Greg Schiffman - Executive Vice President and Chief Financial Officer Martin McGlynn - President and Chief Executive Officer Stephen Huhn - Vice President, CNS Clinical Research and Chief Medical Officer.

Keay Nakae - Chardan.

Good day, ladies and gentleman, and welcome to the StemCells’ Inc. Fourth 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 follow at that time.

[Operator Instructions] I would now like to introduce your host for today’s conference, Greg Schiffman, Chief Financial Officer, StemCells Inc. Please go ahead..

Thank you. Welcome everybody and thank you for joining us today. With me today are Martin McGlynn, President and Chief Executive Officer; and Dr. Stephen Huhn, 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’re encouraged to consult. Now with that, I will turn the call over to Martin..

Thanks, Greg, and thanks to everybody for joining us today. Just to remind everyone, we did not hold a third quarter earnings call last quarter and that was due to the pending Investor and Analyst Day that had been scheduled for November, so we have a little bit of catching up to do today.

We plan to quickly review the headlines for last year followed by an overview of our plans for 2015. Greg will then review financial results, and I will conclude with some final thoughts. Following these prepared remarks, we will open the call for Q&A.

So in 2014, we completed enrollment in both of our Phase I/II clinical programs, one in spinal cord injury and the other in dry age-related macular degeneration, and we released interim results for both of these studies demonstrating the favorable safety profile of ourselves along with early signs of clinical benefit in both programs.

We reported signs of clinical benefit in seven of the 12 patients enrolled in the spinal cord injury study as defined by improvements involved in more than one sensory modality and incorporating multiple thoracic spinal cord segments in patients transplanted between four months to two years post injury.

These types of changes are unanticipated at their individual stages of recovery following motor complete spinal cord injury. In October, we initiated the Pathway study which is a Phase II proof-of-concept study in cervical spinal cord injury.

The primary endpoint is improvement in motor function in the upper body extremities including the hands, arms, wrists, and shoulders. In 2014, we also hosted the company’s first Investor and Analyst Day. This was held in New York City and was enthusiastically attended by analysts from many leading institutions on Wall Street.

The agenda included a keynote by company founder, Irv Weissman; a stem cell science overview by EVP of Scientific and Strategic Alliances, Ann Tsukamoto; and updates on our clinical programs that were presented by Vice President of CNS Clinical Research and Chief Medical Officer, Stephen Huhn; and Ophthalmology, Joel Naor; and Clinical Investigators, Raphael Guzman and Richard Rosen.

The program also premiered video segments featuring three patients who have participated in our SCI and AMD clinical trials. The webcast by the way is available on our website along with the patient videos. Last year, we also strengthened our management team and Board of Directors by several key new hires and appointments.

This included the promotion of Stephen Huhn to the newly created position of Vice President, CNS Clinical Research and Chief Medical Officer. The hiring of Joel Naor, as Vice President, Clinical Development for Ophthalmology; Naymisha Patel as Vice President, Quality Systems; and Mohammad El-Kalay, Vice President, Process Development.

And finally, we streamlined our business with the sale of the SC proven portfolio and the subsequent wind down of our UK subsidiary.

The transaction brought in about $800,000, avoids future operating losses associated with this business, and enables management to focus all of its attention on the clinical translation agenda for our proprietary human neural stem cell platform.

I think you will agree we’ve accomplished a lot last year and we have definitely paved the way for the next phase of clinical development. So, now I’d like to turn to our plans for 2015. First, we plan to release top line results from both of our ongoing Phase I/II clinical trials in the middle of this year.

As mentioned earlier, we initiated the Phase II Pathway Study in cervical spinal cord injury and plan to enroll 52 patients in a total of three cohorts. The first cohort is a six-patient, open-label dose confirmation study.

Three of the subjects in this cohort have already been transplanted, and we expect to complete dosing next quarter and announce top line results later in the year. The second cohort consists of a 40-patient, randomized single-line study, which is powered to measure motor function to the upper extremities.

We anticipate completing enrollment in the second cohort in 2016. This second cohort anticipates an interim analysis, which will likely occur mid-2016. The interim analysis will be triggered when we have six-month follow-up data post transplantation.

The third cohort in the Pathway Study is an optional open-label exploratory arm intended to transplant six patients with motor incomplete injury or AIS C subjects. So, turning now to our interest in retinal degeneration. We plan to initiate our Phase II study in dry age-related macular degeneration shortly.

The timing has likely shifted from our original projection, as we took a little extra time to ensure that the final clinical protocol design could achieve the important proof-of-concept that we are targeting. We have submitted the protocol to the FDA, and in parallel are beginning the processes required to qualify and initiate the clinical standards.

The Phase II study in dry age-related macular degeneration will be conducted as a controlled study based on the design of comparing the outcome of the transplant in the study eye compared to the outcome in the fellow or control eye. All patients will receive transplant of the cells.

But within each patient, only the worst eye based on visual acuity will undergo transplantation, which will allow us to use the fellow eye as the control. The primary endpoint of the study will assess the rate of geographic atrophy, which is the underlying cause for loss of central vision.

Through a standard and objective metric, which we believe may also be an appropriate endpoint for a Phase III pivotal study. The primary endpoint will be examined by an independent and masked central reading center. The study will also measure several secondary endpoints of clinically relevant metrics of visual function.

Again, we would expect to complete enrollment in this study next year and with final results in 2017. Recognizing the importance of measuring changes in geographic atrophy, we made this decision to have the Phase I/II geographic atrophy data retrospectively examined by an independent and masked reading center.

The outcome of the masked review for the four subjects with 12-month data that we had reported on in June 2014 showed consistent results from what had previously been reported. The masked review has also been conducted for the next three subjects with 12-month follow-up.

And the examination continues to show a reduction in the average rate of geographic atrophy in the study eyes as compared to the fellow eyes in these seven subjects. The two cohorts in the Phase I/II study comprised different AMD patient populations by study design.

Cohort two consists of patients with better visual acuity than those in cohort one and had smaller regions of geographic atrophy. The endpoint with the study is based on 12-month outcomes. To-date, we have six-month follow-up on seven subjects in cohort two.

No clear pattern has yet emerged in the six months data for these subjects in cohort two, but we look forward to analyzing the 12-month data for all visual outcomes for these last seven subjects and expect to realize the top line summary of the results in all 15 subjects mid-year.

In short, we plant to transplant significantly more patients this year than any year in the history of the company. The data we generate from these studies, if successful, will ultimately enable us to effectively design our Phase III pivotal studies.

We are planning for success, and so to enable seamless transition from Phase II to pivotal studies, we are investing in the design of a robust and scalable manufacturing process that meets all the regulatory requirements for such studies and is capable of supplying cells for the much larger pivotal studies that will be required.

As you can see, we are making great strides moving our HuCNS-SC cells through clinical development. And we have now emerged from a company that was focused on small open-label studies to one that is now conducting multi-center controlled Phase II studies in major medical disorders.

Both of the indications we are pursuing in the Phase II studies represent large unmet medical needs. In the case of AMD, the market potential is at least as large as the current market or wet AMD, which is over approximately $4 billion in sales today. In the case of spinal cord injury, there are approximately 1.3 million people in the U.S.

with spinal cord injuries. Most of the injuries occur in younger individuals either through motor vehicle accidents or sports injuries. The cost associated with spinal cord injury ranges on average between $1.5 million to $4.5 million over the life of the patient.

Even the modest improvements in motor function can enhance the quality of life and dramatically reduce the healthcare cost for a spinal cord injury patient. The success in either spinal cord injury or AMD would be transformative for our company and patients as well. So, as you can tell, this is an incredibly exciting time for our team at StemCells.

If we are successful, we have a platform technology that has the potential to address many CNS disorders where there are large unmet medical needs. So, I will now turn the call back to Greg..

Thank you, Martin.

Before I begin reviewing our financial results, I want to point out that as a result of selling the SC Proven portfolio and the subsequent wind-down of our subsidiary’s operations, our financial statements include a split between our ongoing operations and our discontinued operation where we sold antibody reagent and cell culture products under the SC Proven brand name.

Historically, this business had been operating at a loss. For the full year 2014, we had a net loss from the discontinued SC Proven business of approximately $480,000. Going forward, we are focused on moving our HuCNS-SC line of human neural stem cells through the clinical process.

The rest of my narrative will focus on the results associated with these ongoing efforts. I’m going to speak mainly to the full year 2014 results. And if there are specific questions you have about Q4, I think we can cover those in the Q&A session. For 2014, total revenue was up significantly year-over-year, a total of approximately $840,000.

This was driven by two transactions in the fourth quarter. First, we received a milestone payment of approximately $500,000 under a licensing agreement with ReNeuron Ltd. In addition, half of the $800,000 received from Takara is reported as licensing revenue. Operating expenses were up year-over-year by approximately 13% or about $3.7 million.

This increase is driven by expanded clinical activities, including the transplanting of our cells in significantly more patients than we have done previously, as well as the initiation of our Phase II proof-of-concept clinical trial in cervical spinal cord injury.

When you initiate a clinical trial of the scope and nature of our study, there are substantial startup costs paid to third-party firms that manage critical aspects of that trial.

Similarly, loss from operations increased by approximately 10% or approximately $2.8 million driven by the $3.7 million growth in operating expenses which was partially offset by the increased revenue of approximately $840,000. For the full year 2014, we reported approximately $1.4 million in net other expense below the operating line.

This is comprised of approximately $2.4 million of income associated with the change in the fair value of our warrant liability, approximately $2.4 million of expense associated with the impairment of goodwill and other intangible assets associated with the disposition of our SC proven business, and approximately $1.4 million of interest and other expense.

The change in the fair value of our warrant liability is a non-cash income item driven by change in the value of our stock price. Just a reminder, under warrant liability accounting, an increase in share price leads to an increase in the warrant liability while a decrease in share price leads to a decrease in the warrant liability.

Changes in warrant liability or passive statement of operations is income or expense. The impairment of goodwill and other intangible assets is also a non-cash charge flowing to the P&L. For the full year 2013, we reported approximately $2.1 million in net other income below the operating line.

This is comprised of approximately $3.3 million of income associated with the change in the fair value of our warrant liability and approximately $1.2 million of interest and other expense.

The year-over-year increase of approximately $3.5 million in net other expense is driven by non-cash charges associated with the sale of the SC proven business and changes in the fair value of our warrants.

We reported a net loss from continuing operations of $0.52 per share in 2014 or an aggregate net loss from continuing operations of approximately $32.3 million. In 2013, we reported a net loss from continuing operations of $0.60 per share or approximately $26.4 million.

Given the number of substantial non-cash charges flowing through our P&L in 2013 and 2014, I believe that it is useful to look at a non-GAAP loss adjusting for the major non-cash charges including stock-based compensation, depreciation and amortization, impairment of intangible assets and changes in the fair value of our warrant liability.

We have included a reconciliation table for these adjustments in our press release issued earlier today. For 2014, the company had net non-cash expenses totaling approximately $3.3 million.

This consists of approximately $2 million associated with stock-based compensation, approximately $1.3 million associated with depreciation and amortization, approximately $2.4 million associated with the impairment of goodwill and other intangibles, and approximately $2.4 million of income associated with the change in the fair value of the warrant liability.

For 2013, the company had net non-cash expenses totaling approximately $400,000. This consists of approximately $2.6 million associated with stock-based compensation, approximately $1 million associated with depreciation and amortization, and income of approximately $3.2 million associated with the change in the fair value of our warrant liability.

The non-GAAP net loss excluding the non-cash items detailed previously for the full year 2014 was approximately $29.4 million or $0.48 per share compared to the full year 2013 of approximately $26 million or $0.60 per share.

The increase in the adjusted net loss of approximately $3.4 million was primarily associated with the increased spending associated with our clinical program.

Our cash usage for the full year 2014 excluding cash inflows from financing and licensing activities and the proceeds from the sale of SC proven business was approximately $33 million or approximately $2.75 million per month. Our year-end cash and cash equivalents were approximately $25 million.

Looking forward to 2015, net cash usage is expected to increase as we are planning to transplant significantly more patients than we have in any year in the history of our company. In addition, we are increasing spending on manufacturing process development.

This investment in process development is critical so that we are able to scale the manufacturing processes appropriately should we be successful in one or both of our ongoing Phase II clinical trials. The year-over-year increase in net cash usage is very dependent on the number of patients transplanted.

Given that we have just begun enrolling patients in our cervical spinal cord injury trial 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. Before I turn the call back over to Martin, I would like to briefly talk about our web presence and our emerging use of social media.

We have just completed a significant update of our website content to reflect our current clinical focus and programs. We are also making use of both LinkedIn and Twitter as a means of keeping investors informed. I would encourage all of you to follow us on Twitter.

You can access our Twitter feed directly from the homepage of our website at www.stemcellsinc.com. We also have a recruitment website dedicated to the pathway study which includes patient education and information on our Phase II spinal cord study. We think that this recruitment strategy will help recruit patients into the study in a timely way.

Let me now turn the call back to Martin for some final closing comments..

Thanks, Greg. So just in closing, I wanted to share just an observation or two with you that struck me recently. There was a Biocentury TV edition entitled gene therapy 30-year overnight success. This was aired this past December.

As you are probably aware, over the past couple of years, gene therapy has emerged as a very promising segment in the drug development industry. This segment has also seen a strong success in the financial markets over the same timeframe.

The Biocentury TV story detailed how the path from idea to reality for gene therapy had technical challenges that needed to be overcome, exaggerated initial expectations, and clinical setbacks. Regenerative Medicine in the field of stem cell research shows that there are very strong parallels with this gene therapy story.

The science has been pursued for 30 years, but exaggerated initial clinical expectations. The field of cellular therapy like any new field with the potential for breakthrough presents technical and clinical challenges that need to be overcome. However, we are now at a critical juncture for this industry.

Over the next couple of years, there are several companies that will be releasing meaningful clinical data, which if the studies are successful have the potential to revolutionize treatment paradigms in many disease areas using regenerative therapies.

These companies that have weathered the ups and downs over the years with strong science supporting their clinical programs, StemCells is one of those companies. We are the only CNS focused company that has executed clinical trials in all three compartments of the CNS; the brain, the eye, and the spinal cord.

We are the most clinically advanced with one active controlled Phase II study underway and another about to start. I believe that we are on the brink of Regenerative Medicine revolution, and I am excited that we are one of the companies leading this revolution. So with that, I would now like to open the call for questions. Thank you..

Thank you. [Operator Instructions] And your first question comes from Keay Nakae from Chardan. Your line is now open, please go ahead..

Thank you. Couple of questions for you. First one, a point of clarification from you, Marty, as it relates to seeing data on the second cohort of the Phase I/II AMD study.

So should we expect now that the next data we will see is for the full set of ‘15 at 12 months as opposed to any interim data on the second cohort?.

That’s correct. We are a matter of months away from rolling up all of that data, and so the endpoint that we were looking for into study design specifically was the aggregate data of 12 months for the patients in both cohorts. So, yes, that is correct..

And two other questions related to that. One, will all of the 15 patients be evaluated by the central lab, that’s question number one.

And then number two, it sounds like you are targeting to release that as simply top line via press release as opposed to presenting at a conference?.

Well, first of all, the answer to the question regarding the lab is, yes, all 15 patients will in fact – their data will be derived and reviewed by the independent mass [ph] lab. As for the plans for releasing the clinical data, yeah, we will be issuing press releases as we have in the past. Dr.

Huhn is with me and he has greater handle on the specifics, but I think we do have plans to attend some conferences mid-year..

Yeah, that’s correct, Martin. We are anticipating a conference that would be appropriate for disclosure, as Marin said, around midyear and I’ll be presenting that data..

Okay, great. Good. Two more questions for you.

With respect to the cervical spine center, you now have three patients enrolled, are they all at the one center in Miami or are they spread out amongst different centers at this point?.

The short answer is it’s among different centers in the study. As Martin indicated, it’s a multicenter program. So the patients now have been enrolled at multiple centers..

Okay, great, and then just final question for Greg.

As we think about your potential cash utilization in 2015, as you still depend on the number of patients enrolled, but is there a cost per patient that we should be thinking about?.

I think cost per patient gets a little bit challenging because it relates to certainly between the AMD and the spinal cord, it’s very different, and also as you enroll subjects, there are costs for subjects that actually get into the study as well as those that you look to see if they qualify and are eligible, but turn out not to be.

I think we will look to provide updates with it. I think we have historically said we would expect to see our expenses increase this year just because of the amount of clinical activities, but I think it’s tough for us to narrow anything beyond that down given the early stage of enrollment we are at..

Okay, thanks..

Thank you. [Operator Instructions] And I am not showing any further questions in queue at this time. I would now like to turn the call back to Martin McGlynn, CEO of StemCells Inc. for any further remarks..

Thanks to everybody for joining us today for our quarterly call and we look forward to updating you again on our clinical progress as the year progresses. Thank you everybody..

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