UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549

 
FORM 10-K
(Mark One)
 
x
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
          For the fiscal year ended December 31, 2009.
or

¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
          For the transition period from                      to                     .
 
Commission File Number 000-1357459
 
NEURALSTEM, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
52-2007292
State or other jurisdiction of
 incorporation or organization
(I.R.S. Employer
 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 
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of each class
 
Name of each exchange on which registered
Common stock, $0.01 par value
 
NYSE Amex

Securities registered pursuant to Section 12(g) of the Act:
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ¨ Yes  x No

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ¨Yes  x No

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).  x  Yes ¨ No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨
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 smaller 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 Act).  Yes   ¨  No   x
 
The aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold as of the last business day of the registrant’s most recently completed second fiscal quarter based upon the closing price of the common stock as reported by NYSE Amex on such date, was approximately $33,827,962.
 
The number of shares outstanding of Registrant’s common stock, $0.01 par value at March 25, 2010 was 42,820,875.
 
DOCUMENTS INCORPORATED BY REFERENCE
 
None.
 
SUBSEQUENT EVENTS

During the first quarter of 2010, the Company entered into a series of transactions resulting in securing what management believes provides sufficient financing to fund operations through the first quarter of 2011.  As a result of these transactions, it received net proceeds from the exercise of our Series A, B, C and D warrants of $7.3 million.  On March 16, 2010 the Company had cash on hand of $7.5 million.

On January 21, 2010, Neuralstem, Inc. announced that the first Amyotrophic Lateral Sclerosis (“ALS” or “Lou Gehrig’s disease”) patient was treated with its spinal cord stem cells at the Emory ALS Center at Emory University, in Atlanta, GA.

 
 

 
 
NEURALSTEM, INC

FORM 10-K

FOR THE YEAR ENDED DECEMBER 31, 2009

INDEX
 
       
Page
PART I
 
3
         
Item 1.
 
Business
 
3
Item 1A.
 
Risk Factors
 
13
Item 2.
 
Properties
 
21
Item 3.
 
Legal Proceedings
 
21
Item 4.
 
Removed and Reserved
 
21
 
PART II
 
22
         
Item 5.
 
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
22
Item 6.
 
Selected Financial Data
 
24
Item 7.
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
24
Item 7A.
 
Quantitative and Qualitative Disclosures About Market Risk
 
30
Item 8.
 
Financial Statements and Supplementary Data
 
30
Item 9.
 
Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
 
46
Item 9A.
 
Controls and Procedures
 
47
Item 9B.
 
Other Information
 
48
 
PART III
 
48
         
Item 10.
 
Directors, Executive Officers and Corporate Governance
 
48
Item 11.
 
Executive Compensation
 
52
Item 12.
 
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
 
56
Item 13.
 
Certain Relationships and Related Transactions, and Director Independence
 
58
Item 14.
 
Principal Accounting Fees and Services
 
58
 
PART IV
 
58
         
Item 15.
 
Exhibits, Financial Statement Schedules
 
59
 
 
2

 
 
PART I
We urge you to read this entire Annual Report on Form 10-K, including the” Risk Factors” section, the financial statements and related notes included herein.  As used in this Annual Report, unless context otherwise requires, the words “we,” “us,”“our,” “the Company,” “Neuralstem” and “Registrant” refer to Neuralstem, Inc.  Also, any reference to “common share” or “common stock,” refers to our $.01 par value common stock.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain statements contained in this Annual Report on Form 10-K constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. All statements included in this Annual Report, including those related to our cash, liquidity, resources and our anticipated cash expenditures, as well as any statements other than statements of historical fact, regarding our strategy, future operations, financial position, projected costs, prospects, plans and objectives are forward-looking statements.  These forward-looking statements are derived, in part, from various assumptions and analyses we have made in the context of our current business plan and information currently available to us and in light of our experience and perceptions of historical trends, current conditions and expected future developments and other factors we believe are appropriate in the circumstances. You can generally identify forward looking statements through words and phrases such as “believe”, “expect”, “seek”, “estimate”, “anticipate”, “intend”, “plan”, “budget”, “project”, “may likely result”, “may be”, “may continue”  and other similar expressions, although not all forward-looking statements contain these identifying words. We cannot guarantee future results, levels of activity, performance or achievements, and you should not place undue reliance on our forward-looking statements.

Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including the risks described in Part I, Item 1A, “Risk Factors” and elsewhere in this Annual Report. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or strategic investments. In addition, any forward-looking statement represents our expectation only as of the day this Annual Report was first filed with the Securities and Exchange Commission (“SEC”) and should not be relied on as representing our expectations as of any subsequent date. While we may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our expectations change.

When reading any forward-looking statement, you should remain mindful that actual results or developments may vary substantially from those expressed in or implied by such statement for a number of reasons or factors, including but not limited to:
 
·
the success of our research and development activities, the development of a viable commercial product, and the speed with which regulatory authorizations and product launches may be achieved;

·
whether or not a market for our product develops, and, if a market develops, the rate at which it develops;

·
our ability to successfully sell or license our products if a market develops;

·
our ability to attract and retain qualified personnel to implement our business plan and corporate growth strategies;

·
our ability to develop sales, marketing, and distribution capabilities;

·
our ability to obtain reimbursement from third party payers for our proposed products if they are developed;

·
the accuracy of our estimates and projections;

·
our ability to fund our short-term and long-term financing needs;

·
changes in our business plan and corporate strategies; and

·
other risks and uncertainties discussed in greater detail in the section captioned “Risk Factors

Each forward-looking statement should be read in context with and in understanding of the various other disclosures concerning our company and our business made elsewhere in this Annual Report as well as our public filings with the SEC. You should not place undue reliance on any forward-looking statement. We are not obligated to update or revise any forward-looking statements contained in this Annual Report or any other filing to reflect new events or circumstances unless and to the extent required by applicable law. 

ITEM 1.
BUSINESS

Overview

We are focused on the development and commercialization of treatments for central nervous system disease based on transplanting human neural stem cells and small molecule drugs.  We are headquartered in Rockville, Maryland.

 
3

 

We have developed and maintain a portfolio of patents and patent applications that form the proprietary base of our research and development efforts in the areas of neural stem cell research, small molecule research, and related technologies. We believe our patented technology, in combination with our know-how, and collaborative projects with major research institutions, provide a competitive advantage and will enable us to  develop and commercialize products for use in treatment of a number of neurodegenerative conditions and in regenerative repair of acute disease.

Regenerative medicine is a young and emerging field. 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 product may not be able to successfully compete against them.
  
All of our research efforts to date are at either the level of research or pre-clinical stage of development, or at the clinical stage of development.  On December 18, 2008 we filed our first Investigational New Drug Application (“IND”) with the U.S. Food and Drug Administration (“FDA”) to begin a clinical trial to treat Amyotrophic Lateral Sclerosis (“ALS” or “Lou Gehrig’s disease”). On September 21, 2009, the FDA approved our IND.  The first patient was dosed on January 21, 2010.

The Field of Regenerative Medicine
    
The emerging field of treatment called "regenerative medicine" or "cell therapy" refers to treatments that are founded on the concept of 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 or 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 (“CNS”) including: Alzheimer's disease, Parkinson's disease, Multiple Sclerosis, ALS, depression, and injuries to the spinal cord.

Stem Cell Therapy Background
 
Cells maintain normal physiological function in healthy individuals by secreting or metabolizing substances, such as sugars, amino acids, neurotransmitters and hormones, which are essential to life. When cells are damaged or destroyed, they no longer produce, metabolize or accurately regulate those substances. Cell loss or impaired cellular functions are leading causes of degenerative diseases, and some of the specific substances or proteins that are deficient in some of these diseases have been identified. Although administering these substances or proteins has some advantages over traditional pharmaceuticals, such as specificity, there is no existing technology that can deliver them precisely to the sites of action, under the appropriate physiological regulation, in the appropriate quantity, nor for the duration required to cure the degenerative condition. Cells, however, may do all this naturally. Thus, where failing cells are no longer producing needed substances or proteins or where there has been irreversible tissue damage or organ failure, transplantation of stem or progenitor cells may enable the generation of new functional cells, thus potentially restoring organ function and the patient's health.

Stem cells have two defining characteristics: (i) they produce mature cells which make up particular organs; and (ii) they self renew — that is, some of the cells developed from stem cells are themselves new stem cells, thus permitting the process to continue again and again. Stem cells are known to exist for a number of systems of the human body, including the blood and immune system, the central and peripheral nervous systems (including the brain), the skin, bone, and even hair. They are thought to exist for many others, including the liver and pancreas endocrine systems, gut, muscle, and heart. Stem cells are responsible for organ regeneration during normal cell replacement and, to a greater or lesser extent, after injury.
 
Stem cells are rare and only available in limited supply, whether from the patients themselves or from donors. Also, stem cells can often be obtained only through significant surgical procedures. Therefore, in order to develop stem cell therapeutics, three key challenges must be overcome: (i) identification of stem or progenitor cells of a particular organ and testing them for therapeutic potential; (ii) creation of processes to enable use of these rare cells in clinical applications, such as expanding and banking them in sufficient quantities to transplant into multiple patients; and (iii) demonstration of the safety and efficacy of these potential therapeutics in human clinical trials.
 
The Potential of Our Tissue-Derived Stem Cell-Based Therapy

We believe that, if successfully developed, stem cell therapeutics have the potential to provide a broad therapeutic approach comparable in importance to traditional pharmaceuticals and genetically engineered biologics. With respect to the human neural stem cells, we have developed proprietary and reproducible processes to identify, isolate, expand, and control cell differentiation in mature functioning human neuronsand glia2 and bank human neural stem cells derived from brain tissue. Because the cells are normal human neural stem cells, they may be better suited for transplantation and may provide a safer and more effective alternative to therapies that are based on cells derived from cancer cells, animal derived cells or cells derived from an unpurified mix of many different cell types.


1 Neurons are a major class of cells in the nervous system. Neurons are sometimes called nerve cells, though this term is technically imprecise since many neurons do not form nerves. In vertebrates, they are found in the brain, the spinal cord and in the nerves and ganglia of the peripheral nervous system, and their primary role is to process and transmit neural information. One important characteristic of neurons is that they have excitable membranes which allow them to generate and propagate electrical signals.
 
2 Glia cells, commonly called neuroglia or simply glia, are non-neuronal cells that provide support and nutrition, maintain homeostasis, form myelin, and participate in signal transmission in the nervous system. In the human brain, glia are estimated to outnumber neurons by as much as 50 to 1.

 
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Potential Markets

We believe the potential markets for regenerative medicine based on our technologies are large. The table below summarizes the potential United States patient populations which we believe may be amenable to neural cell transplantation or treatment with our small molecule compound and represent potential target markets for our proposed products:

Medical Condition
 
Number of Patients
 
Stem cells
     
ALS
 
30,000
(1)
Huntington’s disease
 
15,000
(2)
Spinal Cord Injury
 
250,000
(4)
Stroke
 
 6.5 million
(3)
Small molecule compound
     
Alzheimer’s disease
 
4.5 million
(5)
Depression
 
14.8 million
(5)
Schizophrenia
 
2.4 million
(5)
Stroke
 
6.5 million
(3)

(1) Agency for Toxic Substances and Disease Registry (ATSDR),
(2) National Institute of the Neurological Disorders and Stroke (NINDS)
(3) 2005 American Heart Association study
(4) The University of Alabama National Spinal Cord Injury Statistical Center - March 2002
(5) National Institute of Health

Our Technology

Stem Cells

Our technology includes the ability to isolate human neural stem cells from most areas of the human brain and spinal cord and to grow them into physiologically relevant human neurons of all types. Our core patents entitled:

·
Isolation, Propagation, and Directed Differentiation of Stem Cell from Embryonic and Adult Central Nervous System of Mammal; and

·
In Vitro Generation of Differentiated Neurons from Cultures of Mammalian Multi-potential CNS Stem Cell

contain claims which cover the details of this process and the culture of cells created. What differentiates our stem cell technology from others is that our patented processes do not require us to “push” the cells towards a certain fate by adding specific growth factors. Our cells actually “become” the type of cell they are fated to be. We believe this process and the resulting cells create a technology platform that allows for the efficient isolation and ability to produce, in commercially reasonable quantities, neural stem cells.
  
Our technology allows for cells to grow in cultured dishes, also known as “in vitro” growth, without mutations or other adverse events that would compromise their usefulness. We believe this provides the following advantages:

 
·
 Our cells are multipotent, so they give rise to the three critical cell types of the nervous system: neurons (cells that carry signals throughout the brain and spinal cord), astrocytes (cells that support and protect neurons), and oligodendrocytes (cells that provide insulation to neurons to make signaling efficient).
 
·
The cells are lineage-restricted, so they only give rise to cells of the nervous system. For example, our spinal cord stem cells can only form cells found within the spinal column.
 
·
Our technology enables large-scale expansion of neural stem cells under controlled conditions without introducing mutations or other adverse events that would compromise their usefulness.
 
·
Our spinal cord cells can be produced in commercial quantities.

 
5

 

 
·
We have isolated and cultured cells from multiple regions of the brain, allowing application to a number of serious disorders. Cells have been isolated from spinal cord (ALS, spinal cord injury), hippocampus (stroke, Alzheimer’s disease), midbrain (Parkinson’s disease), and cortex (ischemia).
 
·
Universal Compatibility.   The Company’s stem cell products are provided to patients as ‘allografts,’ As such, the recipient is not genetically identical to the donor, and may be treated with a course of immunosuppressant drugs to prevent rejection of the cells. This strategy allows for a single stem cell product to be provided to many thousands of patients, ensuring the highest degree of quality in manufacturing and predictability in outcome. Because the brain and spinal cord are considered ‘immune privileged’ by most experts in the field, it is expected that immune suppression of the patient will only be performed for a brief period, allowing for minimal disruption of their normal immune function.
 
·
Our biologic drug candidates can be stored frozen at end-user medical facilities until they are needed. This is a key feature of our technology.
 
Although not the focus of our business, our technology also has ancillary uses with respect to drug development. Our ability to grow and differentiate neural cells in vitro, gives us the ability to analyze the potential biological effects of molecules on these cells.

Small molecule Compounds

The Company has developed and patented a series of small molecule compounds (low molecular weight organic compounds which can efficiently cross the blood/brain barrier).  The Company expects to file an IND to commence a human safety trial of its lead compound to treat major depression in late 2010 or early 2011.

Business Strategy
 
Neuralstem has a number of prospects for developing treatments for central nervous system disease using its stem cells and small molecule compounds.

A central focus of Company strategy is keeping its fixed costs as low as possible through outsourcing a wide variety of functions including some legal services, financial transaction processing, laboratory staffing, regulatory management, IT, public relations and research projects. As a result we can find the best possible resource to fill a particular need, and after the project is completed the associated costs stop. This low fixed cost approach enables the company to fit its development spending to the cash on hand.

Stem Cells

The Company has focused its most intensive cell development activities on treating spinal cord injury and disease. All preclinical safety and efficacy testing has been successfully completed for our first application in Amyotrophic Lateral Sclerosis (ALS, or Lou Gehrig’s disease). This work culminated in the filing of an Investigational New Drug (IND) application to the FDA.  In September of 2009 the FDA approved the Company’s application, making ours the first neural stem cell clinical trial in the United States for ALS.  Neuralstem believes that it can manage the clinical trial and product approval process without a strategic partner.

In preparation for the clinical trials described above, Neuralstem has reached the following milestones with regard to our spinal cord stem cell product: (1) the cells have been produced in large quantities under Good Manufacturing Practices (GMP) methodology; (2) the cells have completed pre-clinical safety testing in the context of delivery to the spinal cord; and (3) the Company has developed a process for delivering the cells to the spinal cord.  We are also working on the following additional indications for our technologies:

 
·
Spinal Cord Injury
 
·
Stroke
 
·
Huntington’s disease
 
·
ALS

Small Molecule Compounds

As a first indication, Neuralstem is targeting depression. The Company plans to file a request with the FDA to initiate clinical trials for this application without a partner, and may also manage initial clinical safety and efficacy trials by itself. Because of the complexity and cost of managing clinical trials after the earliest phases, Neuralstem will seek a strategic partner to manage the later stages of the trials.

Our Research and Programs

We have devoted substantial resources to our research programs to isolate and develop a series of neural stem cell banks that we believe can serve as a basis for therapeutic products. Our efforts to date have been directed at methods to identify, isolate and culture large varieties of stem cells of the human nervous system, and to develop therapies utilizing these stem cells. This research is conducted both internally and through the use of third party laboratory consulting companies under our direct supervision.

 
6

 

In addition to research which we conduct internally or under our direct supervision, we conduct research and development through research collaborations. These collaborations, or programs, are undertaken with both commercial and scholarly institutes pursuant to the terms and conditions of our standard material transfer agreement.
  
The terms of our standard material transfer agreement require us to provide our research partner or collaborator with access to our technology or “research materials,” which are comprised of our neurological stem cells, for a specific pre-defined purpose. As part of the agreement, we agree to provide sufficient research materials and technical assistance to accomplish the purpose of the program. The determination of sufficiency is determined at our sole discretion. As part of these agreements, we are entitled to certain reporting rights and the right to have patentable discoveries presented to us prior to publication in order for us to file applicable patents. In the event we choose to file a patent, we will either be responsible for all filing and maintenance fees or we will split the fees with our research partner depending on the type of patent to be filed. The agreements also provide for us to receive a fully paid up, royalty free, non-exclusive license to any inventions made by our partner with respect to our technologies and their interest in any intellectual property jointly developed and first right to negotiate an exclusive license. The agreements also provide confidentiality between the parties. Generally each party is responsible for its own expense, there are no milestone payment or royalty payment requirements and the duration of these agreements is for a three year term which can be terminated by either party by providing 90 days written notice.  Also, these agreements may require us to pay for certain costs and expenses incurred in connection with the research.
 
Examples of such projects include:
 
University of California San Diego, San Diego, CA: In May of 2002, we initiated a research project with the University of California in San Diego for the purpose of researching the applicability of our technology to the treatment of Ischemic Spastic Paraplegia and traumatic spinal cord injury. The project is ongoing. The research yielded findings that contributed to our filing of patent entitled Transplantation of Human Cells for Treatment of Neurological Disorders.

Johns Hopkins University, School of Medicine, Baltimore, MD: In March of 2001 we initiated a research project with Johns Hopkins University, School of Medicine for the purpose of researching the applicability of our technology to the treatment of Amyotrophic Lateral Sclerosis and traumatic spinal cord injury. The project is ongoing. The research yielded findings that contributed to our filing of patent entitled Transplantation of Human Cells for Treatment of Neurological Disorders.
  
University of Southern Florida, Tampa, FL: In September of 2005 we initiated a research project with the University of Southern Florida for the purpose of researching the applicability of our technology to the treatment of Parkinson's Disease. The project is ongoing.

University of Central Florida, Orlando, FL: In March of 2006 we initiated a research project with the University of Central Florida for the purpose of researching the applicability of our technology to the treatment of spinal cord injuries. The project is ongoing.
 
University of Pennsylvania whereby we have entered into an agreement with the university to assist us in developing “A Feasibility and Safety Study of human Spinal Stem Cell Transplantation for the Treatment of Ischemic Spastic Paraplegia Due to Spinal Cord Ischemia.

China Medical University & Hospital of Taiwan, to  collaborate on Amyotrophic Lateral Sclerosis (ALS or Lou Gehrig's disease) with Dr. Shinn-Zong Lin, MD, PhD as principle investigator.

Albert-Ludwigs-University in Freiburg, Germany, to collaborate on the treatment of Huntington's disease.

University of  Cincinnati to collaborate on the treatment of Parkinson’s Disease

University of Michigan to collaborate on the treatment of ALS

Emory University for ALS clinical trials.

The forgoing is not exhaustive and is only meant to provide a brief overview of the types of projects we are undertaking with third parties.        
 
Manufacturing
 
We currently manufacture our cells both in-house and on an outsource basis. 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 to be used in pre-clinical works, and which are accordingly subject to higher FDA requirements, to Charles River Laboratories, Inc., of Wilmington, Massachusetts. The Charles River facility has the capacity to be used for cell processing under the FDA determined Good Manufacturing Practices (GMP) in quantities sufficient for our current and anticipated pre-trial and clinical trial needs in both the near to intermediate term. We have no quantity or volume commitment with Charles River Laboratories and our cells are ordered and manufactured on an as needed basis.

 
7

 
 
Products & Marketing
 
Because of the early stage of our programs, we have yet to identify any specific product and we have not yet addressed questions of channels of distribution and marketing of potential future products.
 
Our Intellectual Property

Our research and development is supported by our intellectual property. We currently own or have exclusive licenses to 14 patents and 22 patent applications pending worldwide in the field of regenerative medicine and cell therapy.

Our success will likely depend upon our ability to preserve our technologies and operate without infringing the proprietary rights of other parties. However, we may rely on certain proprietary technologies and know-how that are not patentable. We protect our proprietary information, in part, by the use of confidentiality agreements with our employees, consultants and certain of our contractors.

When appropriate, we seek patent protection for inventions in our core technologies and in ancillary technologies that support our core technologies or which we otherwise believe will provide us with a competitive advantage. We accomplish this by filing patent applications for discoveries we make, either alone or in collaboration with scientific collaborators and strategic partners. Typically, although not always, we file patent applications both in the United States and in select international markets. In addition, we plan to obtain licenses or options to acquire licenses to patent filings from other individuals and organizations that we anticipate could be useful in advancing our research, development and commercialization initiatives and our strategic business interests.
 
The following table identifies the issued and pending patents we own that we believe currently support our technology platform.

 
8

 

Patents Pending
 
Number
 
Country
 
Filing
Date
 
Issue Date
 
Expiration
Date
 
Title
                     
2257068
 
CA
 
5/7/1997
 
N/A
 
N/A
 
ISOLATION, PROPOGATION, AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM CENTRAL NERVOUS SYSTEM OF MAMMALS
                     
2343571
 
CA
 
9/20/1999
 
N/A
 
N/A
 
STABLE NEURAL STEM CELL LINES
                     
99948396.9
 
EP
 
9/20/1999
 
N/A
 
N/A
 
STABLE NEURAL STEM CELL LINES
                     
2000-574224
 
JP
 
9/20/1999
 
N/A
 
N/A
 
STABLE NEURAL STEM CELL LINES
                     
3790356.4
 
EP
 
12/5/2003
 
N/A
 
N/A
 
METHOD FOR DISCOVERING NEUROGENIC AGENTS
                     
11/281,640
 
US
 
11/17/2005
 
N/A
 
N/A
 
TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS
                     
200580039450
 
CN
 
11/17/2005
 
N/A
 
N/A
 
TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS
                     
5851748.3
 
EP
 
11/17/2005
 
N/A
 
N/A
 
TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS
                     
2613/CHENP/2007
 
IN
 
11/17/2005
 
N/A
 
N/A
 
TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS
                     
183092
 
IL
 
11/17/2005
 
N/A
 
N/A
 
TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS
                     
2007-543219
 
JP
 
11/17/2005
 
N/A
 
N/A
 
TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS
                     
10-2007-7012097
 
KR
 
11/17/2005
 
N/A
 
N/A
 
TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS
                     
1-2007-501016
 
PH
 
11/17/2005
 
N/A
 
N/A
 
TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS
                     
2007122507
 
RU
 
11/17/2005
 
N/A
 
N/A
 
TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS
                     
1-2007-01216
 
VN
 
11/17/2005
 
N/A
 
N/A
 
TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEURODEGENERATIVE CONDITIONS
                     
20073078
 
NO
 
11/17/2005
 
N/A
 
N/A
 
TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS
                     
11/852,922
 
US
 
9/10/2007
 
N/A
 
N/A
 
METHOD FOR DISCOVERING NEUROGENIC AGENTS
                     
11/932,923
 
US
 
10/31/2007
 
N/A
 
N/A
 
TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS
                     
12/404,841
 
US
 
3/16/2009
 
N/A
 
N/A
 
METHODS OF TREATING ISCHEMIC SPASTITICY
                     
12/424,238
 
US
 
4/15/2009
 
N/A
 
N/A
 
STABLE NEURAL STEM CELL LINES
                     
12/500,073
 
US
 
7/9/2009
 
N/A
 
N/A
 
USE OF FUSED NICOTINAMIDES TO PROMOTE NEUROGENESIS

 
9

 

Patents Issued

Number
 
Country
 
Filing
Date
 
Issue Date
 
Expiration
Date
 
Title
5,753,506
 
US
 
9/25/1996
 
5/19/1998
 
9/25/2016
 
ISOLATION PROPAGATION AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM EMBRYONIC AND ADULT CENTRAL NERVOUS SYSTEM OF MAMMALS
                     
6,040,180
 
US
 
5/7/1997
 
3/21/2000
 
5/7/2017
 
IN VITRO GENERATION OF DIFFERENTIATED NEURONS FROM CULTURES OF MAMMALIAN MULTIPOTENTIAL CNS STEM CELLS
                     
6,284,539
 
US
 
10/9/1998
 
9/4/2001
 
10/9/2018
 
METHOD FOR GENERATING DOPAMINERGIC CELLS DERIVED FROM NEURAL PRECURSORS
                     
7,544,511
 
US
 
1/14/2002
 
6/9/2009
 
4/13/2017
 
STABLE NEURAL STEM CELL LINES
                     
7,560,553
 
US
 
3/17/2008
 
7/14/2009
 
8/9/2024
 
USE OF FUSED NICOTINAMIDES TO PROMOTE NEUROGENESIS
                     
755849
 
AU
 
9/20/1999
 
4/3/2003
 
9/20/2019
 
STABLE NEURAL STEM CELL LINES
                     
915968
 
EP
 
5/7/1997
 
7/25/2007
 
5/7/2017
 
ISOLATION, PROPOGATION, AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM CENTRAL NERVOUS SYSTEM OF MAMMALS
                     
915968
 
ES
 
5/7/1997
 
7/25/2007
 
5/7/2017
 
ISOLATION, PROPAGATION AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM EMBRYONIC AND ADULT CENTRAL NERVOUS SYSTEM OF MAMMALS
                     
915968
 
FR
 
5/7/1997
 
7/25/2007
 
5/7/2017
 
ISOLATION, PROPAGATION AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM EMBRYONIC AND ADULT CENTRAL NERVOUS SYSTEM OF MAMMALS
                     
915968
 
GB
 
5/7/1997
 
7/25/2007
 
5/7/2017
 
ISOLATION, PROPAGATION AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM EMBRYONIC AND ADULT CENTRAL NERVOUS SYSTEM OF MAMMALS
                     
915968
 
IE
 
5/7/1997
 
7/25/2007
 
5/7/2017
 
ISOLATION, PROPAGATION AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM EMBRYONIC AND ADULT CENTRAL NERVOUS SYSTEM OF MAMMALS
                     
915968
 
SE
 
5/7/1997
 
7/25/2007
 
5/7/2017
 
ISOLATION, PROPAGATION AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM EMBRYONIC AND ADULT CENTRAL NERVOUS SYSTEM OF MAMMALS
                     
915968
 
CH
 
5/7/1997
 
7/25/2007
 
5/7/2017
 
ISOLATION, PROPAGATION AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM EMBRYONIC AND ADULT CENTRAL NERVOUS SYSTEM OF MAMMALS
                     
69737949.3
 
DE
 
5/7/1997
 
7/25/2007
 
5/7/2017
 
ISOLATION, PROPAGATION AND DIRECTED DIFFERENTIATION OF STEM CELLS FROM EMBRYONIC AND ADULT CENTRAL NERVOUS SYSTEM OF MAMMALS
                     
132324
 
SG
 
11/17/2005
 
11/30/2009
 
11/17/2025
 
TRANSPLANTATION OF HUMAN NEURAL CELLS FOR TREATMENT OF NEUROLOGICAL DISORDERS

We also rely upon trade-secret protection for our confidential and proprietary information and take active measures to control access to that information.
 
Our policy is to require our employees, consultants and significant scientific collaborators and sponsored researchers to execute confidentiality and assignment of invention agreements upon the commencement of an employment or consulting relationship with us. These agreements generally provide that all confidential information developed or made known to the individual by us during the course of the individual's relationship with us is to be kept confidential and not disclosed to third parties except in specific circumstances. In the case of employees and consultants, the agreements generally provide that all inventions conceived by the individual in the course of rendering services to us shall be our exclusive property.

 
10

 

The patent positions of pharmaceutical and biotechnology companies, including ours, are uncertain and involve complex and evolving legal and factual questions. The coverage sought in a patent application can be denied or significantly reduced before or after the patent is issued. Consequently, we do not know whether any of our pending applications will result in the issuance of patents, or if any existing or future patents will provide significant protection or commercial advantage or will be circumvented by others. Since patent applications are secret until the applications are published (usually eighteen months after the earliest effective filing date), and since publication of discoveries in the scientific or patent literature often lags behind actual discoveries, we cannot be certain that we were the first to make the inventions covered by each of our pending patent applications or that we were the first to file patent applications for such inventions. There can be no assurance that patents will issue from our pending or future patent applications or, if issued, that such patents will be of commercial benefit to us, afford us adequate protection from competing products, or not be challenged or declared invalid.
 
In the event that a third party has also filed a patent application relating to inventions claimed in our patent applications, we may have to participate in interference proceedings declared by the United States Patent and Trademark Office to determine priority of invention, which could result in substantial uncertainties and cost for us, even if the eventual outcome is favorable to us. There can be no assurance that our patents, if issued, would be held valid by a court of competent jurisdiction.
 
A number of pharmaceutical, biotechnology and other companies, universities and research institutions have filed patent applications or have been issued patents relating to cell therapy, stem cells and other technologies potentially relevant to or required by our expected products. We cannot predict which, if any, of such applications will issue as patents or the claims that might be allowed.
 
If third party patents or patent applications contain claims infringed by our technology and such claims are ultimately determined to be valid, there can be no assurance that we would be able to obtain licenses to these patents at a reasonable cost, if at all, or be able to develop or obtain alternative non-infringing technology. If we are unable to obtain such licenses or develop or obtain alternative non-infringing technology at a reasonable cost, we may not be able to develop certain products commercially. There can be no assurance that we will not be obliged to defend ourselves in court against allegations of infringement of third party patents. Patent litigation is very expensive and could consume substantial resources and create significant uncertainties. An adverse outcome in such a suit could subject us to significant liabilities to third parties, require us to seek licenses from third parties, or require us to cease using such technology.

Competition

The biotechnology industries are characterized by rapidly evolving technology and intense competition. Our competitors include major multinational pharmaceutical companies, specialty biotechnology companies and chemical and medical products companies operating in the fields of regenerative medicine, cell therapy, tissue engineering and tissue regeneration. Many of these companies are well-established and possess technical, research and development, financial and sales and marketing resources significantly greater than ours. In addition, certain smaller biotech companies have formed strategic collaborations, partnerships and other types of joint ventures with larger, well established industry competitors that afford these companies potential research and development and commercialization advantages. Academic institutions, governmental agencies and other public and private research organizations are also conducting and financing research activities which may produce products directly competitive to those we are developing. Moreover, many of these competitors may be able to obtain patent protection, obtain FDA and other regulatory approvals and begin commercial sales of their products before we do.

Although not necessarily direct competitors, some of the specialty biotechnology companies include Geron Corporation, Genzyme Corporation, StemCells, Inc., Aastrom Biosciences, Inc. and Viacell, Inc. Some of these companies are well-established and have substantial technical and financial resources compared to us. However, as cell-based products are only just emerging as medical therapies, many of our direct competitors are smaller biotechnology and specialty medical products companies. These smaller companies may become significant competitors through rapid evolution of new technologies. Any of these companies could substantially strengthen their competitive position through strategic alliances or collaborative arrangements with large pharmaceutical or biotechnology companies.

The diseases and medical conditions we are targeting have no effective long-term therapies. Nevertheless, we expect that our technologies and products will compete with a variety of therapeutic products and procedures offered by major pharmaceutical companies. Many pharmaceutical and biotechnology companies are investigating new drugs and therapeutic approaches for the same purposes, which may achieve new efficacy profiles, extend the therapeutic window for such products, alter the prognosis of these diseases, or prevent their onset. We believe that our products, when and if successfully developed, will compete with these products principally on the basis of improved and extended efficacy and safety and their overall economic benefit to the health care system. Competition for our products may be in the form of existing and new drugs, other forms of cell transplantation, surgical procedures, and gene therapy. We believe that some of our competitors are also trying to develop similar stem cell-based technologies. We expect that all of these products will compete with our potential stem cell products based on efficacy, safety, cost and intellectual property positions. We may also face competition from companies that have filed patent applications relating to the use of genetically modified cells to treat disease, disorder or injury. In the event our therapies should require the use of such genetically modified cells, we may be required to seek licenses from these competitors in order to commercialize certain of our proposed products, and such licenses may not be granted or be extremely expensive.

If we develop products that receive regulatory approval, they would then have to compete for market acceptance and market share. For certain of our potential products, an important success factor will be the timing of market introduction of competitive products. This timing will be a function of the relative speed with which we and our competitors can develop products, complete the clinical testing and approval processes, and supply commercial quantities of a product to market. These competitive products may also impact the timing of clinical testing and approval processes by limiting the number of clinical investigators and patients available to test our potential products.

 
11

 

Government Regulation

Regulation by governmental authorities in the United States and other countries is a significant factor in our research and development and will be a significant factor in the manufacture and marketing of our proposed products. The nature and extent to which such regulation applies to us will vary depending on the nature of any products we may develop. We anticipate that many, if not all, of our products will require regulatory approval by governmental agencies prior to commercialization. In particular, human therapeutic products are subject to rigorous preclinical and clinical testing and other approval procedures of the FDA and similar regulatory authorities in European and other countries. Various governmental statutes and regulations also, govern, or influence testing, manufacturing, safety, labeling, storage and recordkeeping related to such products and their marketing. The process of obtaining these approvals and the subsequent compliance with appropriate statutes and regulations require the expenditure of substantial time and money, and there can be no guarantee that approvals will be granted.

FDA Approval    

We are presently at the stage of clinical development.  On December 18, 2008 we filed our first investigational new drug application (IND) with the FDA to begin a clinical trial to treat amyotrophic ALS or Lou Gehrig’s Disease. On September 22, 2009, the FDA provided us approval of the IND.

The protocol for each clinical study must be approved by an independent institutional review board, or IRB, of the institution at which the study is conducted, and the informed consent of all participants must be obtained. The Emory IRB approved our trial in December of 2009.  The first patient was dosed January 21, 2010.  The IRB reviews the existing information on the product, considers ethical factors, the safety of human subjects, the potential benefits of the therapy and the possible liability of the institution. The IRB is responsible for ongoing safety assessment of the subjects during the clinical investigation.

Clinical development is traditionally conducted in three sequential phases.
 
 
·
Phase 1 studies for a cell therapy product are designed to evaluate safety in a small number of subjects in a selected patient population by assessing adverse effects, and may include multiple dose levels. This study may also gather preliminary evidence of a beneficial effect on the disease.

 
·
Phase 2 may involve studies in a limited patient population to determine biological and clinical effects of the product and to identify possible adverse effects and safety risks of the product in the selected patient population.

 
·
Phase 3 trials would be undertaken to conclusively demonstrate clinical benefit or effect and to test further for safety within a broader patient population, generally at multiple study sites. The FDA continually reviews the clinical trial plans and results and may suggest changes or may require discontinuance of the trials at any time if significant safety issues arise.

The results of the preclinical studies and clinical studies are submitted to the FDA in the form of Biological License Application (“BLA”) marketing approval authorization applications.  The FDA must approve the applications prior to any commercial sale or practice of the technology or product. Biologic product manufacturing establishments located in certain states also may be subject to separate regulatory and licensing requirements. The testing and approval process will require substantial time, effort and expense. The time for approval is affected by a number of factors, including relative risks and benefits demonstrated in clinical trials, the availability of alternative treatments and the severity of the disease, and animal studies or clinical trials that may be requested during the FDA review period.

Our research and development is based largely on the use of human stem and progenitor cells. The FDA has initiated a risk-based approach to regulating human cell, tissue and cellular and tissue-based products and has published current Good Tissue Practice regulations. As part of this approach, the FDA has published final rules for registration of establishments that engage in the recovery, screening, testing, processing, storage or distribution of human cells, tissues, and cellular and tissue-based products, and for the listing of such products. While the Company believes that it is in compliance with all such practices and regulations; we are not required to register until we apply for licensure from the FDA for our product, subject to successful completion of human trials. In addition, the FDA has published rules for making suitability and eligibility determinations for donors of cells and tissue and for current good tissue practice for manufacturers using them, which have recently taken effect. We cannot now determine the full effects of this regulatory initiative, including precisely how it may affect the clarity of regulatory obligations and the extent of regulatory burdens associated with our stem cell research and the manufacture and marketing of stem cell products.

European and Other Regulatory Approval   Approval of a product by regulatory authorities comparable to the FDA in Europe and other countries will likely be necessary prior to commencement of marketing a product in any of these countries. The regulatory authorities in each country may impose their own requirements and may refuse to grant approval, or may require additional data before granting approval, even though the relevant product has been approved by the FDA or another authority. The regulatory authorities in the European Union, or EU, and other developed countries have lengthy approval processes for pharmaceutical products. The process for gaining approval in particular countries varies, but is generally similar to the FDA approval process. In Europe, the European Committee for Proprietary Medicinal Products provides a mechanism for EU-member states to exchange information on all aspects of product licensing. The EU has established a European agency for the evaluation of medical products, with both a centralized community procedure and a decentralized procedure, the latter being based on the principle of licensing within one member country followed by mutual recognition by the other member countries.

 
12

 

Other Regulations   In addition to safety regulations enforced by the FDA, we are also subject to regulations under the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act and other present and potential future and federal, state, local, and foreign regulations.

Outside the United States, we will be subject to regulations that govern the import of drug products from the United States or other manufacturing sites and foreign regulatory requirements governing human clinical trials and marketing approval for our products. The requirements governing the conduct of clinical trials, product licensing, pricing and reimbursements vary widely from country to country.
 
The United States Congress, several states and foreign countries have considered legislation banning or restricting human application of stem cell-based and nuclear transfer based technologies. No assurance can be given regarding future restrictions or prohibitions that might affect our technology and business. In addition, we cannot assure you that future judicial rulings with respect to nuclear transfer technology or human stem cells will not have the effect of delaying, limiting or preventing the use of nuclear transfer technology or stem cell-based technology or delaying, limiting or preventing the sale, manufacture or use of products or services derived from nuclear transfer technology or stem cell-derived material. Any such legislative or judicial development would harm our ability to generate revenues and operate profitably.
 
For additional information about governmental regulations that will affect our planned and intended business operations, see "Risk Factors.”

Employees
 
As of March 13, 2010, we had eight full-time employees and six full time independent contractors.  Of these employees, ten work on research and development and four in administration. We also use the services of numerous outside consultants in business and scientific matters.

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
 
ITEM 1A.
RISK FACTORS

We have described below a number of uncertainties and risks which, in addition to uncertainties and risks presented elsewhere in this Annual 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 Annual Report should be considered carefully in evaluating us, our business and the value of our securities. The following important factors, among others, could cause our actual business, financial condition and future results to differ materially from those contained in forward-looking statements made in this Annual Report or presented elsewhere by management from time to time.

Risks Relating to Our Stage of Development

We have a limited operating history and have significantly shifted our operations and strategies since inception.

Since inception in 1996 and through December 31, 2009, we have raised $62,551,375 of capital and recorded accumulated losses totaling $67,566,831.  On December 31, 2009, we had a working capital surplus of $892,552 and stockholders’ deficit of $5,015,456.  Our net losses for the two most recent fiscal years have been $10,364,363 and $11,830,798 for 2009 and 2008 respectively.  We had no revenues for the twelve months ended December 31, 2009.

 
13

 

Our ability to generate revenues and achieve profitability will depend upon our ability to complete the development of our proposed stem cell products, obtain the required regulatory approvals, manufacture, and market and sell our proposed products. In part because of our past operating results, no assurances can be given that we will be able to accomplish any of these goals.

Although we have generated some revenue in prior years, we have not generated any revenue from the commercial sale of our proposed stem cell products. Since inception, we have engaged in several related lines of business and have discontinued operations in certain areas. For example, in 2002, we lost a material contract with the Department of Defense and were forced to close our principal facility and lay off almost all of our employees in an attempt to focus our development strategy on stem cell technologies. This limited and changing history may not be adequate to enable you to fully assess our future prospects. 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 material revenues from our proposed products

We will need to raise additional capital to continue operations.

Since inception, we have relied almost entirely on external financing to fund operations. Such financing has come primarily from the sale of common stock and the exercise of investor warrants.  As of December 31, 2009, we had cash and cash equivalents on hand of $2,309,774.  Presently, we have a monthly cash burn rate of approximately $600,000.  We will need to raise additional capital to fund anticipated operating expenses and future expansion. Among other things, external financing will be required to further develop our technologies and products, as well as to pay general operating costs.   On September 21, 2009, the FDA approved our IND application to commence Phase I trials for ALS. The first patient was dosed on January 21, 2010.

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.

Our long term capital requirements are expected to depend on many factors, including:

·
the continued progress and costs of our research and development programs;

·
the progress of pre-clinical studies and clinical trials;

·
the time and costs involved in obtaining regulatory clearance;

·
the costs involved in preparing, filing, prosecuting, maintaining and enforcing patent claims;

·
The cost of defending any patent litigation;

·
the costs of developing sales, marketing and distribution channels and our ability to sell our products if developed;

·
the costs involved in establishing manufacturing capabilities for commercial quantities of our proposed products;

·
competing technological and market developments;

·
market acceptance of our proposed products;

·
the costs of recruiting and retaining employees and consultants; and

·
the costs associated with educating and training physicians about our proposed 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 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.

Additional financing requirements could result in dilution to existing stockholders.

We are not able to finance our operations by generating revenue.  Accordingly, we will be required to secure additional financing which may be dilutive to current shareholders.  We are authorized to issue 150,000,000 shares of common stock and 7,000,000 shares of preferred stock. Such securities may generally be issued without the approval or consent of our stockholders.  The issuance of such securities may result in substantial dilution.

 
14

 

Risks Relating to Our Business

Our business is dependent on a single product candidate.

At present our ability to progress as a company is significantly dependent on a single product candidate for ALS which is entering Phase I 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 any of 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 substantial additional capital we will need to further develop our cellular technologies. Moreover, any material adverse occurrence in our first clinical trials could substantially impair our ability to initiate clinical trials to test our stem cell therapies in other potential indications. This, in turn, could adversely impact our ability to raise additional capital and pursue our planned research and development efforts.

Our business relies on stem cell technologies that we may not be able to commercially develop.

We have concentrated the majority of our research on stem cell 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 and have limited human applications. 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 and royalty/licensing fees related to the technology, will be our primary sources of revenues. If we are unable to develop the technologies, we may never realize any revenue.

Our product development programs are based on novel technologies and are inherently risky.

We are subject to the risks of failure inherent in the development of products based on new technologies. The novel nature of these therapies 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.

Our inability to complete pre-clinical and clinical testing and trials will impair our viability.

On September 21, 2009, we received approval from the FDA for our first IND in order to commence clinical trials.  We commenced the trials on January 21, 2010 with the dosing of our first patient.  Although we have commenced the trials, the outcome of the trials is uncertain, and 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 the 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 therapeutic products, and our business and results of operations would be materially harmed.

Our proposed products may not have favorable results in clinical trials or receive regulatory approval.

Positive results from pre-clinical studies should not be relied upon as evidence that clinical trials will succeed. Even if our product candidates achieve positive results in pre-clinical studies, we will be required to demonstrate through clinical trials that the 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 our development efforts of any of our product candidates, then we may not be able to generate sufficient revenues to become profitable, and our operations could be materially harmed.

There are no assurances that we will be able to submit or obtain FDA approval of a biologics license application.

There can be no assurance that even  if the clinical trials of any potential product candidate are successfully initiated and completed, we will be able to submit a Biologics License Application (“BLA”) to the FDA or that any BLA we submit will be approved in a timely manner, if at all. If we are unable to submit a BLA with respect to any future product candidate, or if any BLA we submit is not approved by the FDA, we will be unable to commercialize that product. The FDA can and does reject BLAs and requires additional clinical trials, even when product candidates performed well or achieved favorable results in clinical trials. If we fail to commercialize our product candidate, 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 cause our stock price to decrease.

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

 
15

 

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 or the country altogether, in order to assure that their careers will not be impeded by restrictions on their work. 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 it. 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 owned by or exclusively licensed to StemCells relating to stem cell culture compositions. At present, the litigation is in its initial stages and any likely outcome is difficult to predict.

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 be infringed 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 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 United States or 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 health care 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.

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, we may not be able to charge a high enough price for us to make a profit from the sale of our cell therapy products.

We are dependent on the acceptance of our products by the health care 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:

 
16

 

 
 ·
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 health care community does not accept our products for any reason, our business would be materially harmed.

We depend on two key employees for our continued operations and future success.

The loss of either of our key executive officers, Richard Garr and Karl Johe, would be detrimental to us.

 
 ·
We currently do not maintain “key person” life insurance on the life of Mr. Garr. As a result, the Company will not receive any compensation upon the death or incapacity of this key individual;

 
 ·
We currently do maintain “key person” life insurance on the life of Mr. Johe. As a result, the Company will receive approximately $1,000,000 in the event of his death or incapacity.

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 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 November 1, 2012.  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 $1,000,000 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 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. Although not necessarily direct competitors, companies such as Geron Corporation, Genzyme Corporation, StemCells, Inc., Advanced Cell Technology, Inc., Aastrom Biosciences, Inc. and Viacell, Inc., as well as others, may have substantially greater resources and experience in our fields which put us at a competitive disadvantage.

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.

The development, manufacturing and commercialization of cell-based therapeutic products expose us to product liability claims.

By developing and, ultimately, commercializing medical products, we are exposed to the risk of product liability claims. Product liability claims against us could result in substantial litigation costs and damage awards against us. We have obtained liability insurance that covers our clinical trials.  If and when 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.

 
17

 

We intend to rely upon third-party FDA-approved manufacturers for our stem cells.

We currently have no internal manufacturing capability, and will rely extensively on FDA-approved licensees, strategic partners or third party contract manufacturers or suppliers. Should we be forced to manufacture our stem cells, we cannot give you any assurance that we will be able to develop an internal manufacturing capability or procure alternative third party suppliers. Moreover, we cannot give you any assurance that any contract manufacturers or suppliers we procure will be able to supply our product in a timely or cost effective manner or in accordance with applicable regulatory requirements or our specifications.

Risks Relating to Our Common Stock

Our common shares are sporadically or “thinly” traded.

Our common shares have historically been sporadically or “thinly” traded, meaning that the number of persons interested in purchasing our common shares at or near the asking price at any given time may be relatively small or non-existent. This situation is attributable to a number of factors, including the facts that we are a small company which is relatively unknown to stock analysts, stock brokers, institutional investors and others in the investment community.  Even if we came to the attention of such persons, they tend to be risk-adverse and would be reluctant to follow an unproven development stage company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without a material reduction in share price. We cannot give you any assurance that a broader or more active trading market for our common shares will develop or be sustained, or that current trading levels will be sustained. Due to these conditions, we can give you no assurance that you will be able to sell your shares if you need money or otherwise desire to liquidate your investment.

As a result of a recent accounting pronouncement, we no longer meet the continued listing requirements of the NYSE AMEX.

Effective January 1, 2009, we adopted new guidance issued by FASB related to determining whether an instrument or embedded feature is indexed to an entity’s own stock.  As a result, we reclassified 8,547,762 of our issued and outstanding common stock purchase warrants from equity to liability status.  The adjustment also had the effect of reducing stockholder’s equity by $2.8 million.  Due to such adjustment, we may no longer meet the continued listing requirements of the NYSE AMEX with regard to stockholders (deficit) equity.   On June 4, 2009, as anticipated, we received notification from the NYSE AMEX that we are not in compliance with continued listing requirements contained in Section 1003(i) of the NYSE AMEX company guide.  In order to maintain our listing on the NYSE AMEX, we were required to submit a plan detailing how we intend to regain compliance.  On July 6, 2009, we submitted our plan.  On August 18, 2009, the NYSE AMEX notified that it would continue listing our common shares subject to the following conditions:

 
·
That we regain compliance with Section 1003(i) of the NYSE AMEX company guide by December, 2010, and

 
·
That we provide the Exchange Staff with updates in conjunction with the initiatives of the Plan as appropriate or upon request, but no later than at each quarter completion concurrent with our appropriate filing with the Securities and Exchange Commission.

We are currently being monitored by the NYSE AMEX with regard to listing qualifications.

On February 16, 2010 we received a letter from the NYSE Amex informing it that it had now resolved the continued listing deficiencies referenced in the NYSE Amex LLC's ("NYSE Amex") letters dated June 4, 2009 and August 18, 2009. The Exchange said that while the Company remains noncompliant with the stockholders' equity requirements under Section 1003 of the NYSE Amex Company Guide, the Exchange staff has determined that the Company complies with the alternative listing standards in Section 1003, including the requirement for $50,000,000 million in market capitalization. The Exchange will continue to monitor the Company's compliance with the continued listing standards in Section 1003 of the NYSE Amex Company Guide. As provided in Section 1009(f) of the NYSE Amex Company Guide.  If the Company is able to demonstrate compliance with the continued listing standards for a period of two consecutive quarters ending June 30, 2010, the Exchange staff will deem the Plan Period over. However, if the Company cannot demonstrate compliance over the next two quarters, the Plan Period will remain open and Exchange staff will continue to monitor the Company throughout the end of the Plan Period, December 6, 2010. At any time during the Plan Period, the Exchange staff may initiate delisting proceedings based on its evaluation of the Company. In the event the Company does not comply with all continued listing standards as of December 6, 2010, the Exchange staff will promptly initiate delisting procedures.

The delisting of our common shares from the NYSE Amex may limit the ability of our stockholders to sell their common stock.

We are currently being monitored by the NYSE AMEX.  If we are delisted, our stock will most likely commence trading on the Over-the-Counter Bulletin Board or the Pink Sheets. In such case, a stockholder likely would find it more difficult to trade our common stock or to obtain accurate market quotations for it.  If our common stock is delisted, it will become subject to the Securities and Exchange Commission’s “penny stock rules,” which impose sales practice requirements on broker-dealers that sell that common stock to persons other than established customers and “accredited investors.” Application of this rule could make broker-dealers unable or unwilling to sell our common stock and limit the ability of stockholders to sell their common stock in the secondary market.

 
18

 

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. First, our common shares are sporadically or thinly traded. As a consequence of this lack of liquidity, the trading of relatively small quantities of shares by our shareholders may disproportionately influence the price of those shares in either direction. The price for our shares could, for example, decline precipitously in the event that a large number of our common shares are sold on the market without commensurate demand.  Secondly, 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, require changes in the corporate governance practices and financial reporting standards for public companies. These new laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 relating to internal control over financial reporting (“Section 404”), will materially increase the Company's legal and financial compliance costs and make some activities more time-consuming, burdensome and expensive.  ). On October 2, 2009, the SEC announced it would extend the deadline for non-accelerated filers to comply with Section 404(b) of the Sarbanes-Oxley Act.  Unless further extended, we will be required to include attestation reports in our annual report for year ending on December 31, 2010.  We anticipate this will further increase the costs associated with our compliance with the Sarbanes-Oxley Act of 2002.

Any failure to comply with the requirements of the Sarbanes-Oxley Act of 2002, our ability to remediate any material weaknesses that we may identify during our compliance program,  or difficulties  encountered in their implementation,  could harm our operating results,  cause us to fail to meet our reporting  obligations  or result in  material  misstatements  in our  financial statements. Any such failure could also adversely affect the results of the periodic management evaluations of our internal controls and, in the case of a failure to remediate any material weaknesses that we may identify, would adversely affect the annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting that are required under Section 404 of the Sarbanes-Oxley Act.  Inadequate internal controls could also cause investors to lose confidence in our reported financial information, which could have a negative effect on the trading price of our common stock.

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.

Issuance of additional securities could dilute your proportionate ownership and voting rights.
 
We are entitled under our amended and restated certificate of incorporation to issue up to 150,000,000 common and 7,000,000 “blank check” preferred shares. As of December 31, 2009, we have issued and outstanding 35,743,831 common shares, 24,365,916 common shares reserved for issuance upon the exercise of current outstanding options and warrants (excluding options and warrants issued under our equity compensation plans), 319,341 common shares reserved for issuance of additional grants under our 2005 incentive stock plan, and 760,000 shares reserved for issuance of grants under our 2007 stock plan. Accordingly, we will be entitled to issue up to 88,810,912 additional common shares and 7,000,000 additional preferred shares. Our board may generally issue those common and preferred shares, or options or warrants to purchase those shares, without further approval by our shareholders based upon such factors as our board of directors may deem relevant at that time. Any preferred shares we may issue shall 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 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 option plans, in order to attract and retain qualified personnel. In the event of issuance, your proportionate ownership and voting rights may be significantly decreased and the value of your investment impacted.

 
19

 

Risks Relating to Intellectual Property and Government Regulation

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 U.S. Patent and 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 in its initial stages and any likely outcome is difficult to predict.

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 United States.  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.

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 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.  On September 21, 2009 the FDA approved our IND application to commence a Phase I trial for ALS.  We commenced the trials on January 21, 2010 with the dosing of our first patient.  We cannot assure you that we will successfully complete any clinical trials in connection with such IND. Further, we cannot predict when we might first submit any product license application 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 United States 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 the development and manufacture of the cells and cell lines required for our preclinical and clinical products could substantially delay or prevent us from producing the cells needed to initiate 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.

We base our research and development on the use of human 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 Good Manufacturing Practices, or “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.

 
20

 

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 United States (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 will be materially and negatively impacted.
 
ITEM 2.
PROPERTIES

We currently lease two facilities.   Our executive offices and primary research facilities are located at 9700 Great Seneca Highway, Rockville MD, 20850. We lease these facilities consisting of approximately 2,500 square feet for $8,220 per month. The term of our lease expires on January 31, 2011.

We entered into a lease in 2009 consisting of approximately 2,375 square feet of research space in San Diego, California at a monthly lease rate of $4,806. The lease terminates in August of 2011.

The aforesaid properties are in good condition and we believe they will be suitable for our purposes for the next 12 months. There is no affiliation between us or any of our principals or agents and our landlords or any of their principals or agents.
 
ITEM 3.
LEGAL PROCEEDINGS

As of the date of this Annual 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., (collectively StemCells and Neurospheres Holding Ltd are referred to as “Plaintiffs”) in U.S. District Court for the District of Maryland, alleging that U.S. Patent No. 7,361,505 (the “’505 patent”), alleging that the ‘505 patent was exclusively licensed to the Plaintiffs, is invalid, not infringed, and unenforceable.   See Civil Action No. 08-1173.   On May 13, 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 as alleged by the Plaintiffs.  On July 15, 2008, the Plaintiffs filed a Motion to Dismiss for Lack of Subject Matter Jurisdiction, Lack of Personal Jurisdiction, and Improper Venue or in the Alternative to Transfer to the Northern District of California.  On August 27, 2008, Judge Alexander Williams, Jr. of the District of Maryland denied StemCells’ Motion to Dismiss, but granted Neurospheres’ motion to dismiss. 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 owned by or exclusively licensed to StemCells relating to stem cell culture compositions, genetically modified stem cell cultures, and methods of using such cultures.  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.  Discovery has commenced and it is not known when, nor on what basis, this matter will be concluded.
 
ITEM 4.
REMOVED AND RESERVED.
 
 
21

 

PART II

ITEM 5. 
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Our common stock is traded on the NYSE Amex under the symbol "CUR."  The following table sets forth, for the periods indicated, the high and low intraday sale prices for our common stock.

   
High
 
Low
             
2008
           
First Quarter
 
$
3.58
 
$
2.29
Second Quarter
 
$
2.59
 
$
1.31
Third Quarter
 
$
1.86
 
$
1.20
Fourth Quarter
 
$
2.15
 
$
1.01
2009
           
First Quarter
 
$
1.79
 
$
0.80
Second Quarter
 
$
1.30
 
$
1.03
Third Quarter
 
$
2.08
 
$
1.04
Fourth Quarter
 
$
1.91
 
$
1.26

Holders

As of March 8, 2010 our common stock was held by approximately 725 record holders.  We believe our actual number of shareholders may be significantly higher as 34,638,732 shares are currently being held in street name.

Dividends

We have not paid any cash dividends to date and have no plans to do so in the immediate future.

Equity Compensation Plan Information

The following table sets forth information with respect to our 2005 & 2007 Stock Plans as of December 31, 2009.
 
 
(a)
 
(b)
 
(c)
 
Number of Securities
to be Issued
upon Exercise of
Outstanding
Options, Warrants
and Rights
 
Weighted-Average
Exercise Price of 
Outstanding
Options,
Warrants and
Rights
 
Number of Securities
Remaining Available for
Future Issuance under
Equity Compensation Plans 
(Excluding Securities
Reflected in Column (a))
Equity compensation plans approved by security holders
  
 
 
 
  
2005 Stock Plan, as amended 
3,680,659
 
$
1.26
 
            319,341
2007 Stock Plan
5,615,475
   
3.38
 
            534,525
Equity compensation plans not approved by security holders
N/A
   
N/A
 
N/A
             
Total
9,296,134
 
$
                  2.52
 
853,866

Recent Sales of Unregistered Securities

The following information is given with regard to unregistered securities sold during the period covered by this report.  The unregistered securities were issued pursuant to section 4(2) of the Securities Act:  

 
22

 

 
·
On January 5, 2009 we granted a consultant options to purchase 100,000 common shares at a price per share of $1.64.  The options were issued as compensation for services rendered.  The grant was made pursuant to our 2005 Stock Plan.  The options have a term of 7 years.

 
·
On March 30, 2009, we granted a consultant a common stock purchase warrant to purchase 96,000 common shares at a price per share of $1.25.  The warrant will expire on 3/30/2015.

 
·
On June 3, 2009, we granted a consultant100,000 options to purchase common shares at a price of $1.13.  The options were issued as compensation for services rendered.  The grant was made pursuant to our 2005 Stock Plan.  The options vest as follows:  25,000 vested immediately; 25,000 vest at the six month anniversary; 25,000 vest at the twelve month anniversary; 25,000 vest at the eighteen month anniversary.  The options expire on June 3, 2019.

 
·
On July 2, 2009, pursuant to our director compensation policy, we granted each of Messrs. Ogilvie and Oldaker options to purchase 35,000 common shares as compensation for their services on our board of directors and related committees.  For a further description of the transaction, please refer to the section of this Annual Report entitled “Executive Compensation – Director Compensation” contained in Item 11.

 
·
On October 1, 2009 we granted a consultant warrants to purchase100,000 shares at a price of $1.49.  The warrants are fully vested and have a cashless exercise provision.  The warrants expire on 10/1/2016.

 
·
On December 29, 2009, we completed a private placement of 646,551 common shares resulting in gross proceeds of $1,500,000.  The shares were sold to 1 accredited investor at a price per share of $2.32.

 
·
On December 30, 2009, we issued Richard Garr and John Conron, our Chief Executive Officer and Chief Financial Officer, respectively, an aggregate of 225,475 common shares as consideration for the cancelation of certain obligations owed to such executives.  For a further description of the transaction, please refer to the section of this Annual Report entitled “Transactions with Related Persons, Promoters and Certain Control Person’s” contained in Item 13.

 
·
On January 8, 2010, pursuant to a consulting agreement for investor relations and business development services, we issued Market Development Consulting Group, Inc.: (i) 140,000 common shares; and (ii) a common stock purchase warrant entitling the holder to purchase 400,000 shares of common stock at $1.70 per share.  The warrant is exercisable immediately, shall expire on December 31, 2019, and is freely assignable in whole or in part.   We also agreed to register the shares underlying the warrant for resale.  In connection with the registration of the shares underlying the warrant, we agreed to pay consultant a penalty of 1% additional warrants per each 30 days in the event: (i) a registration statement covering the shares is not filed by March 21, 2009, and (ii) the registration statement covering the shares is not declared effective within 90 days of filing.  The date for registration has been extended to the earlier of: (a) the day following such day as we file our Annual Report for 2009 ; or (b) April 15, 2010.

 
·
On January 15, 2010, we issued a consultant options to purchase an aggregate of 45,000 common shares at $2.40 per share.  The options vest as follows: (i) 25,000 upon grant; and (ii) 20,000 on December 31, 2010.  The options have a term of 5 years.

 
·
On January 15, 2010, we issued a consultant options to purchase an aggregate of 100,000 common shares at $2.40 per share.  The options are 100% vested upon grant and have a term of 7 years.

 
·
On January 29, 2010, as an inducement to exercise 800,000 Series D Warrants, we issued Vicis Capital Master Fund a replacement warrant.  As a result of the exercise, we received gross proceeds in the amount of $1,000,000.  The replacement warrant entitles the holder to purchase 400,000 common shares at price of $1.85 per share.  The warrant has a term of 1 year.

 
·
In March of 2010, in connection with the exercise of 2,699,400 Series C Warrants, we issued the prior warrant holders an aggregate of 2,699,400 replacement warrants.  As a result of the exercise, we received gross proceeds in the amount of $3,374,250.   The replacement warrant is substantially the same as the prior Series C warrants except that: (i) the exercise price is $2.13; (ii) the replacement warrants expire 5 years from the date they were issued; and (iii) the replacement warrants do not provide for any anti-dilution rights.
 
 
·
In March of 2010, in connection with the exercise of 782,005 placement agent warrants, we issued T.R. Winston & Company, LLC, a replacement warrant to purchase 782,005.   As a result of the exercise, we received gross proceeds in the amount of  $860,205.  The replacement warrant is substantially the same as the prior replacement warrants issued to our Series C Warrant holders except that: (i) the exercise price is $2.13; (ii) the replacement warrants expire 5 years from the date they were issued; and (iii) the replacement warrants do not provide for any anti-dilution rights.
 
 
·
In March of  2010, we amended 706,752 placement agent warrants held by TR Winston & Company, LLC.  Pursuant to the amendment, we agreed to extend the expiration date of the placement agent warrants from March 15, 2012 to March 15, 2014 in exchange for the removal of the anti-dilution provisions from said warrants.  We did not receive any additional consideration in connection with the amendment.

 
23

 
 
ITEM 6.
SELECTED FINANCIAL DATA

We are not required to provide the information as to selected financial data as we are considered a smaller reporting company.

ITEM 7. 
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is provided in addition to the accompanying consolidated financial statements and notes to assist readers in understanding our results of operations, financial condition, and cash flows. MD&A is organized as follows:

 
• 
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 our operating segments and outlook for 2010.
 
 
• 
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 2009 to 2008.
 
 
• 
Liquidity and Capital Resources. An analysis of changes in our balance sheets and cash flows, and discussion of our financial condition including potential sources of liquidity.
 
The various sections of this MD&A contain forward-looking statements. Words such as “expects,” “goals,” “plans,” “believes,” “continues,” “may,” and variations of such words and similar expressions are intended to identify such forward-looking statements. In addition, any statements that refer to projections of our future financial performance, our anticipated growth and trends in our businesses, and other characterizations of future events or circumstances are forward-looking statements. Such statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in the “Overview” and “Trends & Outlook” section (see also “Risk Factors” in Part I, Item 1A of this Form 10-K). Our actual results may differ materially.
 
Overview

Neuralstem is focused on the development and commercialization of treatments based on transplanting human neural stem cells.

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 four (4) issued patents and twelve (12) patent pending applications in the field of regenerative medicine and related technologies. We believe our technology base, in combination with our know-how, and collaborative projects with major research institutions provides a competitive advantage and will facilitate the successful 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. 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 product 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, our facilities and our capital, to accelerate the advancement of our stem cell technologies. In addition, we are pursuing strategic collaborations with members of academia. We are headquartered in Rockville, Maryland.

In addition to our core tissue based technology, we have begun developing a neurogenic and neuroprotective Small-Molecule compound.  The patent covering this new class of drugs was issued June 10, 2009.

 
24

 
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. Our two issued core patents entitled: (i)  Isolation, Propagation, and Directed Differentiation of Stem Cells from Embryonic and Adult Central Nervous System of Mammals ; and (ii)  In Vitro Generation of Differentiated Neurons from Cultures of Mammalian Multipotential CNS Stem Cell  contain claims which cover the process of deriving the cells and the cells created from this process.
 
What differentiates our stem cell technology from others is that our patented processes do not require us to direct the cells towards a certain fate by adding specific growth factors. Our cells actually “become” the type of cell they are fated to be. This process and the resulting cells comprise a technology platform that allows for the efficient isolation and production, in commercially reasonable quantities, of neural stem cells from the human brain and spinal cord.

To date the Company has focused its efforts on applications involving spinal cord stem cells. It has completed preclinical efficacy and safety studies on these cells sufficient to gain FDA approval for human clinical trials. The company believes it has established “proof of principle” for two important spinal cord applications: ALS, or Lou Gehrig’s disease, and Ischemic Spastic Paraplegia (a painful form of spasticity that may arise as a complication of surgery to repair aortic aneurysms). In anticipation of Phase I trials, the Company has created spinal cord cell banks using GMP.

We have developed and we maintain a portfolio of patents and patent applications that form the proprietary basis for our research and development efforts in the area of neural stem cell research.  We own or exclusively license four (4) issued patents and thirteen (13) patent pending applications in the field of regenerative medicine and related technologies.

Small-molecule Compounds

The Company has performed tests using cultured neural stem cells and in animals to validate the performance of small molecule compounds for hippocampal neurogenesis. The Company has successfully contracted for the manufacture of small batches of the compound. It expects to contract for a production run using Good Manufacturing Practice (GMP) methods which will be large enough to complete safety testing and Phase I clinical trials.

 In June the company received a notice of allowance from the U.S. Patent and Trademark Office (USPTO) for a patent on these compounds. Patent application 12/049,922, entitled “Use of Fused Nicotinamides to Promote Neurogenesis,” claims four chemical entities and any pharmaceutical composition including them.
.
Research

We have devoted substantial resources to our research programs in order to isolate and develop a series of neural stem cell banks that we believe can serve as a basis for therapeutic products. Our efforts to date have been directed at methods to identify, isolate and culture large varieties of stem cells of the human nervous system, and to develop therapies utilizing these stem cells. This research is conducted both internally and through the use of third party laboratory consulting companies under our direct supervision.
 
Trends & Outlook

Revenue

 We had no revenue for the years ended December 31, 2009 and 2008.  Our focus is now on initiating and successfully managing the clinical trial for ALS authorized by the FDA in September of this year.  We are also pursuing pre-clinical studies on other central nervous system indications in preparation for additional clinical trials. We are not focused at this time on generating revenue.

Long-term, we anticipate our revenue will be derived primarily from licensing fees and sales of our cell therapy and small molecule compounds. Because we are at such an early stage in the clinical trials process for our first application, ALS, we are not yet able to accurately predict when we will have a product ready for commercialization.

Research & Development Expenses

Our research and development costs consist of expenses incurred in identifying, developing and testing treatments for central nervous system diseases. These expenses consist primarily of salaries and related expenses for personnel, fees paid to professional service providers and academic collaborators for research, testing, contract manufacturing, costs of facilities, and the preparation of regulatory applications and reports. 

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.

 
25

 

We expect that research and development expenses will increase in the future, as funding allows. 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 packages. This approach allows the Company to use the best expertise available for each task and keep its spending inside available cash resources.

Stem Cells

Our top development priority is the ALS clinical trial at Emory University in Atlanta. We estimate that the Phase I trial for ALS will require 12 to 18 patients at an estimated cost of $130,000 per patient. The per- patient number includes the costs of the operation to administer our spinal cord cells, post operation treatment for the patient, Emory University’s charges for running the trial and third party trial monitoring and data collection. Our spending on an individual patient will be spread over the life of the trial as the majority of our costs are incurred after the patient has been operated on. We expect trial spending to gradually increase to $100,000 per month after a number of patients have been treated.

In the strategy section we outlined a number of additional indications for which our spinal cord stem cells have potential therapeutic value.  We will work on proof of principle testing, dosing rationale, and the development of clinical protocols for the most promising indications. We intend to submit IND applications to the FDA to initiate clinical trials for the most promising treatment candidates.  The Company expects to submit an IND to treat Spinal Cord Injury in 2010.

Small Molecule Compounds

We believe we have successfully demonstrated proof of principle to support advancement of our lead small molecule compound for treatment of depression.  We have completed planning for toxicology, tumorigenicity, dosing rationale, and development of the clinical protocol. We will issue work orders to contractors for these efforts when funding is available. If the remaining preclinical testing results are successful we will file an IND with the FDA. We hope to begin clinical trials for this indication in late 2010 or early 2011.

General and Administrative Expenses

Our general and administrative (“G&A”) expenses consist of the general costs, expenses and salaries for the operation and maintenance of our business. We anticipate that general and administrative expenses will increase as we progress from pre-clinical to a clinical phase.

We anticipate G&A expenses related to our core business will increase at a slower rate than that of similar companies making such transition due in large part to our outsourcing model.
 
Critical Accounting Policies

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. 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 1of the Notes to Financial Statements 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 historically been minor and 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 accounting principles generally accepted in the United States, 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 financial statements:

 Use of Estimates—Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States and, accordingly, require management 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, our management has estimated the expected economic life and value of our licensed technology, our net operating loss for tax purposes and our stock option and warrant expenses related to compensation to employees and directors, consultants and investment banks. Actual results could differ from those estimates.

 
26

 

Revenue Recognition—We had no revenues for the years ended December 31, 2009 and 2008.  Our revenues, to date, have been previously derived primarily from providing treated samples for gene expression data from stem cell experiments and from providing services as a subcontractor under federal grant programs. 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.

Intangible and Long-Lived Assets—We follow FASB guidelines related to the accounting for impairment of long-lived assets, which established 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 period ended December 31, 2009 no impairment losses were recognized.

 Accounting for WarrantsWe have adopted FASB guidance related to determining whether an instrument or embedded feature is indexed to an entity’s own stock.  This guidance applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by the FASB, and to any freestanding financial instruments that are potentially settled in an entity’s own common stock.  As a result, certain of our warrants are considered to be derivatives and must be valued using various assumptions as they are recorded as liabilities.

Research and Development Costs—Research and development costs consist of expenditures for the research and development of patents and technology, 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.
 
Stock Based Compensation—The Company accounts for equity instruments issued to non-employees in accordance with guidance issued by FASB.  Accordingly, the estimated fair value of the equity instrument is recorded on the earlier of the performance commitment date or the date the services required are completed.

Beginning in 2006, we adopted the guidance issued by the FASB related to share based payments.  This guidance requires compensation costs related to share-based payment transactions to be recognized in the financial statements.  We recognized $4,556,916   and $4,632,847 in stock-based compensation expense for the years ended December 31, 2009 and 2008, respectively.

Results of Operations
 
Revenue

The company did not have revenues for the twelve months ended December 31, 2009 and 2008, respectively.

We do not anticipate any revenues for 2010.

Operating Expenses
 
Operating expenses totaled $10,466,549 in 2009 and $11,831,973 in 2008.

         
Change in
 
         
2009
 
         
Versus 2008
 
 
2009
 
2008
 
$
 
%
 
Operating Expenses
                       
Research & development
  $ 5,346,904     $ 6,513,349     $ (1,166,445 )     18 %
General, selling & administrative expense
    5,030,981       5,252,863       (221,882 )     4 %
Depreciation and amortization
    88,664       65,761       22,903       35 %
Total expense
  $ 10,466,549     $ 11,831,973     $ (1,365,424 )     12 %

 
27

 
 
Research and Development Expenses

Research and development expenses totaled $5,346,904 in 2009, as compared to $6,513,349 in 2008.  The decrease of $1,166,445, or 18%, from 2008 to 2009 was primarily attributable to the costs in 2008 of completing the application to the FDA to move our cell based product into clinical trials and a reduction in non-cash stock-based compensation expense.

General and Administrative Expenses
 
G&A expenses totaled $5,030,981 in 2009, compared with $5,252,863 in 2008.  The decrease of $221,882, or 4%, from 2008 to 2009 was primarily attributable to increased litigation expenses offset by expense decreases spread over a wide range of categories, including non-cash stock-based compensation expense, and reflects management’s ongoing efforts to manage cash consumption.

Depreciation and Amortization

Depreciation and amortization expenses totaled $88,664 in 2009, compared with $65,761 in 2008.  The increase of $29,203 or 35% from 2008 to 2009 was primarily attributed to fixed asset and patent filing fee additions over the past year.

Nonoperating (expense) income
 
Nonoperating (expense) income totaled $102,186 and $1,175 for the twelve months ended December 31, 2009 and 2008, respectively.  The nonoperating income or expense is discussed below.
 
Interest income totaled $19,614 in 2009 compared to $39,806 in 2008. The decrease of $20,192 for the twelve months ended December 31, 2009 compared to the comparable period in 2008 was attributable to lower cash balances and much reduced interest rates on short term savings.
 
Interest expense was $776 in 2009 and $0 in 2008. The increase in 2009 as compared to 2008 was attributable to the short term financing of some insurance costs.

The Company had a warrant modification expense of $38,631 in 2008.  Details of the transaction are in Note 2 to the financial statements.

On January 1, 2009 we reclassified the fair value of  common stock purchase warrants, which have exercise price reset and anti-liquidation features, from equity to liability classification as if these warrants were treated as a derivative liability since their date of issue.  We established a long-term warrant liability of $6.8 million to recognize the fair value of such warrants. In the first quarter ended March 30, 2009, the fair value of these common stock purchase warrants decreased because of a decrease in the stock price, resulting in a gain for the quarter.  In the three months ended June 30, 2009, the fair value of these common stock purchase warrants increased to $3.2 million because of an increase in the stock price. We recognized a $473,799 non-cash expense from the change in fair value of these warrants for the three months ended June 30, 2009.  In the three months ended September 30, 2009, the fair value of these common stock purchase warrants increased to $5.6 million due to an increase in the stock price. We recognized a $2.6 million non-cash expense from the change in fair value of these warrants for the three months ended September 30, 2009.  In the three months ended December 31, 2009, the fair value of these common stock purchase warrants increased to $6.5 million due to an increase in the stock price.  We recognized a $677,830 non-cash expense from the change in fair value of the warrants for the three months ended December 31, 2009.The net gain for the twelve month period ended December 31, 2009 is $83,348.

Liquidity and Capital Resources
 
Since our inception, we have financed our operations through the private placement of our securities, the exercise of investor warrants, and to a lesser degree from grants. Currently, our monthly cash burn rate is $600,000.   We anticipate that our available cash and expected income will be sufficient to finance our current activities for at least the next 12 months from December 31, 2009, although certain activities and related personnel may need to be reduced.

On December 18, 2008, we filed our first IND with the FDA.  We estimate that we will have sufficient cash and cash equivalents to finance our current operations, pre-clinical and clinical work for at least 12 months from December 31, 2009. We cannot assure you that public or private financing or grants will be available on acceptable terms, if at all. 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.
 
               
Change in 2008
 
               
Versus 2007
 
   
2009
   
2008
   
$
   
%
 
Cash and cash equivalents
  $ 2,309,774     $ 4,903,279     $ (2,593,505 )     (53 )%
                                 
Net cash used in operating activities
  $ (5,144,820 )   $ (6,860,039 )   $ (1,715,219 )     (25 )%
Net cash used in investing activities
  $ (210,784 )   $ (193,630 )   $ 17,154       (9 )%
Net cash provided by financing activities
  $ 2,762,099     $ 4,553,211     $ (1,791,112 )     (39 )%

 
28

 

Total cash and cash equivalents was $2,309,774 at December 31, 2009, compared with $4,903,279 at December 31, 2008.  The decrease in our cash and cash equivalents of $2,593,505 or 53%, from December 31, 2008 to December 31, 2009 was do to the postponement of new financing until the first quarter of 2010 when the company raised an additional $7M.

Net Cash Used in Operating Activities
 
Operating activities required $5,144,820 for the twelve months ended December 31, 2009 compared to $6,860,039 for the same period  in 2008. The decrease of $1,715,219 in cash consumption, or 25%, for the twelve months ended December 31, 2009 compared to the same period in 2008 was primarily attributable to an increase of $295,334 in short term financing by vendors, employees and other service providers for the year and a reduction in spending, particularly in research of $969,506 and $325,112 in management incentive bonuses. ..

Net Cash Used in Investing Activities
 
In our investment activities we used $210,784 in cash in 2009 and $193,630 in cash in 2008.  The increase in our cash use of $17,154, or 9%, for the twelve months ended December 31, 2009 compared to the same period in 2008 was primarily attributable to an increase in purchases of property and equipment.
 
Net Cash Provided by Financing Activities
 
Net cash provided by financing activities was $2,762,099 in 2009 as compared to $4,553,211 in 2008 as $7M of new financing activity was postponed to the first quarter of 2010 when better terms where available.
 
Subsequent Financing Activities

During the first quarter of 2010, and subsequent to the date of the balance sheet included in this Annual Report, we completed a series of transactions resulting in us receiving gross proceeds for the exercise of our Series A, B, C and D warrants of $7.3 million.  On March 16, 2010 we had cash on hand of $7.8 million. 

Listed below are key financing transactions entered into by us in the last two years.  Also, please refer to the section of this Annual Report entitled “Recent Sale of Unregistered Securities” for a further description of the following transactions:
 
In February of 2008, we sold a strategic purchaser $2,500,000 of our common stock.

 
• 
On December 18, 2008, we sold $2,000,000 of common stock pursuant to our shelf registration statement on Form S-3.

 
• 
On June 30, 2009, we sold $1,000,000 of common stock and warrants to purchase an additional 2,440,000 common shares pursuant to our shelf registration statement on Form S-3.

 
• 
In September 2009, we received $347,418 as a result of warrant exercises.

 
• 
In October and December 2009, we received $53,214 as a result of warrant exercises.

 
• 
On December 29, 2009 we sold $1,500,000 of common stock pursuant to a private placement.

Transactions Subsequent to December 31, 2009

 
·
On January 29, 2010, we received $1,000,000 as a result of Series D warrant exercises.
 
 
·
In February of 2010, we exercised the call provision related to our Series B Warrants which resulted in $2,460,918from the exercise thereof.
 
 
29

 

 
·
In March of 2010, we received $3,374,250 as a result of Series C warrant exercises.
 
 
·
In March of 2010, we received $860,205 as a result of placement agent warrant exercises.
 
Call of Series B Warrants

During the first quarter of 2006, we issued an aggregate of 2,019,231 Series B warrants in connection with a private placement of our securities. The Series B warrants contained a call provision allowing us to redeem the warrants for $.01 per warrant share, upon 30 days notice, provided the following two conditions were met:  (a) we receive approval of our IND, and (b) a registration statement covering the resale of the warrant shares shall be effective.  As a result, Series B warrant holders exercised their respective warrants which resulted in us issuing 1,993,876 common shares and receiving gross proceeds in the amount of $2,460,918.
 
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. We have a shelf registration statement which was declared effective on September 29, 2008 and covers up to approximately $25,000,000 of our securities that could be available for financings. On December 18, 2008 and June 30, 2009, we filed Prospectus Supplements under which we sold securities with an aggregate market value pursuant to General Instruction I.B.6. of Form S-3, of $6,167,520.  Accordingly, depending on our market capitalization and other restrictions and conditions contained in General Instruction I.B.6. of Form S-3, we may be able to sell up to an additional $18,832,420 pursuant to our shelf registration statement.

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 7A. 
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK 

We are not required to provide the information as to selected financial data as we are considered a smaller reporting company, as defined by Rule 229.10(f)(1).
 
ITEM 8. 
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO FINANCIAL STATEMENTS
  
 
Page
Report of Independent Registered Public Accounting Firm
 
31
     
Balance Sheets
 
32
     
Statements of Operations
 
33
     
Statements of Cash Flows
 
34
     
Statements of Stockholders’ Equity
 
35
     
Notes to Financial Statements
 
36
 
 
30

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Neuralstem, Inc.
Rockville, Maryland

We have audited the accompanying balance sheets of Neuralstem, Inc. as of December 31, 2009 and 2008, and the related statements of operations, stockholders’ equity and cash flows for the years ended December 31, 2009 and 2008.  Neuralstem, Inc.’s management is responsible for these financial statements.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards required that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.  Neuralstem, Inc. is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.  Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of Neuralstem, Inc.’s internal control over financial reporting.  Accordingly, we express no such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Neuralstem, Inc. as of December 31, 2009 and 2008, and the results of its operations and its cash flows for the years ended December 31, 2009 and 2008 in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 8 to the financial statements, in 2009 Neuralstem, Inc. adopted the guidance issued by the Financial Accounting Standards Board regarding whether an instrument or embedded feature is indexed to an entity’s own stock.  This resulted in the recharacterization of certain warrants as liabilities.

 
/s/ Stegman & Company

Baltimore, Maryland
March 30, 2010

 
31

 

Neuralstem, Inc.
 
Balance Sheets

   
December 31,
   
December 31,
 
   
2009
   
2008
 
             
ASSETS
           
CURRENT ASSETS
           
Cash and cash equivalents
  $ 2,309,774     $ 4,903,279  
Prepaid expenses
    143,600       136,287  
                 
Total current assets
    2,453,374       5,039,566  
                 
Property and equipment, net
    196,755       163,930  
Intangible assets, net
    301,560       212,265  
Other assets
    55,716       52,972  
                 
Total assets
  $ 3,007,405     $ 5,468,733  
                 
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
               
                 
CURRENT LIABILITIES
               
                 
Accounts payable and accrued expenses
  $ 791,607     $ 547,950  
Accrued bonus expense
    769,215       717,538  
Total current liabilities
    1,560,822       1,265,488  
                 
LONG-TERM LIABILITIES
               
                 
Fair value of warrant obligations
    6,462,039       -  
                 
Total liabilities
    8,022,861       1,265,488  
                 
STOCKHOLDERS' (DEFICIT) EQUITY
               
                 
Preferred stock, 7,000,000 shares authorized, zero shares issued and outstanding
    -       -  
                 
Common stock, $0.01 par value; 150 million shares authorized, 35,743,831 and 33,751,300 shares outstanding in 2009 and 2008, respectively
    357,438       337,513  
Additional paid-in capital
    62,193,937       61,352,527  
Accumulated deficit
    (67,566,831 )     (57,486,795 )
Total stockholders' (deficit) equity
    (5,015,456 )     4,203,245  
                 
Total liabilities and stockholders' (deficit) equity
  $ 3,007,405     $ 5,468,733  

See notes to financial statements.
 
 
32

 
 
Neuralstem, Inc.

Statements of Operations

   
Years
 
   
Ended December 31,
 
   
2009
   
2008
 
             
Revenues
  $ -     $ -  
                 
Operating expenses:
               
Research and development costs
    5,346,904       6,513,349  
General, selling and administrative expenses
    5,030,981       5,252,863  
Depreciation and amortization
    88,664       65,761  
Total operating expenses
    10,466,549       11,831,973  
Operating loss
    (10,466,549 )     (11,831,973 )
                 
Nonoperating (expense) income:
               
Interest income
    19,614       39,806  
Interest expense
    (776 )     -  
Warrant modification expense
    -       (38,631 )
Gain from change in fair value of warrant obligations
    83,348       -  
Total nonoperating income
    102,186       1,175  
                 
Net loss attributable to common shareholders
  $ (10,364,363 )   $ (11,830,798 )
                 
Net loss per share, basic and diluted
  $ (0.30 )   $ (0.37 )
                 
Weighted average common shares outstanding, basic and diluted
    34,280,882       32,114,365  

See notes to financial statements.
 
 
33

 

Neuralstem, Inc.
 
Statements of Cash Flows

   
Twelve Months
 
   
Ended December 31,
 
   
2009
   
2008
 
             
Cash flows from operating activities:
           
Net loss
  $ (10,364,363 )   $ (11,830,798 )
                 
Adjustments to reconcile net loss to cash used in operating activities:
               
Depreciation and amortization
    88,664       65,761  
Share based compensation expenses
    4,556,916       4,632,847  
Warrant modification expense
    -       38,631  
                 
Gain from change in fair value of warrant obligations
    (83,348 )     -  
                 
Changes in operating assets and liabilities:
               
Prepaid expenses
    (7,313 )     (5,568 )
Other assets
    (2,744 )     (9,701 )
Accounts payable and accrued expenses
    243,657       127,301  
Accrued bonus expenses
    423,711       121,488  
Net cash used in operating activities
    (5,144,820 )     (6,860,039 )
                 
Cash flows from investing activities:
               
Acquisition of intangible assets
    (122,406 )     (116,921 )
Purchase of property and equipment
    (88,378 )     (76,709 )
Net cash used in investing activities
    (210,784 )     (193,630 )
                 
Cash flows From financing activities:
               
Issuance of common stock
    2,762,099       4,553,211  
Net cash provided by financing activities
    2,762,099       4,553,211  
                 
Net decrease in cash
    (2,593,505 )     (2,500,458 )
                 
Cash and cash equivalents, beginning of period
    4,903,279       7,403,737  
                 
Cash and cash equivalents, end of period
  $ 2,309,774     $ 4,903,279  
                 
Supplemental disclosure of cash flows information:
               
Cash paid for interest
    776       -  
Cash paid for income taxes
    -       -  
                 
Supplemental schedule of non cash investing and financing activities:
               
Common stock issued to pay accrued employee bonuses
    372,033       -  

See notes to financial statements.

 
34

 

Neuralstem, Inc.

Statements
of Shareholders' Equity (Deficit)

For the years ended December 31, 2009 and 2008

   
Common
   
Common
   
Additional
         
Total
 
   
Stock
   
Stock
   
Paid-In
   
Accumulated
   
Stockholders'
 
   
Shares
   
Amount
   
Capital
   
Deficit
   
Equity (Deficit)
 
                               
Balance at January 1, 2008
    31,410,566     $ 314,106     $ 52,151,245     $ (45,655,997 )   $ 6,809,354  
Exercise of Warrants to purchase Common Stock ($1.50 to $2.00 per share), net of offering costs of $20,889
    125,425       1,254       209,957               211,211  
Issuance of common stock though private placement ($4.06 per share).
    615,309       6,153       2,493,847               2,500,000  
Issuance of common stock though private placement ($1.25 per share) , net of offering costs of $158,000
    1,600,000       16,000       1,826,000               1,842,000  
Share Based Payments - Employee Compensation
                    4,632,847               4,632,847  
Warrant Modification Expense
                    38,631               38,631  
Net loss
                            (11,830,798 )     (11,830,798 )
Balance at December 31, 2008
    33,751,300       337,513       61,352,527       (57,486,795 )     4,203,245  
Cumulative effect of reclassification of warrants to liabilities
                    (7,044,118 )     284,327       (6,759,791 )
Balance, January 1, 2009 as adjusted
    33,751,300       337,513       54,308,409       (57,202,468 )     (2,556,546 )
Share based payment - employee compensation
                    4,556,916               4,556,916  
Issuance of common stock through Private Placement ($1.25 per share), net of financing costs of $96,608.
    800,000       8,000       895,392               903,392  
Issuance of common stock from warrants exercised ($1.25 per share), net of financing costs of $31,300.
    320,505       3,205       575,741               578,946  
Issuance of common stock in settlement of outstanding 2008 bonus due to officers (225,475 shares at $1.65 per share)
    225,475       2,255       369,778               372,033  
Issuance of common stock through Private Placement ($2.32 per share), net of financing costs of $5,833
    646,551       6,465       1,487,701               1,494,166  
Net loss
                            (10,364,363 )     (10,364,363 )
Balance at December 31, 2009
    35,743,831     $ 357,438     $ 62,193,937     $ (67,566,831 )   $ (5,015,456 )

See notes to financial statements.

 
35

 

NEURALSTEM, INC.

NOTES TO FINANCIAL STATEMENTS
 
Note 1.  Nature of Business and Significant Accounting Policies
 
Nature of business:

Neuralstem, Inc. (“Company”) is a biopharmaceuticals company that is utilizing its proprietary human neural stem cell technology to create a comprehensive platform for the treatment of central nervous system diseases. The Company will commercialize this technology as a tool for use in the next generation of small-molecule drug discovery and to create cell therapy biotherapeutics to treat central nervous system diseases for which there are no cures. The Company was founded in 1997 and currently occupies lab and office space in Rockville, Maryland.

Inherent in the Company’s business are various risks and uncertainties, including its limited operating history, the fact that Neuralstem’s technologies are new and may not allow the Company or its customers to develop commercial products, regulatory requirements associated with drug development efforts and the intense competition in the genomics industry. The Company’s success depends, in part, upon successfully raising additional capital, prospective product development efforts, the acceptance of the Company’s solutions by the marketplace, and approval of the Company’s solutions by various governmental agencies.

A summary of the Company’s significant accounting policies is as follows:

Basis of Presentation

These financial statements have been prepared on the basis that the Company will continue as a going concern.  Such assertion contemplates the significant losses recognized to date and the challenges we anticipate with respect to obtaining near-term funding under prevailing and forecasted economic conditions.  The Company continues to be fully committed and has the capacity to continue to provide necessary capital and liquidity to fund continuing operations.

Use of Estimates

The preparation of financial statements in accordance with generally accepted accounting principles 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. Because of the use of estimates inherent in the financial reporting process, actual results could differ significantly from those estimates.
 
The Company's business currently does not generate cash. The Company's management does not know when this will change. The Company has expended and will continue to expend substantial funds in the research, development and clinical and pre-clinical testing of the Company's stem cell technologies and products with the goal of ultimately obtaining approval from the United States Food and Drug Administration ("FDA") to market and sell our products. 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 products. Based on our current operating levels, we believe that we have sufficient levels of cash and cash equivalents to fund operations into the first quarter of 2011.

No assurance can be given that (i) we will be able to expand our operations prior to FDA approval of our products, or (ii) that FDA approval will ever be granted for our products.

Cash and Cash Equivalents

For the Statements of Cash Flows, all highly liquid investments with maturity of three months or less are considered to be cash equivalents.

Property and Equipment

Property and equipment is stated at cost and depreciated on a straight-line basis over the estimated useful lives ranging from three to eight years. Expenditures for maintenance and repairs are charged to operations as incurred.

Recoverability of Long-Lived Assets and Identifiable Intangible Assets

Long-lived assets and certain identifiable intangible assets to be held and used are reviewed for impairment when events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written down to their estimated fair values. Long-lived assets and certain identifiable intangible assets to be disposed of are reported at the lower of carrying amount or fair value less cost to sell.
 
36

 
Fair Value of Financial Instruments

The fair values of financial instruments are estimated based on market rates based upon certain market assumptions and information available to management. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, accounts payable and notes payable. Fair values were assumed to approximate carrying values for cash and payables due to the short-term nature or that they are payable on demand.

Revenue Recognition
Our revenue recognition policies are in accordance with guidance issued by the SEC and Financial Accounting Standards Board (FASB).  Historically, our revenue has been derived primarily from providing treated samples for gene expression data from stem cell experiments, from providing services under various grant programs and 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.

Research and Development

 Research and development expenses consist primarily of costs associated with pre-clinical research, exclusively in the field of human neural stem cell therapies and regenerative medicine, related to our clinical cell therapy candidates. These expenses represent both pre-clinical development costs and costs associated with non-clinical support activities such as quality control and regulatory processes. Research and development costs are expensed as they are incurred.

Income taxes

Income taxes are provided for using the liability method of accounting in accordance with accepted accounting standards.  A deferred tax asset or liability is recorded for all temporary differences between financial and tax reporting. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax basis. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effect of changes in tax laws and rates on the date of enactment.

Significant New Accounting Pronouncements

On July 1, 2009, the Accounting Standards codification became FASB’s officially recognized source of authoritative U.S. generally accepted accounting principles applicable to all public and non-public non-governmental entities, superseding existing FASB, AICPA, EITF and related literature.  Rules and interpretive releases of the SEC under the authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  All other accounting literature is considered non-authoritative.  The switch to the ASC affects the way companies refer to U.S. GAAP in financial statements and accounting policies.  Citing particular content in the ASC involves specifying the unique numeric path to the content through the Topic, Subtopic, Section and Paragraph structure.

In June 2008, the FASB ratified consensus reached on determining whether an instrument is indexed to an entity’s own stock. The FASB provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity's own stock. The guidance applies to any freestanding financial instrument or embedded feature that has all the characteristics of a derivative, as defined by the FASB. The guidance also applies to any freestanding financial instrument that is potentially settled in an entity's own stock, regardless of whether the instrument has all the characteristics of a derivative, for purposes of determining whether the instrument is subject to accounting guidance for instruments that are indexed to, and potentially settled in, the issuer's own stock. This guidance is effective for fiscal years beginning after December 15, 2008.  See Note 5 for a discussion of the effect of this standard that was adopted on January 1, 2009.

In May 2009, the FASB issued new accounting guidance related to the accounting and disclosures of subsequent events.  This guidance incorporates the subsequent events guidance contained in the auditing standards literature into authoritative accounting literature. This guidance is effective for financial statements issued for interim or annual periods ending after June 15, 2009.  We adopted this guidance upon its issuance and it had no material impact on our financial statements.
 
In June 2009, the FASB issued new accounting guidance to improve financial reporting by companies involved with variable interest entities and to provide more relevant and reliable information to users of financial statements.  This guidance is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. Earlier application is prohibited.  We adopted this guidance upon its issuance and it had no material impact on the Company’s financial statements.
 
Share Based Payments

We have granted stock-based compensation awards to employees and board members.  Awards may consist of common stock, warrants, or stock options.  Our stock options and warrants have up to a ten year life.  The stock options or warrants 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 at the date of the grant. 
 
37

 
During the twelve months ended December 31, 2009, we granted 270,000 options, and in the similar period ended December 31, 2008, we granted 5,650,000 options. We recorded related compensation expenses as our options vest in accordance with guidance issued by the FASB related to share based payments.  We recognized $4,556,916 and $4,632,847 in share-based compensation expense during the twelve months ended December 31, 2009 and 2008, respectively, from the vesting of stock options or warrants.

Note 2. Stockholders’ (Deficit) Equity

Preferred and Common Stock

The authorized stock of the Company consists of 7,000,000 shares of blank check preferred stock with a par value of $0.01 and 150,000,000 shares of common stock with par value of $0.01.  None of these shares have been issued.
 
The Company completed a registered offering of 800,000 common shares at $1.25 per share increasing equity by approximately $1,000,000 in June 2009, less approximately $97,000 in related placement and closing costs.  In September 2009 and December 2009, several warrant holders exercised 320,505 warrants at $1.25 per warrant increasing equity by approximately $401,000 less $31,300 in related financing costs.  In December 2009, the Company completed a private placement of 646,551 common shares at $2.32 per share increasing equity by approximately $1,500,000 less approximately $6,000 in related costs.

During the year ended December 31, 2008, the Company sold 2,215,309 shares of common stock for a total consideration of $4,342,000 (net of offering expenses of $158,000). During the year ended December 31, 2008 the Company also converted 125,425 warrants to purchase Common Stock into common shares, raising $211,211 net of $20,889 in expenses.
 
Stock Options

In 1997, the Company adopted a stock incentive plan (the Plan) to provide for the granting of stock awards, such as stock options and restricted common stock to employees, directors and other individuals as determined by the Board of Directors. The Company reserved 2.7 million shares of common stock for issuance under the Plan. At December 31, 2002, 816,084 options were outstanding with 216,040 options exercisable. During 2003, the Company reduced operations and terminated employment with all employees. The Plan was discontinued, terminating all options outstanding.

·
On January 21, 2008, we granted the following options pursuant to our 2007 Stock Plan:
 
Karl Johe, Chairman and Chief Science Officer - options to purchase 2.1 million common shares at a price of $3.66 per share. The options vest over 3.5 years with the vesting period commencing on January 1, 2008 with 700,000 options vesting on each of February 28, 2009, April 30, 2010, and June 30, 2011. The options expire on January 1, 2018. Additionally, the options will become immediately exercisable upon an event which would result in an acceleration of Mr. Johe’s stock options granted under his employment agreement.

Richard Garr, Chief Executive Officer and General Council - options to purchase 2.1 million common shares at a price of $3.66 per share. The options vest over 3.5 years with the vesting period commencing on January 1, 2008 with 700,000 options vesting on each of February 28, 2009, April 30, 2010, and June 30, 2011. The options expire on January 1, 2018.  Additionally, the options will become immediately exercisable upon an event which would result in an acceleration of Mr. Garr’s stock options granted under his employment agreement.

·
On April 1, 2008, we granted an officer compensatory options to purchase an aggregate of 1,050,000 common shares at an exercise price of $2.60. The options vest as follows: (i) 50,000 vest immediately; and (ii) 1,000,000 vest annually over the next three years so that 100% of the options will be vested on April 1, 2011. The options were issued pursuant to our two stock plans as follows: (x) the option to purchase 1,000,000 common shares was issued pursuant to our 2007 Stock Plan; and (y) option to purchase 50,000 common shares was issued pursuant to our 2005 Stock Plan.

·
On May 28, 2008, we granted independent directors options to purchase an aggregate of 120,000 common shares at an exercise price of $1.32. The grant was made pursuant to our 2007 Stock Plan and in compliance with our non-executive compensation arrangement. The grant consists of: (i) an option purchase 90,000 common shares as compensation for serving on the board of directors; (ii) an option to purchase 10,000 common shares as compensation for serving on our Audit Committee; (iii) an option to purchase 10,000 common shares as compensation for serving on our Compensation Committee; and (iv) an option to purchase 10,000 common shares as compensation for serving on our Governance and Nominating Committee. The options vest quarterly over the grant year and expire 7 years from the date of grant.
 
38

 
·
On August 14, 2008, we granted options to purchase an aggregate of 30,000 common shares at an exercise price of $1.88 to two employees (15,000 each). The grants were made pursuant to our 2005 Stock Plan. The options vest as follows: (i) 15,000 on the granted date; and (ii) 15,000 on August 14, 2009. The options expire on August 14, 2018.

·
On August 14, 2008, we granted one of our employees options to purchase 200,000. The grant is effective as of August 11, 2008, the employee’s start date. The options vest as follows: (i) 40,000 on the effective date; and (ii) 40,000 on each of August 11, 2009, 2010, 2011 and 2012. The grant was made pursuant to the 2005 Stock Plan. The options have an exercise price of $1.89 and expire on August 14, 2018.

·
On November 14, 2008 we granted a consultant 50,000 warrants to purchase common shares at a price of $2.75, which were reclassed in 2009 to options with the same terms. The grant was made pursuant to our 2005 Stock Plan.  The options are fully vested.  The options were issued as partial compensation for services rendered.  The options expire on November 13, 2013.

·
On January 5, 2009 we granted a consultant 100,000 options to purchase common shares at a price of $1.64.  The options were issued as compensation for services rendered. The grant was made pursuant to our 2005 Stock Plan.  The options are fully vested and have a cashless exercise provision.  The options expire on January 5, 2016.

·
On June 3, 2009 we granted a consultant100,000 options to purchase common shares at a price of $1.13.  The options were issued as compensation for services rendered.  The grant was made pursuant to our 2005 Stock Plan.  The options vest as follows:  25,000 vested immediately; 25,000 vest at the six month anniversary; 25,000 vest at the twelve month anniversary; 25,000 vest at the eighteen month anniversary.  The options expire on June 3, 2019.

·
On July 2, 2009 we granted independent directors options to purchase an aggregate of 70,000 common shares at an exercise price of $1.17.  The grant was made pursuant to our 2007 Stock Plan and in compliance with our non-executive compensation arrangement.  The grant consists of: (i) options to purchase 40,000 common shares as compensation for serving on the Board of Directors; (ii) options to purchase 10,000 common shares as compensation for serving on the Audit Committee; (iii) options to purchase 10,000 common shares as compensation for serving on the Compensation Committee; and (iv) options to purchase 10,000 common shares as compensation for serving on the Governance and Nominating Committee.  These options vest quarterly over the grant year and expire 7 years from the date of grant.
 
During the twelve months ended December 31, 2009, we granted 270,000 options and in the similar period ended December 31, 2008, we granted 5,650,000 options. We recorded related compensation expenses as our options vest in accordance with accordance with guidance issued by the FASB related to share based payments.   We recognized $4,556,916 and $4,632,847 in share-based compensation expense during the twelve months ended December 31, 2009 and 2008, respectively, from the vesting of stock options or warrants.

   
Number of
Options
   
Weighted-
Average
Exercise
Price
   
Weighted-
Average
Remaining
Contractual Life
(in years)
   
Aggregate
Intrinsic Value
 
                                 
Outstanding at January 1, 2008
    3,150,659     $ 1.19       6.8     $ -  
                                 
Granted
    5,650,000       3.34       9.3     $ -  
Exercised
    -       -       -       -  
Forfeited
    -       -       -       -  
                                 
Outstanding at January 1, 2009
    8,800,659     $ 2.55       8.2     $ -  
                                 
Granted
    270,000       1.33       8.2     $ 124,400  
Exercised
    -       -       -       -  
Forfeited
    -       -       -       -  
                                 
Outstanding at December 31, 2009
    9,070,659     $ 2.52       7.2     $ 3,276,800  
                                 
Exercisable at December 31, 2009
    5,065,659     $ 1.88       6.6     $ 3,222,100  
 
 
39

 

Range of
           
Exercise
 
Outstanding
       
Price
 
Options
   
Expiration Dates
 
             
$0.50 - 2.00
    3,070,000       2015 - 2019  
                 
$ 2.01 - 3.00
    1,115,000       2013 - 2018  
                 
$3.01 - 4.00
    4,818,275       2012 - 2018  
                 
$4..01 - 8.00
    62,042