Earnings Transcript for MBOT - Q1 Fiscal Year 2015

Executives: Gregory T. Schiffman - Chief Financial Officer and Executive Vice President of Finance Martin M. McGlynn - Chief Executive Officer, Director, Member of Strategic Transactions Committee, Chief Executive Officer of Stemcells California Inc and President of Stemcells California Inc Stephen Huhn - Chief Medical Officer and Vice President of CNS Clinical Research

Analysts: Jason Kolbert - Maxim Group LLC, Research Division Keay Thomas Nakae - Chardan Capital Markets, LLC, Research Division

Operator: Good day, ladies and gentlemen, and welcome to the StemCells, Inc. First Quarter 2015 Earnings Conference Call. [Operator Instructions] I would now turn the call over to your host, Mr. Greg Schiffman, Chief Financial Officer. Mr. Schiffman, you may begin.

Gregory T. Schiffman: Thank you. Welcome, everybody, and thank you for joining us today. With me today are Martin McGlynn, our Chief Executive Officer, Dr. Ian Massey, our President and Chief Operating Officer, who joined the company on March 23rd of this year; 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 earnings release, which you are encouraged to consult. Now let me quickly review our financial results for Q1 2015, following which, I'll turn the call over to Martin. Operating expenses for Q1 2015 were up from Q1 2014 by approximately 31% or about $2.1 million. Approximately $800,000 or 40% of this increase is related to noncash stock compensation. Of the remaining approximately $1.3 million, approximately $600,000 are related to headcount growth to support our clinical programs. And increases in R&D costs grew by approximately $700,000. This is a combination of increases in costs associated with our Phase II clinical trial in spinal cord injury and dry age-related macular degeneration as well as process development activities offset by decreases in costs associated with our ongoing Phase I/II clinical trials for the same indications. Loss from continuing operations increased by approximately 24% or approximately $1.8 million. The delta between our growth in operating expenses of approximately $2.1 million and the loss from continuing operations of approximately $1.8 million was primarily due to lower noncash interest expense accruals associated with the CIRM loan. We will no longer be accruing expenses for this loan as it has been forgiven by CIRM in connection with the decision to cease work on the preclinical Alzheimer's program. Last quarter, we began reporting a non-GAAP loss adjusting for the major noncash charges including stock-based compensation, depreciation and amortization, impairment of intangible assets and changes in the fair value of our warrant liability because we believe that this metric provides useful information to investors. We have included a reconciliation table for these adjustments in our press release issued earlier today. For Q1 2015, the company had a non-GAAP net loss of approximately $7.4 million compared to a non-GAAP net loss for Q1 2014 of approximately $6.4 million. The increase of approximately 15% or approximately $1 million is driven by the increase in headcount costs, clinical trial costs and process development activities discussed earlier. Our cash usage for the first quarter 2015 was approximately $11 million. The cash usage includes an approximate $600,000 repayment of unused funds to the California Institute for Regenerative Medicine associated with the discontinuance of our preclinical Alzheimer's program. On a pro forma basis, including the receipt of approximately $23.4 million net from a cash fundraising completed last week, our cash balance at end of Q1 was approximately $37.4 million. We are still not in a position to provide specific cash guidance for 2015 as our net cash usage is very dependent on the number of patients transplanted in our controlled Phase II clinical studies. Given that we have just begun enrolling patients in our Pathway Study in cervical spinal cord injury and have not yet begun to enroll patients in our dry age-related macular degeneration study, it is difficult to predict how many patients will be transplanted at this point in time. Accordingly, until we get further into the year and have a better handle on recruitment rates, it is difficult to provide specific guidance in cash usage for 2015. Now with that, I will turn the call over to Martin.

Martin M. McGlynn: Thanks, Greg. So today, there are 2 topics that I want to discuss

Operator: [Operator Instructions] Our first question is from Jason Kolbert with Maxim.

Jason Kolbert - Maxim Group LLC, Research Division: I wonder if you could take a minute and help me understand how your approach is differentiated from those of others, particularly in the eye when we talk about dry macular degeneration. I know there's been recent news flow from 2 competitors also talking about their approaches. So if you could just help me a little bit with the competitive landscape, both on the dry AMD side and maybe touch even on spine as well, that would be helpful.

Martin M. McGlynn: Sure, Jason. Thank you, and I appreciate your observation about the comprehensive rundown. I think it's important that we be absolutely clear and everybody knows and understands our game plan and the time lines involved. So as we have Dr. Stephen Huhn on the call, our Chief Medical Officer, I'd like to have him address your question, Jason.

Stephen Huhn: So Jason, I'm not sure exactly what other entities you might be referring to, but I think I can address your question. The approach that we have for geographic atrophy is one in which we're looking to arrest progression of the disease by what we essentially refer to as neuroprotective qualities or attributes of the neural stem cell. And this matches the data that we have in the preclinical setting in which we observed not only preservation of the photoreceptors, but as well preservation of vision and vision function. So the approach that we have is one that's going to be based upon arresting or slowing the progression of the disease, which, for someone with AMD, in particular dry AMD, who are in the later stages of life, could have a particularly value -- particularly if you were to -- durable effect from a onetime transplant. The other approach is, what I think you might be referring to, if I could just speculate a little bit, is that specific cell replacement strategies for specific retinal cells, for example, replacement of the retinal pigment epithelial cells, which is part of the AMD pathology. So we're not looking to replace the RPE cells, but our preclinical data shows that we may be actually substituting some of the function that's lost in the RPE as part of that disease. Ultimately, others I think are pursuing this, maybe what you're referring to as well, a way of actually replacing photoreceptors in the eye from a -- in a retinal disorder. Certainly, that's an admirable goal and one that I think everyone supports. But it has its challenges in that it's a very complex cell to replace and then that cell has to integrate into the neural circuitry of the retina. So we think an approach is in many ways very simple and intuitive of simply protecting the threatened cells in the eye by using those attributes observed by the neural stem cell is a very viable first approach of thinking about cellular treatment for retinal disorders. I'm not sure. Did I answer your question, Jason?

Jason Kolbert - Maxim Group LLC, Research Division: Steve, you absolutely nailed what I was going after. And if -- when we transition the same exact explanation on spine, can you help me understand how you selected the specific time line around implantation, which we can then use to differentiate your approach versus that of others in terms of when the cells are actually implanted on the spine side?

Stephen Huhn: Right. So there's a lot of particular important elements in this question, Jason. Most of this is driven on 2 points. 1 is that our preclinical data is strongly supportive of the effect of the cells at later time points than the acute injury itself. We have data that shows that we can put the cells in at the immediate time of the injury, which is the acute period. We don't see any harm, but we don't necessarily see as a strong effect as we see when we delay the transplant to later time points. And there's lots of reasons for why this may be true. It's likely that the inflammatory profile from the injury has settled down by that point in time. So a lot of our selection of patients who are at the late subacute or early chronic stage of diseases based upon our preclinical data. The second part of this has to do with clinical trial pragmatism in some sense and it's nice that the stars align for our biology. Patients who are acutely injured have typically thereafter a period of spontaneous recovery. That spontaneous recovery introduces things that make a power rate [ph] in a certain study much more difficult because you have to many more patients because the outcome is more variable. When you select patients for entering the trial who have, for the most part, reached a plateau of stability and the likelihood of spontaneous recovery is down, then you begin to look at trial numbers for proof of concept and perhaps even more definitive studies that are much more manageable for spinal cord injury. So by waiting in our current Phase II study until the patient's at least 4 months from injury, we're already dealing with a patient population that should have much less variability. So that is a dramatic effect on our power calculations.

Operator: [Operator Instructions] And our next question is from Keay Nakae with Chardan.

Keay Thomas Nakae - Chardan Capital Markets, LLC, Research Division: Wonder if I could just follow up on the question Jason had with respect to dry AMD. Dr. Huhn, you talked about the neuroprotective aspects of your stem cells. Certainly, we've seen the effect on the myelin. Can you talk about how that translates into protecting the support structure for the RPE cells?

Stephen Huhn: So the RPE, and not to get into too much detail, there's a couple of important things to support the overlying photoreceptors. They do a process known as phagocytosis, which is essentially metabolizing the debris that's shed by the active photoreceptors. So we've seen in our preclinical studies evidence that the debris zone was absent. We wondered why. We turned to electro microscopy studies and showed in fact that the neural stem cells are phagocytosing the shed debris by the photoreceptors. So in many ways, taking over a process that's been lost by the RPE. We also know the RPE is responsible for different trophic factors that support the photoreceptors, and we know that the neural stem cell also secretes these factors with a lot of overlap. So I think the mechanism of action, if this is sort of what you're alluding to, is likely to be multi-factorial. And that's sort of the beauty of a cellular approach is that, unlike a small molecule which could typically exert one mechanism of action, a cell can take on more than one mechanism. So we think that those combined approaches or mechanisms should result in preservation photoreceptors. So photoreceptors that are being threatened by loss secondary to AMD should be stabilized by a neuroprotective approach.

Keay Thomas Nakae - Chardan Capital Markets, LLC, Research Division: Okay, great. And then you will [ph] see delay in getting AMD up and running. Can you talk about any last-minute changes to the protocol that you haven't previously discussed and maybe more specific on that point, the ability to possibly increase the sample size in the trial. It seems like that one is also in sort of interim work.

Stephen Huhn: So our current Phase II study, we had to be thoughtful about this and undertaking a proof-of-concept study. At this stage, based on our Phase I data, required very careful planning on our part so that there were some delays in making certain that we were going to be creating a protocol that we felt would be the best protocol to move forward into clinical testing. The plan for the Phase II will have an interim analysis that we'll look at, if you will, distribution of patients, so we can increase the trial length or increase patient population if the interim analysis indicates us the need to do so. As we all recognize, AMD has a time course of progression, so the trial has an element in it that's built in to address that should we need to execute that particular question.

Keay Thomas Nakae - Chardan Capital Markets, LLC, Research Division: And in terms of possibly extending the length, then what is the time point where you're looking to do the interim analysis?

Stephen Huhn: It's about midway through the trial.

Keay Thomas Nakae - Chardan Capital Markets, LLC, Research Division: Both in terms of patients and with respect to the 12-month follow-up?

Stephen Huhn: With regard to the number of patients that we will have and the follow-up length for those particular patients. You want have sufficient follow-up in the group of patients that you're going to be basing the interim analysis on, so you're confident in the results of the interim analysis.

Keay Thomas Nakae - Chardan Capital Markets, LLC, Research Division: Okay. And then just finally, with respect to the number of trials we should now expect to participate in the AMD study, it sounded like you just had a conversation with 21-ish in site. Is that about the number of sites we should expect to participate in the study?

Stephen Huhn: Yes, I think that's pretty much -- very much in the ballpark. Martin, go ahead.

Martin M. McGlynn: It's pretty much in the ballpark. Of course, if there are additional study centers that are interested in participating and we feel that they are fully qualified to do so, of course we would be willing to accommodate additional sites.

Keay Thomas Nakae - Chardan Capital Markets, LLC, Research Division: Okay. And if I could just squeeze one last question related to the upcoming data at ISSCR. Is that time frame -- is that enough of a window to have follow-up on all 12 or follow-up on all 15 patients?

Martin M. McGlynn: Stephen?

Stephen Huhn: Yes. So we believe that as we recognize the last few patients are finishing up their 12-month visits and we'll have adequate time to produce the top line analysis of the major results from the Phase I/II.

Operator: And I'm not showing any further questions. I'd now like to turn the call back over to your CEO, Martin.

Martin M. McGlynn: Thank you very much. And Jason and Keay, thank you very much for your very insightful and thoughtful questions. I'd just like to conclude with a couple of remarks. I've talked about how this is a transformational time for our company and have discussed that at many occasions and in many different places. We give you some insight into that. In the first 9 years of clinical activity, we dosed 38 patients through the end of 2014. In 2015 and '16 combined, we anticipate dosing approximately 94 patients and will enroll approximately 114 patients into our 2 Phase II trials and we should have approximately 25 to 30 sites enrolling patients by the end of this year. The most clinical sites we've ever had enrolling at one time previously was a total of 6. We're generating data at an unprecedented rate and we're rapidly approaching final results on 2 Phase II controlled proof-of-concept clinical trials. This truly is an exciting and transformational time for StemCells Inc. So I thank you for joining us today and for our quarterly call. And I look forward to updating you again on our clinical progress as the year progresses. Thank you, all.

Operator: Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone, have a great day.