Martin McGlynn – President and CEO Rodney Young – CFO and VP, Finance & Administration

Good day ladies and gentleman and welcome to the Third Quarter StemCells, Incorporated Earnings Conference Call. My name is Brittany, and I will be the operator for today. At this time, all participants are in listen-only mode. Later we will conduct the question-and-answer session. (Operator Instructions) At this time, I would now like to turn the presentation over to key host for today, Mr. Martin McGlynn. Please proceed sir.

Thank you Brittany. Welcome everybody, thank you for joining us today. Apologies, we had technical glitch, but I am glad that we were able to resolve it. So, with me today on our call is Rodney Young, our chief financial officer as Rodney is feeling little bit under the weather struggling with the heavy cold today, I will deliver the prepared remarks before opening up the call for Q&A. Before proceeding, I would like to remind everyone that during today’s call, we will be making some forward looking statements which reflect or current views and are based up certain assumptions that may or may not ultimately prove value. 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 risk and uncertainties to which we are subject. These risks and uncertainties are described in our public bindings with the Securities & Exchange Commission and at the end of our earning release, which were encouraged to consult. Okay, so for the financial results which were just released a little while ago. We will start with the top line total revenue in Q3 2103 was $325,000, compared to $264,000 in Q3 of last year. SC proven sales total $272,000, which is a 34% increase compared to 203,000 last year. Q3 was the strong quarter and 2013 is looking like another strong year for SC proven business. If you extract the eight to nine month sales as to of full year 2013 is tracking to grow around 25% over last year, which would be the third straight year of 20% plus growth. Turning to the expense side, third quarter operating expenses increased by $1.6 million or 31% to $6.9 million compared to $5.3 million in 2012. The increase was predominantly due to increased foreign D expanses, which were $1.7 million higher in the third quarter of 2013 compared to Q3 of last year. We saw higher direct and manufacturing expenses related to our clinical trial activities and we added personnel to focus on clinical development. In addition, we increased spending on preclinical research some of which was for specific projects that won’t re-occur. SG&A expanses were essentially flatting Q3 of 2013 compare to Q3 of last year and in Q3 we no longer had any lying down expenses related to our former facility in Rhode Island. So, lost from operations total $6.7 million in Q3 of 2013, and this compares to $5.1 million in Q3 of last year. Turning now to items below the operating line. We reported other expense of $536 in the quarter compared to other expanses of $11.3 million in Q3 of 2012. The lower expense was to mainly lower expense from the change in the fair value of our warrant liability. Just as reminder, under warrant liability accounting, changes in the value of the warrant liability or pass through the income statement as income or expanses with increases in the liability recorded as expense and decreases in the liability recorded as income. So, the lower warrant liability expense in Q3 2013 reflects a smaller increase in the liability compared to the increase in Q3 of 2012. Regardless of whether we show income or expense from the change in warrant liability, it is a non-cash item. Other items to know below the operating line include interest expense of $382,000 in Q3 compared to 11,000 in the same quarter last year. This increased history to our higher death level in 2013, mainly due to alone from Silicon Valley Bank. Bottom line in Q3 2013, we reported the net loss of $7.2 million equates to 17 cents per share and this compares to a net loss of 16.3 million in Q3 of last year of 54 cents per share. Cash used in operating activities for the 9 months ended September 30, 2013 total $16.4 million, which was about 10% higher than the 14.9 million cash used in operating activities in the first 9 months of 2012. Also, as we noted in the press release issued earlier today, we have made a significant investment in a new GMP manufacturing facility to house or sale processing clean rooms related QC/QA and documentation systems as well as process development laboratories. All in preparation for the larger multicenter phase II proof of concept trials that are planned for next year. Having evaluated the number of different strategies designed to secure our self-supply lines, we concluded that the best choice for both financial and strategic reasons was to invest in our own facility. As a result, we list a suitable building in Sunnyvale, California completed to design and construction and recently received our drug manufacturing license from the state California. While this facility involved enough run CapEx investment, which totals about 4 million through September 30th. This outlay is financially justified, as we will have significantly more production capacity with lower operating cost going forward and strategically this facility gives us greater control over our self-supply lines. Turning out to our cash balances. So as of September 30, 2013, our reported cash total $21 million. However, on October 7th, we closed on $18.6 million underwritten public offering, which included the exercise of the full over-allotment option. So, on a pro-forma basis including the net proceeds from the offering we would have 38.3 million in cash as of September 30, 2013. So moving away from the financials, I would now like to make few comments and observations with regards to the business. As we said in the past, our strategy is to build shareholder value by generating meaningful clinical data in a cash efficient manner. We have an exciting clinical development plan and experienced team in place. Our focus now is on execution. Our immediate priority is to complete enrolment in the ongoing spinal cord injury and dry age-related macular degeneration trials. We have now dosed 8 of the 12 patients planned in our spinal cord injury trial and are on track to complete enrolment in Q1 of 2014. You will recall that our dry AMD trial is a 16-patient trial with two cohorts of eight patients each. To date, we have dosed six patients and targeting to complete enrolment of the first cohort by the end of this year and enrolment of the second cohort by middle 2014. As has been our practice in the past, we are continuing to provide updates on the progress of the trials and we will make interim date available at meaningful time points. Having said that, I just wish to remind everyone that these are first and foremost safety trials and that any evidence or signals of efficacy need to be treated cautiously. The real exciting test comes with the start of the phase II trials. We planned to initiate phase II studies for spinal cord injury and dry age-related macular degeneration shortly after we have completed enrolment in the phase I, II trials. These phase II trials will be designed to demonstrate clinical proof of concept. They will have control arms and will be multicenter trials involving larger numbers of patients in the earlier trials. We anticipate in initiating the phase II trial for spinal cord injury in middle of 2014 and we anticipate initiating the phase II trial for dry AMD later in the year. Lastly, regarding PMD, Pelizaeus–Merzbacher disease, we have a meeting scheduled with the FDA for next month to discuss the design of a potential phase II trial and the potential regulatory pathways to approval. So while we still have a lot of work to do, the early clinical data is very encouraging. I am really excited by the prospect that we could be looking at interim data from phase II trials in spinal cord injury and AMD as early as the middle of 2015, the final data approximately one year later. Moreover, depending on the outcome of our meeting with the FDA next month regarding PMD, we could well add a third phase II trial to our list. So with that, I will thank you for your attention and I would now open the call up for questions.

(Operator Instructions) First question comes from the line of [indiscernible]. Please proceed.

Yes, thank you. For Martin or Rodney, how should we think about quarterly operating expense going forward for next couple of quarters?

Thanks for the question. I will have Rodney to address that.

I think it is little early for us to talk about that for next year. As Martin described we already have plans for multiple larger phase II trials to be initiated next year. So from a planning perspective, we actually have a lot of moving pieces. So, at this point it is too early for us to really give you any good guidance for next year.

At least for maybe Q4, Q1 something similar to what to you just posted in Q3 as reasonable?

Yes, I think we are looking for 2013 as a whole, we will probably come in at about 24 million, also on average about 2 million, 2.1 million, 2.2 million per month. That is a good estimate for Q4 and probably you know, as you correctly point out thing will pick up until you know the latter part of 2014, so that early part of 2014 is probably is similar to Q4.

Thanks for that. And then Martin, I just start to think about what a phase II spinal cord study could look like, if you had a control arm, give us a sense of what that trial design might look like. I know you are just finalizing that, but just conceptually.

Well, are we talking about the spinal cord injury study?

Yeah, phase II spinal cord proof of concept today.

Right, right, so, obviously the numbers will be greater. We are still working out the details. The control arm, you know there are reference points that we can go to in other trials involving spinal cord injury. Now Sham surgery is out of the question, but we are in the process of putting the finishing touches to the control arm in the course. All of these, in term, will have to be reviewed and agreed through by the agencies.

Right, I guess that’s really what I am looking for you know, some more clarity or creativity absolutely a better word in terms of you know what you think would be inappropriate control arm for study that you would not have a lot of difficulty involving and then in terms of the efficacy you know, what kind of thing do you think you might need to show especially in terms of motor improvement?

All in the planning stages, great questions, you can appreciate at this stage you know I will be very reluctant to slow and you could details. This is a rapidly moving project. It is also a competitive field and we first and foremost want to make sure that we have the study design that accomplishes what we need to do and one that the FDA agrees with.

Okay, we will defer on that that until we will go further down the road then, thanks.

I appreciate your call thank you Kay.

There are no further questions in the queue at this time sir.

Okay, if there are no further questions, thank you everybody for joining us today and we will look forward to stay with you early next year when we will review the results for the year and for the fourth quarter. Thank you all.

Ladies and gentlemen that includes the presentation for today’s conference you may now all disconnect and have a wonderful day.