know in PMD, you were able to do MRI scans and you were able to see myelination. I was wondering if there's a way that you can do the same thing for -- to show that your cells are actually remyelinating the nerves? Martin M. McGlynn: Right. So, of course, in the animal studies that were done in collaboration with Dr. Aileen Anderson at UC Irvine, they were able to demonstrate remyelination. And that preclinical work has been published. For the spinal cord injury study, however, we're not imaging for myelin as we were in the PMD study, where we did show de novo myelin in all 4 patients that were dosed. We do, however, in the spinal cord injury trial, we use objective measurements such as electro [ph] To determine whether or not there is a complete transference of the electrical signal and conducted all the way down across the site of injury. And so when we talk about response to stimuli, we're not only just talking about responses to touch, but we're also talking about responses to electrical stimulation across the cord.

Right. And another thing is, since you acquired the patent from NsGene, so that you could actually purify now cells that could be differentiated into neurons, are you planning on actually moving and making HuCNS-SC that are [indiscernible] you can make all different type of cell types? Martin M. McGlynn: No. The neural StemCells platform that we have is the platform we're developing and taking forward into the clinic.

Thank you. And I would now like to turn the call over to Mr. Martin McGlynn for closing comments. Martin M. McGlynn: Thank you, Sue. We appreciate everybody's taking the time to join our call. I know this is earnings season, there's a lot going on. Appreciate the opportunity to continue to report excellent progress as a company. And I thank you for your time. Much appreciated. Thank you.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect. Good day.