U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

 
FORM 10-Q
 
(Mark one)
 
x
Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the Quarterly Period Ended September 30, 2013
Or
 
¨
Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934
 
Commission File Number 000-1357459
 
NEURALSTEM, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
 
52-2007292
State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization
 
Identification No.)
 
 
 
9700 Great Seneca Highway
 
 
Rockville, MD
 
20850
(Address of principal executive offices)
 
(Zip Code)
 
Registrant’s telephone number, including area code (301)-366-4841
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   x Yes     ¨ No 
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). xYes     ¨ No 
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ¨
Accelerated filer   ¨
 
 
Non-accelerated filer   ¨  (Do not check if a small reporting company)
Smaller reporting company  x
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)   ¨ Yes x No 
 
As of October 31, 2013, there were 76,662,839 shares of common stock, $.01 par value, issued and outstanding.
 
 
 
Neuralstem, Inc.
 
Table of Contents
 
   
 
Page
  
 
 
PART I -  
FINANCIAL INFORMATION
 3
  
 
 
Item 1.  
Unaudited Condensed Consolidated Financial Statements
 3
  
 
 
  
Unaudited Condensed Consolidated Balance Sheets as of  September 30, 2013 and December 31, 2012
 3
  
 
 
  
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss For the three and nine months ended September 30, 2013 and 2012
 4
  
 
 
  
Unaudited Condensed Consolidated Statements of Cash Flows For the nine months ended September 30, 2013 and 2012
 5
 
 
 
  
Notes to Unaudited Condensed Consolidated Financial Statements
 6
  
 
 
Item 2.  
Management's Discussion and Analysis of Financial Condition and Results of Operations
 14
  
 
 
Item 3.  
Quantitative and Qualitative Disclosures about Market Risk
 23
  
 
 
Item 4.  
Controls and Procedures
 23
  
 
 
PART II -  
OTHER INFORMATION
24
  
 
 
Item 1.  
Legal Proceedings
 24
  
 
 
Item 1A.  
Risk Factors
 24
  
 
 
Item 2.  
Unregistered Sales of Equity Securities and Use of Proceeds
 34
  
 
 
Item 3.  
Defaults Upon Senior Securities
 35
  
 
 
Item 4.  
Mine Safety Disclosure
 35
  
 
 
Item 5.  
Other Information
 35
  
 
 
Item 6.  
Exhibits
 35
 
 
 
 
Signatures
 35
 
 
 
 
Certificates
 
 
 
Page 2

 
PART I
FINANCIAL INFORMATION
 
ITEM 1.          UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
   
Neuralstem, Inc. 
 
Unaudited Condensed Consolidated Balance Sheets 
 
 
 
September 30, 
2013
 
December 31, 
2012
 
ASSETS
 
 
 
 
 
 
 
CURRENT ASSETS
 
 
 
 
 
 
 
Cash and cash equivalents
 
$
16,401,728
 
$
7,443,773
 
Billed and unbilled receivables
 
 
7,500
 
 
3,333
 
Deferred financing fees, current portion
 
 
575,377
 
 
-
 
Prepaid expenses
 
 
343,973
 
 
205,651
 
Total current assets
 
 
17,328,578
 
 
7,652,757
 
 
 
 
 
 
 
 
 
Property and equipment, net
 
 
253,562
 
 
230,397
 
Patent filing fees, net
 
 
1,047,940
 
 
807,357
 
Deferred financing fees, net of current portion
 
 
470,769
 
 
-
 
Other assets
 
 
64,862
 
 
59,568
 
Total assets
 
$
19,165,711
 
$
8,750,079
 
 
 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
CURRENT LIABILITIES
 
 
 
 
 
 
 
Accounts payable and accrued expenses
 
$
1,212,578
 
$
1,199,662
 
Accrued bonus expense
 
 
462,882
 
 
465,865
 
Current portion of long term debt, net of discount
 
 
1,986,154
 
 
-
 
Derivative instruments
 
 
1,311,880
 
 
-
 
Other current liabilities
 
 
174,345
 
 
90,776
 
Total current liabilities
 
 
5,147,839
 
 
1,756,303
 
 
 
 
 
 
 
 
 
Long term debt, net of discount and current portion
 
 
5,661,336
 
 
-
 
Other long term liabilities
 
 
89,650
 
 
21,143
 
Total liabilities
 
 
10,898,825
 
 
1,777,446
 
 
 
 
 
 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
 
 
 
Preferred stock, 7,000,000 shares authorized, zero shares issued and outstanding
 
 
-
 
 
-
 
Common stock, $0.01 par value; 150 million shares authorized, 76,662,839 and 68,189,314 shares outstanding in 2013 and 2012, respectively
 
 
766,628
 
 
681,893
 
Additional paid-in capital
 
 
132,617,006
 
 
114,884,915
 
Accumulated other comprehensive income
 
 
6,101
 
 
-
 
Accumulated deficit
 
 
(125,122,849)
 
 
(108,594,175)
 
Total stockholders' equity
 
 
8,266,886
 
 
6,972,633
 
Total liabilities and stockholders' equity
 
$
19,165,711
 
$
8,750,079
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
Page 3

 
Neuralstem, Inc.
 
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss
 
 
 
Three Months Ended 
September 30,
 
Nine Months Ended 
September 30,
 
 
 
2013
 
2012
 
2013
 
2012
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenues
 
$
2,500
 
$
170,833
 
$
107,500
 
$
405,208
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Research and development costs
 
 
1,847,403
 
 
1,385,478
 
 
5,502,137
 
 
4,406,538
 
General and administrative expenses
 
 
1,707,690
 
 
1,280,606
 
 
4,184,740
 
 
3,264,146
 
Depreciation and amortization
 
 
81,393
 
 
87,908
 
 
181,991
 
 
164,154
 
Total operating expenses
 
 
3,636,486
 
 
2,753,992
 
 
9,868,868
 
 
7,834,838
 
Operating loss
 
 
(3,633,986)
 
 
(2,583,159)
 
 
(9,761,368)
 
 
(7,429,630)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Other income (expense):
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest income
 
 
18,776
 
 
5,411
 
 
45,336
 
 
21,601
 
Interest expense
 
 
(448,943)
 
 
(335)
 
 
(936,471)
 
 
(1,789)
 
Warrant modification expense
 
 
(1,945,214)
 
 
-
 
 
(5,017,156)
 
 
-
 
Loss from change in fair value of derivative instruments
 
 
(677,883)
 
 
-
 
 
(859,682)
 
 
-
 
Litigation settlement
 
 
293
 
 
692
 
 
667
 
 
3,265
 
Total other income (expense)
 
 
(3,052,971)
 
 
5,768
 
 
(6,767,306)
 
 
23,077
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(6,686,957)
 
$
(2,577,391)
 
$
(16,528,674)
 
$
(7,406,553)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss per share - basic and diluted
 
$
(0.09)
 
$
(0.04)
 
$
(0.23)
 
$
(0.14)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding - basic and diluted
 
 
72,986,698
 
 
58,363,721
 
 
70,533,035
 
 
54,751,377
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
 
$
(6,686,957)
 
$
(2,577,391)
 
$
(16,528,674)
 
$
(7,406,553)
 
Foreign currency translation adjustment
 
 
6,101
 
 
-
 
 
6,101
 
 
-
 
Comprehensive loss
 
$
(6,680,856)
 
$
(2,577,391)
 
$
(16,522,573)
 
$
(7,406,553)
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
Page 4

 
  Neuralstem, Inc.
 
Unaudited Condensed Consolidated Statements of Cash Flows
 
 
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
 
 
 
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
 
 
 
Net loss
 
$
(16,528,674)
 
$
(7,406,553)
 
Adjustments to reconcile net loss to cash used in operating activities:
 
 
 
 
 
 
 
Depreciation and amortization
 
 
181,991
 
 
164,154
 
Share based compensation expense
 
 
2,080,740
 
 
1,187,692
 
Amortization of deferred financing fees and debt discount
 
 
462,794
 
 
-
 
Warrant modification expense
 
 
5,017,156
 
 
-
 
Loss from change in fair value of derivative instruments
 
 
859,682
 
 
-
 
 
 
 
 
 
 
 
 
Changes in operating assets and liabilities:
 
 
 
 
 
 
 
Billed and unbilled receivables
 
 
(4,167)
 
 
233,542
 
Prepaid expenses
 
 
38,849
 
 
117,838
 
Other assets
 
 
(5,172)
 
 
15,861
 
Accounts payable and accrued expenses
 
 
(97,128)
 
 
(342,339)
 
Accrued bonus expense
 
 
(94,558)
 
 
37,812
 
Other current liabilities
 
 
(18,541)
 
 
8,807
 
Other long term liabilities
 
 
(8,651)
 
 
23,750
 
Net cash used in operating activities
 
 
(8,115,679)
 
 
(5,959,436)
 
 
 
 
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
 
 
 
Patent filing fees
 
 
(325,783)
 
 
(158,115)
 
Purchase of property and equipment
 
 
(118,938)
 
 
(30,203)
 
Net cash used in investing activities
 
 
(444,721)
 
 
(188,318)
 
 
 
 
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
 
 
 
Proceeds from issuance of common stock from warrants exercised, net of issuance costs
 
 
5,836,346
 
 
-
 
Proceeds from sale of common stock and warrants, net of issuance costs
 
 
4,241,640
 
 
13,685,408
 
Proceeds from long term debt, net of issuance costs
 
 
7,551,329
 
 
-
 
Payments on notes payable
 
 
(81,362)
 
 
(16,272)
 
Prepayment of equity financing fees
 
 
(35,000)
 
 
-
 
Net cash provided by financing activities
 
 
17,512,953
 
 
13,669,136
 
Effects of exchange rates on cash
 
 
5,402
 
 
-
 
Net increase in cash and cash equivalents
 
 
8,957,955
 
 
7,521,382
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, beginning of period
 
 
7,443,773
 
 
2,352,013
 
 
 
 
 
 
 
 
 
Cash and cash equivalents, end of period
 
$
16,401,728
 
$
9,873,395
 
 
 
 
 
 
 
 
 
Supplemental disclosure of cash flows information:
 
 
 
 
 
 
 
Cash paid for interest
 
$
399,960
 
$
1,789
 
 
 
 
 
 
 
 
 
Supplemental schedule of non cash investing and financing activities:
 
 
 
 
 
 
 
Issuance of common stock for vendor services, net of returned shares for amended agreement
 
$
-
 
$
152,288
 
Issuance of warrants for vendor services
 
$
658,326
 
$
-
 
Issuance of common stock for executive bonuses
 
$
-
 
$
141,119
 
Issuance of common stock for fees related to debt issuance
 
$
396,234
 
$
-
 
Issuance of warrants for fees related to debt issuance
 
$
452,187
 
$
-
 
Financing of insurance premiums through note payable
 
$
183,472
 
$
146,452
 
Issuance of common stock for cashless exercise of warrants
 
$
587,500
 
$
-
 
Issuance of common stock for exercise of restricted stock units
 
$
-
 
$
330
 
 
See accompanying notes to unaudited condensed consolidated financial statements.
 
 
Page 5

 
NEURALSTEM, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2013
 
Note 1.  Basis of Presentation and Liquidity
In management’s opinion, the accompanying condensed consolidated financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly our financial position, results of operations and cash flows. The condensed consolidated balance sheet at December 31, 2012, has been derived from audited financial statements as of that date. The interim results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain information and footnote disclosure normally included in the financial statements prepared in accordance with generally accepted accounting principles in the United States of America (U.S. GAAP) have been condensed or omitted pursuant to instructions, rules and regulations prescribed by the U.S. Securities and Exchange Commission (SEC). We believe that the disclosures provided herein are adequate to make the information presented not misleading when these condensed financial statements are read in conjunction with the Financial Statements and Notes included in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on March 15, 2013, and as may be amended. Certain prior period amounts have been reclassified to conform to the current year presentation.
 
Neuralstem, Inc. is referred to as “Neuralstem,” the “Company,” “us,” or “we” throughout this report. Beginning in the quarter ended September 30, 2013, our investment in, and the operations of, our wholly-owned and controlled subsidiary located in China are consolidated in our condensed consolidated financial statements; previously, all investments in China were expensed as incurred. The impacts of this change were not material in any period presented.
 
The Company's operations currently do not generate significant cash. The Company's management does not know when this will change. The Company has spent and will continue to spend substantial funds in the research, development, clinical and pre-clinical testing of the Company's stem cell and small molecule product candidates with the goal of ultimately obtaining approval from the United States Food and Drug Administration (the “FDA”), to market and sell our products. While we believe our long-term cash position is inadequate to fund all of the costs associated with the full range of testing and clinical trials required by the FDA for our core product candidates, we anticipate that our available cash and expected income will be sufficient to finance our current activities at least through September 30, 2014.
 
No assurance can be given that (i) we will be able to expand our operations prior to FDA approval of our proposed products, or (ii) that FDA approval will ever be granted for our product candidates, or (iii) that if FDA approval is granted, that we will ever be able to sell our products or be profitable.

Note 2. Significant Accounting Policies and Recent Accounting Pronouncements
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The condensed financial statements include significant estimates for the value and expected economic life of our licensed technology, our net operating loss for tax purposes, the fair value of our derivative instruments and our share-based compensation related to employees and directors, consultants and investment banks, among other things. Because of the use of estimates inherent in the financial reporting process, actual results could differ significantly from those estimates.
 
Fair Value Measurements
The carrying amounts of our short-term financial instruments, which primarily include cash and cash equivalents, accounts payable and certain accrued expenses, approximate their fair values due to their short maturities. The fair value of our long-term indebtedness is estimated based on the quoted prices for the same or similar issues or on the current interest rates offered to the Company for debt of the same remaining maturities. The fair values of our derivative instruments and certain other accrued expenses are estimated using level 3 unobservable inputs. See Note 3 for further details.
 
Foreign Currency Translation
The functional currency of our wholly owned foreign subsidiary is their local currency.  Assets and liabilities of our foreign subsidiary are translated into United States dollars based on exchange rates at the end of the reporting period; income and expense items are translated at the weighted average exchange rates prevailing during the reporting period. Translation adjustments for subsidiaries that have not been sold, substantially liquidated or otherwise disposed of are accumulated in other comprehensive income, a component of stockholders' equity.  Transaction gains or losses are included in the determination of net loss.
 
Cash, Cash Equivalents and Credit Risk
Cash equivalents consist of investments in low risk, highly liquid money market funds and certificates of deposit with original maturities of 90 days or less. Cash deposited with banks and other financial institutions may exceed the amount of insurance provided on such deposits. If the amount of a deposit at any time exceeds the federally insured amount at a bank, the uninsured portion of the deposit could be lost, in whole or in part, if the bank were to fail.
 
 
Page 6

 
Financial instruments that potentially subject us to concentrations of credit risk consist primarily of cash equivalents. Our investment policy, approved by our Board of Directors, limits the amount we may invest in any one type of investment issuer, thereby reducing credit risk concentrations. We limit our credit and liquidity risks through our investment policy and through regular reviews of our portfolio against our policy. To date, we have not experienced any loss or lack of access to cash in our operating accounts or to our cash equivalents.
 
Revenue Recognition
Historically, our revenue has been derived primarily from (i) selling treated samples for gene expression data from stem cell experiments, (ii) providing services under various contracts and grants and (iii) licensing the use of our intellectual property to third parties. Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery of goods and services has occurred, the price is fixed and determinable, and collection is reasonably assured.
 
Research and Development
Research and development costs are expensed as they are incurred. Research and development expenses consist primarily of costs associated with pre-clinical development of treatments for central nervous system diseases, and with our clinical trials for both pharmaceutical and stem cell based treatments.  
 
Income (Loss) per Common Share
Basic income (loss) per common share is computed by dividing total net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period.
 
For periods of net income when the effects are dilutive, diluted earnings per share is computed by dividing net income available to common shareholders by the weighted average number of shares outstanding and the dilutive impact of all dilutive potential common shares. Dilutive potential common shares consist primarily of stock options, restricted share units and stock warrants. The dilutive impact of potential common shares resulting from common stock equivalents is determined by applying the treasury stock method. The Company’s unvested restricted shares contain non-forfeitable rights to dividends, and therefore are considered to be participating securities; the calculation of basic and diluted income per share excludes net income attributable to the unvested restricted shares from the numerator and excludes the impact of the shares from the denominator.
 
For all periods of net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all dilutive potential common shares is anti-dilutive due to the net losses; accordingly, diluted loss per share is the same as basic loss per share for the three- and nine-month periods ended September 30, 2013 and 2012. A total of approximately 36.1 million potential dilutive shares have been excluded in the calculation of diluted net income per share for the three- and nine-month periods ended September 30, 2013 and 35.2 million potential dilutive shares have been excluded in the calculation of diluted net income per share for the three- and nine-month periods ended September 30, 2012, as their inclusion would be anti-dilutive.
 
Share-Based Compensation
We account for share-based compensation at fair value. Share-based compensation cost for stock options and warrants is determined at the grant date using an option pricing model that uses level 3 unobservable inputs; share-based compensation cost for restricted stock and restricted stock units is determined at the grant date based on the closing price of our common stock on that date. The value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service period.
 
Intangible and Long-Lived Assets
We assess impairment of our long-lived assets using a "primary asset" approach to determine the cash flow estimation period for a group of assets and liabilities that represents the unit of accounting for a long-lived asset to be held and used. Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. During the three- and nine-month periods ended September 30, 2013 and 2012, no impairment losses were recognized.
 
Income Taxes
We account for income taxes using the asset and liability approach, which requires the recognition of future tax benefits or liabilities on the temporary differences between the financial reporting and tax bases of our assets and liabilities. For interim periods, we recognize an income tax provision (benefit) based on an estimated annual effective tax rate expected for the entire year. A valuation allowance is established when necessary to reduce deferred tax assets to the amounts expected to be realized. We also recognize a tax benefit from uncertain tax positions only if it is “more likely than not” that the position is sustainable based on its technical merits. Our policy is to recognize interest and penalties on uncertain tax positions as a component of income tax expense. Tax periods open to examination by the Internal Revenue Service include the calendar years ended December 31, 2012, 2011 and 2010.
 
Significant New Accounting Pronouncements
We have evaluated all Accounting Standards Updates through the date the financial statements were issued and believe the adoption of any new accounting and disclosure requirements will not have a material impact to our results of operations or financial position.
 
 
Page 7

 
Note 3.  Fair Value Measurements
Fair value is the price that would be received from the sale of an asset or paid to transfer a liability assuming an orderly transaction in the most advantageous market at the measurement date. U.S. GAAP establishes a hierarchical disclosure framework which prioritizes and ranks the level of observability of inputs used in measuring fair value. These levels are:
 
      Level 1 – inputs are based upon unadjusted quoted prices for identical instruments traded in active markets.
 
      Level 2 – inputs are based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques (e.g. the Black-Scholes model) for which all significant inputs are observable in the market or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Where applicable, these models project future cash flows and discount the future amounts to a present value using market-based observable inputs including interest rate curves, foreign exchange rates, and forward and spot prices for currencies and commodities.
 
      Level 3 – inputs are generally unobservable and typically reflect management's estimates of assumptions that market participants would use in pricing the asset or liability. The fair values are therefore determined using model-based techniques, including option pricing models and discounted cash flow models.
  
Financial Assets and Liabilities Measured at Fair Value on a Recurring Basis
The Company has segregated its financial assets and liabilities that are measured at fair value on a recurring basis into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date in the table below (in thousands).
 
The inputs used in measuring the fair value of cash and cash equivalents are considered to be Level 1 in accordance with the three-tier fair value hierarchy. The fair market values are based on period-end statements supplied by the various banks and brokers that held the majority of the Company’s funds. The fair value of other short-term financial instruments (primarily accounts receivable, inventory, prepaid expenses and other current assets, and accounts payable and accrued expenses) approximate their carrying values because of their short-term nature. The fair value of our long-term indebtedness approximates its carrying value.
 
The Company has stock purchase warrants issued in conjunction with its March 2013 debt offering (see Notes 4 and 5) that are accounted for as derivative instruments whose fair market value is determined using Level 3 inputs. The Company also has issued certain stock options that are subject to shareholder approval that are recorded as an accrued liability carried at fair market value using Level 3 inputs. These inputs include expected term, expected dividends and expected volatility.
 
The following table identifies the carrying amounts of such assets and liabilities:
 
 
 
September 30, 2013
 
 
 
Level 1
 
Level 2
 
Level 3
 
Total
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
Stock options subject to shareholder approval
 
$
-
 
$
-
 
$
109,602
 
$
109,602
 
Derivative instruments - stock purchase warrants
 
 
-
 
 
-
 
 
1,311,880
 
 
1,311,880
 
 
 
$
-
 
$
-
 
$
1,421,482
 
$
1,421,482
 
 
The Company did not have any Level 3 financial assets or liabilities measured at fair value at December 31, 2012.
 
The following table presents the activity for those items measured at fair value on a recurring basis using Level 3 inputs for the nine months ended September 30, 2013:
 
 
Page 8

 
 
 
Derivative
Instruments - Stock
Purchase Warrants
 
Stock Options
 
Balance at December 31, 2012
 
$
-
 
$
-
 
Issuance
 
 
452,198
 
 
35,000
 
Change in fair value
 
 
859,682
 
 
74,602
 
Balance at September 30, 2013
 
$
1,311,880
 
$
109,602
 
 
The losses resulting from the changes in the fair value of the derivative instruments are classified as the “change in the fair value of derivative instruments” in the accompanying condensed statements of operations. The change in fair value of the contingent stock options is classified as share-based compensation. The fair values of both the stock purchase warrants and the contingent stock options are determined based on the Black-Scholes option pricing model, and includes the use of unobservable inputs such as the expected term, anticipated volatility and expected dividends. Changes in any of the assumptions related to the unobservable inputs identified above may change the fair value; increases in expected term, anticipated volatility and expected dividends generally result in increased in fair value, while decreases in these unobservable inputs generally result in decreases in fair value.
 
Non-Financial Assets and Liabilities Measure at Fair Value on a Recurring Basis
The Company has no non-financial assets and liabilities that are measured at fair value on a recurring basis.
 
Non-Financial Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company measures its long-lived assets, including property and equipment and patent filing fees, at fair value on a nonrecurring basis. These assets are recognized at fair value when they are deemed to be other-than-temporarily impaired. No such fair value impairment was recognized in the nine-months ended September 30, 2013 or 2012.

Note 4.  Debt
In March 2013, the Company entered into a Loan and Security agreement for an initial $8 million term loan with an additional $2 million of borrowing capacity if certain conditions involving new partnerships are met. The loan is collateralized by substantially all of the Company’s assets, including our intellectual property.
 
The loan provides for interest at a variable rate based on prime with a floor of 11% and matures in June 2016. Our weighted average interest on outstanding borrowings was 11% for the nine months ended September 30, 2013. The loan calls for interest only payments through December 2013 at which time principal and interest payments begin through maturity. The interest only period and maturity could both be extended by three months if the additional borrowing capacity was drawn on; such capacity was not drawn on. The loan resulted in net proceeds of approximately $7,551,000 after origination and other cash fees and expenses related to the closing of the loan.
 
In conjunction with the loan agreement, the Company issued to the lender a five-year common stock purchase warrant to purchase 648,809 shares at an exercise price of $1.0789 per share. This warrant contains non-standard anti-dilution protection and, consequently, is being accounted for as a derivative instrument and is recorded at fair market value each period (see Note 3). The allocation of proceeds to this warrant resulted in a debt discount which is being amortized as interest expense over the term of the debt using the effective interest method.
 
The Company also incurred expenses with various third parties in connection with the debt issuance, consisting of approximately $449,000 in cash, 350,650 shares of common stock valued at approximately $396,000, and a five-year common stock purchase warrant to purchase 648,798 shares at an exercise price of $1.07892 per share. The warrant is classified as equity. Fees related to the debt offering are recorded as deferred financing fees and are being amortized as interest expense over the term of the debt using the effective interest method.

Note 5.  Stockholders’ Equity
We have granted share-based compensation awards to employees, board members and service providers. Awards may consist of common stock, restricted common stock, restricted common stock units, warrants, or stock options. Our stock options and warrants have lives of up to ten years from the grant date.  The awards vest either upon the grant date or over varying periods of time. The stock options we grant provide for option exercise prices equal to or greater than the fair market value of the common stock on the date of the grant.  Restricted stock units grant the holder the right to receive fully paid common shares with various restrictions on the holder’s ability to transfer the shares.  As of September 30, 2013, we have approximately 32,000 shares of common stock reserved for issuance of such awards under our equity compensation plans.
 
Share-based compensation expense included in the condensed statements of operations for the three and nine months ended September 30, 2013 and 2012 was as follows:
 
 
Page 9

 
 
 
Three Months Ended September 30,
 
 
 
2013
 
2012
 
Research and development costs
 
$
241,934
 
$
193,558
 
General and administrative expenses
 
 
765,519
 
 
293,142
 
Total
 
$
1,007,453
 
$
486,700
 
 
 
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
Research and development costs
 
$
690,199
 
$
462,380
 
General and administrative expenses
 
 
1,390,541
 
 
725,312
 
Total
 
$
2,080,740
 
$
1,187,692
 
 
Included in general and administrative expenses for each of the nine months ended September 30, 2013 and 2012 is approximately $11,000 and $180,000, respectively related to consulting expenses where we paid consultants in shares of common stock. Additionally, included in expenses for the nine months ended September 30, 2012, is approximately $141,000, respectively related to research and development expenses that we paid for with shares of common stock.
 
Stock Options. A summary of stock option activity during the nine months ended September 30, 2013 and related information is included in the table below:
 
 
 
Number of Options
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Life (in years)
 
Aggregate
Intrinsic Value
 
Outstanding at January 1, 2013
 
14,787,287
 
$
1.98
 
6.1
 
$
1,926,000
 
Granted
 
1,502,579
 
$
1.12
 
 
 
 
 
 
Exercised
 
-
 
$
-
 
 
 
 
 
 
Forfeited
 
-
 
$
-
 
 
 
 
 
 
Outstanding at September 30, 2013
 
16,289,866
 
$
1.90
 
5.7
 
$
17,479,303
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercisable at September 30, 2013
 
12,364,648
 
$
2.17
 
4.7
 
$
10,865,493
 
 
 
 
 
 
 
 
 
 
 
 
 
Vested and expected to vest
 
16,289,866
 
$
1.90
 
5.7
 
$
17,479,303
 
 
Range of Exercise Prices
 
Number of Options
Outstanding
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Life (in years)
 
Aggregate
Intrinsic Value
 
$0.50 - $1.00
 
5,400,000
 
$
0.73
 
5.7
 
$
10,674,000
 
$1.01 - $2.00
 
4,182,999
 
$
1.19
 
7.9
 
$
6,342,186
 
$2.01 - $3.00
 
1,903,534
 
$
2.47
 
5.0
 
$
463,117
 
$3.01 - $4.00
 
4,803,333
 
$
3.59
 
4.0
 
$
-
 
 
 
16,289,866
 
$
1.90
 
5.7
 
$
17,479,303
 
 
The Company uses the Black-Scholes option pricing model to calculate the fair value of options. Significant assumptions used in this model include:
 
Page 10

 
 
 
Nine Months Ended September 30,
 
 
 
2013
 
2012
 
Annual dividend
 
-
 
-
 
Expected life (in years)
 
3.0 - 6.0
 
2.0 - 4.0
 
Risk free interest rate
 
0.51% - 1.01%
 
0.29% - 0.65%
 
Expected volatility
 
65.1% - 75.2%
 
55.5% - 70.6%
 
 
The 1,502,579 options granted in the first nine months of 2013 had a weighted average grant date fair value of $0.69. Unrecognized compensation expense for unvested stock options outstanding at September 30, 2013 was approximately $2,065,000 and will be recognized over an average of 1.9 years.
 
Restricted Stock Units. We have granted restricted stock units (RSUs) to certain employees and directors that entitle the holders to receive shares of our common stock upon vesting of the RSUs, and subject to certain restrictions regarding the exercise of the RSUs.  The fair value of restricted stock units granted is based upon the market price of the underlying common stock as if they were vested and issued on the date of grant.
 
A summary of our restricted stock unit activity for the nine months ended September 30, 2013 is as follows:
 
 
 
Number of
RSU's
 
Weighted-
Average
Grant Date
Fair Value
 
Outstanding at January 1, 2013
 
371,491
 
$
2.10
 
Granted
 
30,702
 
$
1.14
 
Vested and converted to common shares
 
-
 
$
-
 
Forfeited
 
-
 
$
-
 
Outstanding at September 30, 2013
 
402,193
 
$
2.03
 
 
 
 
 
 
 
 
Exercisable at September 30, 2013
 
363,585
 
$
2.05
 
 
Unrecognized compensation expense for unvested restricted stock units outstanding at September 30, 2013 was approximately $69,000 and will be recognized over an average of 0.4 years.
 
Common Stock Purchase Warrants. Warrants to purchase common stock were issued to certain officers, directors, stockholders and service providers. In addition, warrants were issued in conjunction with the March 2013 debt transaction and the September 2013 registered direct offering.
 
  A summary of warrant activity for the nine months ended September 30, 2013 follows:
 
 
 
Number of
Shares
Underlying
Warrants
 
Weighted-
Average
Exercise
Price
 
Weighted-
Average
Remaining
Contractual
Life (in years)
 
Aggregate
Intrinsic
Value
 
Outstanding at January 1, 2013
 
19,840,176
 
$
2.08
 
3.5
 
$
854,649
 
Granted
 
7,761,211
 
$
1.83
 
4.3
 
 
 
 
Exercised
 
(5,202,935)
 
$
1.29
 
 
 
 
 
 
Forfeited
 
(2,599,633)
 
$
3.12
 
 
 
 
 
 
Outstanding at September 30, 2013
 
19,798,819
 
$
1.97
 
3.6
 
$
18,508,411
 
 
 
 
 
 
 
 
 
 
 
 
 
Exercisable at September 30, 2013
 
18,204,219
 
$
1.80
 
3.2
 
$
17,376,245
 
 
The 7,761,211 common stock purchase warrants granted in the nine months ended September 30, 2013 had a weighted average grant date fair value of $0.82.
 
 
Page 11

 
Common Stock
In February 2012, the Company completed a registered direct placement of 5,200,000 shares of common stock at a price of $1.00 per share, and 5,200,000 common stock purchase warrants, each with an exercise price of $1.02 per share and exercisable starting six months from the issuance date for a term of five years. The Company received aggregate gross proceeds of $5,200,000; net proceeds were approximately $4,877,000. The warrants are classified within equity.
 
In March 2012, pursuant to the terms of a 2010 consulting agreement, we issued: (i) 180,000 common shares; and (ii) a common stock purchase warrant entitling the holder to purchase 510,821 shares of common stock at $0.99 per share as compensation for business advisory services. The warrant was exercisable immediately, expires on January 6, 2022, and is freely assignable in whole or in part. We also agreed to register the shares underlying the warrant with the SEC for resale. The warrant is classified within equity.
 
In August 2012, the Company completed an underwritten public offering of 6,900,000 shares of common stock at a price of $0.40 per share. The Company received aggregate gross proceeds of $2,760,000; net proceeds were approximately $2,441,000. In connection with the offering, the Company issued a common stock purchase warrant to the underwriters for the purchase of up to 300,000 shares of its common stock; the warrant has an exercise price of $0.50 per share and is exercisable for five years. The warrant is classified within equity.
 
In September 2012, the Company completed a registered direct placement of 7,000,000 shares of common stock at a price of $1.00 per share. The Company received aggregate gross proceeds of $7,000,000; net proceeds were approximately $6,368,000. In connection with the offering, the Company issued a common stock purchase warrant to the placement agent for the purchase of up to 350,000 shares of its common stock; the warrant has an exercise price of $1.25 per share and is exercisable for five years. The warrant is classified within equity.
 
In October of 2012, we entered into a consulting agreement related to the marketing of NS-189, our small molecule compound to other pharmaceutical and drug development companies. As partial consideration for the services to be rendered, we issued an aggregate of 25,000 shares of our common stock which vests over the initial five month term of the agreement.
 
In December 2012, we issued 200,000 shares of common stock as a result of a warrant holder exercising their common stock purchase warrants. The stock was issued at $1.02 and generated approximately $204,000 in net proceeds.
 
In January and February 2013, we issued 258,000 shares of common stock as a result of certain warrant holders exercising their common stock purchase warrants. The stock was issued at $1.25 per share and generated approximately $323,000 in net proceeds. In conjunction with the exercises we modified the warrants to reduce the exercise price to $1.25 and issued 258,000 replacement warrants. The replacement warrants have an exercise price of $1.25 and expire in March 2020. We recognized an expense for the value of the replacement warrants and the reduction of the strike price on the original warrants. Such expense is classified as warrant modification expense. The warrants are classified within equity.
 
In March 2013, we issued 350,650 shares of common stock and 1,297,607 common stock purchase warrants to various parties in conjunction with our debt transaction (see Note 4).
 
In May 2013, we issued 440,000 shares of common stock as a result of a certain warrant holder exercising their common stock purchase warrants. The stock was issued at $1.07 per share and generated approximately $433,000 in net proceeds. In conjunction with the exercise we modified the warrants to reduce the exercise price to $1.07 and issued 440,000 replacement warrants. The replacement warrants have an exercise price of $1.25 and expire in May 2016. We recognized expense for the value of the replacement warrants and the reduction of the strike price on the original warrants; such expense is classified as warrant modification expense. The warrants are classified within equity.
 
In May 2013, we issued 689,675 shares of common stock as a result of certain warrant holders exercising their common stock purchase warrants. The stock was issued at $1.25 per share and generated approximately $844,000 in net proceeds. In conjunction with the exercises we modified the warrants to reduce the exercise price to $1.25 and issued 689,675 replacement warrants. The replacement warrants have an exercise price of $1.25 and expire in March 2020. We recognized an expense for the value of the replacement warrants and the reduction of the strike price on the original warrants; such expense is classified as warrant modification expense. The warrants are classified within equity.
 
In May and June 2013, we issued 378,809 shares of common stock as a result of certain warrant holders exercising their common stock purchase warrants. The stock was issued at $1.25 per share and generated approximately $474,000 in net proceeds. In conjunction with the exercise we issued 378,809 replacement warrants. The replacement warrants have an exercise price of $1.25 and expire in March 2020. We recognized an expense for the value of the replacement warrants; such expense is classified as warrant modification expense. The warrants are classified within equity.
 
In May and June 2013, we issued 300,000 shares of our common stock to a warrant holder as a result of their exercising their common stock purchase warrants. The stock was issued at $1.02 and generated approximately $306,000 in net proceeds.
 
 
Page 12

 
In July 2013, we issued 942,520 shares of our common stock to a warrant holder as a result of their exercising their common stock purchase warrants. The stock was issued at $1.25 per share and generated approximately $1,178,000 in net proceeds. In conjunction with the exercises we modified 782,005 of the warrants to reduce the exercise price to $1.25 and issued 942,520 replacement warrants. The replacement warrants have an exercise price of $1.25 and expire in March 2020. We recognized an expense for the value of the replacement warrants and the reduction of the strike price on the original warrants; such expense is classified as warrant modification expense. The warrants are classified within equity.
 
In July 2013, we issued 100,000 shares of common stock as a result of a warrant holder exercising their common stock purchase warrants. The stock was issued at $1.02 and generated approximately $102,000 in net proceeds.
 
In September 2013, we issued 1,448,798 shares of common stock as a result of certain warrant holders exercising their common stock purchase warrants. The stock was issued at $1.25 per share (800,000 shares) and $1.08 per share (648,798 shares) and generated approximately $1,700,000 in net proceeds. In conjunction with the exercise we issued an additional 72,440 shares of our common stock as a commission for exercise. We recognized an expense for the value of the additional common stock; such expense is classified as warrant modification expense.
 
In September 2013, we issued 244,000 shares of common stock as a result of certain warrant holders exercising their common stock purchase warrants. 240,000 shares of stock were issued at $2.13 while 4,000 shares of stock were issued at $1.56. The exercises generated approximately $477,000 net proceeds.
 
In September 2013, we issued 401,133 shares of our common stock as a result of certain warrant holders exercising the cashless exercise provision of their common stock purchase warrants with an average strike price of $0.90. Such exercises resulted in 248,867 warrants being forfeited and resulted in no net proceeds to the Company.
 
In September 2013, the Company completed a registered direct placement of 2,847,500 shares of common stock at a price of $1.60 per share. The Company received aggregate gross proceeds of $4,556,000; net proceeds were approximately $4,242,000. In connection with the offering, the Company issued 1,423,750 common stock purchase warrants to purchase 1,423,750 shares of our common stock; the warrant has an exercise price of $2.00 and is exercisable for five years. Additionally, we issued a common stock purchase warrant to the placement agent for the purchase of up to 170,850 shares of its common stock; the warrant has an exercise price of $2.00 per share and is exercisable for 19 months. The warrants are classified within equity.

Note 6. Commitments and Contingencies
We are parties to legal proceedings that we believe to be ordinary, routine litigation incidental to the business of present or former operations. It is management’s opinion, based on the advice of counsel, that the ultimate resolution of such litigation will not have a material adverse effect on our financial condition, results of operations or cash flows.
 
On May 7, 2008, we filed suit against StemCells, Inc., StemCells California, Inc. (collectively "StemCells") and Neurospheres Holding Ltd. in U.S. District Court for the District of Maryland, alleging that U.S. Patent No. 7,361,505 (the "'505 patent") is invalid, not infringed, and unenforceable. See Civil Action No. 08-1173. On May 13, 2008, we filed an Amended Complaint seeking declaratory judgment that U.S. Patent No. 7,155,418 (the "'418 patent") is invalid and not infringed and that certain statements made by our CEO are not trade libel or do not constitute unfair competition. On September 11, 2008, StemCells filed its answer asserting counterclaims of infringement for the '505 patent, the 418 patent, and state law claims for trade libel and unfair competition. This case was consolidated with the 2006 litigation discussed below and it is not known when, nor on what basis, this matter will be concluded.
 
On July 28, 2006, StemCells, Inc., filed suit against Neuralstem, Inc. in the U.S. District Court in Maryland, alleging that Neuralstem has been infringing, contributing to the infringement of, and or inducing the infringement of four patents allegedly owned by or exclusively licensed to StemCells. See Civil Action No. 06-1877. We answered the Complaint denying infringement, asserting that the patents are invalid, asserting that we have intervening rights based on amendments made to the patents during reexamination proceedings, and further asserting that some of the patents are unenforceable due to inequitable conduct. Neuralstem has also asserted counterclaims that StemCells has engaged in anticompetitive conduct in violation of antitrust laws. On February 28, 2011, Neuralstem filed a Motion to Dismiss for lack of standing and concurrently filed a Motion for Leave to Amend its Answer and Counterclaim to allege that StemCells is not the exclusive licensee of the patents-in-suit and also that Neuralstem has obtained a non-exclusive license to the patents-in-suit. In addition, before the Court decided Neuralstem’s Motion to Dismiss for lack of standing, StemCells filed a motion for summary judgment on the issue standing. Neuralstem responded to that motion and cross-moved for summary judgment on the issue of standing. The Court further issued its Markman Order on August 12, 2011. On August 26, 2011, StemCells moved for reconsideration of two terms construed in the Markman Order and that motion remains pending. On April 6, 2012, the Court granted Neuralstem's Motion for Leave to Amend to assert lack of standing and denied Neuralstem's Motion to Dismiss and Motion for Summary Judgment without prejudice. The Court also denied StemCells' Motion for Summary Judgment with prejudice. The Court has stayed all other matters regarding the merits of the suit pending resolution of the question of standing.
 
 
Page 13

 
On October 22, 2013, the Court ordered the parties to submit a joint briefing schedule regarding the issue of standing. It is anticipated that the parties will complete briefing the standing issue sometime in January of 2014. Thereafter, the Court will decide whether StemCells has standing to pursue its patent infringement claims. It is unknown when or how the Court will resolve these issues.
 
In connection with the January 2011 settlement of our litigation with ReNeuron, Ltd. we are entitled to, among other things, future milestone and royalty payments based on ReNeuron’s development of certain products. We assert that one of the milestones has been achieved as of June 30, 2013 and consequently we are due a milestone payment of $250,000. We are currently negotiating with ReNeuron as they contend that the milestone has not been met. To date, we have not recognized any revenue for this milestone.

Note 7. Subsequent Events
The Company has performed an evaluation of subsequent events through the date the accompanying financial statements were issued and did not identify any material subsequent transactions that require disclosure.

ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
FORWARD LOOKING STATEMENTS
Statements in this Quarterly Report that are not strictly historical are forward-looking statements and include statements about products in development, results and analyses of clinical trials and studies, research and development expenses, cash expenditures, licensure applications and approvals, and alliances and partnerships, among other matters. You can identify these forward-looking statements because they involve our expectations, intentions, beliefs, plans, projections, anticipations, or other characterizations of future events or circumstances. These forward-looking statements are not guarantees of future performance and are subject to risks and uncertainties that may cause actual results to differ materially from those in the forward-looking statements as a result of any number of factors. These factors include, but are not limited to, risks relating to our ability to conduct and obtain successful results from ongoing clinical trials, our ability to commercialize our technology, our ability to obtain regulatory approval for our product candidates, our ability to contract with third parties to adequately manufacture our proposed products, our ability to protect our intellectual property rights and our ability to obtain additional financing to continue development efforts. Some of these factors are more fully discussed, as are other factors, in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012, filed with the SEC on March 15, 2013, and as may be amended from time to time, as well as in the section of this Quarterly Report entitled “Risk Factors”. We do not undertake to update any of these forward-looking statements or to announce the results of any revisions to these forward-looking statements except as required by law.
 
We urge you to read this entire Quarterly Report on Form 10-Q, including the” Risk Factors” section, the financial statements, and related notes.  As used in this Quarterly Report, unless the context otherwise requires, the words “we,” “us,” “our,” “the Company,” “Neuralstem” and “Registrant” refers to Neuralstem, Inc.  Also, any reference to “common shares,” or “common stock,” refers to our $.01 par value common stock.   The information contained herein is current as of the date of this Quarterly Report (September 30, 2013), unless another date is specified. We prepare our interim financial statements in accordance with U.S. GAAP.  Our financial statements and results of operations as of and for the three- and nine-month periods ended September 30, 2013 are not necessarily indicative of our prospective financial condition and results of operations for the pending full fiscal year ending December 31, 2013. The interim financial statements presented in this Quarterly Report as well as other information relating to our company contained in this Quarterly Report should be read in conjunction and together with the reports, statements and information filed by us with the United States Securities and Exchange Commission or SEC.
 
Our Management’s Discussion and Analysis of Financial Condition and Results of Operations or MD&A, is provided in addition to the accompanying financial statements and notes to assist readers in understanding our results of operations, financial condition and cash flows.  Our MD&A is organized as follows:
 
·      Executive Overview — Discussion of our business and overall analysis of financial and other highlights affecting the Company in order to provide context for the remainder of MD&A.
 
·      Trends & Outlook — Discussion of what we view as the overall trends affecting our business and the strategy for 2013.
 
·      Critical Accounting Policies— Accounting policies that we believe are important to understanding the assumptions and judgments incorporated in our reported financial results and forecasts.
 
·      Results of Operations— Analysis of our financial results comparing the three- and nine-month periods ended September 30, 2013 to the comparable period of 2012.
 
 
 
Page 14

 
·      Liquidity and Capital Resources— An analysis of cash flows and discussion of our financial condition and future liquidity needs.
 
Executive Overview
We are focused on the development and commercialization of treatments based on (i) human neuronal stem cells and (ii) small molecule compounds. We are headquartered in Rockville, Maryland and have a wholly-owned subsidiary in China.
 
We have developed and maintain a portfolio of patents and patent applications that form the proprietary base for our research and development efforts in the area of neural stem cell research. We own or exclusively license forty-nine (49) U.S. or foreign issued patents and fifty-nine (59) U.S. and foreign patent applications in the field of regenerative medicine, related to our stem cell technologies as well as our small molecule compounds. At times, including in the third quarter of 2012 and first quarter of 2013, we have licensed the use of our intellectual property to third parties.
 
We believe our technology base, in combination with our know-how, and collaborative projects with major research institutions, will facilitate the development and commercialization of products for use in the treatment of a wide array of neurodegenerative conditions and in regenerative repair of acute disease.
 
Regenerative medicine is a young and emerging field. Regenerative medicine is the process of creating living, functional tissues to repair or replace tissue or organ function lost due to age, disease, damage, or congenital defects. There can be no assurances that our intellectual property portfolio will ultimately produce viable commercialized products and processes. Even if we are able to produce a commercially viable product, there are strong competitors in this field and our products may not be able to successfully compete against them.
 
All of our research efforts to date are at the pre-clinical or clinical stage of development. We are focused on leveraging our key assets, including our intellectual property, our scientific team and our facilities, to advance our technologies. In addition, we are pursuing strategic collaborations with members of academia and industry.
 
Clinical Programs
 
Below is a description of our four most advanced clinical programs, their intended indication, current stage of development and our expected future development plans.
 
 
 
 
 
 
 
Future
Program
 
Indication
 
Development Status
 
Development Plan
NSI – 566
 
Amyotrophic Lateral Sclerosis (ALS)
 
Commenced Phase II clinical trials.
 
Anticipated to complete dosing of the Phase II clinical trials during the second quarter of 2014
 
 
 
 
 
 
 
NSI – 566
 
Chronic Spinal Cord Injury
 
Approved to commence Phase I clinical trials.
 
Phase I Trial expected to commence during the fourth quarter of 2013.
 
 
 
 
 
 
 
NSI – 566
 
Motor deficits due to ischemic stroke
 
Approved to commence combined Phase I/II clinical trials in China.
 
Anticipated to commence trials during the fourth quarter of 2013.
 
 
 
 
 
 
 
NSI – 189
 
Major Depressive Disorder
 
Completed Phase Ia, Phase Ib dosing complete.
 
Actively looking to partner development after Phase Ib trial. Final data expected during the fourth quarter of 2013.
 
 NSI - 566 (Stem Cells).
 
Amyotrophic Lateral Sclerosis (ALS)
 
 
Page 15

 
Amyotrophic lateral sclerosis, or ALS, is a disease of the nerve cells in the brain and spinal cord that control voluntary muscle movement. In ALS, nerve cells (neurons) waste away or die, and can no longer send messages to muscles. This eventually leads to muscle weakening, twitching, and an inability to move the arms, legs, and body. The condition slowly gets worse. When the muscles in the chest area stop working, it becomes hard or impossible to breathe. We believe that NSI-566 may provide an effective treatment for ALS by providing cells which nurture and protect the patients’ remaining motor neurons; and possibly repair some motor neurons which were not dead, but diseased.
 
During the first nine months of 2012, we were primarily engaged in conducting the Phase I trial for our proposed treatment of ALS at Emory University in Atlanta Georgia. The purpose of the Phase I trial was to evaluate the safety and transplantation technique of our proposed treatment and procedure. The dosing of patients in the Phase I trial, as designed, was completed in August of 2012. We commenced Phase II clinical trial in September of 2013. The Phase II dose escalation trial is designed to treat up to 15 ambulatory patients in five different dosing cohorts, under an accelerated dosing and treatment schedule. To date, we have treated the first cohort and started dosing patients in the second cohort. We anticipate completing the Phase II dosing in the second quarter of 2014. Although initial data from the Phase I trial appears promising, the outcome of the trial is uncertain and this trial or future trials may ultimately be unsuccessful.
 
Chronic Spinal Cord Injury
 
A spinal cord injury or SCI generally refers to any injury to the spinal cord that is caused by trauma instead of disease although in some cases, it can be the result of diseases. Chronic Spinal Cord Injury refers to the time after the initial hospitalization. Spinal cord injuries are most often traumatic, caused by lateral bending, dislocation, rotation, axial loading, and hyperflexion or hyperextension of the cord or cauda equina. Motor vehicle accidents are the most common cause of SCIs, while other causes include falls, work-related accidents, sports injuries, and penetrations such as stab or gunshot wounds. In certain instances, SCIs can also be of a non-traumatic origin, as in the case of cancer, infection, intervertebral disc disease, vertebral injury and spinal cord vascular disease. We believe that NSI-566 may provide an effective treatment for Chronic Spinal Cord Injury by “bridging the gap” in the spinal cord created in traumatic spinal cord injury and providing new cells to help transmit the signal from the brain to points at or below the point of injury.
 
During the first quarter of 2013, we received approval from the FDA to commence our proposed Phase I clinical trial to treat chronic spinal cord injury. We anticipate the trial will commence during the fourth quarter of 2013.
 
Motor Deficits Due to Ischemic Stroke
 
Ischemic strokes, the most common type of stroke, occur as a result of an obstruction within a blood vessel supplying blood to the brain. Post-stroke motor deficits include paralysis in arms and legs and can be permanent. We believe that NSI-566 may provide an effective treatment for restoring motor deficits resulting from Ischemic Stroke by both creating new circuitry in the area of injury and through repairing and or nurturing diseased cells to improve function in patients.
 
In September of 2012, we received approval to commence human clinical trials to treat motor deficits due to ischemic stroke. The trial will be conducted by our wholly owned subsidiary, Neuralstem China, at BaYi Brain Hospital in Beijing, China and will utilize our spinal cord stem cells. . The trial approval includes a combined phase I/II/III design and will test direct injections into the brain of NSI-566, the same cell product used in our recently-completed Phase I ALS trial in the United States. The trial is expected to begin in the fourth quarter of 2013 and is designed to enroll up to 118 patients.
 
NSI - 189 (Small Molecule Pharmaceutical Compound).
 
Major Depression Disorder
 
Major depressive disorder or MDD (also known as recurrent depressive disorder, clinical depression, major depression, unipolar depression, or unipolar disorder) is a mental disorder characterized by episodes of all-encompassing low mood accompanied by low self-esteem and loss of interest or pleasure in normally enjoyable activities. We believe that NSI-189 may provide an effective treatment for patients suffering from MDD by structurally rebuilding the hippocampus.
 
In February of 2011, we commenced the Phase I clinical trial (Phase Ia portion) of our small molecule drug compound, NSI-189, at California Clinical Trials, LLC, in Glendale, California. NSI-189 is being developed for the treatment of major depressive disorder and other psychiatric and/or cognitive impairment indications. NSI-189 is the lead compound in our neurogenerative small molecule drug platform. The purpose of the Phase Ia portion of the trial was to evaluate the safety of the drug in healthy volunteers. The Phase Ia portion tested a single oral administration of NSI-189 in 24 healthy volunteers and was completed in October of 2011. In December of 2011, we received approval from the FDA to commence the Phase Ib portion of the trial. The purpose of the Phase Ib portion of the clinical trial is to determine the safety of the drug at several dosings in actual MDD patients. The Phase Ib portion consists of patients with MDD receiving daily doses for 28 consecutive days. In June of 2012, we dosed our first patient in the Phase Ib portion of the trial. To date, we have completed dosing all cohorts of patients in the Phase Ib portion of the trial. We expect final data from the 1b trial to be available in the fourth quarter of 2013. It is still too early in the trial to make any determination as to its level of success, if any.
 
 
Page 16

 
Technology
 
Stem Cells.
 
Our technology enables the isolation and large-scale expansion of human neural stem cells from all areas of the developing human brain and spinal cord, thus enabling the generation of physiologically relevant human neurons of all types. We believe that our stem cell technology will assist the body in producing new cells to replace malfunctioning or dead cells as a way to treat disease and injury. Many significant and currently untreatable human diseases arise from the loss or malfunction of specific cell types in the body. Our focus is the development of effective methods to generate replacement cells from neural stem cells. We believe that replacing damaged, malfunctioning or dead neural cells with fully functional ones may be a useful therapeutic strategy in treating many diseases and conditions of the central nervous system or CNS, including: Alzheimer's disease, Parkinson's disease, Multiple Sclerosis, Lou Gehrig’s disease or ALS, depression, and injuries to the spinal cord. We own or exclusively license thirty-two (32) U.S. and foreign issued patents and thirty-seven (37) U.S. and foreign patent applications related to our stem cell technologies.
 
To date we have focused our research efforts on applications involving spinal cord stem cells. We believe we have established “proof of principle” in animal models for important spinal cord cell applications: ALS and Traumatic spinal cord injury. Of these applications, we have completed our first Phase I trial with regard to ALS and commenced initial Phase II trials in the third quarter of 2013. We have also received approval from the United States Food and Drug Administration or FDA to commence a Phase I trial in Chronic Spinal Cord Injury (patients one to two years out from their injury) in complete (no sensory of motor function from the site of the injury down) thoracic patients. We expect this trial to start in the fourth quarter of 2013. We believe that, if successfully developed, stem cell therapeutics have the potential to provide a broad therapeutic approach comparable to traditional pharmaceuticals and genetically engineered biologics.
 
Small Molecule Pharmaceutical Compounds.
 
We have developed and patented a series of small molecule compounds (low molecular weight organic compounds which can efficiently cross the blood/brain barrier). We believe that these small molecule compounds will stimulate the growth of new neurons in the hippocampus and provide a treatment for depression, and possibly other cognitive impacting diseases. In mice, our research indicated that our small molecule compounds both stimulate neurogenesis of the hippocampus and increase its volume. Additionally, our research also indicates that our small molecule compounds stimulate neurogenesis of human hippocampus-derived neural stem cells in vitro. Based on this research, we believe that our small molecule compounds may assist in reversing atrophy in the human hippocampus. Such atrophy has been seen in major depression and other disorders.
 
Our small molecule compounds are covered by seventeen (17) exclusively owned U.S. and foreign issued patents and twenty-two (22) exclusively owned U.S. and foreign patent applications related to our small molecule compounds.
 
Operating Strategy
 
We generally employ an outsourcing strategy where we outsource our Good Laboratory Practices or GLP preclinical development activities and Good Manufacturing Practices or GMP manufacturing and clinical development activities to contract research organizations or CRO and contract manufacturing organizations or CMO as well as all non-critical corporate functions. Manufacturing is also outsourced to organizations with approved facilities and manufacturing practices. This outsource model allows us to better manage cash on hand and minimize non-vital expenditures. It also allows for us to operate with relatively fewer employees and lower fixed costs than that required by similar companies.
 
Manufacturing
 
We currently manufacture our cells both in-house and on an outsource basis. We outsource the manufacturing of our pharmaceutical compound to third party manufacturers. We manufacture cells in-house which are not required to meet stringent FDA requirements. We use these cells in our research and collaborative programs. We outsource all the manufacturing and storage of our stem cells and pharmaceuticals compound to be used in pre-clinical works, and which are accordingly subject to higher FDA requirements, to Charles River Laboratories, Inc., of Wilmington, Massachusetts (stem cells) and Albany Molecular Resources, Inc. (“AMRI”) (small molecule). Both the Charles River and AMRI facilities have the capacity to be used for manufacturing under the FDA determined GMP standards in quantities sufficient for our current and anticipated pre-trial and clinical trial needs. We have no quantity or volume commitment with either Charles River Laboratories or AMRI and our cells and pharmaceutical compounds are ordered and manufactured on an as needed basis.
 
 
Page 17

 
Employees
 
As of September 30, 2013, we had 13 full-time employees and one (1) full-time independent contractor. Of these full-time employees and contractor, nine (9) work on research and development and five (5) in administration. We also use the services of numerous outside consultants in business and scientific matters.
 
Our Corporate Information
 
We were incorporated in Delaware. Our principal executive offices are located at 9700 Great Seneca Highway, Rockville, Maryland 20850, and our telephone number is (301) 366-4841. Our website is located at www.neuralstem.com.
 
In addition to announcing material financial information through our investor relations website, press releases, SEC filings and public conference calls and webcasts, we also intend to use the following social media channels as a means of disclosing information about the company, its services and other matters and for complying with our disclosure obligations under Regulation FD:
 
·      Neuralstem’s Twitter Account (https://twitter.com/Neuralstem_Inc)
·      Neuralstem’s Facebook Page (https://www.facebook.com/Neuralstem)
·      Neuralstem’s Company Blog (http://neuralstem.com/neuralstem-ceo-blog)
·      Neuralstem’s Google+ Page (https://plus.google.com/u/0/b/104875574397171789280/104875574397171789280/posts)
·      Neuralstem’s LinkedIn Company Page (http://www.linkedin.com/company/neuralstem-inc-)
 
The information we post through these social media channels may be deemed material. Accordingly, investors should monitor these accounts and the blog, in addition to following the company’s press releases, SEC filings and public conference calls and webcasts. This list may be updated from time to time.
We have not incorporated by reference into this report the information in, or that can be accessed through, our website, and you should not consider it to be a part of this report.
 
Where to Find More Information
 
We make our public filings with the SEC, including our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all exhibits and amendments to these reports. Also our executive officers, directors and holders of more than 10% of our common stock, file reports with the SEC on Forms 3, 4 and 5 regarding their ownership of our securities. These materials are available on the SEC’s web site, http://www.sec.gov. You may also read or copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Alternatively, you may obtain copies of these filings, including exhibits, by writing or telephoning us at:
 
NEURALSTEM, INC
9700 Great Seneca Highway,
Rockville, Maryland 20850
Attn: Chief Financial Officer
Tel: (301) 366-4841
 
Trends & Outlook
Revenue
 
For the nine months ended September 30, 2013 and 2012, we generated no revenues from the sale of our proposed therapies. We are mainly focused on: (i) successfully managing our clinical trials, and (ii) preparing for the initiation of clinical trials relating to Chronic Spinal Cord injury. We are also pursuing pre-clinical studies on other central nervous system indications in preparation for additional clinical trials.
 
In August of 2011, we were selected as the primary subcontractor for a DOD contract awarded to Loma Linda University entitled "Research to Treat Cancerous Brain Tumors with Neural Stem Cells." We received $625,000 for our effort on this contract through its completion in the second quarter of 2012, and recognized revenue related to this contract of approximately $234,000 for the nine months ended September 30, 2012.
 
 
Page 18

 
In the February 2013, we licensed the use of certain of our intellectual property surrounding a surgical device and delivery method to third parties. In the nine months ended September 30, 2013, we recognized revenue from these agreements and ongoing annual license fees from agreements entered into previously of approximately $108,000. In the nine months ended September 30, 2012 we recognized revenue of approximately $170,000 related to up-front payments under agreements to license certain intellectual property to third parties.
 
On a long-term basis, we anticipate that our revenue will be derived primarily from licensing fees and sales of our cell based therapy and small molecule compounds. Because we are at such an early stage in the clinical trials process, we are not yet able to accurately predict when we will have a product ready for commercialization, if ever.
 
Research and Development Expenses
 
Our research and development expenses consist primarily of  contractors and personnel expenses associated with clinical trials and regulatory submissions; costs associated with preclinical activities such as proof of principle for new indications; toxicology studies; costs associated with cell processing and process development; facilities-related costs and supplies. Clinical trial expenses include payments to research organizations, contract manufacturers, clinical trial sites, consultants and laboratories for testing clinical samples.
 
We focus on the development of treatment candidates with potential uses in multiple indications, and use employee and infrastructure resources across several projects. Accordingly, many of our costs are not attributable to a specifically identified product and we do not account for internal research and development costs on a project-by-project basis.
 
For a further description of these clinical trials, see the portion of this report entitled “Clinical Trials.”
 
We expect that research and development expenses, which include expenses related to our ongoing clinical trials, will increase in the future, as funding allows and we proceed into our anticipated Phase II trials. To the extent that it is practical, we will continue to outsource much of our efforts, including product manufacture, proof of principle and preclinical testing, toxicology, tumorigenicity, dosing rationale, and development of clinical protocol and IND applications. This approach allows us to use the best expertise available for each task and permits staging new research projects to fit available cash resources.
 
We have formed a wholly owned subsidiary in the People’s Republic of China.  We anticipate that this subsidiary will primarily: (i) conduct pre-clinical research with regard to proposed stem cell therapies, and (ii) oversee our approved clinical trials in China, including the proposed trial to treat motor deficits due to ischemic stroke. To date this subsidiary has incurred expenses of approximately $254,000.
 
General and Administrative Expenses
 
General and administrative expenses are primarily comprised of legal fees, salaries, benefits and other costs associated with, finance, legal, human resources, information technology, public relations, facilities and other external general and administrative services.
 
Critical Accounting Policies
 
Our condensed financial statements have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Note 2 of the Notes to Unaudited Condensed Consolidated Financial Statements included elsewhere herein describes the significant accounting policies used in the preparation of the financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.
 
A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: (1) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and (2) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.
 
Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have been included in the financial statements as soon as they became known. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our financial statements are fairly stated in accordance with U.S. GAAP, and present a meaningful presentation of our financial condition and results of operations. We believe the following critical accounting policies reflect our more significant estimates and assumptions used in the preparation of our condensed financial statements:
 
 
Page 19

 
Use of Estimates— Our condensed financial statements prepared in accordance with U.S. GAAP require us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Specifically, we have estimated the value and expected economic life of our licensed technology, our net operating loss for tax purposes, the fair value of our derivative instruments and our share-based compensation expenses related to employees, directors, consultants and investment banks. Actual results could differ from those estimates.
 
Revenue Recognition—Historically, our revenue has been derived primarily from (i) selling treated samples for gene expression data from stem cell experiments, (ii) providing services under various grants and contracts, and (iii) through the licensing of the use of our intellectual property.  Revenue is recognized when there is persuasive evidence that an arrangement exists, delivery of goods and services has occurred, the price is fixed and determinable, and collection is reasonably assured.
 
Fair Value Measurements ---The carrying amounts of our short-term financial instruments, which primarily include cash and cash equivalents, accounts payable and certain accrued expenses, approximate their fair values due to their short maturities. The fair value of our long-term indebtedness is estimated based on the quoted prices for the same or similar issues or on the current interest rates offered to the Company for debt of the same remaining maturities. The fair values of our derivative instruments and certain other accrued expenses are estimated using level 3 unobservable inputs.
 
Intangible and Long-Lived Assets—We assess impairment of our long-lived assets using a "primary asset" approach to determine the cash flow estimation period for a group of assets and liabilities that represents the unit of accounting for a long-lived asset to be held and used. Long-lived assets to be held and used are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset. Long-lived assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell. During the three- and nine-month periods ended September 30, 2013 and 2012, no impairment losses were recognized.
 
Research and Development Expenses - Research and development expenses consist of expenditures for the research and development of patents and technology, including the costs of pre-clinical and clinical trials, which are not capitalizable and charged to operations when incurred. Our research and development costs consist mainly of payroll and payroll related expenses, research supplies and costs incurred in connection with specific research grants.
 
Share-Based Compensation - We account for share-based compensation at fair value; accordingly we expense the estimated fair value of share-based awards over the requisite service period. Share-based compensation cost for stock options and warrants is determined at the grant date using an option pricing model that uses level 3 unobservable inputs; share-based compensation cost for restricted stock and restricted stock units is determined at the grant date based on the closing price of our common stock on that date. The value of the award that is ultimately expected to vest is recognized as expense on a straight-line basis over the requisite service period.
 
RESULTS OF OPERATIONS
 
Comparison of Three Months Ended September 30, 2013 and 2012
 
Revenue
 
We did not generate any revenues from the sale of our products in 2013 or 2012. For the three months ended September 30, 2013 and 2012, we recognized approximately $3,000 and $171,000, respectively related to the licensing of certain intellectual property surrounding a surgical device and delivery method to third parties.
 
Operating Expenses
 
Operating expenses totaled approximately $3,636,000 and $2,754,000 for the three months ended September 30, 2013 and 2012, respectively.
 
 
 
Three Months Ended September 30,
 
 
Increase (Decrease)
 
 
 
2013
 
2012
 
$
 
%
 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
Research & development costs
 
$
1,847,403
 
$
1,385,478
 
$
461,925
 
33
%
General & administrative expenses
 
 
1,707,690
 
 
1,280,606
 
 
427,084
 
33
%
Depreciation and amortization
 
 
81,393
 
 
87,908
 
 
(6,515)
 
(7)
%
Total operating expenses
 
$
3,636,486
 
$
2,753,992
 
$
882,494
 
32
%
 
Research and Development Expenses
Our research and development expenses consist primarily of  contractors charges and personnel expenses associated with clinical trials and regulatory submissions; costs associated with preclinical activities such as proof of principle for new indications; toxicology studies; costs associated with cell processing and process development; facilities-related costs and supplies. Clinical trial expenses include payments to research organizations, contract manufacturers, clinical trial sites, laboratories for testing clinical samples and consultants.
 
 
Page 20

 
Research and development expenses totaled approximately $1,847,000 and $1,385,000 for the three months ended September 30, 2013 and 2012, respectively. The increase of approximately $462,000 or 33% was primarily attributable to a $377,000 increase in project and lab related expenses, a $28,000 increase in travel expenses and a $26,000 increase in consulting and temporary labor all due to the ramping up of our clinical trial and research efforts coupled with a $48,000 increase in share-based compensation.
 
General and Administrative Expenses
General and administrative expenses are primarily comprised of legal fees, salaries, benefits and other costs associated with, finance, legal, human resources, information technology, public relations, facilities and other external general and administrative services.
 
General and administrative expenses totaled approximately $1,708,000 and $1,281,000 for the three months ended September 30, 2013 and 2012, respectively.   The increase of approximately $427,000 or 33% was primarily attributable to a $472,000 increase in share-based compensation, a $31,000 increase in insurance expense due to increased renewal premiums partially offset by a $75,000 decrease in payroll related and directors’ fees.
 
Depreciation and Amortization
Depreciation and amortization expenses totaled approximately $81,000 and $88,000 for the three months ended September 30, 2013 and 2012, respectively.   
 
Other income (expense)
 
Other income (expense) totaled approximately ($3,053,000) and $6,000 for the three months ended September 30, 2013 and 2012, respectively. Other expense in 2013 consisted primarily of a $1,945,000 expense related to the modification of certain stock purchase warrants, a $678,000 expense related to the change in fair value of the Company’s warrant liabilities and $449,000 of interest expense primarily related to the Company’s March 2013 long term debt.
 
Comparison of Nine Months Ended September 30, 2013 and 2012
 
Revenue
 
We did not generate any revenues from the sale of our products in 2013 or 2012. For the nine months ended September 30, 2013 and 2012, we recognized approximately $108,000 and $171,000, respectively related to the licensing of certain intellectual property surrounding a surgical device and delivery method to third parties. During the nine months ended September 30, 2012, we also recognized approximately $234,000 for our services as principal subcontractor under the DOD contract; this contract was completed in the second quarter of 2012.
 
Operating Expenses
 
Operating expenses totaled approximately $9,868,000 and 7,835,000 for the nine months ended September 30, 2013 and 2012, respectively.
 
 
 
Nine Months Ended September 30,
 
Increase (Decrease)
 
 
 
2013
 
2012
 
$
 
%
 
Operating Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
Research & development costs
 
$
5,502,137
 
$
4,406,538
 
$
1,095,599
 
25
%
 
General & administrative expenses
 
 
4,184,740
 
 
3,264,146
 
 
920,594
 
28
%
 
Depreciation and amortization
 
 
181,991
 
 
164,154
 
 
17,837
 
11
%
 
Total operating expenses
 
$
9,868,868
 
$
7,834,838
 
$
2,034,030
 
26
%
 
 
Research and Development Expenses
Research and development expenses totaled approximately $5,502,000 and $4,407,000 for the nine months ended September 30, 2013 and 2012, respectively.  The increase of approximately $1,096,000 or 25% was primarily attributable to a $500,000 increase in project and lab expenses, a $153,000 increase in personnel related expenses due to the hiring of additional research and development personnel, a $137,000 increase in travel expenses all due to the ramping up of our clinical trial and research efforts coupled with a $228,000 increase in share-based compensation.
 
 
Page 21

 
General and Administrative Expenses
General and administrative expenses totaled approximately $4,185,000 and $3,264,000 for the nine months ended September 30, 2013 and 2012, respectively.   The increase of approximately $921,000 or 28% was primarily attributable to a $665,000 increase in share-based expenses and a $410,000 increase in professional services, a $63,000 increase in charitable donations, partially offset by a $213,000 decrease in bonus expenses and personnel related expenses.
 
Depreciation and Amortization
Depreciation and amortization expenses totaled approximately $182,000 and $164,000 for the nine months ended September 30, 2013 and 2012, respectively. The increase is primarily due to depreciation of fixed assets held by our China subsidiary along with increases in amortization of patent related intangible assets.
 
Other income (expense)
 
Other income (expense) totaled approximately $6,767,000 and $23,000 for the nine months ended September 30, 2013 and 2012, respectively. Other expense in 2013 consisted primarily of a $5,017,000 expense related to the modification of certain stock purchase warrants, $937,000 of interest expense primarily related to the Company’s March 2013 long term debt and a $860,000 expense related to the change in fair value of the Company’s warrant liabilities.
 
Liquidity and Capital Resources
 
Since our inception, we have financed our operations through the sales of our securities, the exercise of investor warrants, and to a lesser degree from grants and research contracts. During the first nine months of 2013 the Company raised approximately $17.6 million of net proceeds from the following: approximately $7.6 million from the March 2013 issuance of its long term debt and warrants, $5.8 million from exercises of investor warrants and $4.2 million from a registered equity offering consisting of common shares and warrants.
 
Currently, our monthly cash requirement for operations is approximately $1.0 million. We anticipate that our available cash, expected income and expected proceeds from the sales of our securities will be sufficient to finance our current activities at least through September 30, 2014, although certain activities and related personnel may need to be reduced. We cannot assure you that we will be able to secure such additional financing or that the expected income will materialize. Several factors will affect our ability to raise additional funding, including, but not limited to, the volatility of our common shares and general market conditions. 
 
 
 
Nine Months Ended September 30,
 
Increase (Decrease)
 
 
 
2013
 
2012
 
$
 
%
 
Cash and cash equivalents
 
$
16,401,728
 
$
9,873,395
 
$
6,528,333
 
66
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net cash used in operating activities
 
$
(8,115,679)
 
$
(5,959,436)
 
$
(2,156,243)
 
(36)
%
 
Net cash used in investing activities
 
$
(444,721)
 
$
(188,318)
 
$
(256,403)
 
(136)
%
 
Net cash provided by financing activities
 
$
17,512,953
 
$
13,669,136
 
$
3,843,817
 
28
%
 
 
Total cash and cash equivalents was approximately $16,402,000 at September 30, 2013, compared with approximately $9,873,000 at September 30, 2012.  The increase in our cash and cash equivalents of approximately $6,528,000 or 66%, was primarily due to proceeds of from our common stock offering in the third quarter of 2012, our March 2013 debt offering, proceeds from exercises of stock purchase warrants in 2013 and proceeds from our September 2013 sale of common stock and warrants, partially offset by cash used in operations.
 
Net Cash Used in Operating Activities
 
We used approximately $8,116,000 and $5,959,000 of cash in our operating activities for the nine months ended September 30, 2013 and 2012, respectively.  The increase in our use of cash was approximately $2,156,000 or 36% was primarily due to an increase in expenses in 2013 related to the ramping up of our clinical trial and other research and development efforts.
 
Net Cash Used in Investing Activities
 
We used approximately $445,000 and $188,000 of cash in connection with investment activities for nine months ended September 30, 2013 and 2012, respectively.  The increase in our use of cash of approximately $256,000 or 136% was primarily due to an increase in patent filing fee activities in 2013 and the purchase of fixed assets by our China subsidiary related to the ramping up of our clinical trial efforts.
 
Net Cash Provided by Financing Activities
 
Proceeds from financing activities were approximately $17,513,000 and $13,669,000 in the nine months ended September 30, 2013 and 2012, respectively. The increase of approximately $3,844,000 or 28% was primarily the result of raising approximately $7,551,000, net from our debt offering in 2013, $5,836,000, net from stock purchase warrant exercises and $4,242,000, net from our 2013 equity offerings and, compared to raising approximately $13,685,000, net from our equity offering in the nine months ended September 30, 2012.
 
 
Page 22

 
Future Liquidity and Needs
 
We have incurred significant operating losses and negative cash flows since inception. We have not achieved profitability and may not be able to realize sufficient revenue to achieve or sustain profitability in the future. We do not expect to be profitable in the next several years, but rather expect to incur additional operating losses. We have limited liquidity and capital resources and must obtain significant additional capital resources in order to sustain our product development efforts, for acquisition of technologies and intellectual property rights, for preclinical and clinical testing of our anticipated products, pursuit of regulatory approvals, acquisition of capital equipment, laboratory and office facilities, establishment of production capabilities, for general and administrative expenses and other working capital requirements. We rely on cash balances and the proceeds from the offering of our securities, exercise of outstanding warrants and grants to fund our operations.
 
We intend to pursue opportunities to obtain additional financing in the future through the sale of our securities and additional research grants. On September 13, 2013, our shelf registration statement registering the sale of up to $50 million of our securities was declared effective by the SEC. We anticipate conducting financing in the future based on our shelf registration statement when and if financing opportunities arise.
 
On October 25, 2013, we entered into an at the market offering agreement. Pursuant to the agreement, we may, from time to time, offer and sell shares of our common stock having an aggregate offering price of up to $20,000,000, subject to certain limitations, through the sales agent. Sales, if any, under the program will depend on market conditions and other factors to be determined by us, and will be made in "at the market offerings" as defined in Rule 415 of the Securities Act of 1933, as amended (the "Securities Act"), including sales made directly on the NYSE MKT, on any other existing trading market for our shares or to or through a market maker. The agent may also solicit purchases of shares in privately negotiated transactions. The agreement also provides that sales may be made directly to the agent as principal.
 
The source, timing and availability of any future financing will depend principally upon market conditions, interest rates and, more specifically, on our progress in our exploratory, preclinical and future clinical development programs. Funding may not be available when needed, at all, or on terms acceptable to us. Lack of necessary funds may require us, among other things, to delay, scale back or eliminate some or all of our research and product development programs, planned clinical trials, and/or our capital expenditures or to license our potential products or technologies to third parties.
 
ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
We are not required to provide the information required by this items as we are considered a smaller reporting company, as defined by Rule 229.10(f)(1).
 
ITEM 4.
CONTROLS AND PROCEDURES.
 
Evaluation of Disclosure Controls and Procedures
 
Disclosure controls and procedures are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act are recorded, processed, summarized and reported, within the time period specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in the reports filed under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), as appropriate, to allow timely decisions regarding required disclosure.
 
Based on management’s evaluation (with the participation of our CEO, who is also our acting CFO), as of the end of the period covered by this report, our CEO has concluded that our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)), are effective to provide reasonable assurance that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and is accumulated and communicated to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
 
Changes in Internal Control over Financial Reporting
 
There has been no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met, and therefore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. We do not expect that our disclosure controls and procedures or our internal control over financial reporting are able to prevent with certainty all errors and all fraud.
 
 
Page 23

 
PART II
OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS
 
As of the date of this Quarterly Report, there are no material pending legal or governmental proceedings relating to our company or properties to which we are a party, and to our knowledge there are no material proceedings to which any of our directors, executive officers or affiliates are a party adverse to us or which have a material interest adverse to us, other than the following:
 
On May 7, 2008, we filed suit against StemCells, Inc., StemCells California, Inc. (collectively "StemCells") and Neurospheres Holding Ltd. in U.S. District Court for the District of Maryland, alleging that U.S. Patent No. 7,361,505 (the "'505 patent") is invalid, not infringed, and unenforceable. See Civil Action No. 08-1173. On May 13, 2008, we filed an Amended Complaint seeking declaratory judgment that U.S. Patent No. 7,155,418 (the "'418 patent") is invalid and not infringed and that certain statements made by our CEO are not trade libel or do not constitute unfair competition. On September 11, 2008, StemCells filed its answer asserting counterclaims of infringement for the '505 patent, the 418 patent, and state law claims for trade libel and unfair competition. This case was consolidated with the 2006 litigation discussed below and it is not known when, nor on what basis, this matter will be concluded.
 
On July 28, 2006, StemCells, Inc., filed suit against Neuralstem, Inc. in the U.S. District Court in Maryland, alleging that Neuralstem has been infringing, contributing to the infringement of, and or inducing the infringement of four patents allegedly owned by or exclusively licensed to StemCells. See Civil Action No. 06-1877. We answered the Complaint denying infringement, asserting that the patents are invalid, asserting that we have intervening rights based on amendments made to the patents during reexamination proceedings, and further asserting that some of the patents are unenforceable due to inequitable conduct. Neuralstem has also asserted counterclaims that StemCells has engaged in anticompetitive conduct in violation of antitrust laws. On February 28, 2011, Neuralstem filed a Motion to Dismiss for lack of standing and concurrently filed a Motion for Leave to Amend its Answer and Counterclaim to allege that StemCells is not the exclusive licensee of the patents-in-suit and also that Neuralstem has obtained a non-exclusive license to the patents-in-suit. In addition, before the Court decided Neuralstem’s Motion to Dismiss for lack of standing, StemCells filed a motion for summary judgment on the issue standing. Neuralstem responded to that motion and cross-moved for summary judgment on the issue of standing. The Court further issued its Markman Order on August 12, 2011. On August 26, 2011, StemCells moved for reconsideration of two terms construed in the Markman Order and that motion remains pending. On April 6, 2012, the Court granted Neuralstem's Motion for Leave to Amend to assert lack of standing and denied Neuralstem's Motion to Dismiss and Motion for Summary Judgment without prejudice. The Court also denied StemCells' Motion for Summary Judgment with prejudice. The Court has stayed all other matters regarding the merits of the suit pending resolution of the question of standing.
 
On October 22, 2013, the Court ordered the parties to submit a joint briefing schedule regarding the issue of standing. It is anticipated that the parties will complete briefing the standing issue sometime in January of 2014. Thereafter, the Court will decide whether StemCells has standing to pursue its patent infringement claims. It is unknown when or how the Court will resolve these issues.
 
In connection with the January 2011 settlement of our litigation with ReNeuron, Ltd. we are entitled to, among other things, future milestone and royalty payments based on ReNeuron’s development of certain products. We assert that one of the milestones has been achieved as of June 30, 2013 and consequently we are due a milestone payment of $250,000. We are currently negotiating with ReNeuron as they contend that the milestone has not been met. To date, we have not recognized any revenue for this milestone.
 
ITEM 1A.               RISK FACTORS
 
Investing in our common stock involves a high degree of risk. We have described below a number of uncertainties and risks which, in addition to uncertainties and risks presented elsewhere in this Quarterly Report, may adversely affect our business, operating results and financial condition.  The uncertainties and risks enumerated below as well as those presented elsewhere in this Quarterly Report should be considered carefully in evaluating our company and our business and the value of our securities.
 
Risks Relating to Our Stage of Development and Capital Structure
 
We have a history of losses.
 
Since inception in 1996 and through September 30, 2013, we have recorded accumulated losses totaling approximately $125,123,000.  On September 30, 2013, we had a working capital surplus of approximately $12,181,000 and stockholders’ equity of approximately $8,267,000. Our net losses for the two most recent fiscal years have been approximately $10,122,000 and $12,519,000 for 2012 and 2011, respectively. In August of 2011, we were selected as the primary subcontractor under a DOD contract to develop its human neural stem cell technology for the treatment of cancerous brain tumors. We recognized $625,000 of revenue related to this contract which was completed in the second quarter of 2012. We have recognized revenue of approximately $108,000 in the nine months ended September 30, 2013 related to the licensing of certain of our intellectual property to third parties. We recognized licensing revenue of approximately $173,000 in the year ended December 31, 2012. We had no revenue from the sales of our products during the nine months ended September 30, 2013 or the years 2012 and 2011. For the nine months ended September 30, 2013 we had a net loss of approximately $16,529,000. 
 
 
 
Page 24

 
 
Our ability to generate revenues and achieve profitability will depend upon our ability to complete the development of our proposed products, obtain the required regulatory approvals, manufacture, and market and sell our proposed products. To date, we have not generated any revenue from the commercial sale of our proposed products. No assurances can be given as to exactly when, if at all, we will be able to fully develop, commercialize, market, sell and/or derive any, let alone material, revenues from our proposed products.
 
We will need to raise additional capital to continue operations.
 
Since our inception, we have funded our operations through the sale of our securities, the issuance of long-term debt, the exercise of investor warrants, and to a lesser degree, from grants and research contracts and other revenue generating activities such as licensing. As of September 30, 2013, we had cash and cash equivalents on hand of approximately $16,402,000. Currently our monthly cash burn from operations is approximately $1.0 million. We anticipate that our available cash, expected income and expected proceeds from sales of our securities will be sufficient to finance our current activities at least through September 30, 2014, although certain activities and related personnel may need to be reduced. We cannot assure you that we will be able to secure additional financing or enter into licensing agreements. Our inability to accomplish either licensing or additional financing will materially impact our ability to fund our current activities which will result in our being required to substantially reduce our activities.
 
We have expended and expect to continue to expend substantial cash in the research, development, clinical and pre-clinical testing of our stem cell technologies with the goal of ultimately obtaining FDA approval to market our proposed products. We will require additional capital to conduct research and development, establish and conduct clinical and pre-clinical trials, enter into commercial-scale manufacturing arrangements and to provide for marketing and distribution of our products. We cannot assure you that financing will be available if needed. If additional financing is not available, we may not be able to fund operations and planned growth, develop or enhance our technologies, take advantage of business opportunities or respond to our competitive market pressures. If we exhaust our cash reserves and are unable to realize adequate additional financing, we may be unable to meet operating obligations which could result in us initiating bankruptcy proceedings or delaying, or eliminating some or all of our research and product development programs.
 
Our debt obligations expose us to risks that could adversely affect our business, operating results and financial condition. We will need to raise additional capital to pay our indebtedness as it comes due.
 
We have a substantial level of debt. As of September 30, 2013, we had approximately $8 million in aggregate principal amount of indebtedness outstanding. As security for such indebtedness, we have pledged substantially all of our assets, including our intellectual property. We will need to raise additional capital to pay our indebtedness as it comes due. If we are unable to obtain funds necessary to make required payments, or if we fail to comply with the various requirements of our indebtedness, we would be in default, which would permit the holders of our indebtedness to accelerate the maturity of the indebtedness and could cause defaults under any indebtedness we may incur in the future. Any default under our indebtedness would have a material adverse effect on our business, operating results and financial condition. Additionally, our loan and security agreement governing our $10 million credit facility contains a number of affirmative and restrictive covenants, including reporting requirements and other collateral limitations, certain limitations on liens and indebtedness, dispositions, mergers and acquisitions, restricted payments and investments, corporate changes and limitations on waivers and amendments to certain agreements, our organizational documents, and documents relating to debt that is subordinate to our obligations under the credit facility. Our failure to comply with the covenants in the loan and security agreement governing the credit facility could result in an event of default that, if not cured or waived, could result in the acceleration of all or a substantial portion of our debt and potential foreclosure on the assets pledged to secure the debt. If we are unable to refinance or repay our indebtedness as it becomes due or upon an event of default, we may become insolvent and be unable to continue operations.
 
Risks Relating to Our Business
 
Our business is dependent on the successful development of our product candidates.
 
Our business is significantly dependent on our two product candidates currently at different phases of clinical trials.  Any clinical, regulatory or other development that significantly delays or prevents us from completing any of our trials, any material safety issue or adverse side effect to any study participant in these trials, or the failure of these trials to show the results expected, would likely depress our stock price significantly and could prevent us from raising the additional capital we will need to develop our technologies. Moreover, any adverse occurrence in our clinical trials could substantially impair our ability to initiate clinical trials to test our product candidates in other potential indications. This, in turn, could adversely impact our ability to raise additional capital and pursue our planned research and development efforts.
 
 
Page 25

  
Our business relies on technologies that we may not be able to commercially develop.
 
We have concentrated the majority of our research on stem cell and small molecule technologies.  Our ability to generate revenue and operate profitably will depend on being able to develop these technologies for human applications. These are emerging technologies that may have limited human application. We cannot guarantee that we will be able to develop our technologies or that such development will result in products with any commercial utility or value. We anticipate that the commercial sale of such products or royalty/licensing fees related to our technologies, will be our primary sources of revenue. We recognized revenue of approximately $173,000 for the twelve months ended December 31, 2012 and $108,000 in the first nine months of 2013 related to the licensing of certain intellectual property to third parties. If we are unable to develop our technologies, we may never realize any significant revenue.
 
Our product development programs are based on novel technologies and are inherently risky.
 
We are subject to the risks inherent in the development of products based on new technologies. The novel nature of therapies in the field of regenerative medicine creates significant challenges in regard to product development and optimization, manufacturing, government regulation, third party reimbursement, and market acceptance. For example, the pathway to regulatory approval for cell-based therapies, including our product candidates, may be more complex and lengthy than the pathway for conventional drugs. These challenges may prevent us from developing and commercializing products on a timely or profitable basis or at all.
 
We are unable to predict when or if we will be able to earn revenues.
 
Given the uncertainty of our technologies and the need for government regulatory approval, we cannot predict when, or if ever, we will be able to realize revenues related to our products. As a result, we will be primarily dependent on our ability to raise capital through the sale of our securities for the foreseeable future.
 
Our inability to manufacture and store our stem cells in-house that are used in our products could adversely impact our business.
 
We currently outsource the manufacturing of our stem cells and small molecule pharmaceutical compounds to third party contractors and as such are unable to adequately control the manufacturing process and the safe storage thereof. Any manufacturing or storage irregularity, error, or failure to comply with applicable regulatory procedure would require us to find new third parties to outsource our manufacturing and storage responsibilities. Our business would suffer in the event that there are delays in locating suitable third parties or if no suitable third parties are found.
 
Our inability to complete pre-clinical and clinical testing and trials will impair our viability.
 
We are currently in clinical trials for NSI-566 and NSI-189, two of our proposed products. We commenced our first Phase II clinical trial, related to NSI-566, during the third quarter of 2013. Additionally, we anticipate commencing Phase I clinical trials of NSI-566 related to chronic spinal cord injury and motor deficit due to ischemic stroke during the fourth quarter of 2013. Additionally, we have completed Phase I clinical trials of NSI-189, our small molecule compound, related to major depressive disorder and are actively looking to partner further development. Although we have commenced a number of trials, the ultimate outcome of the trials is uncertain. If we are unable to satisfactorily complete such trials, or if such trials yield unsatisfactory results, we will be unable to commercialize our proposed products. No assurances can be given that our clinical trials will be completed or result in a successful outcome.  If regulatory authorities do not approve our products or if we fail to maintain regulatory compliance, we would be unable to commercialize our proposed products, and our business and results of operations could be materially harmed.
 
Our proposed products may not have favorable results in clinical trials or receive regulatory approval.
 
Positive results from pre-clinical studies or our Phase I trials should not be relied upon as evidence that our clinical trials will succeed. Even if our product candidates achieve positive results in pre-clinical studies or during our Phase I studies, we will be required to demonstrate through further clinical trials that our product candidates are safe and effective for use in a diverse population before we can seek regulatory approvals for their commercial sale. There is typically an extremely high rate of attrition from the failure of product candidates as they proceed through clinical trials. If any product candidate fails to demonstrate sufficient safety and efficacy in any clinical trial, then we would experience potentially significant delays in, or be required to abandon, development of that product candidate. If we delay or abandon the development efforts of any of our product candidates, we may not be able to generate revenues.
 
There are no assurances that we will be able to submit or obtain FDA approval in order to market and sell our products.
 
There can be no assurance that even  if the clinical trial of any potential product candidate is successfully initiated and completed, that we will be able to submit a Biologics License Application (“BLA”) or New Drug Application (“NDA”) to the FDA, or that any BLA or NDA we submit will be approved in a timely manner, if at all.  If we are unable to submit a BLA or NDA with respect to any future product, or if such application is not approved by the FDA, we will be unable to commercialize that product.  The FDA can and does reject BLAs and NDAs and may require additional clinical trials, even when product candidates performed well or achieved favorable results in clinical trials. If we fail to commercialize our product candidates, we may be unable to generate sufficient revenues to attain profitability and our reputation in the industry and in the investment community would likely be damaged, each of which would have a materially adverse effect on our business.
 
 
Page 26

 
 
The manufacturing of stem cell-based therapeutic products is novel and dependent upon specialized key materials.
 
The manufacturing of stem cell-based therapeutic products is a complicated and difficult process, dependent upon substantial know-how and subject to the need for continual process improvements.  We depend almost exclusively on third party manufacturers to supply our cells.  In addition, our suppliers’ ability to scale-up manufacturing to satisfy the various requirements of our planned clinical trials is uncertain.  Manufacturing irregularities or lapses in quality control could have a material adverse effect on our reputation and business, which could cause a significant loss of stockholder value. Many of the materials that we use to prepare our cell-based products are highly specialized, complex and available from only a limited number of suppliers. At present, some of our material requirements are single sourced, and the loss of one or more of these sources may adversely affect our business.
 
Our business is subject to ethical and social concerns.
 
The use of stem cells for research and therapy has been the subject of debate regarding ethical, legal and social issues.  Negative public attitudes toward stem cell therapy could result in greater governmental regulation of stem cell therapies, which could harm our business. For example, concerns regarding such possible regulation could impact our ability to attract collaborators and investors.  Existing and potential U.S. government regulation of human tissue may lead researchers to leave the field of stem cell research. Similarly, these factors may induce graduate students to choose other fields less vulnerable to changes in regulatory oversight, thus exacerbating the risk that we may not be able to attract and retain the scientific personnel we need in the face of competition among pharmaceutical, biotechnology and health care companies, universities and research institutions for what may become a shrinking class of qualified individuals
 
We may be subject to litigation that will be costly to defend or pursue and uncertain in its outcome.
 
Our business may bring us into conflict with licensees, licensors, or others with whom we have contractual or other business relationships or with our competitors or others whose interests differs from ours. If we are unable to resolve these conflicts on terms that are satisfactory to all parties, we may become involved in litigation brought by or against such parties. Any litigation is likely to be expensive and may require a significant amount of management's time and attention, at the expense of other aspects of our business. The outcome of litigation is always uncertain, and in some cases could include judgments against us which could have a materially adverse effect on our business.  By way of example, in May of 2008, we filed a complaint against StemCells Inc., alleging that U.S. Patent No. 7,361,505 (the “‘505 patent”), allegedly exclusively licensed to StemCells, Inc., is invalid, not infringed and unenforceable. On the same day, StemCells, Inc. filed a complaint alleging that we had infringed, contributed to the infringement of, and or induced the infringement of two patents allegedly exclusively licensed to StemCells. Please refer to the section of this Quarterly Report entitled “Legal Proceedings” for a further discussion of the status of such litigation.
 
We may not be able to obtain necessary licenses to third-party patents and other rights.
 
A number of companies, universities and research institutions have filed patent applications or have received patents relating to technologies in our field. We cannot predict which, if any, of these applications will issue as patents or how many of these issued patents will be found valid and enforceable. There may also be existing issued patents on which we would infringe by the commercialization of our product candidates. If so, we may be prevented from commercializing these products unless the third party is willing to grant a license to us. We may be unable to obtain licenses to the relevant patents at a reasonable cost, if at all, and may also be unable to develop or obtain alternative non-infringing technology. If we are unable to obtain such licenses or develop non-infringing technology at a reasonable cost, our business could be significantly harmed. Also, any infringement lawsuits commenced against us may result in significant costs, divert our management’s attention and result in an award against us for substantial damages, or potentially prevent us from continuing certain operations.
 
We may not be able to obtain third-party patient reimbursement or favorable product pricing.
 
Our ability to successfully commercialize our proposed products, if developed, in the human therapeutic field depends to a significant degree on patient reimbursement of the costs of such products and related treatments. We cannot assure you that reimbursement in the U.S. or in foreign countries will be available for any products developed, or, if available, will not decrease in the future, or that reimbursement amounts will not reduce the demand for, or the price of, our products.  We cannot predict what additional regulation or legislation relating to the health care industry or third-party coverage and reimbursement may be enacted in the future or what effect such regulation or legislation may have on our business. If additional regulations are overly onerous or expensive or if healthcare related legislation makes our business more expensive or burdensome than originally anticipated, we may be forced to significantly downsize our business plans or completely abandon the current business model.
 
 
Page 27

  
Our products may not be profitable due to manufacturing costs.
 
Our products may be significantly more expensive to manufacture than other drugs or therapies currently on the market today due to a fewer number of potential manufacturers, greater level of needed expertise and other general market conditions affecting manufacturers of stem cell based products.  Accordingly, if developed, we may not be able to charge a high enough price for us to make a profit from the sale of our products.
 
We are dependent on the acceptance of our products by the healthcare community.
 
Our proposed products, if approved for marketing, may not achieve market acceptance since hospitals, physicians, patients or the medical community, in general, may decide not to accept and utilize these products. The products that we are attempting to develop represent substantial departures from established treatment methods and will compete with a number of more conventional drugs and therapies manufactured and marketed by major pharmaceutical companies. The degree of market acceptance will depend on a number of factors, including:
 
·      the clinical efficacy and safety of our proposed products;
·      the superiority of our products to alternatives currently on the market;
·      the potential advantages of our products over alternative treatment methods; and
·      the reimbursement policies of government and third-party payors.
 
If the healthcare community does not accept our products for any reason, our business would be materially harmed.
 
We depend on key employees for our continued operations and future success.
 
We are highly dependent on our chief executive officer, chief scientific officer and outside consultants.  Although we have entered into employment and consulting agreements with these parties, these agreements can be terminated at any time.  The loss of any of these key employees or consultants could adversely affect our opportunities and materially harm our future prospects.  In addition, we anticipate growth and expansion into areas and activities requiring additional expertise, such as clinical testing, regulatory compliance, manufacturing and marketing.  We anticipate the need for additional management personnel and the development of additional expertise by existing management personnel. There is intense competition for qualified personnel in the areas of our present and planned activities, and there can be no assurance that we will be able to continue to attract and retain the qualified personnel necessary for the development our business.
 
The employment contracts of certain key employees contain significant anti-termination provisions which could make changes in management difficult or expensive.
 
We have entered into employment agreements with Messrs. Garr and Johe which expire on October 31, 2017.  In the event either individual is terminated prior to the full term of their respective contracts, for any reason other than a voluntary resignation, all compensation due to such employee under the terms of the respective agreement shall become due and payable immediately. These provisions will make the replacement of either of these employees very costly and could cause difficulty in effecting a change in control. Termination prior to the full term of these contracts would cost us as much as approximately $1,800,000 per contract and the immediate vesting of all outstanding options and/or warrants held by Messrs. Garr and Johe.
 
Our competition has significantly greater experience and financial resources.
 
The biotechnology industry is characterized by intense competition. We will compete against numerous companies, many of which have substantially greater resources. Several such enterprises have initiated cell therapy research programs and/or efforts to treat the same diseases which we target. Given our current stage of development and resources, it may be extremely difficult for us to compete against more developed companies.
 
Our outsource model depends on third parties to assist in developing and testing our proposed products.
 
Our strategy for the development, clinical and preclinical testing and commercialization of our proposed products is based on an outsource model. This model requires us to engage third parties in order to further develop our technology and products as well as for the day to day operations of our business. In the event we are not able to enter into such relationships in the future, our ability to operate and develop products may be seriously hindered or we would be required to expend considerable resources to bring such functions in-house. Either outcome could result in our inability to develop a commercially feasible product or in the need for substantially more working capital to complete the research in-house.
 
 
Page 28

 
The commercialization of cell-based therapeutic products exposes us to product liability claims.
 
Product liability claims could result in substantial litigation costs and damage awards against us. We have obtained liability insurance that covers our clinical trials.  If we begin commercializing products, we will need to increase our insurance coverage.  We may not be able to obtain insurance on acceptable terms, if at all, and the policy limits on our insurance policies may be insufficient to cover our liability.
 
We currently rely heavily upon third party FDA-regulated manufacturers and suppliers for our products
 
We currently manufacture our cells both in-house and on an outsource basis. We outsource the manufacturing of our pharmaceutical compound to third party manufacturers. We manufacture cells in-house which are not required to meet stringent FDA requirements. We use these cells in our research and collaborative programs. We outsource all the manufacturing and storage of our stem cells and pharmaceuticals compound to be used in pre-clinical works, and which are accordingly subject to higher FDA requirements, to Charles River Laboratories, Inc., of Wilmington, Massachusetts (stem cells) and Albany Molecular Resources, Inc. (small molecule). Because manufacturing facilities are subject to regulatory oversight and inspection, failure to comply with regulatory requirements could result in material manufacturing delays and product shortages, which could delay or otherwise negatively impact our clinical trials and product development. In the event we are required to seek alternative third party suppliers or manufacturers, they may require us to purchase a minimum amount of materials or could require other unfavorable terms. Any such event would materially impact our business prospects and could delay the development of our products. Moreover, there can be no assurance that any manufacturer or supplier that we select will be able to supply our products in a timely or cost effective manner or in accordance with applicable regulatory requirements or our specifications. In addition, due to the novelty of our products and product development, there can be no assurances that we would be able to find other suitable third party FDA-regulated manufacturers at terms reasonable to us. Failure to secure such third party manufacturers or suppliers would materially impact our business.
 
We rely on third parties to conduct our clinical trials and perform data collection and analysis, which may result in costs and delays that prevent us from successfully commercializing our product candidates.
 
Although we design and manage our current preclinical studies, we do not have the in-house capability to conduct clinical trials for our product candidates. We rely, and will rely in the future, on medical institutions, clinical investigators, contract research organizations, contract laboratories, and collaborators to perform data collection and analysis and other aspects of our clinical trials. Our preclinical activities or clinical trials conducted in reliance on third parties may be delayed, suspended, or terminated if:
 
·
the third parties do not successfully carry out their contractual duties;
·
fail to meet regulatory obligations or expected deadlines;
·
we replace a third party; or
·
the quality or accuracy of the data obtained by third parties is compromised due to their failure to adhere to clinical protocols, regulatory requirements, or for other reasons.
 
Third party performance failures may increase our development costs, delay our ability to obtain regulatory approval, and delay or prevent the commercialization of our product candidates. While we believe that there are numerous alternative sources to provide these services, in the event that we seek such alternative sources, we may not be able to enter into replacement arrangements without incurring delays or additional costs.
 
Risks Relating to Intellectual Property
 
We may not be able to withstand challenges to our intellectual property rights.
 
We rely on our intellectual property, including issued and applied-for patents, as the foundation of our business. Our intellectual property rights may come under challenge.  No assurances can be given that, even though issued, our current and potential future patents will survive such challenges. For example, in 2005 our neural stem cell technology was challenged in the United States Patent Trademark Office. Although we prevailed in this particular matter upon re-examination by the patent office, these cases are complex, lengthy, expensive, and could potentially be adjudicated adversely to our interests, removing the protection afforded by an issued patent. The viability of our business would suffer if such patent protection were limited or eliminated. Moreover, the costs associated with defending or settling intellectual property claims would likely have a material adverse effect on our business and future prospects. At present, there is litigation with StemCells, Inc., which is further described in this Quarterly Report in the section entitled “Legal Proceedings.”
 
We may not be able to adequately protect against the piracy of the intellectual property in foreign jurisdictions.
 
We anticipate conducting research in countries outside of the U.S., including the trials to be conducted through our subsidiary in the People’s Republic of China.  A number of our competitors are located in these countries and may be able to access our technology or test results.  The laws protecting intellectual property in some of these countries may not adequately protect our trade secrets and intellectual property.  The misappropriation of our intellectual property may materially impact our position in the market and any competitive advantages, if any, that we may have.
 
 
Page 29

 
Risks Relating to Our Common Stock
 
The market price for our common shares is particularly volatile.
 
The market for our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share price will continue to be more volatile than those of a seasoned issuer. The volatility in our share price is attributable to a number of factors. Mainly however, we are a speculative or “risky” investment due to our limited operating history, lack of significant revenues to date and the uncertainty of future market acceptance for our products if successfully developed. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly and at greater discounts than would be the case with the stock of a seasoned issuer. Additionally, in the past, plaintiffs have often initiated securities class action litigation against a company following periods of volatility in the market price of its securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs and liabilities and could divert management’s attention and resources.
 
The following factors may add to the volatility in the price of our common shares:  actual or anticipated variations in our quarterly or annual operating results; government regulations; announcements of significant acquisitions, strategic partnerships or joint ventures; our capital commitments; and additions or departures of our key personnel. Many of these factors are beyond our control and may decrease the market price of our common shares, regardless of our operating performance. We cannot make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including as to whether our common shares will sustain their current market prices, or as to what effect the sale of shares or the availability of common shares for sale at any time will have on the prevailing market price.
 
We face risks related to compliance with corporate governance laws and financial reporting standard.
 
The Sarbanes-Oxley Act of 2002, as well as related new rules and regulations implemented by the SEC, and the Public Company Accounting Oversight Board or PCAOB, require changes in the corporate governance practices and financial reporting standards for public companies. These laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 relating to internal control over financial reporting, will materially increase the Company’s legal and financial compliance costs and make some activities more time-consuming and more burdensome. Commencing on January 1, 2014, we will be considered an accelerated filer. Accordingly, we will be required to comply with Item 404(b) of Regulation S-K which requires our independent registered public accounting firm to audit the design and operating effectiveness of our internal controls and management’s assessment of the design and the operating effectiveness of such internal controls. We anticipate that we will be required to expend substantial capital in connection with such compliance.
 
The requirements of being a public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified board members.
 
As a public company, we incur significant legal, accounting and other expenses that we would not incur as a private company, including costs associated with public company reporting requirements. We also incur costs associated with the Sarbanes-Oxley Act of 2002, as amended, the Dodd-Frank Wall Street Reform and Consumer Protection Act and related rules implemented or to be implemented by the SEC and the NYSE MKT. The expenses incurred by public companies generally for reporting, insurance and corporate governance purposes have been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities more time-consuming and costly, although we are currently unable to estimate these costs with any degree of certainty. These laws and regulations could also make it more difficult or costly for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as our executive officers and may divert management’s attention. Furthermore, if we are unable to satisfy our obligations as a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially civil litigation.
 
We have never paid a cash dividend and do not intend to pay cash dividends on our common stock in the foreseeable future.
 
We have never paid cash dividends nor do we anticipate paying cash dividends in the foreseeable future.  Accordingly, any return on your investment will be as a result of stock appreciation if any.
 
Our anti-takeover provisions may delay or prevent a change of control, which could adversely affect the price of our common stock.
 
Our amended and restated certificate of incorporation and amended and restated bylaws contain provisions that may make it difficult to remove our board of directors and management and may discourage or delay “change of control” transactions, which could adversely affect the price of our common stock. These provisions include, among others:
 
 
Page 30

 
·      our board of directors is divided into three classes, with each class serving for a staggered three-year term, which prevents stockholders from electing an entirely new board of directors at an annual meeting;
·      advance notice procedures that stockholders must comply with in order to nominate candidates to our board of directors and propose matters to be brought before an annual meeting of our stockholders may discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirer’s own slate of directors or otherwise attempting to obtain control of our company; and
·      our board of directors may, without stockholder approval, issue series of preferred stock, or rights to acquire preferred stock, that could dilute the interest of, or impair the voting power of, holders of our common stock or could also be used as a method of discouraging, delaying or preventing a change of control.
 
If securities or industry analysts do not publish research reports, or publish unfavorable research about our business, the price and trading volume of our common stock could decline.
 
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us and our business. We currently have limited research coverage by securities and industry analysts. In the event an analyst downgrades our securities, the price of our securities would likely decline. If analysts cease to cover us or fails to publish regular reports on us, interest in our securities could decrease, which could cause the price of our common stock and other securities and their trading volume to decline.
 
Our corporate documents and Delaware law contain provisions that could make it difficult for us to be acquired in a transaction that might be beneficial to our stockholders.
 
Our board of directors has the authority to issue shares of preferred stock and to fix the rights, preferences, privileges, and restrictions of these shares without stockholder approval.  Additionally, our Bylaws provide for a staggered board.  These provisions in our corporate documents, along with certain provisions under Delaware law, may make it more difficult for a third party to acquire us or discourage a third party from attempting to acquire us, even if the acquisition might be beneficial to our stockholders.
 
Our board of directors has broad discretion to issue additional securities which might dilute the net tangible book value per share of our common stock for existing stockholders.
 
We are entitled under our certificate of incorporation to issue up to 150,000,000 shares of common stock and 7,000,000 “blank check” shares of preferred stock. Shares of our blank check preferred stock provide the board of directors broad authority to determine voting, dividend, conversion, and other rights. As of September 30, 2013 we have issued and outstanding 76,662,838 shares of common stock and we have 38,637,891 shares of common stock reserved for future grants under our equity compensation plans and for issuances upon the exercise or conversion of currently outstanding options, warrants and convertible securities. As of September 30, 2013, we had no shares of preferred stock issued and outstanding. Accordingly, we are entitled to issue up to 34,699,271 additional shares of common stock and 7,000,000 additional shares of “blank check” preferred stock. Our board may generally issue those common and preferred shares, or convertible securities to purchase those shares, without further approval by our shareholders. Any preferred shares we may issue will have such rights, preferences, privileges and restrictions as may be designated from time-to-time by our board, including preferential dividend rights, voting rights, conversion rights, redemption rights and liquidation provisions. It is likely that we will be required to issue a large amount of additional securities to raise capital in order to further our development and marketing plans. It is also likely that we will be required to issue a large amount of additional securities to directors, officers, employees and consultants as compensatory grants in connection with their services, both in the form of stand-alone grants or under our various stock plans. The issuance of additional securities may cause substantial dilution to our shareholders.
 
Our publicly filed reports are subject to review by the SEC, and any significant changes or amendments required as a result of any such review may result in material liability to us and may have a material adverse impact on the trading price of our common stock.
 
The reports of publicly traded companies are subject to review by the SEC from time to time for the purpose of assisting companies in complying with applicable disclosure requirements, and the SEC is required to undertake a comprehensive review of a company’s reports at least once every three years under the Sarbanes-Oxley Act of 2002. SEC reviews may be initiated at any time. We could be required to modify, amend or reformulate information contained in prior filings as a result of an SEC review. Any modification, amendment or reformulation of information contained in such reports could be significant and result in material liability to us and have a material adverse impact on the trading price of our common stock.
 
 
Page 31

 
Risks Related to Government Regulation and Approval of our Product Candidates
 
Our products may not receive regulatory approval.
 
The FDA and comparable government agencies in foreign countries impose substantial regulations on the manufacturing and marketing of pharmaceutical and biological products through lengthy and detailed laboratory, pre-clinical and clinical testing procedures, sampling activities and other costly and time-consuming procedures. Satisfaction of these regulations typically takes several years or more and vary substantially based upon the type, complexity and novelty of the proposed product.  We are currently undertaking clinical trials for our lead products candidates NSI-566 and NSI-189.  We cannot assure you that we will successfully complete any clinical trials in connection with such INDs.  Further, we cannot predict when we might first submit any product license application (BLA or NDA) for FDA approval or whether any such product license application will be granted on a timely basis, if at all.  Moreover, we cannot assure you that FDA approvals for any products developed by us will be granted on a timely basis, if at all. Any delay in obtaining, or failure to obtain, such approvals could have a material adverse effect on the marketing of our products and our ability to generate product revenue.
 
Development of our technologies is subject to extensive government regulation.
 
Our research and development efforts, as well as any future clinical trials, and the manufacturing and marketing of any products we may develop, will be subject to, and restricted by, extensive regulation by governmental authorities in the U.S. and other countries. The process of obtaining FDA and other necessary regulatory approvals is lengthy, expensive and uncertain.  FDA and other legal and regulatory requirements applicable to our proposed products could substantially delay or prevent us from initiating additional clinical trials. We may fail to obtain the necessary approvals to commence clinical testing or to manufacture or market our potential products in reasonable time frames, if at all.  In addition, the U.S. Congress and other legislative bodies may enact regulatory reforms or restrictions on the development of new therapies that could adversely affect the regulatory environment in which we operate or the development of any products we may develop.
 
A substantial portion of our research and development entails the use of stem cells obtained from human tissue.  The U.S. federal and state governments and other jurisdictions impose restrictions on the acquisition and use of human tissue, including those incorporated in federal Good Tissue Practice, or “GTP,” regulations. These regulatory and other constraints could prevent us from obtaining cells and other components of our products in the quantity or of the quality needed for their development or commercialization. These restrictions change from time to time and may become more onerous. Additionally, we may not be able to identify or develop reliable sources for the cells necessary for our potential products — that is, sources that follow all state and federal laws and guidelines for cell procurement. Certain components used to manufacture our stem and progenitor cell product candidates will need to be manufactured in compliance with the FDA’s GMP. Accordingly, we will need to enter into supply agreements with companies that manufacture these components to GMP standards.  There is no assurance that we will be able to enter into any such agreements.
 
Noncompliance with applicable requirements both before and after approval, if any, can subject us, our third party suppliers and manufacturers and our other collaborators to administrative and judicial sanctions, such as, among other things, warning letters, fines and other monetary payments, recall or seizure of products, criminal proceedings, suspension or withdrawal of regulatory approvals, interruption or cessation of clinical trials, total or partial suspension of production or distribution, injunctions, limitations on or the elimination of claims we can make for our products, refusal of the government to enter into supply contracts or fund research, or government delay in approving or refusal to approve new drug applications.
 
We cannot predict if or when we will be permitted to commercialize our products due to regulatory constraints.
 
Federal, state and local governments and agencies in the U.S. (including the FDA) and governments in other countries have significant regulations in place that govern many of our activities.  We are, or may become, subject to various federal, state and local laws, regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices, the experimental use of animals and the use and disposal of hazardous or potentially hazardous substances used in connection with its research and development work. The preclinical testing and clinical trials of our proposed products are subject to extensive government regulation that may prevent us from creating commercially viable products. In addition, our sale of any commercially viable product will be subject to government regulation from several standpoints, including manufacturing, advertising, marketing, promoting, selling, labeling and distributing.  If, and to the extent that, we are unable to comply with these regulations, our ability to earn revenues, if any, will be materially and negatively impacted.
 
If our clinical trials fail to demonstrate to the FDA that any of our product candidates are safe and effective for the treatment of particular diseases, the FDA may require us to conduct additional clinical trials or may not grant us marketing approval for such product candidates for those diseases.
 
We are not permitted to market our product candidates in the United States until we receive approval of a BLA or NDA from the FDA. Before obtaining regulatory approvals for the commercial sale of any product candidate for a target indication, we must demonstrate with evidence gathered in preclinical and well-controlled clinical trials, and, with respect to approval in the United States, to the satisfaction of the FDA and, with respect to approval in other countries, similar regulatory authorities in those countries, that the product candidate is safe and effective for use for that target indication and that the manufacturing facilities, processes and controls used to produce the product are compliant with applicable statutory and regulatory requirements. Our failure to adequately demonstrate the safety and effectiveness of any of our product candidates for the treatment of particular diseases may delay or prevent our receipt of the FDA’s approval and, ultimately, may prevent commercialization of our product candidates for those diseases. The FDA has substantial discretion in deciding whether, based on the benefits and risks in a particular disease, any of our product candidates should be granted approval for the treatment of that particular disease. Even if we believe that a clinical trial or trials has demonstrated the safety and statistically significant efficacy of any of our product candidates for the treatment of a disease, the results may not be satisfactory to the FDA. Preclinical and clinical data can be interpreted by the FDA authorities in different ways, which could delay, limit or prevent regulatory approval. If regulatory delays are significant or regulatory approval is limited or denied altogether, our financial results and the commercial prospects for those of our product candidates involved will be harmed, and our prospects for profitability will be significantly impaired.
 
 
Page 32

 
In addition, in the course of its review of a BLA or NDA or other regulatory application, the FDA or other regulatory authorities may conduct audits of the practices and procedures of a company and its suppliers and contractors concerning manufacturing, clinical study conduct, non-clinical studies and several other areas. If the FDA and/or other regulatory authorities conducts an audit relating to a BLA, NDA or other regulatory application and finds a significant deficiency in any of these or other areas, the FDA or other regulatory authorities could delay or not approve such BLA, NDA or other regulatory application. If regulatory delays are significant or regulatory approval is limited or denied altogether, our financial results and the commercial prospects for those of our products or product candidates involved will be harmed, and our prospects for profitability will be significantly impaired.
 
We are subject to extensive and rigorous governmental regulation, including the requirement of FDA or other regulatory approval before our product candidates may be lawfully marketed.
 
Both before and after the approval of our product candidates, we, our product candidates, our operations, our facilities, our suppliers, and our contract manufacturers, contract research organizations, and contract testing laboratories are subject to extensive regulation by governmental authorities in the United States and other countries, with regulations differing from country to country. In the United States, the FDA regulates, among other things, the pre-clinical testing, clinical trials, manufacturing, safety, efficacy, potency, labeling, storage, record keeping, quality systems, advertising, promotion, sale and distribution of therapeutic products. Failure to comply with applicable requirements could result in, among other things, one or more of the following actions: notices of violation, untitled letters, warning letters, fines and other monetary penalties, unanticipated expenditures, delays in approval or refusal to approve a product candidate; product recall or seizure; interruption of manufacturing or clinical trials; operating restrictions; injunctions; and criminal prosecution. We or the FDA, or an institutional review board, may suspend or terminate human clinical trials at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable health risk. Our product candidates cannot be lawfully marketed in the United States without FDA approval. Any failure to receive the marketing approvals necessary to commercialize our product candidates could harm our business.
 
The regulatory review and approval process of governmental authorities, which includes the need to conduct nonclinical studies and clinical trials of each product candidate, is lengthy, expensive and uncertain, and regulatory standards may change during the development of a particular product candidate. We are not permitted to market our product candidates in the United States or other countries until we have received requisite regulatory approvals. For example, securing FDA approval requires the submission of an NDA to the FDA. The approval application must include extensive nonclinical and clinical data and supporting information to establish the product candidate’s safety and effectiveness for each indication. The approval application must also include significant information regarding the chemistry, manufacturing and controls for the product. The FDA review process typically takes significant time to complete and approval is never guaranteed. If a product is approved, the FDA may limit the indications for which the product may be marketed, require extensive warnings on the product labeling, impose restricted distribution programs, require expedited reporting of certain adverse events, or require costly ongoing requirements for post-marketing clinical studies and surveillance or other risk management measures to monitor the safety or efficacy of the product. Markets outside of the United States also have requirements for approval of drug candidates with which we must comply prior to commencing marketing of our products in those markets. Obtaining regulatory approval for marketing of a product candidate in one country does not ensure we will be able to obtain regulatory approval in other countries, but a failure or delay in obtaining regulatory approval in one country may have a negative effect on the regulatory process in other countries. Also, any regulatory approval of any of our product candidates, once obtained, may be withdrawn.
 
In addition, we, our suppliers, our operations, our facilities, and our contract manufacturers, our contract research organizations, and our contract testing laboratories are required to comply with extensive FDA requirements both before and after approval of our products. For example, we are required to report certain adverse reactions and production problems, if any, to the FDA, and to comply with certain requirements concerning advertising and promotion for our product candidates and our products. Also, quality control and manufacturing procedures must continue to conform to current Good Manufacturing Practices, or cGMP, regulations after approval, and the FDA periodically inspects manufacturing facilities to assess compliance with cGMP. Accordingly, we and others with whom we work must continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production, and quality control. In addition, discovery of safety issues may result in changes in labeling or restrictions on a product manufacturer or NDA holder, including removal of the product from the market.
 
 
Page 33

  
The results of pre-clinical studies and early-stage clinical trials, such as the results from our recent Phase I ALS trial, may not be predictive of the results of later-stage clinical trials.
 
A number of companies in the pharmaceutical and biotechnology industries, including those with greater resources and experience than us, have suffered significant setbacks in Phase II and Phase III clinical trials, despite positive results from earlier-stage trials. The principal investigator of the Phase I safety trial of our human spinal cord stem cells (HSSC's) in amyotrophic lateral sclerosis (ALS or Lou Gehrig's disease), recently presented data on the patients in the study. The study was designed to assess the safety of intraspinal transplantation in ALS patients and was not intended to demonstrate efficacy. While no adverse events related to the surgical procedure or our neural stem cells were reported, the small sample size, limited time frame and preliminary nature of the study make it difficult to draw any conclusions from the results of the study. No assurance can be given that the surgical procedure or our neural stem cells will be deemed safe by the FDA or that efficacy in the treatment of ALS will be demonstrated in any future studies. Failure to demonstrate safety and efficacy results acceptable to the FDA in later stage trials could impair our development prospects and even prevent regulatory approval of our neuronal stem cells, NSI-189 or other future products.
 
ITEM 2.               UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 
The following information is given with regard to unregistered securities sold during the current fiscal year through October 2013.  The unregistered securities were issued in private transactions pursuant to Sections 3(a)(9) and 4(2) of the Securities Act:
 
·      In January and February of 2013, we received and accepted a proposal from certain warrant holders. Pursuant to the proposal, the holders agreed to exercise certain warrants for cash in exchange for the Company: (i) reducing the current exercise price of their outstanding warrants from $3.17 to $1.25 (for 200,000 warrants) and from $2.14 to $1.25 (for 58,000 warrants), and (ii) issuing such holders a replacement warrant, equal to the number of warrants exercised pursuant to the their proposal. Pursuant to the proposal, we issued an aggregate of 258,000 replacement warrants. The terms of the replacement warrants are to be substantially similar to the holders’ original warrants and have an exercise price of $1.25 and expire on March 31, 2020.
 
·      In March 2013, we issued a common stock purchase warrant to purchase 10,000 shares of our common stock as compensation for business advisory services in connection with our wholly-owned subsidiary in the People’s Republic of China. The warrant has a term of 5 years and will expire on March 19, 2018, an exercise price of $1.4375 and provides for the adjustment of the purchase price and number of shares upon stock dividends and splits. The warrant does not contain any price protection provisions with regard to subsequent financings.
 
·      In March 2013, the Company entered into a Loan and Security agreement for an initial $8 million term loan with an additional $2 million of borrowing capacity if certain conditions involving new partnerships are met. The loan is collateralized by substantially all of the Company’s assets, including our intellectual property.
 
In connection with the Loan Agreement, we issued a five-year warrant to purchase 648,809 shares of our common stock at an exercise price of $1.0789 per share. The number of shares underlying the warrant and the exercise price are subject to adjustment upon the occurrence of a non-public offering occurring between December 22, 2012 and March 22, 2014, a merger event, reclassification of shares, subdivision or combination of shares, or dividends as described in the Warrant.
 
In connection with the loan origination, we paid an advisor: (i) cash in the amount of $290,000, including the reimbursement of legal fees, (ii) 259,740 common shares, and (iii) an advisor warrant, to purchase 648,798 common shares, having the same terms and conditions as the lender warrant except that there are no adjustments upon subsequent financing and the addition of cashless exercise after 6 months from the date of issuance if underlying shares are not subject to an effective registration statement.
 
Additionally, we also issued 90,910 shares of our common stock as consideration for the waiver of any potential preferential rights contained in the underwriting agreement between the Company and a previous advisor dated August 14, 2012.
 
·      Between May and July of 2013, we received and accepted proposals from certain warrant holders. Pursuant to the proposals, the holders agreed to exercise their warrants to purchase 1,911,680 shares of our common stock, for cash, in exchange for us agreeing to: (i) reduce the original exercise price of the outstanding warrants from $2.13 to $1.07 for 440,000 warrants, from $2.13 to $1.25 for 958,005 warrants and from $2.14 to $1.25 for 513,675 warrants, and (ii) issue such holders a replacement warrant, equal to the number of warrants exercised pursuant to their proposal. Pursuant to the proposal, we issued an aggregate of 1,911,680 replacement warrants. The terms of the replacement warrant are substantially similar to the holders’ original warrants, other than having an exercise price of $1.25 and expiration dates of May 1, 2016 for 440,000 warrants and March 31, 2020 for 1,471,680 warrants.
 
·      Between March and July of 2013, we received and accepted proposals from certain warrant holders. Pursuant to the proposals, the holders agreed to exercise their warrants for cash in exchange for us agreeing to issue such holders replacement warrants equal to the number of warrants exercised pursuant to the proposal. Pursuant to the proposal, we issued an aggregate of 539,324 replacement warrants. The replacement warrants have an exercise price of $1.25 and expire on March 31, 2020.
 
 
Page 34

   
·      In June of 2013, we issued one of our legal firms a common stock purchase warrant to purchase 150,000 shares of our common stock at an exercise price of $1.52 per share in exchange for certain legal work. The warrant has a term of 5 years and will expire on June 1, 2018. The warrant can be exercised after 6 months from the issuance date on a cashless basis at any time that the shares underlying the warrant are not subject to a registration statement. The warrant provides for an adjustment to the purchase price and number of shares underlying the warrant upon stock dividends and splits. The warrant does not contain any price protection provisions with regard to subsequent financings.
 
·      In August 2013, we issued one of our advisors a common stock purchase warrant to purchase 2,000,000 shares of our common stock at an exercise price of $3.00 per share in exchange for strategic advisory services. The warrant has an initial term of 18 months expiring on February 13, 2015. Such term can be extended to 5 years if certain capital raising milestones are met. The warrant can be exercised after 6 months from the issuance date on a cashless basis at any time that the shares underlying the warrant are not subject to a registration statement. The warrant provides for an adjustment to the purchase price and number of shares underlying the warrant upon stock dividends and splits. The warrant does not contain any price protection provisions with regard to subsequent financings.
 
·      During September 2013, we issued an aggregate of 72,440 common shares to a broker-dealer as compensation for the cash exercise of 1,448,798 outstanding common stock purchase warrants. Pursuant to the exercise, we received an aggregate of approximately $1,563,000.
   
ITEM 3.  DEFAULT UPON SENIOR SECURITIES
  
None
  
ITEM 4.  MINE SAFETY DISCLOSURE
  
Not Applicable
  
ITEM 5.  OTHER INFORMATION
  
None
  
ITEM 6.  EXHIBITS
 
The exhibits listed in the accompanying index to exhibits are filed or incorporated by reference as part of this Form 10-Q.
 
SIGNATURES
 
In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant has caused this report to be signed by the undersigned hereunto duly authorized.
 
 
NEURALSTEM, INC.
 
 
 
 
 
Date: November 12,  2013
 
/s/ I. Richard Garr
 
 
 
Chief Executive Officer
 
 
 
 
 
 
/s/ I. Richard Garr
 
 
 
Chief Financial Officer
 
 
 
(Principal Accounting Officer)
 
 
 
 
 
 
 
Page 35

 
  
INDEX TO EXHIBITS
 
 
 
 
 
 
 
 
Incorporated by Reference
Exhibit
No.
 
Description
 
Filed
Herewith
 
Form
 
Exhibit
No. 
 
File No.
 
Filing Date
 
 
 
 
 
 
 
 
 
 
 
 
 
3.01(i)
 
Amended and Restated Certificate of Incorporation of Neuralstem, Inc. filed on 9/29/05
 
 
 
10-K
 
3.01(i)
 
001-33672
 
3/31/09
 
 
 
 
 
 
 
 
 
 
 
 
 
3.02(i)
 
Certificate of Amendment to Certificate of Incorporation of Neuralstem, Inc. filed on 5/29/08
 
 
 
DEF 14A
 
Appendix I
 
 001-33672
 
4/24/08
 
 
 
 
 
 
 
 
 
 
 
 
 
3.03(ii)
 
Amended and Restated Bylaws of Neuralstem, Inc. adopted on 7/16/07
 
 
 
10-QSB
 
3.2(i)
 
333-132923
 
8/14/07
 
 
 
 
 
 
 
 
 
 
 
 
 
4.01**
 
Amended and Restated 2005 Stock Plan adopted on 6/28/07
 
 
 
10-QSB
 
4.2(i)
 
333-132923
 
8/14/07
 
 
 
 
 
 
 
 
 
 
 
 
 
4.02**
 
Non-qualified Stock Option Agreement between Neuralstem, Inc. and Richard Garr dated 7/28/05
 
 
 
SB-2
 
4.4
 
333-132923
 
6/21/06
 
 
 
 
 
 
 
 
 
 
 
 
 
4.03**
 
Non-qualified Stock Option Agreement between Neuralstem, Inc. and Karl Johe dated 7/28/05
 
 
 
SB-2
 
4.5
 
333-132923
 
6/21/06
 
 
 
 
 
 
 
 
 
 
 
 
 
4.04**
 
Neuralstem, Inc. 2007 Stock Plan
 
 
 
10-QSB
 
4.21
 
333-132923
 
8/14/07
 
 
 
 
 
 
 
 
 
 
 
 
 
4.05
 
Form of Common Stock Purchase Warrant Issued to Karl Johe on 6/5/07
 
 
 
10-KSB
 
4.22
 
333-132923
 
3/27/08
 
 
 
 
 
 
 
 
 
 
 
 
 
4.06
 
Form of Placement Agent Warrant Issued to Midtown Partners & Company on 12/18/08
 
 
 
8-K
 
4.1
 
001-33672
 
12/18/08
 
 
 
 
 
 
 
 
 
 
 
 
 
4.07
 
Form of Consultant Common Stock Purchase Warrant issued on 1/5/09
 
 
 
S-3/A
 
10.1
 
333-157079
 
02/3/09