The
selling stockholders identified on pages 34 of this prospectus are offering
on a
resale basis a total of 3,975,480
shares
of our common stock. Although we will incur expenses in connection with the
registration of the common stock, we will not receive any of the proceeds from
the sale of the shares of common stock by the selling stockholders. We will
receive gross proceeds of up to $6,762,000 from the exercise of the warrants,
if
and when they are exercised.
Our
common stock is listed on the OTC Bulletin Board and traded under the symbol
“NRLS.OB.” On April 27, 2007, the closing price of the common stock quoted on
the OTC Bulletin Board was $3.95 per
share.
We
may
amend or supplement this prospectus from time to time by filing amendments
or
supplements as required. You should read this entire prospectus and any
amendments or supplements carefully before you make your investment
decision.
_________________________________
The
securities offered by this prospectus involve a high degree of
risk.
See
“Risk Factors” beginning on page2
_________________________________
Neither
the Securities and Exchange Commission nor any state securities commission
has
approved or disapproved
these
securities or determined that this prospectus is truthful or complete. A
representation to the contrary is a criminal
CHANGES
AND DISAGREEMENTS WITH ACCOUNTS ON ACCOUNTING & FINANCIAL
DISCLOSURE
37
TRANSFER
AGENT
37
LEGAL
MATTERS
38
EXPERTS
38
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
38
WHERE
YOU CAN FIND MORE INFORMATION
38
FINANCIAL
INFORMATION
F-1
INFORMATION
NOT REQUIRED IN PROSPECTUS
II-1
Indemnification
Of Directors & Officers
II-1
Other
Expenses of Issuance & Distribution
II-1
Recent
Sales of Unregistered Securities
II-1
Exhibits
II-4
1
RISK
FACTORS
An
investment in Neuralstem, Inc. involves significant risks. You should read
these
risk factors carefully before deciding whether to invest in our company. The
following is a description of what we consider our key challenges and
risks.
Risks
Relating to the Company's Stage of Development
Since
the Company has a limited operating history and has significantly shifted its
operations and strategies since inception, you cannot rely upon the Company's
limited historical performance to make an investment
decision.
Since
inception in 1996 and through December 31, 2006, the Company has raised in
aggregate, approximately $39,994,994 in capital and recorded accumulated losses
totaling $38,592,725 as of December 31, 2006. The Company had a working capital
of $1,486,154 and stockholder's equity of $1,552,269. Our net losses for the
two
most recent fiscal years have been $3,147,488 and $1,651,507 for 2006 and 2005
respectively. During this period, we have generated only marginal revenue from
licensing and grants in the amount of $265,759 and $309,142 for the 2006 and
2005 fiscal years, respectively.
The
Company's ability to generate revenues and achieve profitability depends upon
its ability to complete the development of its stem cell products, obtain the
required regulatory approvals, manufacture, market and sell its products. In
part because of the Company's past operating results, no assurances can be
given
that the Company will be able to accomplish all or any these goals.
Although
the Company has generated some revenue to date, the Company has not generated
any revenue from the commercial sale of its proposed stem cell products. Since
inception, the Company has engaged in several related lines of business and
has
discontinued operations in certain areas. For example, in 2002, the Company
lost
a material contract with the Department of Defense and was forced to close
its
principal facility and lay off almost all of its employees in an attempt to
focus the Company's strategy on its stem cell technology. This limited and
changing history may not be adequate to enable you to fully assess the Company's
current ability to develop and commercialize its technologies and proposed
products, obtain approval from the U.S. Food and Drug Administration (“FDA”),
achieve market acceptance of its proposed products and respond to competition.
No assurances can be given as to exactly when, if at all, the Company will
be
able to fully develop, commercialize, market, sell and derive material revenues
from its proposed products in development.
The
Companywill
need to raise additional capital to continue operations, and failure to do
so
will impair the Company's ability to fund operations, develop its technologies
or promote its products.
The
Company has relied almost entirely on external financing to fund operations.
Such financing has historically come primarily from the sale of common and
preferred stock and convertible debt to third parties and to a lesser degree
from grants, loans and revenue from license and royalty fees. The Company
anticipates, based on current proposed plans and assumptions relating to its
operations (including the timetable of, and costs associated with, new product
development) and financings the Company has undertaken prior to the date of
this
prospectus, that its current working capital will be sufficient to satisfy
contemplated cash requirements for approximately 20 months, assuming that
the Company does not engage in an extraordinary transaction or otherwise face
unexpected events or contingencies, any of which could effect cash requirements.
As of the date of this prospectus, the Company has cash and cash equivalents
on
hand of approximately $6,400,000. Presently, the Company has a monthly cash
burn
rate of $260,000. Accordingly, the Company will need to raise additional capital
to fund anticipated operating expenses and future expansion after such 20 month
period. Among other things, external financing will be required to cover the
further development of the Company's technologies and products and other
operating costs. The Company cannot assure you that financing whether from
external sources or related parties will be available if needed or on favorable
terms. If additional financing is not available when required or is not
available on acceptable terms, the Company may be unable to fund operations
and
planned growth, develop or enhance its technologies, take advantage of business
opportunities or respond to competitive market pressures. Any negative impact
on
the Company's operations may make capital raising more difficult and may also
result in a lower price for the Company's securities.
The
Company may have difficulty raising needed capital in the future as a result
of,
among other factors, the Company's limited operating history and business risks
associated with the Company.
The
Company's business currently generates limited amounts of cash which will not
be
sufficient to meet its future capital requirements. 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.
The
Company will require additional funds to conduct research and development,
establish and conduct clinical and pre-clinical trials, commercial-scale
manufacturing arrangements and to provide for the marketing and distribution.
Additional funds may not be available on acceptable terms, if at all. If
adequate funds are unavailable from any available source, the Company may have
to delay, reduce the scope of or eliminate one or more of its research,
development or commercialization programs or product launches or marketing
efforts which may materially harm the Company's business, financial condition
and results of operations.
2
The
Company's long term capital requirements are expected to depend on many factors,
including:
·
continued
progress and cost of its research and development
programs;
·
progress
with pre-clinical studies and clinical
trials;
·
time
and costs involved in obtaining regulatory
clearance;
·
costs
involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims;
·
costs
of developing sales, marketing and distribution channels and its
ability
to sell the Company's stem cell
products;
·
costs
involved in establishing manufacturing capabilities for commercial
quantities of its products;
·
competing
technological and market
developments;
·
market
acceptance of its stem cell
products;
·
costs
for recruiting and retaining employees and consultants;
and
·
costs
for educating and training physicians about its stem cell
products.
The
Company may consume available resources more rapidly than currently anticipated,
resulting in the need for additional funding. The Company may seek to raise
any
necessary additional funds through the exercising of warrants, options, equity
or debt financings, collaborative arrangements with corporate partners or other
sources, which may be dilutive to existing stockholders or otherwise have a
material effect on the Company's current or future business prospects. If
adequate funds are not available, the Company may be required to significantly
reduce or refocus its development and commercialization efforts.
The
Company relies on stem cell technologies that it may not be able to commercially
develop, which will prevent the Company from generating revenues, operating
profitably or providing investors any return on their
investment.
The
Company has concentrated its research on its stem cell technologies, and the
Company's ability to generate revenue and operate profitably will depend on
it
being able to develop these technologies for human applications. These are
emerging technologies with, as yet, limited human applications. The Company
cannot guarantee that it will be able to develop its stem cell technologies
or
that such development will result in products or services with any significant
commercial utility. The Company anticipates that the commercial sale of such
products or services, and royalty/licensing fees related to its technology,
will
be the Company's primary sources of revenues. If the Company is unable to
develop its technologies, investors will likely lose their entire
investment.
Inability
to complete pre-clinical and clinical testing and trials will impair the
viability of the Company.
The
Company is in its development stage and has not yet applied for approval by
the
FDA to conduct clinical trials. Even if the Company successfully files an IND
and receives approval from the FDA to commence trials, the outcome of
pre-clinical, clinical and product testing of the Company's products is
uncertain, and if the Company is unable to satisfactorily complete such testing,
or if such testing yields unsatisfactory results, the Company will be unable
to
commercially produce its proposed products. Before obtaining regulatory
approvals for the commercial sale of any potential human products, the Company's
products will be subjected to extensive pre-clinical and clinical testing to
demonstrate their safety and efficacy in humans. No assurances can be given
that
the clinical trials of the Company's products, or those of licensees or
collaborators, will demonstrate the safety and efficacy of such products at
all,
or to the extent necessary to obtain appropriate regulatory approvals, or that
the testing of such products will be completed in a timely manner, if at all,
or
without significant increases in costs, program delays or both, all of which
could harm the Company's ability to generate revenues. In addition, the
Company's proposed products may not prove to be more effective for treating
disease or injury than current therapies. Accordingly, the Company may have
to
delay or abandon efforts to research, develop or obtain regulatory approval
to
market its proposed products. Many companies involved in biotechnology research
and development have suffered significant setbacks in advanced clinical trials,
even after promising results in earlier trials. The failure to adequately
demonstrate the safety and efficacy of a therapeutic product under development
could delay or prevent regulatory approval of the product and could harm the
Company's ability to generate revenues, operate profitably or produce any return
on an investment in the Company.
The
Company's additional financing requirements could result in dilution to existing
stockholders.
The
additional financings which the Company will require may in the future be
obtained through one or more transactions which will effectively dilute the
ownership interests of stockholders. The Company has the authority to issue
additional shares of common stock and preferred stock, as well as additional
classes or series of ownership interests or debt obligations which may be
convertible into any one or more classes or series of ownership interests.
The
Company is authorized to issue 75,000,000 shares of common stock and 7,000,000
shares of preferred stock. Such securities may be issued without the approval
or
other consent of the Company's stockholders.
3
Risks
Relating to Intellectual Property and Government
Regulation
The
Company may not be able to withstand challenges to its intellectual property
rights, such as patents, should contests be initiated in court or at the U.S
Patent and Trademark Office
.
The
Company relies on its intellectual property, including its issued and applied
for patents, as the foundation of its business. The intellectual property rights
of the Company may come under challenge, and no assurances can be given that,
even though issued, the Company's current and potential future patents will
survive claims commencing in the court system alleging invalidity or
infringement on other patents. For example, in 2005, the Company's neural stem
cell technology was challenged in the U.S. Patent and Trademark Office by a
competitor. Although the Company prevailed in this particular matter upon
re-examination by the patent office, these cases are complex, lengthy and
expensive, and could potentially be adjudicated adversely to the Company,
removing the protection afforded by an issued patent. The viability of the
Company's 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
the
Company.
The
Company may not be able to adequately protect against piracy of intellectual
property in foreign jurisdictions.
Considerable
research in the area of stem cell therapies is being performed in countries
outside of the United States, and a number of the Company's competitors are
located in those countries. The laws protecting intellectual property in
some of those countries may not provide protection for the Company's trade
secrets and intellectual property adequate to prevent its competitors from
misappropriating the Company's trade secrets or intellectual property. If
the Company's trade secrets or intellectual property are misappropriated in
those countries, the Company may be without adequate remedies to address the
issue.
The
Company's products may not receive FDA approval, which would prevent the Company
from commercially marketing its products and producing
revenues.
The
FDA
and comparable government agencies in foreign countries impose substantial
regulations on the manufacture 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 varies
substantially based upon the type, complexity and novelty of the proposed
product. The Company cannot yet accurately predict when it might first submit
any Investigational New Drug, or IND, application to the FDA, or whether any
such IND application would be granted on a timely basis, if at all, nor can
the
Company assure you that it will successfully complete any clinical trials in
connection with any such IND application. Further, the Company cannot yet
accurately predict when it might first submit any product license application
for FDA approval or whether any such product license application would be
granted on a timely basis, if at all. As a result, the Company cannot
assure you that FDA approvals for any products developed by it will be granted
on a timely basis, if at all. Any such delay in obtaining, or failure to obtain,
such approvals could have a material adverse effect on the marketing of the
Company's products and its ability to generate product revenue.
Because
the Company or its collaborators must obtain regulatory approval to market
its
products in the United States and other countries, the Company cannot predict
whether or when it will be permitted to commercialize its
products.
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 the Company's activities. The Company is 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 the products that the Company or its collaborators develop are subject
to extensive government regulation that may prevent the Company from creating
commercially viable products from its discoveries. In addition, the sale by
the
Company or its collaborators of any commercially viable product will be subject
to government regulation from several standpoints, including manufacturing,
advertising and promoting, selling and marketing, labeling, and distributing.
If, and to the extent that, the Company is unable to comply with these
regulations, its ability to earn revenues will be materially and negatively
impacted.
Risks
Relating to Competition
The
Company's competition includes both public and private organizations and
collaborations among academic institutions and large pharmaceutical companies,
most of which have significantly greater experience and financial resources
than
the Company does.
The
biotechnology industry is characterized by intense competition. The Company
competes against numerous companies, many of which have substantially greater
financial and other resources than it has. Several such enterprises have
initiated cell therapy research programs and/or efforts to treat the same
diseases targeted by the Company. Companies such as Geron Corporation, Genzyme
Corporation, StemCells, Inc., Advanced Cell Technology, Inc., Aastrom
Biosciences, Inc. and Viacell, Inc., as well as others, have substantially
greater resources and experience in the Company's fields than it does, and
are
well situated to compete with us effectively. Of course, any of the world's
largest pharmaceutical companies represent a significant actual or potential
competitor with vastly greater resources than the Company's.
4
Risks
Relating to the Company's Reliance on Third Parties
The
Company's outsource model depends on collaborators, non-employee consultants,
research institutions, and scientific contractors to help it develop and test
its proposed products. Our ability to develop such relationships could impair
or
delay our ability to develop products.
The
Company's strategy for the development, clinical testing and commercialization
of its proposed products is based on an outsource model. This model requires
that the Company enter into collaborations with corporate partners, research
institutions, scientific contractors and licensors, licensees and others in
order to further develop its technology and develop products. In the event
the
Company is not able to enter into such relationships in the future, our: ability
to develop products may be seriously hindered; or we would be required to expend
considerable money and research to bring such research and development 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. Also, we are currently dependent on
collaborators for a substantial portion of our research and development.
Although our collaborative agreements do not impose any duties or obligations
on
us other than the licensing of our technology, the failure of any of these
collaborations may hinder our ability to develop products in a timely fashion.
By way of example, our collaboration with John Hopkins University, School of
Medicine yielded findings that contributed to our patent application entitled
Transplantation of Human Cells for Treatment of Neurological Disorder. Had
the
collaboration not have existed, our ability to apply for such patent would
have
been greatly hindered. We currently have 4 key collaborations. They are
with:
·
The
University of California, San
Diego;
·
University
of South Florida;
·
University
of Central Florida; and
·
John
Hopkins University.
As
we are
under no financial obligation to provide additional funding under any of these
collaborations, our primary risk is that no results are derived from their
research. For further information relating to our collaborations, see that
section of this prospectus captioned “ Our
Business--Our Research and Programs”.
We
intend to rely upon the third-party FDA-approved manufacturers for our stem
cells. Should these manufacturers fail to perform as expected, we will need
to
develop or procure other manufacturing sources, which would cause delays or
interruptions in our product supply and result in the loss of significant sales
and customers.
We
currently have no internal manufacturing capability, and will rely extensively
on FDA-approved licensees, strategic partners or third party contract
manufacturers or suppliers. We current have an agreement with Charles River
Laboratories for the manufacturing and storage of our cells. The agreement
is a
paid for services agreement and does not require us to purchase a minimum amount
of cells. In the event Charles River Laboratories fails to provide suitable
cells, we would be forced to either manufacture the cells ourselves or seek
other third party vendors. 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 third party suppliers. In the event we
must
seek alternative third party suppliers, they may require us to purchase a
minimum amount of cells, could be significantly more expensive than our current
supplier, or could require other unfavorable terms. Any such event would
materially impact our prospects and could delay our development. 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.
The
Company may be subject to litigation that will be costly to defend or pursue
and
uncertain in its outcome.
The
Company's business may bring it into conflict with its licensees, licensors,
or
others with whom it has contractual or other business relationships or with
its
competitors or others whose interests differ from the Company's. If the Company
is unable to resolve those conflicts on terms that are satisfactory to all
parties, the Company may become involved in litigation brought by or against
it.
That 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 the
Company's business. The outcome of litigation is always uncertain, and in some
cases could include judgments against us that require the Company to pay
damages, enjoin it from certain activities, or otherwise affect its legal or
contractual rights, which could have a significant adverse effect on its
business.
The
Company may not be able to obtain third-party patient reimbursement or favorable
product pricing, which would reduce its ability to operate
profitably.
The
Company's ability to successfully commercialize certain of its proposed products
in the human therapeutic field may depend to a significant degree on patient
reimbursement of the costs of such products and related treatments at acceptable
levels from government authorities, private health insurers and other
organizations, such as health maintenance organizations. The Company cannot
assure you that reimbursement in the United States or foreign countries will
be
available for any products it may develop or, if available, will not be
decreased in the future, or that reimbursement amounts will not reduce the
demand for, or the price of, its products with a consequent harm to the
Company's business. The Company 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 the Company's business. If additional regulations are
overly onerous or expensive or if health care related legislation makes its
business more expensive or burdensome than originally anticipated, the Company
may be forced to significantly downsize its business plans or completely abandon
its business model.
5
The
Company's products may be expensive to manufacture, and they may not be
profitable if the Company is unable to control the costs to manufacture
them.
The
Company's products may be significantly more expensive to manufacture than
most
other drugs currently on the market today due to a fewer number of potential
manufactures, greater level of needed expertise, and other general market
conditions affecting manufacturers of stem cell based products. The
Company would hope to substantially reduce manufacturing costs through process
improvements, development of new science, increases in manufacturing scale
and
outsourcing to experienced manufacturers. If the Company is not able to make
these, or other improvements, and depending on the pricing of the product,
its
profit margins may be significantly less than that of most drugs on the market
today. In addition, the Company may not be able to charge a high enough price
for any cell therapy product it develops, even if they are safe and effective,
to make a profit. If the Company is unable to realize significant profits from
its potential product candidates, its business would be materially
harmed.
In
order to secure market share and generate revenues, the Company's proposed
products must be accepted by the health care community, which can be very slow
to adopt or unreceptive to new technologies and
products.
The
Company's proposed products and those developed by its collaborative partners,
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 the Company is attempting
to develop represents 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 of any of the Company's developed products will depend on
a
number of factors, including:
·
the
Company's establishment and demonstration to the medical community
of the
clinical efficacy and safety of its proposed
products;
·
the
Company's ability to create products that are superior to alternatives
currently on the market;
·
the
Company's ability to establish in the medical community the potential
advantage of its treatments over alternative treatment methods;
and
·
reimbursement
policies of government and third-party
payors.
If
the
health care community does not accept the Company's products for any of the
foregoing reasons, or for any other reason, the Company's business would be
materially harmed.
We
depend on two key employees for our continued operations and future success.
A
loss of either employee could significantly hinder our ability to move forward
with our business plan.
The
loss
of either of our key executive officers, Richard Garr and Karl Johe, would
be
significantly 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 individuals;
·
We
currently do
maintain “key person” line 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, the Company's anticipated growth and expansion into areas and
activities requiring additional expertise, such as clinical testing, regulatory
compliance, manufacturing and marketing, will require the addition of new
management personnel and the development of additional expertise by existing
management personnel. There is intense competition for qualified personnel
in
the areas of the Company's present and planned activities, and there can be
no
assurance that the Company will be able to continue to attract and retain the
qualified personnel necessary for the development of its business. The failure
to attract and retain such personnel or to develop such expertise would
adversely affect the Company's business.
6
The
Company has entered into long-term contracts with key personnel and
stockholders, with significant anti-termination provisions, which could make
future changes in management difficult or expensive.
Messrs.
Garr and Johe have entered into seven (7) year employment agreements with the
Company which expire on November 1, 2012 and which include termination
provisions stating that if either employee is terminated for any reason other
than a voluntary resignation, then 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 to the Company, and could cause difficulty in effecting a change in
control of the Company. Termination prior to full term on the contracts would
cost the Company as much as $1,800,000 per contract, and immediate vesting
of
all outstanding options (1,200,000 shares each). “Executive
Compensation--Employment Agreements and Change in Control
Arrangements”.
The
Company has no product liability insurance, which may leave it vulnerable to
future claims that the Company will be unable to
satisfy.
The
testing, manufacturing, marketing and sale of human therapeutic products entails
an inherent risk of product liability claims, and the Company cannot assure
you
that substantial product liability claims will not be asserted against it.
The
Company has no product liability insurance. In the event the Company is forced
to expend significant funds on defending product liability actions, and in
the
event those funds come from operating capital, the Company will be required
to
reduce its business activities, which could lead to significant
losses.
The
Company cannot assure you that adequate insurance coverage will be available
in
the future on acceptable terms, if at all, or that, if available, the Company
will be able to maintain any such insurance at sufficient levels of coverage
or
that any such insurance will provide adequate protection against potential
liabilities.
The
Company has limited director and officer insurance and commercial insurance
policies. Any significant claim would have a material adverse effect on its
business, financial condition and results of operations. Insurance availability,
coverage terms and pricing continue to vary with market conditions. The Company
endeavors to obtain appropriate insurance coverage for insurable risks that
it
identifies, however, the Company may fail to correctly anticipate or quantify
insurable risks, may not be able to obtain appropriate insurance coverage,
and
insurers may not respond as the Company intends to cover insurable events that
may occur. The Company has observed rapidly changing conditions in the insurance
markets relating to nearly all areas of traditional corporate insurance. Such
conditions may result in higher premium costs, higher policy deductibles, and
lower coverage limits. For some risks, the Company may not have or maintain
insurance coverage because of cost or availability.
Our
common shares are sporadically or “thinly” traded, so you may be unable to sell
at or near ask prices or at all if you need to sell your shares to raise money
or otherwise desire to liquidate your shares
Our
common shares have historically been sporadically or “thinly” traded on the
OTCBB, meaning that the number of persons interested in purchasing our common
shares at or near ask prices at any given time may be relatively small or
non-existent. This situation is attributable to a number of factors, including
the fact that we are a small company which is relatively unknown to stock
analysts, stock brokers, institutional investors and others in the investment
community that generate or influence sales volume, and that even if we came
to
the attention of such persons, they tend to be risk-averse 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 public 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 at or near ask prices or at all if you need money or otherwise desire
to
liquidate your shares.
The
market price for our common shares is particularly volatile given our status
as
a relatively unknown development stage company with a small and thinly-traded
public float, limited operating history and lack of revenues or profits to
date
could lead to wide fluctuations in our share price. The price at which you
purchase our common shares may not be indicative of the price that will prevail
in the trading market. You may be unable to sell your common shares at or above
your purchase price, which may result in substantial losses to you. The
volatility in our common share price may subject us to securities
litigation.
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 a seasoned issuer. The volatility in our
share
price is attributable to a number of factors. First, as noted above, 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, as compared to a seasoned issuer which
could better absorb those sales without a material reduction in share price.
Secondly, we are a speculative or “risky” investment due to our limited
operating history and lack of significant revenues to date, and 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.
7
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 that the sale o f shares or the
availability of common shares for sale at any time will have on the prevailing
market price.
The
Company has identified significant weaknesses with regard to its financial
control procedures. These weaknesses, if not remedied, could result in a
significant misstatement of the Company's financials or its inability to provide
timely disclosure to the public should it become subject to such reporting
requirements.
As
a
result of its stage of development, lack of resources and changes that have
occurred in the Company's operations since 2002, there are currently
deficiencies in the operating effectiveness of the Company's internal controls
over financial reporting that the Company believes may collectively constitute
significant deficiencies and material weaknesses under standards established
by
the American Institute of Certified Public Accountants, resulting in more than
a
remote likelihood that a material misstatement of the annual or interim
financial statements of the Company will not be prevented or detected.
Specifically, the Company has found deficiencies or weaknesses with the timely
reporting of transactions and the documentation thereof. By way of example,
in
the past, the company has failed to document capital transactions when they
occur, has failed to establish controls for document retention, and has failed
to account for transactions using GAAP. As of the date of this prospectus,
the
Company does not have a permanent Chief Financial Officer, although Richard
Garr, the Company's President, is temporarily serving in this capacity. As
a
result, there is a risk that the Company may not be able to properly account
for
operations and/or generate reliable financial statements. This may further
result in the Company not being able to meet its periodic filing requirements
in
a timely manner.
The
Company faces risks related to compliance with corporate governance laws and
financial reporting standards.
The
Sarbanes-Oxley Act of 2002, as well as related new rules and regulations
implemented by the Securities and Exchange Commission 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 made some activities more time-consuming and more
burdensome. Starting in 2007, Section 404 of the Sarbanes-Oxley Act of 2002
will
require that the Company's management assess the Company's internal control
over
financial reporting annually and include a report on its assessment in its
prospectus filed with the SEC. The Company's independent registered public
accounting firm is required to audit both the design and operating effectiveness
of its internal controls and management's assessment of the design and the
operating effectiveness of its internal controls. There exist material
weaknesses and deficiencies at this time in the Company's internal controls.
These weaknesses and deficiencies could have a material adverse effect on the
Company's business and operations.
The
Company does not intend to pay cash dividends on its common stock in the
foreseeable future.
Any
payment of cash dividends will depend upon the Company's financial condition,
results of operations, capital requirements and other factors and will be at
the
discretion of the Board of Directors. The Company does not anticipate paying
cash dividends on its common stock in the foreseeable future. Furthermore,
the
Company may incur additional indebtedness that may severely restrict or prohibit
the payment of dividends.
We
are
entitled under our certificate of incorporation to issue up to 75,000,000
common and 7,000,000 “blank check” preferred shares. As of March 31, 2007,
we have issued an outstanding 28,884,605 common shares, 11,153,832 common shares
reserved for issuance upon the exercise of current outstanding options and
warrants, 1,600,000 common shares reserved for issuances of additional grants
under our 2005 incentive stock plan, and an aggregate of 76,666 common shares
reserved for issuance in the event we incur additional penalties pursuant to
the
registration rights granted our investors in the March 2006 private placement.
Accordingly, we will be entitled to issue up to 33,284,897 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 plans. We cannot
give you any assurance that we will not issue additional common or preferred
shares, or options or warrants to purchase those shares, under circumstances
we
may deem appropriate at the time.
8
CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING INFORMATION
In
this
prospectust we make a number of statements, referred to as “forward-looking
statements”, which are intended to convey our expectations or predictions
regarding the occurrence of possible future events or the existence of trends
and factors that may impact our future plans and operating results. 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 use 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. When reading any forward-looking statement you should
remain mindful that actual results or developments may vary substantially from
those expected as expressed in or implied by that 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 production model, 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 our products if a market
develops;
·
our
ability to attract and retain qualified personnel to implement our
growth
strategies;
·
our
ability to develop sales marketing and distribution
capabilities;
·
our
ability to obtain reimbursement from third party payers for the products
that we sell;
·
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 prospectus. You should not place undue reliance on any
forward-looking statement as a prediction of actual results or developments.
We
are not obligated to update or revise any forward-looking statements contained
in this prospectus to reflect new events or circumstances unless and to the
extent required by applicable law.
USE
OF PROCEEDS
We
will
not receive any proceeds from the sale by the selling stockholders of the shares
of common stock covered by this prospectus.
We
originally received gross proceeds of $6,135,000 for the sales of the shares
of
Common Stock and Warrants to Investors on March 15 and March 27, 2007. The
proceeds were used for general corporate purposes.
If
the
Investor and Placement Agent Warrants are exercised, we will receive gross
proceeds of $6,762,000. We plan to use the proceeds, if any, for general
corporate purposes.
OUR
BUSINESS
We
are a
biotechnology company focused on developing and commercializing human neural
stem cell technology in the emerging field of regenerative
medicine.
Our
History
We
were
incorporated in 1997 in the state of Maryland and re-incorporated in the state
of Delaware in 2001. From 1997 until 2003, our research focused on: Genomics,
which is
the study of genes and their functions; Drug
Discovery,
which
consists of the identification of molecules with desired biological effects
that
have promise as new therapeutic drugs; and Cell
Therapy,
which
consists of treatments in which cells are administered to patients in order
to
repair damaged or depleted tissues.
9
In
2001,
we were paid a licensing fee of $7.5 million by Gene Logic, Inc., payable over
three years, to create a database using our technology. Also, in 2001, the
Company received a Defense Department contract to do drug screening using the
cells derived from its technology in the amount of $2.5 million over 18 months.
Finally, during this period, we pursued our own research into transplanting
cells derived from our technology to cure disease. We reached a high of roughly
50 employees in early 2000, mostly involved in the infrastructure involved
with
the Gene Logic/genomics and drug discovery programs.
In
late
2000 and early 2001, as a result of the decline in biotech funding markets
and
the accompanying devaluation of the genomics industry, our genomics program
was
no longer commercially viable. Additionally, in late 2002, the Department of
Defense cancelled the program which funded our drug discover efforts. As a
result, by the end of 2003, the Company made the strategic decision to lay
off
its employees involved in the genomic and drug discovery programs and focus
entirely on transplantation of its neural stem cells to treat diseases in
patients.
The
Company spent 2004 restructuring its capitalization and creating an “outsourced”
model of product development by having the research conducted at various
universities and research labs and having all other functions outsourced. In
November of 2004 we completed a ten-for-three reverse stock split.
In
2005,
the Company continued to operate under this model, with all accounting, legal,
facility, manufacturing, transplantation experimentation and regulatory
functions outsourced, under the supervision of Richard Garr, the Company's
President and Chief Executive Officer, and Dr. Johe, the Company's Chairman
and
Chief Scientific Officer.
Overview
In
2004,
we refocused our research efforts to concentrate primarily in the field of
Cell
Therapy. Specifically, we are 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, and have ownership or exclusive licensing of four
issued patents and 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 treatment of a wide
array of neurodegenerative conditions and in regenerative repair of acute
disease.
This
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 level of basic research or in the
pre-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 currently headquartered in Rockville, Maryland.
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 vehicle 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, Amyotrophic Lateral Sclerosis
(ALS, or Lou Gehrig's Disease), 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.
10
Stem
cells have two defining characteristics: (i) they produce all the kinds of
mature cells making up the particular organ; 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, 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) identifying the
stem or progenitor cells of a particular organ and testing them for therapeutic
potential; (ii) creating 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) demonstrating
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, purify1
and
control the cells differentiation in mature functioning human
neurons2
and
glia3
and
bank
human neural stem cells from brain tissue. Because the cells are purified 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 are an unpurified
mix
of many different cell types.
Potential
Markets
We
believe that, if successfully developed, neural stem cell-based therapies have
the potential to treat a broad range of diseases and injuries of the CNS. We
believe the potential applications of our technologies given our current
research focus includes developing neural cell therapies to treat Parkinson's
disease, Amyotrophic Lateral Sclerosis (ALS), and injuries to the spinal
cord.
We
believe the potential markets for regenerative medicine based on our neural
stem
cell therapies are large. The table below summarizes the potential United States
patient populations which we believe may be amenable to neural cell
transplantation and represent potential target markets for our
products:
POTENTIAL
U.S. PATIENT POPULATIONS
FOR
NEURAL CELL-BASED THERAPIES
Medical
Condition
Number
of Patients*
Parkinson's
Disease
1
million
Spinal-cord
injuries
0.25
million
Amyotrophic
Lateral Sclerosis
0.03
million
*These
estimates are based on the most current patient estimates published by the
following organizations as of April 2006; the Parkinson's Disease Foundation,
the Parkinson's Action Network, the Foundation for Spinal Cord Injury
Prevention, Care and Cure, and the Amyotrophic Lateral Sclerosis
Association.
1Purification of
our
cells is the process whereby we separate “raw” donor tissue into our cells.
During the process, we monitor the division of the neural stems cells and
remove
or “weed out” any cells which have failed to divide after a predetermined period
of time. We repeat this process 3 to 4 times until the cells remaining have
been
“purified” in our estimation.
2Neurons 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.
3Glia 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.
11
Our
Technology
Our
technology is the ability to isolate human neural stem cells from most areas
of
the developing human brain and spinal cord and our technology includes the
ability to grow them into physiologically relevant human neurons of all types.
Our two issued core patents entitled Isolation,
Propagation, and Directed Differentiation of Stem Cell from Embryonic and Adult
Central Nervous System of Mammals
and
In
Vitro Generation of Differentiated Neurons from Cultures of Mammalian
Multi-potential CNS Stem Cell
contain
claims which cover the process of deriving the cells and the cells created
from
such process.
Our
technology is the ability to isolate human neural stem cells from most areas
of
the developing 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 from the human brain
and
spinal cord.
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 for two distinct advantages:
·
First,
the growth or expansion of the cells in vitro occurs while the cells
are
still in their “stem cell” or blank state which allows for the creation of
commercially reasonable quantities of neural stem cells. Once a sufficient
number of blank cells have been grown, our technology allows us to
program
or differentiate the cells into either neurons or glia;
and
·
Secondly,
we have the ability to sample the cells while still in
vitro
in
order to confirm that the cells are differentiating in the desired
cell
type.
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. This has resulted in the identification of a group of small molecule
compounds with the potential to enhance the survival of the endogenous cells
residing in the hippocampus4
region
on
the brain.
Business
Strategy
We
are
seeking to develop and commercialize stem cell therapeutics to treat, and
possibly cure, a range of human diseases. Our strategy has been to be the first
to identify, isolate and patent important human neural stem and progenitor
cells
derived from human tissue with therapeutic and commercial importance; to develop
techniques which enable the expansion and banking of those cells; and then
to
take them into clinical development as transplantable therapeutics.
A
central
element of our business strategy is to obtain patent protection for the
compositions, processes and uses of these multiple types of cells that would
make the commercial development of neural stem cell therapeutics financially
feasible. We have obtained rights to certain inventions relating to stem cells
and progenitor through our own research and from academic collaborators. We
expect to continue to expand our search for, and to seek to acquire rights
from
third parties where relevant relating to, neural stem and progenitor cells,
and
to further develop our intellectual property positions with respect to these
cells in-house and through research at commercial and scholarly
institutions.
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.
4 The
hippocampus region of the brain plays a part in memory and navigation. We
believe that this ability to enhance the survival rate of the endogenous
cells
may result in the development of drugs or compounds that could be used to
treat
a variety of central nervous system diseases.
12
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
material terms of our standard material transfer agreement requires 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 with 90 days written
notice.
The
only
agreement which varies from our general terms is the agreement pertaining to
our
work with the University of California San Diego. In addition to the general
terms, the agreement also required us to provide a grant of $13,680, which
we
have already paid. We have no other payment obligations under any of our current
material transfer agreements unless the studies result in findings which we
choose to patent. We will then incur the costs associated with the filing and
maintenance of such patent.
In
addition to our general research regarding the application of our technology
to
central nervous systems diseases, we are presently involved in the following
specific programs with our partners in order to demonstrate that our products
work in small, non-statistically controlled studies (commonly referred to as
proof-of-principle), in animal models:
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.
John
Hopkins University, School of Medicine, Baltimore, MD
: In
March of 2001 we initiated a research project with John 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.
Our
Grants
In
August
of 2005 we were awarded a two year, $500,000 Small Business Innovation Research
non competitive grant from the National Institute of Health (NIH), to further
our research with regard to depression. Under the terms of the grant, we submit
an annual budget of $250,000 to be used for the purpose of testing our compounds
in various models of depression. Any changes or modifications to the submitted
budget must be approved by case manager. After we incur expenses, we submit
those expenses to the NIH for reimbursement. The grant covers salary, wages,
personnel costs, supplies, travel costs, and consortium/contractual costs with
regard to the research.
The
only
conditions to full funding of the grant are that we use the proceeds to further
or research regarding depression and that we use the funds as budgeted.
Notwithstanding, in the event of a budget variance, we can seek approval of
such
variance from the case manager and such variance would be funded provided the
aggregate funding does not exceed the amount of the grant. As of December 31,2006, we have received an aggregate of $331,755 pursuant to this
grant.
Our
Intellectual Property Licensed to Others
The
following summarizes licenses from us to third parties.
A-T
Children's Project
. On
December 22, 2004, we entered into a non exclusive limited license and
material transfer agreement with A-T Children's Project (“A-TCP”), pursuant to
which we granted to A-TCP a non-exclusive limited license to use all of our
intellectual property for use in developing suitable tests for screening
compounds to treat Ataxia-Telangiectasia. The license limits the use of our
cells in
vitro
for
compound screen development and not for any therapeutic use of the cells.
In consideration of the rights and licenses granted to A-TCP, A-TCP paid to
us a
one time payment of $37,500.
13
The
initial term of A-TCP license is for a period of 10 years and contains certain
conditions as to confidentiality which will survive the term. The agreement
does
not make any provisions for early termination by the parties and is silent
with
regard to notice requirements. The agreement does not contain any
indemnification provisions or conditions regarding infringement or right to
defend.
Biomedical
Research Models, Inc. License
. On
January 1, 2007 we entered into a new licensing agreement with Biomedical
Research Models, Inc. (“BRM”) which amends and supersedes our prior agreement of
February 7, 2005. As part of the new agreement, we waived any amounts past
due
or owed to us by BRM stemming from the prior agreement.
Pursuant
to the new agreement, we have granted BRM an exclusive, worldwide,
royalty-bearing (with the right to sublicense) license with regard to our
patents entitled:
·
“Use
of Fused Imidazoles, Aminopyrimidines, Isonicotinamides, Aminomethyl
Phenoxypiperidines and Aryloxypiperidines to Promote and Detect Endogenous
Neurogenesis” ( U.S.
Patent Application No. 10/914,460
);
and
·
“Methods
for Discovering Neurogenic Agents” ( U.S.
Patent Application No. 10/728,652
).
Under
the
terms of the agreement, BRM is obligated to pay us an annual license fee on
January 1, 2007, 2008 and 2009. Additionally, beginning in 2010, BRM will also
be obligated to pay us an additional fee of $10,000 on January 1 of each
calendar year thereafter. In the event a milestone payment becomes due during
this period, the annual payments will cease and the last amounts paid will
be
credited towards the milestone payment. BRM has agreed to the milestone payments
upon the following occurrences:
(i)
within
30 days of initiating Phase I clinical trials (Milestone
1);
(ii)
within
30 days of initiating Phase II clinical trials (Milestone
2);
(iii)
within
30 days of initiating Phase III clinical trials (Milestone
3);
(iv)
within
one year after full commercial approval and licensure is granted
by the
United States Food and Drug Administration (Milestone 4);
and
(v)
A
one time sale bonus of $100 million within one year after the first
time
the aggregate net sales of any licensed product by BRM reaches $1.0
billion.
Under
the
terms of the agreement, BRM shall also pay us royalties of 7.0% of net sales
of
products they market directly, or 20% of any sub-license income.
The
term
of the license is for a period of 15 years or until the expiration of the
patents encompassing the licensed technology, whichever shall occur first.
The
agreement also provides for early termination in the event that BRM does not
secure financing in a mutually agreeable amount by October 31, 2007. The
agreement can also be terminated in the event of a material breach by the other
party upon 90 days written notice.
The
agreement also requires BRM to indemnify Neuralstem against any liability
incurred as a result of BRM's use of the technology but excludes any liability
as a result of our gross negligence or intentional activities. Additionally,
the
agreement provides that all costs associated with the preparation, filing,
prosecution and maintenance of all Neuralstem patent rights under the agreement
will be our sole responsibility.
High
Med Technologies, Inc. License
. On July 7, 2005, we entered into a limited exclusive,
licensing agreement relating to the sales, distribution and marketing of our
technology by High Med Technologies, Inc. (HiMed). Under the agreement, we
granted HiMed the exclusive right (excluding Neuralstem) to create, manufacture,
develop, sublicense or offer for sale our technology for the sole purpose of
in
vitro research that does not involve the injection of cells or cell-derivative
materials into living animals or human beings. Accordingly, we have limited
HiMed use under the license to in
vitro
uses,
and there is no license for any therapeutic use of the cells. As part of the
agreement, HiMed has agreed to certain revenue targets which if met, will extend
the term of this agreement from five years to the life of all applicable
patents. Accordingly, we have licensed HiMed any and all technology that we
control, but only for limited in vitro uses mentioned above.
As
compensation under the license, we will be entitled to:
·
80%
of revenues obtained by HiMed where HiMed does not manufacture and
supply
the product to the customer; and
·
20%
of revenues obtained by HiMed where HiMed is required to manufacture
and
supply the product to the customer.
14
We
have
also agreed that should we directly supply a customer who is or was a customer
of HiMed, we will be required to pay HiMed 20% of any revenues received
therefrom.
The
initial term of the HiMed license is for a period of 5 years but automatically
extends to the life of certain patents in the event annual target revenues
are
met. The agreement does not make any provisions for early termination by the
parties and is silent with regard to notice requirements. The agreement does
not
contain any indemnification provisions or conditions regarding infringement
or
right to defend.
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 grant 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 the 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 pre-trial and anticipated future clinical trial needs. We
believe the facility has sufficient capacity to provide for our needs in 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.
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. We are however focusing our efforts
on
applications of our technology to diseases that affect the central nerve
system.
Our
Intellectual Property
Our
research and development is supported by our intellectual property. We currently
own or have exclusive licenses to 4 patents and 12 patent applications pending
worldwide in the field of regenerative medicine and stem cell
therapy.
Our
success will likely depend upon our ability to preserve our proprietary
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.
Patents
Pending
Number
Country
Filing
Date
Issue
Date
Expiration
Date
Title
97923569.4
EP
05/07/97
Pending
N/A
Isolation,
Propagation, and Directed Differentiation of Stem Cell from Embryonic
and
Adult Central Nervous System of Mammals
2257068
CA
05/07/97
Pending
N/A
Isolation,
Propagation, and Directed Differentiation of Stem Cell from Embryonic
and
Adult Central Nervous System of Mammals
99948396.9
EP
09/20/99
Pending
N/A
Stable
Neural Stem Cell Lines
2002-526065
JAP
09/20/99
Pending
N/A
Stable
Neural Stem Cell Lines
2343571
CA
09/20/99
Pending
N/A
Stable
Neural Stem Cell Lines
10/047,352
US
01/14/02
Pending
N/A
Stable
Neural Stem Cells
10/728,652
US
12/05/03
Pending
N/A
Method
for Discovering Neurogenic Agents
2004/053071
WO
12/05/03
Pending
N/A
Method
for Discovering Neurogenic Agents
10/914,460
US
08/09/04
Pending
N/A
Use
of Fused Imidazoles, Aminopyrimidines, Isonicotinamides, Aminomethyl
Phenoxypiperidines and Aryloxypiperidines to Promote and Detect Endogenous
Neurogenesis
1576134
EP
12/05/03
Pending
N/A
Method
for Discovering Neurogenic Agents
11/281,640
US
11/17/05
Pending
N/A
Transplantation
of Human Cells for Treatment of Neurological Disorders
PCT/US05/41367
WO
11/17/05
Pending
N/A
Transplantation
of Human Cells for Treatment of Neurological
Disorders
15
Patents
Issued
Number
Country
Filing
Date
Issue
Date
Expiration
Date
Title
5,753,506
US
09/25/96
05/19/98
09/25/2016
Isolation,
Propagation, and Directed Differentiation of Stem Cell from Embryonic
and
Adult Central Nervous System of Mammals
6,040,180
US
05/07/97
03/21/00
09/25/2016
In
Vitro Generation of Differentiated Neurons from Cultures of Mammalian
Multi-potential CNS Stem Cell
6,284,539
US
10/09/98
09/04/01
10/9/2018
Method
for Generating Dopaminergic Cells Derived from Neural
Precursors
Our
policy is to require our employees, consultants and significant scientific
collaborators and sponsored researchers to execute confidentiality 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.
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.
16
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.
In
the
general area of cell-based therapies, we compete with a variety of companies,
most of whom are specialty biotechnology companies. Some of these, such as
Geron
Corporation, Genzyme Corporation, StemCells, Inc., Aastrom
Biosciences, Inc. and Viacell, Inc., 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 any stem cell products that we may develop 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.
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
U.S. Food and Drug Administration, referred to as 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 The
FDA requirements for our potential products to be marketed in the United States
include the following five steps:
17
Preclinical
laboratory and animal tests must be conducted. Preclinical tests include
laboratory evaluation of the cells and the formulation intended for use in
humans for quality and consistency. In vivo studies are performed in normal
animals and specific disease models to assess the potential safety and efficacy
of the cell therapy product.
An
investigational new drug application, or IND, must be submitted to the FDA,
and
the IND must become effective before human clinical trials in the United States
may commence. The IND is submitted to the FDA with the preclinical data, a
proposed development plan and a proposed protocol for a study in humans. The
IND
becomes effective 30 days following receipt by the FDA, provided there are
no questions, requests for delay or objections from the FDA. If the FDA has
questions or concerns, it notifies the sponsor, and the IND will then be on
clinical hold until a satisfactory response is made by the sponsor.
Adequate
and well-controlled human clinical trials must be conducted to establish the
safety and efficacy of the product. Clinical trials involve the evaluation
of a
potential product under the supervision of a qualified physician, in accordance
with a protocol that details the objectives of the study, the parameters to
be
used to monitor safety and the efficacy criteria to be evaluated. Each protocol
is submitted to the FDA as part 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 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.
Marketing
authorization applications must be submitted to the FDA. The results of the
preclinical studies and clinical studies are submitted to the FDA in the form
of
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.
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.
18
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" beginning on
page 2.
Employees
As
of
April 30, 2007, we had two full-time employees and three part-time employees.
Of
these employees, one is directly involved in research and development activities
and three are engaged in business development and administration. We also use
the services of numerous outside consultants in business and scientific matters.
We believe that we have good relations with our employees and
consultants.
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 $4,876.00 per month. The term of our lease expires on March31,2008.
We
have
recently entered into a 12 month lease to secure animal research space in San
Diego California at a monthly lease rate of $5,500. This amount includes
personnel and supplies used in connection with our animal tests
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.
MANAGEMENT'S
DISCUSSION AND ANALYSIS
Of
FINANCIAL CONDITION AND RESULT OF OPERATIONS
Overview
This
prospectus contains forward-looking statements that involve risks and
uncertainties. See “Risk Factors”set
forth
on page 2 of
this
report for a more complete discussion of these factors. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date that they are made. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise.
The
following discussion should be read in conjunction with the consolidated
financial statements and notes thereto included in this report.
We
are a
biotechnology company focused on developing and commercializing human stem
cell
technology in the emerging fields of regenerative medicine and stem cell
therapy.
Trends
& Outlook
Revenue;
Our
revenue is currently derived from grant reimbursements and licensing fees.
As
our focus is now on pre-clinical work in anticipation of entering clinical
trials in 2007, we are not concentrated on increasing revenue. Additionally,
as
our current grants wind down, revenue can be expected to continue decreasing.
Finally, as most grants use a fiscal year of October 31, revenue attributed
to
grants tends to be lower in the initial quarters of the year and increases
in
subsequent quarters.
Long-term,
we anticipate that grant revenue as a percentage of revenue will decrease and
our revenue will be derived primarily from licensing fees and the sale of our
cell therapy products. At present we are in our pre-clinical stage of
development and as a result, we can not accurately predict when or if we will
be
able to produce a product for commercialization. Accordingly, we cannot
accurately estimate when such a change in revenue composition will occur or
if
it will ever occur.
19
Research
& Development Expense;
Our
research and development expenses consist primarily of costs associated with
basic and 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. The cost of our research and development personnel
is
the most significant category of expense; however, we also incur expenses with
third parties, including license agreements, third party contract services,
sponsored research programs and consulting expenses.
We
do not
segregate research and development costs by project because our research is
focused exclusively on human stem cell therapies as a unitary field of study.
Although we have different areas of focus for our research, these areas are
completely intertwined and have not yet matured to the point where they are
separate and distinct projects. The intellectual property, scientists and other
resources dedicated to these efforts are not separately allocated to individual
projects, but rather are conducting our research on an integrated
basis.
We
expect
that research and development expenses will continue to increase in the
foreseeable future as we add personnel, expand our pre-clinical research (animal
surgeries, manufacturing of cells, and in vitro characterization of cells which
includes testing and cell quality control), begin clinical trial activities,
increase our regulatory compliance capabilities, and ultimately begin
manufacturing.
In
the
third Quarter of 2006 we retained Qunitiles, Inc. to assist with regulatory
compliance, preparation of our first IND application, and patient enrollment
for
our first Human Trial. While recruitment for the trial cannot commence until
we
have received an FDA approved protocol, much of the infrastructure required
must
be done well in advance. For instance, we can begin the identification, contact
and education of prospective patients and the treatment communities. The
expenses associated with their services are estimated to be $200,000 to $250,000
over a twelve month period.
Additionally,
we anticipate hiring 2 additional technicians to assist in the in-house lab
work
associated with various grant and collaborative work. With regard to material
and personnel costs, as the industry continues to mature and grow, we have
seen
increased demand for qualified personnel and suitable materials.
Notwithstanding, we feel that our outsource model will provide us with some
protection regarding fluctuating pricing.
Although
we feel the above increase in personnel will be sufficient for our short term
needs, the amount of the monetary increases stemming from increased personnel
and expenses as we move from pre-clinical to clinical state is difficult to
predict due to the uncertainty inherent in the timing and extent of progress
in
our research programs, and initiation of clinical trials. In addition, the
results from our basic research and pre-clinical trials, as well as the results
of trials of similar therapeutics under development by others, will influence
the number, size and duration of planned and unplanned trials. As our research
efforts mature, we will continue to review the direction of our research based
on an assessment of the value of possible commercial applications emerging
from
these efforts. Based on this continuing review, we expect to establish discrete
research programs and evaluate the cost and potential for cash inflows from
commercializing products, partnering with others in the biotechnology industry,
or licensing the technologies associated with these programs to third
parties.
We
believe that it is not possible at this stage to provide a meaningful estimate
of the total cost to complete our ongoing projects and bring any proposed
products to market. The use of human stem cells as a therapy is an emerging
area
of medicine, and it is not known what clinical trials will be required by the
FDA in order to gain marketing approval. The costs to complete such clinical
trials could vary substantially depending upon the projects selected for
development, the number of clinical trials required and the number of patients
needed for each study. At a minimum, we feel that any trials will require at
least 10 patients at an estimated cost of $100,000 per patient. It is possible
that the completion of these studies could be delayed for a variety of reasons,
including difficulties in enrolling patients, delays in manufacturing,
incomplete or inconsistent data from the pre-clinical or clinical trials, and
difficulties evaluating the trial results. Any delay in completion of a trial
would increase the cost of that trial, which would harm our results of
operations. Due to these uncertainties, we cannot reasonably estimate the size,
nature nor timing of the costs to complete, or the amount or timing of the
net
cash inflows from our current activities. Until we obtain further relevant
pre-clinical and clinical data, we will not be able to estimate our future
expenses related to these programs or when, if ever, and to what extent we
will
receive cash inflows from resulting products.
General
and Administrative Expenses;
Our
general and administrative 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. Additionally, we also anticipate submitting
an
application to become listed on a national exchanges such as the AMEX or NASDAQ.
In anticipation, we are adding in-house accounting and finance capabilities
which will also enable us to conform to the various requirements imposed by
Sarbanes Oxley. As a result, we foresee an increase in general and
administrative expenses relating to professional services (legal, accounting,
audit) and estimate such fees to be $20,000 per month.
Moreover,
in August of 2006 we became the subject of patent litigation with one of our
competitors, StemCells, Inc.. The litigation is in its initial stages and it
is
hard to estimate what the actual costs stemming there from will be. We have
currently budgeted an additional $20,000 per month but this amount could
significantly increase. Notwithstanding, we anticipate that General and
Administrative Expense related to our core business will increase at a slower
rate than that of similar companies making such transition do in large part
to
our outsourcing model.
Significant
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 1 of the Notes to Consolidated Financial Statements describes the
significant accounting policies used in the preparation of the consolidated
financial statements. Certain of these significant accounting policies are
considered to be critical accounting policies, as defined below.
20
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 consolidated 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 consolidated
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 consolidated financial
statements:
Use
of Estimates
--These
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.
Cash
and Equivalents
--Cash
equivalents are comprised of certain highly liquid investments with maturity
of
three months or less when purchased. We maintain our cash in bank deposit
accounts, which at times, may exceed federally insured limits. We have not
experienced any losses in such account.
Revenue
Recognition
--Our
revenues, to date, revenue has been 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 SFAS No. 144, "Accounting for Impairment of Disposal 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, 2005 no impairment losses were
recognized.
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
--We
recognize expenses for stock-based compensation arrangements in accordance
with
provisions of Accounting Principles Board (APB) Opinion No. 25, “ Accounting
for Stock Issued to Employees,”
and
related Interpretations. Accordingly, compensation cost is recognized for the
excess of the estimated fair value of the stock at the grant date over the
exercise price, if any. The Company accounts for equity instruments issued
to
non-employees in accordance with EITF 96-18, “Accounting
for Equity Instruments that are Issued to Other Than Employees for Acquiring,
or
in Conjunction with Selling Good or Services.”
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 SFAS No. 123R “Share Based Payment” which superseded APB
Opinion No. 25. SFAS No. 123R requires compensation costs related to share-based
payment transactions to be recognized in the financial statements. We do not
believe the adoption of SFAS No. 123R will have a material impact on our
financial statements.
Revenues
for the twelve months ended December 31, 2006 was approximately $265,759
compared to $309,142 for the twelve months ended and December 31, 2005.
These amounts relate primarily to license fees, grant reimbursements and
royalties. The decrease in revenue in current period
was principally due to decrease in our license fees with BRM which we did
not collect such fees in 2006. We have since renegotiated our license agreement
with BRM which calls for such fees to resume in 2007 however, at lower amounts
than what was previously received in past years.
Research
and development expenses for the twelve months ended December 31, 2006 were
approximately $1,660,321 compared to $568,299 for the twelve months ended
December 31, 2005. The increase in expenses in current periods, consists
mainly of payroll and payroll related expenses, consultant, research supplies
and costs incurred in connection with specific research grants and clinical
trails.
General,
selling and administrative expenses for the twelve months ended
December 31, 2006 were approximately $1,715,126 compared to $1,256,278 for
the twelve months ended December 31, 2005. The principal increase in expenses
in
2006 versus 2005 were due to increased professional fees such as legal,
accounting and consulting related to the company becoming public and marketing.
Additionally, increased in legal fees was associated with litigation in
defending its patents.
Other
income (expense) for the twelve months ended December 31, 2006 were $14,123
compared to $(84,149) for the twelve months ended December 31, 2005. The
decrease compared to the prior period is primarily attributable to a decrease
in
interest expense by approximately $93,000 mainly due to payoffs of notes payable
in 2005.
Net
loss
for the twelve months ended December 31, 2006 was $3,147,487 compared to
$1,651,507 for the twelve months ended December 31, 2005. The increased loss
in
the current periods is the result of the foregoing factors
discussed.
Recent
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123 (revised 2004),
“Share-Based Payment.” SFAS No. 123R replaced SFAS No. 123 and superseded
Accounting Principles Board Opinion No. 25. SFAS No. 123R will require
compensation costs related to share-based payment transactions to be recognized
in the financial statements. On April 14, 2005, the Securities and Exchange
Commission issued an announcement amending the compliance dates for the FASB's
SFAS 123R that addresses accounting for equity based compensation arrangements.
Under SFAS 123R registrants would have been required to implement the standard
as of the beginning of the first interim or annual period that begins after
June15, 2005. The Commission's new rule will allow companies to implement SFAS
123R
at the beginning of the next fiscal year after June 15, 2005. The Company
anticipates adopting SFAS 123R in the first quarter 2006. The Company does
not
believe that the adoption of SFAS No. 123R will have a material impact on
our financial statements.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary
Assets, an amendment of APB Opinion No. 29” (“SFAS No. 153”). SFAS
No. 153 is based on the principle that exchanges of nonmonetary assets
should be measured based on the fair value of the assets exchanged. APB Opinion
No. 29, “Accounting for Nonmonetary Transactions,” provided an exception to
its basic measurement principle (fair value) for exchanges of similar productive
assets. Under APB Opinion No. 29, an exchange of a productive asset for a
similar productive asset was based on the recorded amount of the asset
relinquished. SFAS No. 153 eliminates this exception and replaces it with
an exception of exchanges of nonmonetary assets that do not have commercial
substance. SFAS No. 153 became effective for our Company as of July 1,2005. The Company will apply the requirements of SFAS No. 153 on any future
nonmonetary exchange transactions.
22
In
March 2005, the FASB issued FASB Interpretation ("FIN") No. 47
"Accounting for Conditional Asset Retirement Obligations--an Interpretation
of
FASB Statement No. 143" ("FIN No. 47"). FIN No. 47 clarifies the
timing of liability recognition for legal obligations associated with the
retirement of a tangible long-lived asset when the timing and/or method of
settlement are conditional on a future event. FIN No. 47 is effective for
us no later than December 31, 2005. We do not expect that the adoption of
FIN No. 47 will have a material impact on our financial condition or
results of operations.
Note
1. In May 2005,
the FASB
issued SFAS No. 154, “Accounting Changes and Error Corrections, a
replacement of APB No. 20 and FASB Statement No. 3” (“SFAS
No. 154”). SFAS No. 154 requires retrospective application to
prior periods' financial statements of a voluntary change in accounting
principle unless it is impracticable. APB Opinion No. 20 “Accounting
Changes,” previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of the change
the cumulative effect of changing to the new accounting principle. This
statement is effective for our Company as of January 1, 2006. The Company
does not believe that the adoption of SFAS No. 154 will have a material
impact on our financial statements.
In
February 2006, the FASB issued FASB Statement No. 155, Accounting for
Certain Hybrid Instruments. This standard amends the guidance in FASB Statements
No. 133, Accounting for Derivative Instruments and Hedging Activities, and
No. 140, Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. Statement 155 allows financial instruments
that
have embedded derivatives to be accounted for as a whole (eliminating the need
to bifurcate the derivative from its host) if the holder elects to account
for
the whole instrument on a fair value basis. Management is currently evaluating
the impact FASB 155 will have on our consolidated financial
statements.
In
September 2005, the Emerging Issues Task Force, or EITF, reached a
consensus on Issue 05-8, "Income Tax Consequences of Issuing Convertible Debt
with a Beneficial Conversion Feature." EITF Issues No. 98-5, "Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios," and No. 00-27, "Application of Issue
No. 98-5 to Certain Convertible Instruments," provide guidance on how
companies should bifurcate convertible debt issued with a beneficial conversion
feature into a liability and an equity component. For income tax purposes,
such
an instrument is only recorded as a liability. A question has been raised as
to
whether a basis difference results from the issuance of convertible debt with
a
beneficial conversion feature and, if so, whether the basis difference is a
temporary difference. We do not expect the provisions of this consensus to
have
a material impact on our financial position, results of operations or cash
flows.
In
November 2004, the Emerging Issues Task Force or EITF reached final consensus
on
Issue 04-8, "The Effect of Contingently Convertible Debt on Diluted
Earnings per Share." Contingently convertible debt instruments, commonly
referred to as Co-Cos, are structured financial transactions that combine the
features of contingently issuable shares with a convertible debt instrument.
Co-Cos are convertible into common shares of the issuer after the common stock
price has exceeded a predetermined threshold for a specified time period (market
price trigger). The issue is when the dilutive effect of Co-Cos should be
included in diluted earnings per share. Management does not expect the
implementation of this new standard to have a material impact on our financial
position, results of operations and cash flows.
In
September 2005, the Emerging Issues Task Force or EITF discussed
Issue 05-4, The Effect of a Liquidated Damages Clause on a Freestanding
Instrument Subject to EITF Issue No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock." The Effect of a Liquidated Damages Clause on a Freestanding Financial
Instrument Subject to EITF Issue No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock." Issuance of a registration rights agreement with a liquidated damages
clause is common when equity instruments, stock purchase warrants, and financial
instruments that are convertible into equity securities are issued. The
agreement requires the issuer to use its "best efforts" to file a registration
statement for the resale of the equity instruments or the shares of stock
underlying the stock purchase warrant or convertible financial instrument and
have it declared effective by the end of a specified grace period. The issuer
may also be required to maintain the effectiveness of the registration statement
for a period of time or pay a liquidated damage penalty to the investor each
month until the registration statement is declared effective. Given the
potential significance of the penalty, a question arises as to the effect,
if
any this feature has on the related financial instruments if they are subject
to
the scope of Issue 00-19. We are currently evaluating the effects of EITF
05-4 and have not been able to ascertain, if any, impact to our financial
statements.
In
September 2005, the Emerging Issues Task Force, or EITF, reached a
consensus on Issue 05-7, "Accounting for Modifications to Conversion Options
Embedded in Debt Securities and Related Issues." EITF Issue No. 96-19,
"Debtor's Accounting for a Modification or Exchange of Debt Instruments,"
provides guidance on whether modifications of debt result in an extinguishment
of that debt. In certain situations, companies may change the terms of a
conversion option as part of a debt modification, which may result in the
following circumstances: (a) the change in the conversion option's terms
causes the fair value of the conversion option to change but does not result
in
the modification meeting the condition in Issue 96-19 that would require the
modification to be accounted for as an extinguishment of debt, and (b) the
change in the conversion option's terms did not result in separate accounting
for the conversion option under Statement 133. When both of these circumstances
exist, questions have arisen regarding whether (a) the modification to the
conversion option, which changes its fair value, should affect subsequent
interest expense recognition related to the debt and (b) a beneficial
conversion feature related to a debt modification should be recognized by the
borrower if the modification increases the intrinsic value of the debt. We
do
not expect the provisions of this consensus to have a material impact on our
financial position, results of operations or cash flows.
In
June 2005, the Emerging Issues Task Force, or EITF, reached a consensus on
Issue 05-2, "The Meaning of "Conventional Convertible Debt Instrument" in EITF
Issue 00-19. Paragraph 4 of Issue 00-19 states that "the requirements of
paragraphs 12-32 of this issue do not apply if the hybrid contract is a
conventional convertible debt instrument in which the holder may only realize
the value of the conversion option by exercising the option and receiving the
entire proceeds in a fixed number of shares or the equivalent amount of cash
(at
the discretion of the issuer)". The term "conventional convertible debt
instrument" is not defined in Issue 00-19 and, as a result, questions have
arisen regarding when a convertible debt instrument should be considered
"conventional" for purposes of Issue 00-19. A question has also arisen related
to whether conventional convertible preferred stock should be treated similar
to
conventional convertible debt. We do not expect the provisions of this consensus
to have a material impact on our financial position, results of operations
or
cash flows.
23
In
June 2005, the Emerging Issues Task Force, or EITF, reached a consensus on
Issue 05-6, Determining the Amortization Period for Leasehold Improvements,
which requires that leasehold improvements acquired in a business combination
or
purchased subsequent to the inception of a lease be amortized over the lesser
of
the useful life of the assets or a term that includes renewals that are
reasonably assured at the date of the business combination or purchase. EITF
05-6 is effective for periods beginning after July 1, 2005. We do not
expect the provisions of this consensus to have a material impact on our
financial position, results of operations or cash flows.
In
March 2005, the SEC released Staff Accounting Bulletin No. 107,
"Share-Based Payment"("SAB 107"), which provides interpretive guidance related
to the interaction between SFAS 123(R) and certain SEC rules and
regulations. It also provides the SEC staff's views regarding valuation of
share-based payment arrangements. In April 2005, the SEC amended the
compliance dates for SFAS 123(R), to allow companies to implement the
standard at the beginning of their next fiscal year, instead of the next
reporting period beginning after June 15, 2005. Management is currently
evaluating the impact SAB 107 will have on our consolidated financial
statements.
Liquidity
and Capital Resources
We
are
financing our operations primarily with the proceeds from the sale of our
securities. During the year ended December 31, 2006 we generated cash from
financing activities of $4,674,799 compared to $1,234,255 for the twelve months
ended December 31, 2005 as described in Notes 2 to our Financial Statements.
To
a substantially lesser degree, financing of our operations is provided through
grant funding, payments received under license agreements, and interest earned
on cash and cash equivalents.
We
have
incurred substantial net losses each year since inception as a result of
research and development and general and administrative expenses in support
of
our operations. We anticipate incurring substantial net losses in the
future.
Cash,
cash equivalents, and cash held in escrow at December 31, 2006 were
$1,807,041 compared to $526,381 at December 31, 2005. The increase in the period
ended December 31, 2006 was the result of closing the financing described above,
net of amounts spent for payment of notes and accounts payable, increased legal
and accounting fees, fees paid to the placement agent, and increases in other
research and development and general and administrative expenses.
In
March
we completed the private placement of 2,454,000 units which resulted in gross
proceeds to the company of $6,135,000. As a result of this offering, cash and
cash equivalents as of the date of this prospectus are $6,400,000.
Taking
into account our development plans, we feel our cash and cash equivalents are
limited. We expect to require substantial additional funding. Our future cash
requirements will depend on many factors, including the pace and scope of our
research and development programs, the costs involved in filing, prosecuting,
maintaining and enforcing patents and other costs associated with
commercializing our potential products. We intend to seek additional funding
primarily through public or private financing transactions, and, to a lesser
degree, new licensing or scientific collaborations, grants from governmental
or
other institutions, and other related transactions. If we are unable to raise
additional funds, we will be forced to either scale back our business efforts
or
curtail our business activities entirely.
We
currently have a monthly burn rate of $260,000. We anticipate that our available
cash and expected income, including the additional capital raised in March
of
2007, will be sufficient to finance most of our current activities for at
least 20
months
from the date of this prospectus, although certain of these activities and
related personnel may need to be reduced.
In
the
event we are able to file a successful IND with the FDA, we anticipate we will
enter clinical trials in late 2007. In the event of such trials, we would incur
additional expenses associated with such trials which are estimated to exceed
$1,000,000. Assuming our current monthly cash burn rate of $260,000, increased
expense from regulatory compliance and personnel required for the pre-trial
and
clinical trial work, as well as the estimated cost of the trial, our cash on
hand is sufficient to finance our current operations, pre-clinical and clinical
work for at least 16 months
from the date of this prospectus. 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 Stock.
LEGAL
PROCEEDINGS
As
of the
date of this prospectus, 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:
24
On
July28, 2006, StemCells, Inc. and StemCells California, Inc. (collectively
“Stemcells”) of Palo Alto, California, filed suit against Neuralstem, Inc. in
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.
In
October 2006, Neuralstem filed a motion to dismiss, or in the alternative for
summary judgment, arguing that its preclinical research activities are covered
under the “safe harbor” provision of 35 U.S.C. § 271(e)(1). On October 30, 2006,
Neuralstem also filed an Answer denying that its stem cell technology infringed
the StemCell patents, and asked the Court to declare those patents invalid
and/or unenforceable for failing to meet the patent law requirements. Neuralstem
also filed a Counterclaim alleging that StemCells has violated Section 2 of
the
Sherman Antitrust Act by engaging in sham litigation.
Discovery
on all substantive patent issues except Neuralstem’s safe harbor defense has
been stayed pending resolution of Neuralstem’s Motion to Dismiss. It is not
known when nor on what basis this matter will be concluded.
MANAGEMENT
The
following table sets forth the name, age and position of each of our directors,
executive officers and significant employees as of March 26, 2007. Except as
noted below each director will hold office until the next annual meeting of
our
stockholders or until his or her successor has been elected and qualified.
Our
executive officers are appointed by, and serve at the discretion of, the Board
of Directors.
Name
Age
Position
I.
Richard Garr
53
Chief
Executive Officer, Chief Financial Officer, President, General Counsel
and
Director
Karl
Johe, Ph.D.
46
Chief
Scientific Officer, Chairman of the Board, and Director
Scott
V. Ogilvie
53
Director
William
Oldaker
65
Director
John
Conron
56
Chief
Financial Officer
Mr.
I. Richard Garr, JD
has been
our Chief Executive Office, Chief Financial Officer, President, Board Director
& Co-Founder since 1996. Mr. Garr was previously an attorney with Beli, Weil
& Jacobs, the B&G Companies, and Circle Management Companies. Mr. Garr
is a graduate of Drew University (1976) and the Columbus School of Law, The
Catholic University of America (1979). Additionally, he was a founder and
current Board member of the First Star Foundation, a children's charity focused
on abused children's issues; a founder of The Starlight Foundation Mid Atlantic
chapter, which focuses on helping seriously ill children; and is a past Honorary
Chairman of the Brain Tumor Society.
Mr.
Karl Johe, Ph.D.
has been
our Chief Scientific Officer, Chairman & Co-Founder since 1996. Dr. Johe has
over 15 years of research and laboratory experience. Dr. Johe is the sole
inventor of Neuralstem's granted stem cell patents and is responsible for
strategic planning and development of the Company's therapeutic products. Dr.
Johe received his Bachelor of Arts Degree in Chemistry from the University
of
Kansas. Dr. Johe also received a Master's Degree from the University of Kansas
and his doctorate was received from the Albert Einstein College of Medicine.
From 1993 to January 1997, Dr. Johe served as a Staff Scientist at the
Laboratory of Molecular Biology of the National Institute of Neurological
Disease and Stroke in Bethesda, Maryland. While holding this position, Dr.
Johe
conducted research on the isolation of neural stem cells, the elucidation of
mechanisms directing cell type specification of central nervous system stem
cells and the establishment of an in vitro model of mammalian
neurogenesis.
Mr.
Scott V. Ogilvie,
has
served on our board of directors since April 12, 2007. Mr. Ogilvie serves as
CEO
and President of Gulf Enterprises International, Ltd.. Gulf Enterprises
International, Ltd, through its United States and Gulf Cooperative Counsel
(“GCC”) operating partners and strategic shareholders, brings GCC regional as
well as U.S. and international expertise, investment capital and operating
platforms to the Middle East and North Africa markets in areas such as
Infrastructure, Industrial, IT, Energy, Entertainment, Health Care and Real
Estate. Mr. Ogilvie is also Managing Director & COO of CIC Group. Formed in
1995, CIC Group is a privately owned international financial services and
investment holding company. Mr.
Ogilvie began his career as a corporate and securities lawyer with Hill, Farrer
& Burrill. Mr. Ogilvie has extensive public and private corporate board
experience in finance, real estate, and technology companies. He is a founding
member of the board of directors of the American Kuwaiti Alliance, a U.S. non
profit corporation comprised of prominent Kuwaiti and U.S. companies and
institutions. Mr. Ogilvie received his BSBA-Finance degree from the University
of Denver and holds his JD from the University of California, Hastings College
of Law.
25
Mr.
William Oldaker,
has
served on our board of directors since April 12, 2007. Mr. Oldaker is a founder
and partner in the Washington, D.C. law firm of Oldaker, Biden & Belair,
LLP. Prior to founding the firm in 1993, Mr. Oldaker was a partner in the
Washington office of the law firm of Manatt, Phelps and Phillips from 1987
to
1993. In 2004, Mr. Oldaker was a founder of WashingtonFirstBank in Washington,
D.C. and serves as a member of the board of directors. He previously served
as a
director of Century National Bank, from 1982 until its acquisition in 2001.
Mr.
Oldaker was appointed by President Clinton to serve as a commissioner on the
National Bioethics Advisory Commission, a post he held until 2001. He is a
member of the Colorado, D.C. and Iowa Bar Associations, the Bar Association
for
the Court of Appeals, D.C., and the Bar of the United States Supreme Court.
He
is also a partner in The National Group, a consulting firm.
Mr.
John Conron
has
served as our Chief Financial Officer effective April 1, 2007. Mr. Conron,
a
Certified Public Accountant, joins the Company after 30 plus years in the field
of corporate finance. Since 2003, Mr. Conron has been consulting early stage
companies by providing critical outsource CFO functions such as implementation
of accounting systems, creation and monitoring of internal controls, Sarbanes
Oxley compliance, audit preparation, financial modeling and strategic planning.
Prior to his work as a consultant, Mr. Conron worked for Cyberstar, Inc., a
wholly owned subsidiary of Loral Space & Communications, Inc., where he held
the position of CFO from 2000 to 2003. Mr. Conron joined Cyberstar from
Transworld Telecommunications, Inc., a Qualcom spin-off which offered
telecommunication services in Russia, where he served as CFO.
Mr.
Conron also served as CFO and on the board of directors of Mercury
Communications in London. Mercury is a European subsidiary of Cable &
Wireless.
BOARD
COMPOSITION AND COMMITTEES
Until
April 12, 2007, our board of directors consisted of two members. On April 12,2007 our board appointed Messrs Ogilvie and Oldaker to serve on our board of
directors.
We
currently do not have standing audit, nominating or compensation committees.
Currently, our entire board of directors is responsible for the functions that
would otherwise be handled by these committees. We intend, however, to establish
an audit committee and a compensation committee of the board of directors as
soon as practicable. We envision that the audit committee will be primarily
responsible for reviewing the services performed by our independent auditors,
evaluating our accounting policies and our system of internal controls. The
compensation committee will be primarily responsible for reviewing and approving
our salary and benefits policies (including stock options) and other
compensation of our executive officers.
COMPENSATION
OF DIRECTORS
For
the
fiscal year ended December 31, 2006, we paid no compensation to our directors
for their services on our board.
Effective
April 12, 2007, we have adopted a compensation plan for individuals serving
on
our board of directors. Pursuant to the plan, each eligible director shall
receive:
·
Options
to purchase 20,000 shares of common stock upon joining the board.
The
options shall vest as follows: (i) 10,000 shall vest on the one month
anniversary of joining the Board; and (ii) 10,000 shall vest quarterly
over a one year period commencing on the date such Director joins
the
Board;
·
Each
Director will receive, starting on their first year anniversary of
service
and each subsequent anniversary thereafter, options to purchase 10,000
shares of common stock. These annual stock option awards will vest
quarterly during the year; and
·
Each
Director will receive options to purchase an additional 5,000 shares
for
each committee on which he or she serves. These special grant options
will
vest quarterly during the year.
The
exercise price for the options to be granted to the directors shall be the
market price of the stock on each applicable grant date.
26
EXECUTIVE
COMPENSATION
Summary
Compensation Table
The
following table sets forth information for our last two most recent completed
fiscal year concerning the compensation of (i) the Principal Executive
Officer and (ii) all other executive officers of Neuralstem, Inc. who
earned over $100,000 in salary and bonus during the last two most recently
completed fiscal year ended December 31, 2006 and December 31, 2005 (together
the “Named Executive Officers”).
Name
and principal position
(a)
Year
(b)
Salary
($)
(c)
Bonus
($)
(d)
Stock
Awards
($)
(e)
Option
Award
($)
(f)(4)
Nonequity
Incentive
Plan
compensation
($)
(g)
Non-qualified
deferred
compensation
earning
($)
(h)
All
other
Compensation
($)
(i)(3)
Total
($)
(j)
I.
Richard Garr
Chief
Executive Officer
(Principal
Executive Officer)
2006
$
336,750
(5)
186,146
(7)
-
$
31,614
$
554,510
2005
$
240,000
(1)
-
$
588,000
$
27,605
$
855,605
Dr.
Karl Johe
Chief
Scientific Officer
2006
$
425,250
(6)
186,146
(7)
-
$
31,614
$
643,010
2005
$
240,000
(2)
-
$
588,000
$
23,070
$
851,070
Merrill
Solomon
2006
$
132,000
$
31,614
$
163,614
(1)
Includes
$200,000 paid as consulting fees and $40,000 paid pursuant to the
November1, 2005 employment agreement with the
Company.
(2)
Includes
$200,000 paid as consulting fees and $40,000 paid pursuant to the
November1, 2005 employment agreement with the
Company.
(3)
Includes
automobile allowance, perquisites and other personal
benefits.
(4)
For
additional information regarding the valuation of Option Awards,
refer to
Note 2 of our financial statements in the section captioned “ Stock
Options. ”
(5)
Includes
$312,750 paid pursuant to amended employment agreement and 24,000
1099
income for partial year service as general
counsel.
(6)
Includes
$300,750 paid pursuant to amended employment agreement and $124,500
1099
income for certain additional work performed in connection with our
grants.
(7)
Includes
bonus for 2005 in the amount of $60,000 and $126,146 for
2006.
27
OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR-END
The
following table provides information concerning unexersised options; stock
that
has not vested; equity incentive; and awards for each Named Executive Officer
outstanding as of the end of the last completed fiscal year.
(1)
The Options were granted pursuant to our 2005 Stock Plan. The options
vest annual at a rate of 300,000 per year. The applicable vesting dates are
July28, 2006, 2007, 2008 and 2009.
EMPLOYMENT
AGREEMENTS
AND
CHANGE-IN-CONTROL ARRANGEMENTS
Employment
Agreement with I. Richard Garr On
November 1, 2005, we entered into an amendment to the employment agreement
with
Richard Garr, our Chief Executive Officer and President. The agreement provides
for annual compensation in the amount of $240,000 and extends his term of
employment until October 31, 2012. Additionally, the agreement provides for
a
$500 monthly automobile allowance and the reimbursement of reasonable business
expenses. The agreement also provides for an industry standard bonus upon the
formation of a compensation committee by the company.
In
January of 2006, we amended the terms of the agreement to include the duties
of
General Counsel for which Mr. Garr is paid an additional $36,000. In April
of
2006, we again amended Mr. Garr's agreement to provide an additional raise
to
his base salary. After taking into account both amendments, Mr. Garr's annual
salary is $357,000. All other terms of the agreement remained the
same.
28
The
agreement also provides for severance (“Termination Provisions”) an amount equal
to the greater of: (i) the aggregate compensation remaining on his contract;
or
(ii) $1,000,000, in the event Mr. Garr is terminated for any reason. In the
event of termination, the agreement also provides for the immediate vesting
of
100% of stock options granted to Mr. Garr during his term of employment. These
termination provisions apply whether employee is terminated for “cause” or
“without cause.” Additionally, in the event employee voluntarily terminates his
employment following a change in control and material reassignment of duties,
he
will also be entitled to the termination provisions under the contract. In
the
event of early termination, the Termination Provisions will require us to make
a
substantial payment to the employee. By way of example, such payments would
be
approximately as follows:
Assumes
payment of annual salary of $357,000 and a monthly automobile allowance
of
$500.00. Does not include health benefits, bonuses or increase in
annual
salary.
Mr.
Garr's agreement contains non-solicitation, and confidentiality and
non-competition covenants. The agreement may be terminated by either party
with
or without cause and without prior notice subject to the termination provisions
as discussed.
Employment
Agreement with Karl Johe, Ph.D. On
November 1, 2005, we entered into an amendment to the employment agreement
with
Karl Johe, Ph.D., our Chief Scientific Office and Chairman of the Board. The
agreement provides for a minimum annual compensation in the amount of $240,000
and in no event less than the salary of the Chief Executive Officer. The
agreement also extends his term of employment until October 31, 2012.
Additionally, the agreement provides for a $500 monthly automobile allowance
and
the reimbursement of reasonable business expenses. The agreement also provides
for an industry standard bonus upon the formation of a compensation committee
by
the company.
In
April
of 2006, we amended Dr. Johe's employment agreement to provide for a base salary
of $321,000. All other terms of the agreement remained the same.
The
agreement also provides for severance (“Termination Provisions”) an amount equal
to the greater of: (i) the aggregate compensation remaining on his contract;
or
(ii) $1,000,000, in the event Mr. Johe is terminated for any reason. In the
event of termination, the agreement also provides for the immediate vesting
of
100% of stock options granted to Mr. Johe during his term of employment. These
termination provisions apply whether employee is terminated for “cause” or
“without cause.” Additionally, in the event employee voluntarily terminates his
employment following a change in control and material reassignment of duties,
he
will also be entitled to the termination provisions under the contract. In
the
event of early termination, the Termination Provisions will require us to make
a
substantial payment to the employee. By way of example, such payments would
be
approximately as follows:
Assumes
payment of annual salary of $321,000 and a monthly automobile allowance
of
$500.00. Does not include health benefits, bonuses or increase in
annual
salary.
Dr.
Johe's agreement contains non-solicitation, and confidentiality and
non-competition covenants. The agreement may be terminated by either party
with
or without cause and without prior notice subject to the termination provisions
as discussed.
29
Employment
Agreement with John Conron. On
April12, 2007, we entered into a one year part-time employment agreement with Mr.
Conron.
The
agreement provides for a monthly compensation in the amount of $10,000. As
part
of the agreement, we granted Mr. Conron options to purchase 100,000 common
shares. The options vest as follows: (i) 25,000 immediately; and (ii) 75,000
vest quarterly over the year. The agreement also provides for acceleration
of
the options in the event Mr. Conron is terminated without cause or in the event
of a change in control. The agreement also contains non-solicitation,
confidentiality and non-competition covenants.
The
following tables set forth certain information regarding the beneficial
ownership of our common stock. Beneficial ownership is determined in accordance
with the applicable rules of the Securities and Exchange Commission and includes
voting or investment power with respect to shares of our common stock. The
information set forth below is not necessarily indicative of beneficial
ownership for any other purpose, and the inclusion of any shares deemed
beneficially owned in this table does not constitute an admission of beneficial
ownership of those shares. Unless otherwise indicated, to our knowledge, all
persons named in the table have sole voting and investment power with respect
to
their shares of common stock, except, where applicable, to the extent authority
is shared by spouses under applicable state community property
laws.
The
following table sets forth information regarding beneficial ownership of our
capital stock as of April 25, 2007 by:
·
each
person, or group of affiliated persons, known to us to be the beneficial
owner of more than 5% of the outstanding shares of our common
stock;
·
each
of our directors and named executive officers;
and
·
all
of our directors and executive officers as a
group.
Common
Stock
Name
Amount(1)
%
Regal
One Corporation (2)(4)
2,293,814
7.93
%
Stanley
Westreich (3)(5)
2,231,404
7.71
%
Karl
Johe (3)(6)
2,188,584
7.56
%
Merrill
Solomon (3)(7)
2,177,097
7.52
%
Richard
Garr (3)(8)
1,997,584
6.90
%
William
Oldaker(3)(9)
49,000
*
%
John
Conron(3)(10)
35,000
*
%
Scott
Ogilvie(3)(11)
10,000
*
%
Directors
& Executive Officers as a Group
6,147,572
21.28
%
*Less
than 1%
(1)
Pursuant
to Rules 13d-3 and 13d-5 of the Exchange Act, beneficial ownership
includes any shares as to which a shareholder has sole or shared
voting
power or investment power, and also any shares which the shareholder
has
the right to acquire within 60 days, including upon exercise of common
shares purchase options or warrant. There are 28,884,605 shares of
common
stock issued and outstanding as of March 31,2007.
(3)
The
address for Regal One Corporation is 11300 West Olympic Boulevard,
LosAngeles, CA90064.
(3)
The
address for the shareholder is 9700 Great Seneca Highway, #240,
Rockville, MD20850.
(4)
Includes
1,000,000 common shares issuable upon the exercise of a vested warrant
granted for services.
(5)
Includes
200,000 common shares issuable upon the exercise of a vested warrant
granted to Mr. Westeich in connection with the settlement of a
note.
(6)
Includes
300,000 common shares issuable upon the exercise of vested options
granted
pursuant to Mr. Johe’s employment
agreements.
(7)
Includes
120,000 common shares issuable upon the exercise of a vested warrant
granted to Mr. Solomon's in connection with the settlement of past
due
consulting fees.
(8)
Includes:
(i) 1,448,084 common shares held directly by Mr. Garr; (ii) 300,000
common
shares issuable upon the exercise of vested options granted pursuant
to
Mr. Garr’s employment agreements; (iii) 200,000 common shares held by Mr.
Garr’s spouse as her sole and separate property; and (iv) 49,500 common
shares held in the trust for Mr. Garr’s child. Mr. Garr disclaims all
interest, including pecuniary interest, in the common shares held
by his
spouse and in trust for his child.
30
(9)
Includes:
(i) 21,000 common shares held directly by Mr. Oldaker; (ii) 10,000
common
shares issuable upon the exercise of options that will vest within
60 days
of this prospectus granted upon joining our Board of Directors.;
and (iii)
18,000 common shares issuable upon the exercise of vested
options.
(10)
Includes
25,000 common shares issuable upon the exercise of options that are
vest.
(11)
Includes
10,000 common shares issuable upon the exercise of options that will
vest
within 60 days of this prospectus granted upon joining our Board
of
Directors.
TRANSACTIONS
AND BUSINESS RELATIONSHIPS WITH
MANAGEMENT
AND PRINCIPAL SHAREHOLDERS
Summarized
below are certain transactions and business relationships between Neuralstem
and
persons who are or were an executive officer, director or holder of more than
five percent of any class of our securities since January 1, 2004:
·
In
late 2004 we issued a note to Stanley Westreich in exchange for
$60,000.
·
On
March 22, 2005, we converted a note payable to Stanley Westreich
in the
amount of $60,000, and all accrued interest thereon, into 120,000
shares
of our common stock.
·
On
July 7, 2005, we entered into a limited exclusive, licensing agreement
relating to the sales, distribution and marketing of our technology
by
High Med Technologies, Inc. HighMed is owned by Karl Johe, one of
our
principal shareholders and our Chief Scientific Officer. To date,
no fees
have been paid under the contract. For further information relating
to
this agreement, see that section of this prospectus captioned “Our
Business --Our
Intellectual Property Licensed to Others”.
·
On
November 1, 2005, we entered into an amendment to the employment
agreement
with Richard Garr, our Chief Executive Officer, and President. For
further
information relating to this agreement, see that section of this
prospectus captioned “ Executive
Compensation--Employment Agreements and Change in Control
Arrangements”.
·
On
November 1, 2005, we entered into an amendment to the employment
agreement
with Karl Y. Johe, Ph.D., our Chief Scientific Office and Chairman
of the
Board. The agreement provides for a minimum annual compensation in
the
amount of $240,000 and in no event less than the salary of the Chief
Executive Officer. For further information relating to this agreement,
see
that section of this prospectus captioned “ Executive
Compensation--Employment Agreements and Change in Control
Arrangements”
·
On
November 7, 2005 we entered into a settlement agreement with Mr.
Merrill
Solomon regarding unpaid consulting fees. As part of the settlement,
we
granted Mr. Solomon: (i) 120,000 shares of our common stock; and
(ii) a
warrant to purchase 120,000 common shares at
$.50.
·
On
November 7, 2005 we converted a note in the amount of $100,000 payable
to
Mr. Stanley Westreich. As part of the conversion, we issued Mr. Westreich:
(i) 200,000 shares of our common stock; and (ii) a warrant to purchase
200,000 common shares at $.50.
·
In
January of 2006, we amended the terms of the agreement to include
the
duties of General Counsel for which Mr. Garr is paid an additional
$36,000.
In
April of 2006, we again amended Mr. Garr's agreement to provide an
additional raise to his base salary. After taking into account both
amendments, Mr. Garr's annual salary is $357,000. All other terms
of the
agreement remained the same.
·
In
April of 2006, we amended Mr. Johe's employment agreement to provide
for a
base salary of $321,000. All other terms of the agreement remained
the
same.
·
In
April 12 2007, we entered into a one year employment contract with
John
Conron our Chief Financial Officer. The agreement provides for monthly
compensation of $10,000. As part of the agreement, we granted Mr.
Conron
options to purchase 100,000 common shares. The options vest as follows:
(i) 25,000 vest immediately; and (iii) 75,000 vest quarterly over
the
year. The options have an exercise price of $3.15 and expire on April1,2015.
·
In
April 12, 2007, we granted each of Messrs Ogilvie and Oldaker 20,000
as
compensation for joining our board of directors. The options vest
as
follows: (i) 10,000 upon the one month anniversary of joining the
board of
directors; and 10,000 vest quarterly over the year. The options have
an
exercise price of $3.30 and expire in 7 years.
31
MARKET
FOR REGISTRANT'S COMMON EQUITY
AND
RELATED
SHAREHOLDER MATTERS
Market
Information
Our
common stock is traded in the NASDAQ's Over-the-Counter Bulletin Board under
the
symbol "NRLS"
The
following table sets forth the range of high and low prices for our common
stock
as reported by OTC website, OTCBB.com for the period that our stock has been
trading. These prices represent reported transactions that do not include retail
markups, markdowns or commissions, and may not necessarily represent actual
transactions.
As
of
April 27, the reported closing prices of our common stock was
$3.95.
Holders
As
of
March 26, 2007 our common stock was held by approximately 848 record holders.
Notwithstanding, we believe our actual number of shareholders may be
significantly higher as 2,692,448 shares are currently being held in street
name.
Dividend
Policy
Holders
of the Company's Common Stock are entitled to receive dividends should they
be
declared by the Board of Directors, out of funds legally available for
distribution. Any such dividends may be paid in cash, property or shares of
the
Company's common stock. The Company has not paid any dividends since its
inception, and it is not likely that dividends on its Common Stock will be
declared at any time in the foreseeable future. Any dividends will be subject
to
the discretion of the Company's Board of Directors, and will depend upon, among
other things, the operating and financial condition of the Company, its capital
requirements and general business conditions. Therefore, there can be no
assurance that any dividends on the Company's Common Stock will be paid in
the
future.
EQUITY
COMPENSATION PLAN INFORMATION
The
following table sets forth information with respect to our 2005 Stock Plan
as of
April 25, 2007.
(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 or
Future
Issuance under
Equity Compensation Plans
(Excluding
Securities
Reflected
in Column (a))
Equity
compensation plans approved by security holders
2,540,000
$
.65
1,460,000
Equity
compensation plans not approved by security holders
N/A
N/A
N/A
Total
2,540,000
$
.65
1,460,000
32
2005
Stock Plan
Our
board
of directors adopted the 2005 Stock Plan on July 27, 2005, and it was
subsequently approved by our stockholders. The 2005 Stock Plan provides for
the
grant of stock options or stock to our employees, directors, and consultants
of
up to 4,000,000 common shares. As of August 28, 2006 options to purchase a
total
of 2,400,000 shares of common stock were outstanding under the 2005 Stock Plan
at a weighted average exercise price of $.50 per share. At August 28, 2006,
1,600,000 shares of our common stock remained available for future issuance
under our 2005 Stock Plan.
Administration
of the 2005 Stock Plan
. Our board of directors administers our 2005 Stock Plan.
The administrator has the power to determine the terms of the awards, including
the exercise price (which may be changed by the administrator after the date
of
grant), the number of shares subject to each award, the exercisability of the
awards and the form of consideration payable upon exercise.
Options
. A stock option is the right to purchase shares of our
common stock at a fixed exercise price for a fixed period of time. The
administrator will determine the exercise price of options granted under our
2005 Stock Plan. Notwithstanding, pursuant to the plan, the exercise price
of
any option granted shall in no event be less than the lesser of: (i) the book
value per share of common stock as of the end of the fiscal year immediately
preceding the date of such grant; or (ii) fifty percent (50%) of the fair market
value per share of the common stock on the date of grant.
Transferability
of Awards
. Unless the administrator determines otherwise, our 2005
Stock Plan does not allow for the transfer of awards other than by will or
by
the laws of descent and distribution, and only the participant may exercise
an
award during his or her lifetime.
Amendment
and Termination of Our 2005 Stock Plan. Our
2005 Stock Plan will automatically terminate in 2010, unless we terminate it
sooner. In addition, our board of directors has the authority to amend, suspend
or terminate our 2005 Stock Plan without shareholder consent.
DESCRIPTION
OF SECURITIES
General
Our
authorized capital consists of (1) 75,000,000 shares of common stock, par value
$.001 per share, and (2) 7,000,000 shares of “blank check” preferred stock, par
value $.001 per share.
Common
Stock
The
holders of our common stock are entitled to one vote per share on each matter
submitted to a vote at a meeting of our stockholders, except to the extent
that
the voting rights of our shares of any class or series of stock are determined
and specified as greater or lesser than one vote per share in the manner
provided by our certificate of incorporation. Our stockholders have no
pre-emptive rights to acquire additional shares of our common stock or other
securities. Our common stock is not subject to redemption rights and carries
no
subscription or conversion rights. In the event of liquidation of our company,
the shares of our common stock are entitled to share equally in corporate assets
after satisfaction of all liabilities. All shares of our common stock now
outstanding are fully paid and non-assessable. Our bylaws authorize the board
of
directors to declare dividends on our outstanding shares. As of March 31, 2007
there are 28,884,605 shares of our common stock issued and
outstanding.
Preferred
Stock
We
may
issue our preferred shares from time to time in one or more series as determined
by our board of directors. The voting powers and preferences, the relative
rights of each series, and the qualifications, limitations and restrictions
thereof may be established by our board of directors without any further vote
or
action by our shareholders. As of August 28, 2006 there were no shares of our
preferred stock issued and outstanding.
Optionsand
Warrants Convertible into Common Shares
As
of
March 31, 2007, there were outstanding common share purchase options or warrants
entitling the holders to purchase up to 8,749,832 common shares.
Registration
Statements
S-8: We
intend
to file one or more registration statements on Form S-8 under the
Securities Act following this offering to register all shares of our common
stock which have been issued or are issuable upon exercise of outstanding stock
options or other rights granted under our equity plans. These registration
statements are expected to become effective upon filing. Shares covered by
these
registration statements will thereupon be eligible for sale in the public
market, upon the expiration or release from the terms of the lock-up agreements,
to the extent applicable, or subject in certain cases to vesting of such
shares.
33
Certain
shareholders are entitled to registration as follows:
2006
Private Placement: From
January 8 through March 8 2006, we raised $5,000,000 in gross proceeds from
the
private placement of units consisting of one share of common stock, ½ class “A”
warrant, and ½ class “B” warrant, to 64 investors. As part of the private
placement, we entered into a registration rights agreements with the investors
under which we agreed to file the registration statement of which this
prospectus is a part in order to register (1) the common shares issued in the
private placement; and (2) the common shares issuable upon the exercise of
the
class “ A ” and “B” warrants. Pursuant to the terms of the agreement, we filed a
registration statement covering those shares and it was declared effective
on
August 30, 2006. If the registration statement does not stay effective for
any
45 consecutive day period: (i) the shares underlying the “A” and “B” warrants
will be increased by one percent (1%) for each 30 day period subject to
proration for any partial period; and (ii) we will be obligated to issue
additional shares equal to one percent (1%) of the common shares sold in the
offering for each 30 day period and subject to proration for any partial
period.
2007
Private Placement:
On
March 15 and 27, 2007, we complete the private placement of a total of 2,454,000
units which resulted in gross proceeds to us of $6,135,000. Each unit consisted
of one share of common stock and ½ common stock purchase warrant. As part of the
offering, we granted our investors certain registration rights. Pursuant to
such
registration rights, we are required to: file this registration statement by
May1, 2007; have the registration statement declared effective by June 13, 2007
or
July 13, 2007 in the event of a “full review” by the SEC; and use our best
efforts to maintain the prospectus continually effective. In the event we fail
to meet the filing and effectiveness dates, or the prospectus ceases to remain
effective for 10 consecutive calendar days or 15 calendar days during any 12
month period, we are required to pay the investors as partial liquidated damages
an amount equal to 1.5% of the aggregate purchase price paid by such investor
for any securities held which are subject to registration.
Lock-up
Agreements
As
a
condition to our March 2006 private placement, certain stockholders, warrant
holders and option holders, representing 10,392,879 shares of our common stock
on an as converted as exercised basis, have agreed with us not to sell or
otherwise dispose of, directly or indirectly, any shares of our common stock
(or
any security convertible into or exchangeable or exercisable for common stock)
until August 30, 2007 without the express consent of T.R. Winston &
Company.
This
prospectus relates to the offering and sale, from time to time, of up to
3,975,480
shares
of our common stock held by the stockholders named in the table below, which
amount includes common shares issuable upon the exercise of warrants held by
the
selling stockholders. The selling stockholders may exercise their warrants
at
any time in their sole discretion. All of the selling stockholders named below
acquired their shares of our common stock and warrants directly from us in
private transactions.
Set
forth
below is information, to the extent known to us, setting forth the name of
each
Selling Shareholder and the amount and percentage of Common Stock owned by
each
(including shares that can be acquired on the exercise of outstanding warrants)
prior to the offering, the shares to be sold in the offering, and the amount
and
percentage of Common Stock to be owned by each (including shares that can be
acquired on the exercise of outstanding warrants) after the offering assuming
all shares are sold. The footnotes provide information about persons who have
investment voting power for the Selling Shareholders and about material
transactions between the Selling Shareholders and the Company.
The
selling stockholders may sell all or some of the shares of common stock they
are
offering, and may sell shares of our common stock otherwise than pursuant to
this prospectus. The table below assumes that each selling stockholder exercises
all of its warrants and sells all of the shares issued upon exercise thereof,
and that each selling stockholder sells all of the shares offered by it in
offerings pursuant to this prospectus, and does not acquire any additional
shares. We are unable to determine the exact number of shares that will actually
be sold or when or if these sales will occur.
The
selling stockholders may sell all, some or none of their shares in this
offering. See “Plan of Distribution.”
The
total
number of common shares sold under this prospectus may be adjusted to reflect
adjustments due to stock dividends, stock distributions, splits, combinations,
recapitalizations or the triggering anti-dilution protective provisions with
regard to the common stock and warrants.
Unless
otherwise stated below, to our knowledge no selling shareholder nor any
affiliate of such shareholder has held any position or office with, been
employed by or otherwise has had any material relationship with us or our
affiliates during the three years prior to the date of this
prospectus.
34
Common
Shares
Owned
Before Sale(1)
Common
Shares
Owned
After Sale(2)
Selling
Shareholder
Common
Shares
Warrants
Shares
Amount
%
of Class
Shares
being registered
Amount
%
of Class
JMG
Capital Partners, L.P.
(2)(5)
150,000
75,000
225,000
*
225,000
-
-
JMG
Triton Offshore Fund, Ltd.
(2)(5)
150,000
75,000
225,000
*
225,000
-
-
MM
& B Holdings, a California general partnership
(2)(6)
400,000
200,000
600,000
2.1
600,000
-
-
Apex
Investment Fund, Ltd.
(2)(7)
200,000
100,000
300,000
1.0
300,000
-
-
IRA
FBO J. Steven Emerson Rollover Account II Pershing LLC as
Custodian
(2)(8)
180,000
90,000
270,000
*
270,000
-
-
W.
Robert Ramsdell & Majorie F. Ramsdell TTEE Ramsdell Family Trust DTD
7/7/94
(2)(9)
40,000
20,000
60,000
*
60,000
-
-
TRW
Capital Growth Fund, LP
(2)(10)
60,000
30,000
90,000
*
90,000
-
-
The
Jay Goldman Master Limited Partnership
(2)(11)
80,000
40,000
120,000
*
120,000
-
-
Woodmont
Investments
(2)(11)
80,000
40,000
120,000
*
120,000
-
-
Newberg
Family Trust UTD 12/18/90
(2)(12)
160,000
80,000
240,000
*
240,000
-
-
Bristol
Investment Fund, Ltd.
(2)(13)
400,000
200,000
600,000
2.1
600,000
-
The
Muhl Family Trust, Phillip E. Muhl & Kristin A. Muhl TTEES DTD
10-11-95
(2)(14)
40,000
20,000
60,000
*
60,000
-
-
Charles
B. Runnels Family Trust DTD 10-14-93, Charles B Runnels & Amy Jo
Runnels TTEES
(2)(15)
10,000
5,000
15,000
*
15,000
-
-
John
W. Galuchie Jr. & Marianne C. Galuchie TTEES Galuchie Living Trust DTD
9-11-00
(2)(16)
4,000
2,000
6,000
*
6,000
-
-
Steven
B. Dunn
(2)
100,000
50,000
150,000
*
150,000
-
-
Andrew
Lessman
(3)
400,000
200,000
600,000
2.1
600,000
-
-
T.R.
Winston & Company, LLC
(4)(17)(18)
294,480
294,480
1
294,480
-
-
Total
2,454,000
1,521,480
3,975,480
13.81
3,975,480
-
-
*
Less
Than 1%
(1)
Pursuant
to Rules 13d-3 and 13d-5 of the Exchange Act, beneficial ownership
includes any common shares as to which a shareholder has sole or
shared
voting power or investment power, and also any common shares which
the
shareholder has the right to acquire within 60 days, including upon
exercise of common shares purchase options or warrants. There were
28,884,605 common shares outstanding as of April 30,2007.
(2)
On
March 15, 2007, pursuant to a securities purchase agreement dated
March15, 2007, we completed a private placement of 2,054,000 units. The
units
were priced at $2.50 each and resulted in gross proceeds to the Company
of
$5,135,000.00. The units consisted of: 1 common stock; and ½ common stock
purchase warrant. The investors also received certain registration
rights
with regard to the underlying securities. The exercise price of the
warrants is $3.00.
(3)
On
March 27, 2007, we sold an additional 400,000 units which resulted
in
gross proceeds to the Company of $1,000,000 pursuant to our March15, 2007
private placement in.
(4)
In
connection with our March 15 and 27, 2007 private placements, we
issued
T.R. Winston & Company, LLC, our placement agent in the transactions,
an aggregate of 294,480 warrants to purchase common stock.
(5)
Jon
Glaser has dispositive power with respect to the securities to be
offered
for resale.
(6)
Bryan
Ezralow has dispositive power with respect to the securities to be
offered
for resale.
(7)
Susan
Fairhurst has dispositive power with respect to the securities to
be
offered for resale.
35
(8)
J.
Steven Emerson has dispositive power with respect to the securities
to be
offered for resale.
(9)
W.
Robert Ramsdell has dispositive power with respect to the securities
to be
offered for resale.
(10)
G.
Tyler Runnels has dispositive power with respect to the securities
to be
offered for resale.
(11)
Jay
Goldman has dispositive power with respect to the securities to be
offered
for resale.
(12)
Bruce
Newberg has dispositive power with respect to the securities to be
offered
for resale.
(13)
Bristol
Capital Advisors, LLC (“BCA”) is the investment advisor to Bristol
Investment Fund, Ltd. (“Bristol”). Paul Kessler is the manager of BCA and
as such has voting and investment control over the securities held
by
Bristol. Mr. Kessler disclaims beneficial ownership of these securities.
(14)
Phillip
Muhl has dispositive power with respect to the securities to be offered
for resale.
(15)
Charles
B. Runnels has dispositive power with respect to the securities to
be
offered for resale.
(16)
John
W. Galuchie, Jr. has dispositive power with respect to the securities
to
be offered for resale.
(17)
G.
Tyler Runnels has dispositive power with respect to the securities
to be
offered for resale.
(18)
T.R.
Winston & Company, LLC has acted as the Company’s placement agent with
respect to its March 2006 and March 2007 offerings.
PLAN
OF DISTRIBUTION
Each
selling shareholder (the “Selling Shareholder”) of the common stock and any of
their pledgees, assignees and successors-in-interest may, from time to time,
sell any or all of their shares of common stock on the over-the-counter bulletin
board or any stock exchange, market or trading facility on which the shares
are
traded or in private transactions. These sales may be at fixed or negotiated
prices. A Selling Shareholders may use any one or more of the following methods
when selling shares:
·
ordinary
brokerage transactions and transactions in which the broker-dealer
solicits purchasers;
·
block
trades in which the broker-dealer will attempt to sell the shares
as agent
but may position and resell a portion of the block as principal to
facilitate the transaction;
·
purchases
by a broker-dealer as principal and resale by the broker-dealer for
its
account;
·
an
exchange distribution in accordance with the rules of the applicable
exchange;
·
privately
negotiated transactions;
·
settlement
of short sales entered into after the effective date of the registration
statement of which this prospectus is a part;
·
broker-dealers
may agree with the Selling Shareholder to sell a specified number
of such
shares at a stipulated price per
share;
·
through
the writing or settlement of options or other hedging transactions,
whether through an options exchange or
otherwise;
·
a
combination of any such methods of sale;
or
·
any
other method permitted pursuant to applicable
law.
The
Selling Shareholder may also sell shares under Rule 144 under the Securities
Act
of 1933, as amended (the “Securities Act”), if available, rather than under this
prospectus.
Broker-dealers
engaged by the Selling Shareholder may arrange for other brokers-dealers to
participate in sales. Broker-dealers may receive commissions or discounts from
the Selling Shareholder (or, if any broker-dealer acts as agent for the
purchaser of shares, from the purchaser) in amounts to be negotiated, but,
except as set forth in a supplement to this Prospectus, in the case of an agency
transaction not in excess of a customary brokerage commission in compliance
with
NASDR Rule 2440; and in the case of a principal transaction a markup or markdown
in compliance with NASDR IM-2440.
36
In
connection with the sale of the common stock or interests therein, the Selling
Shareholders may enter into hedging transactions with broker-dealers or other
financial institutions, which may in turn engage in short sales of the common
stock in the course of hedging the positions they assume. The Selling
Shareholders may also sell shares of the common stock short and deliver these
securities to close out their short positions, or loan or pledge the common
stock to broker-dealers that in turn may sell these securities. The Selling
Sharehlolders may also enter into option or other transactions with
broker-dealers or other financial institutions or the creation of one or more
derivative securities which require the delivery to such broker-dealer or other
financial institution of shares offered by this prospectus, which shares such
broker-dealer or other financial institution may resell pursuant to this
prospectus (as supplemented or amended to reflect such
transaction).
The
Selling Sharholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. Each Selling Shareholder has informed the
Company that it does not have any written or oral agreement or understanding,
directly or indirectly, with any person to distribute the Common Stock. In
no
event shall any broker-dealer receive fees, commissions and markups which,
in
the aggregate, would exceed eight percent (8%).
The
Company is required to pay certain fees and expenses incurred by the Company
incident to the registration of the shares. The Company has agreed to indemnify
the Selling Shareholder against certain losses, claims, damages and liabilities,
including liabilities under the Securities Act.
Because
Selling Shareholders may be deemed to be “underwriters” within the meaning of
the Securities Act, they will be subject to the prospectus delivery requirements
of the Securities Act including Rule 172 thereunder. In addition, any securities
covered by this prospectus which qualify for sale pursuant to Rule 144 under
the
Securities Act may be sold under Rule 144 rather than under this prospectus.
There is no underwriter or coordinating broker acting in connection with the
proposed sale of the resale shares by the Selling Shareholders.
We
agreed
to keep this prospectus effective until the earlier of (i) the date on which
the
shares may be resold by the Selling Shareholders without registration and
without regard to any volume limitations by reason of Rule 144(k) under the
Securities Act or any other rule of similar effect or (ii) all of the shares
have been sold pursuant to this prospectus or Rule 144 under the Securities
Act
or any other rule of similar effect. The resale shares will be sold only through
registered or licensed brokers or dealers if required under applicable state
securities laws. In addition, in certain states, the resale shares may not
be
sold unless they have been registered or qualified for sale in the applicable
state or an exemption from the registration or qualification requirement is
available and is complied with.
Under
applicable rules and regulations under the Exchange Act, any person engaged
in
the distribution of the resale shares may not simultaneously engage in market
making activities with respect to the common stock for the applicable restricted
period, as defined in Regulation M, prior to the commencement of the
distribution. In addition, the Selling Shareholders will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including Regulation M, which may limit the timing of purchases
and
sales of shares of the common stock by the Selling Stockholders or any other
person. We will make copies of this prospectus available to the Selling
Stockholders and have informed them of the need to deliver a copy of this
prospectus to each purchaser at or prior to the time of the sale (including
by
compliance with Rule 172 under the Securities Act).
CHANGES
IN AND DISAGREEMENTS
WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
Termination
of Prior Accountant
On
January 29, 2007 we formally terminated the engagement of George Brenner
(“Brenner”)
as our
independent registered public accounting firm. The decision to dismiss Brenner
was recommended and approved by our board of directors. The reason for the
change was related to Brenner’s health.
Brenner
audited our financial statements for two fiscal years ended
December 31, 2005 and reviewed our interim financial statements
through the interim period ending September 30, 2006. Brenner’s reports on
the financial statements for those fiscal years and interim period did not
contain an adverse opinion or disclaimer of opinion and was not otherwise
qualified or modified as to any other uncertainty, audit scope or accounting
principles. During those two fiscal years and also during the subsequent
period through the date of Brenner’s replacement there were no
disagreements between us and Brenner on any matter of accounting principles
or
practices, financial statement disclosure, or auditing scope or
procedure.
37
Appointment
of New Accountant
On
January 29 2007, we formally appointed David Banerjee (“Banerjee”)
as our
new independent registered public accounting firm for purposes of auditing
our
financial statements for the fiscal year ended December 31, 2006.
The decision to engage Banerjee was approved by our board of
directors.
During
our two most recent fiscal years ended December 31, 2005, and also
during the subsequent interim period through the date of Brenner’s resignation,
we did not consult with Banerjee regarding the application of accounting
principles to a specified completed or contemplated transaction, or the type
of
opinion that might be rendered regarding our financial statements, nor did
we
consult Banerjee with respect to any accounting disagreement or any reportable
event at any time prior to the appointment of that firm.
The
transfer agent for our common shares is American Stock Transfer, 59 Maiden
Lane,
Plaza Level, New York, NY10038. We act as our own transfer agent with regard
to
our outstanding common share purchase options and warrants.
LEGAL
MATTERS
The
validity of the shares of common stock being offered hereby will be passed
upon
for us by The Law Offices of Raul Silvestre & Associates, Los Angeles,
California.
EXPERTS
Our
financial statements for the period of January 1, 2005 through December 31,2005
and the related condensed consolidated statements of operations, shareholders'
deficit and cash flows for such period appearing in this Prospectus and
registration statement have been audited by George Brenner, independent
registered public accountant, as set forth on this report thereon appearing
elsewhere in this Prospectus, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
George Brenner has no interest in the shares being registered in this
filing.
Our
financial statements for the period of January 1, 2006 through December 31,2006
and the related condensed consolidated statements of operations, shareholders'
deficit and cash flows for such period appearing in this Prospectus and
registration statement have been audited by David Banerjee, independent
registered public accountant, as set forth on this report thereon appearing
elsewhere in this Prospectus, and are included in reliance upon such report
given upon the authority of such firm as experts in accounting and auditing.
David Banerjee has no interest in the shares being registered in this
filing.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
The
Corporation Laws of the State of Delaware and the Company's Bylaws provide
for
indemnification of the Company's Directors for expenses actually and necessarily
incurred by them in connection with the defense of any action, suit or
proceeding in which they, or any of them, are made parties, or a party, by
reason of having been Director(s) or Officer(s) of the corporation, or of such
other corporation, except, in relation to matter as to which any such Director
or Officer or former Director or Officer or person shall be adjudged in such
action, suit or proceeding to be liable for negligence or misconduct in the
performance of duty. Furthermore, the personal liability of the Directors
is limited as provided in the Company's Articles of Incorporation.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933
may
be permitted to directors, officers or persons controlling the Company pursuant
to the foregoing provisions, the Company has been informed that in the opinion
of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Securities Act of 1933 and is therefore
unenforceable.
WHERE
YOU CAN FIND MORE INFORMATION
We
have
filed with the SEC this registration statement on Form SB-2 under the Securities
Act with respect to the shares of common stock offered hereby. This prospectus,
which constitutes a part of the registration statement, does not contain all
of
the information set forth in the registration statement or the exhibits and
schedules filed therewith. For further information about us and the common
stock
offered hereby, reference is made to the registration statement and the exhibits
and schedules filed therewith. Statements contained in this prospectus regarding
the contents of any contract or any other document that is filed as an exhibit
to the registration statement are not necessarily complete, and each such
statement is qualified in all respects by reference to the full text of such
contract or other document filed as an exhibit to the registration statement.
A
copy of the registration statement and the exhibits and schedules filed
therewith may be inspected without charge at the public reference room
maintained by the SEC, located at 450 Fifth Street, N.W., Room 1200, Washington,
D.C. 20549, and copies of all or any part of the registration statement may
be
obtained from such offices upon the payment of the fees prescribed by the SEC.
Please call the SEC at 1-800-SEC-0330 for further information about the public
reference room. The SEC also maintains an Internet web site that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the SEC. The address of the site
is
www.sec.gov.
REPORTS
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRMS
1
FINANCIAL
STATEMENTS
Balance
Sheets
3
Statements
of Operations
4
Statements
of Stockholders’ Equity (Deficit)
5
Statements
of Cash Flows
7
Notes
to Financial Statements
8-19
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors
Neuralstem,
Inc.
We
have
audited the accompanying balance sheet of Neuralstem, Inc. as of December31,2006 and the related statements of operations, stockholders’ equity (deficit),
and cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an
opinion on these financial statements based on our audit. We did not audit
the
financial statements of Neuralstem, Inc. for the year ended December 31,2005.
Those statements were audited by other auditors whose report has been furnished
to us, and our opinion, insofar as it relates to the amounts included in
the
year ended December 31, 2005, is based solely on the report of the
auditors.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that my audit 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 December31,2006 and the results of its operations, stockholders’ equity (deficit) and cash
flows for the year then ended, in conformity with U.S. generally accepted
accounting principles.
Report
of Independent Registered Public Accounting Firm
To
the
Board of Directors
Neuralstem,
Inc.
I
have
audited the accompanying balance sheets of Neuralstem, Inc. as of December31,2005 and 2004, and the related statements of operations, stockholders’ deficit,
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. My responsibility is to express
an
opinion on these financial statements based on my audits.
I
conducted my audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
I plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. I believe that my audits provide a reasonable
basis for my opinion.
In
my
opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Neuralstem, Inc. as of December31,2005 and 2004 and the results of its operations, stockholders’ deficit and cash
flows for the years then ended, in conformity with U.S. generally accepted
accounting principles.
As
discussed in Note 9 to the financial statements, the Company has restated
its
financial statements for the years ended December 31, 2005 and 2004 for not
properly accounting for certain options for common stock granted and shares
issued which were not accounted for as deemed interest.
Issuance
of 226,000 shares of common stock related
to
stock payable
$
113,000
$
-
Issuance
of 120,000 shares of common stock for debt
$
-
$
60,000
Conversion
of 6,254,402 shares of preferred stock to
14,182,399
shares of common stock
$
62,544
$
62,544
Conversion
of an accrued liability into a note payable
$
-
$
37,341
The
accompanying notes are an integral part of these financial
statements.
F-7
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 1996 and currently occupies lab and office space in Gaithersburg,
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.
The
Company has incurred cumulative losses of approximately $38,592,725 since
inception and reported a net loss of approximately $3,147,000 for the year
ended
December 31, 2006. In order to further its research and develop its products,
the Company will require additional financing until such time that revenue
streams are of sufficient volume to generate positive cash flow from operations.
Possible sources of funds are strategic alliances, additional equity offerings,
grants and contracts, and research and development funding from third parties.
Management intends to raise additional capital and remains committed to taking
all appropriate and necessary actions to effect timely cost reductions and
cash
preservation measures in the event anticipated revenue and cash flow
expectations are not substantially met. Subsequent to December 31, 2006 as
discussed in Note 9, the Company raised $6,135,000 during March 2007 from
the
sale of common stock with warrants through two private placements. The Company
believe it has sufficient cash position to sustain operations beyond twelve
months.
A
summary of the Company’s significant accounting policies is as
follows:
Estimates
The
preparation of financial statements in conformity 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.
Actual results could differ from those estimates.
Cash
and Equivalents
For
the
Statements of Cash Flows, all highly liquid investments with maturity of
three
months or less are considered to be cash equivalents. There were no cash
equivalents as of December 31, 2006 and December 31, 2005.
F-8
NEURALSTEM,
INC.
NOTES
TO FINANCIAL STATEMENTS
Note
1. Nature
of Business and Significant Accounting Policies
(continued)
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 seven 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.
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
To
date,
revenue has been derived primarily from providing treated samples for gene
expression data from stem cell experiments and from providing services under
a
federal grant program approximating $266,000 and $66,000 in 2006 and 2005,
respectively. Revenue is recognized when there is persuasive evidence that
an
arrangement exists, delivery of goods and services has occurred, the price
is
fixed and determinable, and collection is reasonably assured.
Research
and Development
Research
and development costs are charged to operations when incurred.
F-9
NEURALSTEM,
INC.
NOTES
TO FINANCIAL STATEMENTS
Note
1. Nature
of Business and Significant Accounting Policies
(continued)
Income
taxes
Income
taxes are provided for using the liability method of accounting in accordance
with SFAS No. 109 “Accounting
for Income Taxes.”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.
Stock
- Based Compensation
On
January 1, 2006, the Company adopted SFAS No. 123 (R) “Share-Based Payment”
which requires the measurement and recognition of compensation expense for
all
share-based payment awards made to employees and directors including employee
stock options and employee stock purchases related to a Employee Stock Purchase
Plan based on the estimated fair values.
The
Company adopted SFAS No. 123(R) using the modified prospective transition
method, which required the application of the accounting standard as of January1, 2006. The accompanying financial statements as of and for the year ended
December 31, 2006 reflect the impact of SFAS No. 123(R). In accordance with
the
modified prospective transition method, the Company’s accompanying financial
statements for the prior periods have not been restated, and do not include
the
impact of SFAS No. 123(R). Stock based compensation expense recognized under
SFAS No. 123(R) for the year ended December 31, 2006 totaled $150,000. Pro
forma
stock based compensation for the year ended December 31, 2005 is as
follows:
Note
1. Nature
of Business and Significant Accounting Policies
(continued)
Comprehensive
Loss
Statement
of Financial Accounting Standard (SFAS) No. 130 “Reporting
Comprehensive Income,”
requires
the presentation of comprehensive income or loss and its components as part
of
the financial statements. For the years ended December 31, 2005 and 2004,
the
Company’s net loss reflects comprehensive loss and, accordingly, no additional
disclosure is required.
Recent
Accounting Pronouncements
In
February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments". SFAS No. 155 amends SFAS No 133, "Accounting for
Derivative Instruments and Hedging Activities", and SFAF No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". SFAS No. 155, permits fair value remeasurement for any hybrid
financial instrument that contains an embedded derivative that otherwise
would
require bifurcation, clarifies which interest-only strips and principal-only
strips are not subject to the requirements of SFAS No. 133, establishes a
requirement to evaluate interest in securitized financial assets to identify
interests that are freestanding derivatives or that are hybrid financial
instruments that contain an embedded derivative requiring bifurcation, clarifies
that concentrations of credit risk in the form of subordination are not embedded
derivatives, and amends SFAS No. 140 to eliminate the prohibition on the
qualifying special-purpose entity from holding a derivative financial instrument
that pertains to a beneficial interest other than another derivative financial
instrument.
This
statement is effective for all financial instruments acquired or issued after
the beginning of the Company's first fiscal year that begins after September15,2006. This statement is not expected to have a material effect on the Company's
financial position or results of operations.
In
September 2006, the FASB issued SFAS No. 157 “Fair Value Measurements”. SFAS No.
157 defines fair value, establishes a framework for measuring fair value
in
generally accepted accounting principles and expands disclosure about fair
values. This statement is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those
fiscal
years. Management believes that the adoption of SFAS No. 157 will not have
a
material impact on the financial results of the Company.
Note
2. Stockholders’
Equity (Deficit)
Preferred
and Common Stock
The
authorized stock of the Company consists of 7,000,000 shares of preferred
stock
with a par value of $0.01 and 75,000,000 shares of common stock with par
value
of $0.01. The preferred stock is divided into A, B, and C Series.
During
the year ended December 31, 2005, the Company sold 2,246,000 shares of common
stock for a total consideration of $1,123,000 or $0.50 per share. In conjunction
with the sale of these shares, the Company issued 1,845,287 shares of common
stock and warrants for 1,000,000 shares of common stock with an exercise
price
of $5.00 per share for services performed related to capital raised. The
1,845,287 shares and related warrants have been treated as an offering expense
and have been netted against the total proceeds raised of
$1,123,000.
During
the year ended December 31, 2006, the Company sold 5,000,000 shares of common
stock for a total consideration of $4,550,000 (net of offering expenses of
$450,000) through a Limited Offering Memorandum. Each Unit sold consisted
of one
share of common stock, ½ “A” Warrant to Purchase A share of Common Stock at
$1.50 per share, and ½ ‘B” Warrant to Purchase A Share of Common Stock at $1.00
per share. These warrants have a life of 10 years.
Preferred
Series A & B Stock
The
Company issued 1,047,588 shares of Series A Preferred Stock and 719,895 shares
of Series B Preferred Stock as of December 31, 2005 and 2004. The holders
of the
Series A and B Preferred Stock are entitled to noncumulative dividends of
8% per
annum, on the original issue price of $7.64 per share, when and if declared
by
the board of directors. The preferred stockholders have a liquidation preference
above all other classes of stock equal to $7.64 per share plus all declared
and
unpaid dividends. The liquidation price per share is subject to adjustment
for
certain dilutive events, as defined.
At
any
time, a preferred stockholder has the option to convert their shares into
shares
of common stock on a basis of one preferred share for 0.3 common share. The
conversion rate is subject to adjustment for certain dilutive events, as
defined. Shares of Series A & B Preferred Stock automatically converts into
common stock upon the closing of an underwritten public offering in which
the
Company’s per share price is at least $3.00 and the gross proceeds to the
Company exceed $7.5 million or upon the election of a majority of the preferred
stockholders.
The
preferred stockholders are entitled to the number of votes that equals the
number of shares of common stock into which such shares could be converted,
as
defined. The vote or written consent of the majority of the preferred
stockholders is required to (i) effect of validate a change in the authorized
number of shares of preferred; (ii) a redeem, repurchase, pay dividends or
make
any other distribution to common stockholders; or (iii) effect any action
resulting in the payment or declaration of dividends on any class of
stock.
Preferred
Series C Shares
During
2003, the Company issued 504,694 Series C Preferred Stock at $1.60 per share.
Each share of Series C Preferred Stock is convertible to 3 shares of common
stock. Stock issuance costs of $27,506 were offset against the additional
paid
in capital from the sale of stock.
On
October 6, 2003, the Company issued “Option Promissory Notes” (Notes) totaling
$605,000. The Notes are convertible to Series C Preferred Stock at the same
terms and conditions as the Series C Preferred Stock outstanding on the
effective date of the Notes, at any time before the Due Date, in lieu of
cash
repayment. The current terms are to convert the Notes at $1.60 per share
of
Series C Preferred Stock.
Additionally,
the Notes granted the holder the option to acquire their pro
rata share,
based on the principal balance of the Note as a percentage of the Aggregate
Note, if any, of up to $5 million of equity in Neuralstem, Inc. under the
same
terms and conditions as the Series C Preferred Stock of an exercise price
of
$1.60 per share on or before October 6, 2008 (the Option). The price per
share
of the equity to be purchased under the Option shall increase by 10% on every
six month anniversary starting after April 6, 2004. The option may be exercised
in whole or in part at any time during the period between the date of the
Note
and the expiration date of the Option at the Holder’s discretion. The options
were valued using the Black-Scholes model for option valuation. The assumptions
used in arriving at the fair value of these options under the Black-Scholes
option pricing model include stock price of $1.60 at the date of grant; expected
life of 1 year; volatility of 134%; and discount rate of 4.29%. The $5 million
of equity equates to 3,125,000 shares of Series C Preferred Stock. A beneficial
conversion feature of the Notes of $2,539,004 was recorded to additional
paid in
capital on October 6, 2003. Beneficial conversion feature results from the
allocation of proceeds to the options and the effective conversion rate of
the
notes being below the fair value of the Series C Preferred Stock. Interest
expense of $10,577 was recorded for the period ended December 31, 2003. The
entire beneficial conversion feature was expensed as interest expense in
November 2004, as the convertible debt was converted to Preferred Series
C
shares.
In
October 2004, the Company issued additional Notes to officers of the Company
in
lieu of $479,988 in accrued salary and consulting fees. The new Notes had
the
same terms and conditions and Options as the Notes issued in 2003 which included
the option to acquire their pro
rata
share of
the 3,125,000 shares of the Series C Preferred Stock. The Options for the
Notes
issued in 2004 were also valued using the Black-Scholes model. The assumptions
used in arriving at the fair value of these options under the Black-Scholes
option pricing model include stock price of $1.60 at the date of grant; expected
life of 1 month; volatility of 134%; and discount rate of 4.29%. The pro-rata
portion of the $5 million, 1,093,480 shares of the 3,125,000 are allocated
to
the new Notes. The beneficial conversion feature allocated to these Notes
recorded $270,831 to additional paid in capital on October 25, 2004 since
the
Company did not have the ability to repay such Notes. This conversion feature
was converted to interest expense in November 2004, as the convertible debt
was
converted to Preferred Series C shares.
In
November 2004, the Board of Directors approved the conversion of all Notes
to
Series C Preferred Stock. In consideration of monthly accrued interest on
the
Notes and as an incentive for the noteholders to convert the Notes into Series
C
Preferred Stock, the Company agreed to issue the shares offered in the Option
totaling 3,125,000, without consideration which the Company recorded deemed
interest expense of $5,000,000 equal to what would otherwise should have
been
received in cash by the Company if it had not forego the exercise price of
such
Options. It is in the Company’s management belief that its decision to forego
the cash consideration related to the exercise price of such Options enticed
the
noteholders in converting such Notes to Series C Preferred Stock which
alleviated the Company of cash payment on the Notes. A total of 4,550,718
shares
of Series C Preferred Stock were issued in the conversion of the Notes and
the
Options.
In
2005,
the shareholders of preferred series A, B and C, totaling 6,318,201 shares
were
converted into 14,182,399 shares of common stock. As of December 31, 2005,
there
were no outstanding preferred shares.
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.
In
July
2005, the Company granted options for 2,400,000 shares of common stock to
two of
its officers with an exercise price of $0.50 vesting annually on the anniversary
grant date over a four year period with a ten year life which non were vested
as
of December 31, 2005. The fair value of these options under the Black-Scholes
option pricing model totaled $0.49 per share. The assumptions used in arriving
at the fair value of these options under the Black-Scholes option pricing
model
include stock price of $0.50 at the date of grant; expected life of 5.5 years;
volatility of 224%; and discount rate of 4.1%.
Stock
Warrants
During
the year ended December 31, 2005, the Company issued warrants to various
consultants for 1,599,000 shares of common stock with an exercise price ranging
from $0.05 to $2.00 per share expiration commencing 2007 through 2017. The
warrants were issued for consulting services performed which had been valued
at
approximately $660,000 and expensed for the year ended December 31, 2005.
The
warrants were valued using the Black Scholes option pricing model based on
the
following assumptions: stock price of at date of issuance of $0.50; expected
life of 1.5 years; volatility rate of 224%; and discount rate of
4.1%.
During
the year ended December 31, 2005, the Company issued warrants for 200,000
shares
of common stock with an exercise price of $0.50 expiring in 2008 related to a
note payable. The warrants were issued related to a note payable which had
been
valued at approximately $84,000 and was deemed as interest expense for the
year
ended December 31, 2005. The options were valued using the Black Scholes
option
pricing model based on the following assumptions: stock price of at date
of
issuance of $0.50; expected life of 2 years; volatility rate of 224%; and
discount rate of 4.1%.
During
the year ended December 31, 2005, the Company issued warrants for 200,000
shares
of common stock with an exercise price of $0.50 expiring in 2008 related
to a
note payable. The warrants were issued related to a note payable which had
been
valued at approximately $84,000 and was deemed as interest expense for the
year
ended December 31, 2005. The options were valued using the Black Scholes
option
pricing model based on the following assumptions: stock price of at date
of
issuance of $0.50; expected life of 2 years; volatility rate of 224%; and
discount rate of 4.1%.
During
the year ended December 31, 2006, the Company issued warrants to a consultant
for 24,000 shares of common stock with an exercise price $0.50 per share
expiration commencing 2017. The warrants were issued for consulting services
performed which had been valued at approximately $10,000 and expensed for
the
year ended December 31, 2006. The warrants were valued using the Black Scholes
option pricing model based on the following assumptions: stock price of at
date
of issuance of $0.50; expected life of 1.5 years; volatility rate of 224%;
and
discount rate of 4.1%.
Warrants
to purchase common stock were issued to certain stockholders and consultants.
The
following table summarizes information about stock warrants at December 31,2006
which all are currently exercisable:
Net
loss
per share is calculated in accordance with SFAS No. 128, “Earnings
Per Share.”
The
weighted-average number of common shares outstanding during each period is
used
to compute basic loss per share. Diluted loss per share is computed using
the
weighted averaged number of shares and dilutive potential common shares
outstanding. Dilutive potential common shares are additional common shares
assumed to be exercised. Dilutive loss per share is excluded from the
calculation because the effect would be anti-dilutive.
Common
stock payable for 226,000 unissued shares of common stock at December 31,2005
During
the year ended December 31, 2005, the Company received $113,000 for 226,000
shares of its common stock. As of December 31, 2005, the Company had not
issued
any of 226,000 shares of common stock. However, the 226,000 unissued shares
of
common stock have been included in the net loss per share computation in the
accompanying statements of operations. The Company issued these shares in
2006.
Common
stock payable for 300,000 unissued shares of common stock at December 31,2006
During
the year ended December 31, 2006, the Company received $150,000 related to
exercise of warrants for 300,000 shares of common stock at $0.50 per share.
As
of December 31, 2006, the Company had not issued any of the 300,000 sahres
of
common stock. However, the 300,000 shares of common stock have been included
in
the net loss per share computation in the accompanying statements of operations.
The Company issued these shares in February 2007.
Note
3. Property
and Equipment
The
major
classes of property and equipmentconsist
of the following:
Depreciation
expense for the years ended December 31, 2006 and 2005 was $51,923 and $51,923,
respectively.
F-16
NEURALSTEM,
INC.
NOTES
TO FINANCIAL STATEMENTS
Note
4. Intangible
Assets
The
Company holds patents related to its stem cell research. Patent filing costs
were capitalized and are being amortized over the life of the patents. The
company has determined that the intangibles purchased have a seventeen year
useful life. The provisions of SFAS No. 142 “Goodwill
and Other Intangible Assets”require
the completion of an annual impairment test with any impairments recognized
in
current earnings. The Company determined that no impairment to the assigned
values had occurred. The Company’s intangible assets and accumulated
amortization consisted of the following at December 31, 2006 and
2005:
2006
2005
Accumulated
Accumulated
Gross
Amortization
Gross
Amortization
Patent
filing fees
$
24,796
$
(6,557
)
$
24,796
$
(10,469
)
Amortization
expense for the years ended December 31, 2006 and 2005 was $1,653 and $1,653,
respectively.
Note
5. Notes
payable
As
described in Note 2, on October 6, 2003, the Company issued “Option Promissory
Notes” (Notes) totaling $605,000, convertible to Series C Preferred Stock. The
Notes carry a stated interest rate of 5%, payable quarterly beginning January1,2004. Fifty percent of the principal was due on October 3, 2004 and fifty
percent due on October 3, 2005. The shares were converted to Series C Preferred
Stock in November 2004, without payments of principal or interest on the
Notes.
As of December 31, 2005, the Note was fully paid.
In
April
2005, the Company received a notice from the Department of Economic Development
(“DED”) from the County of Montgomery, Alabama whereby provisions of a $40,000
grant received in 2001 were not fully satisfied. As a result, the Company
is
required to return the grant. In 2004, the Company recorded an accrued liability
for this amount. In 2005, the Company reclassified the accrued liability
as a
note payable since the notice from DED provided provisions for the grant
funds
to be returned over a five year period, in monthly payments of both principal
and interest, interest rate of 5% and maturing in May 2010. As of December31,2006 and 2005, the balance related to this note totaled $28,395 and $37,341,
respectively.
In
November 2001, the Company entered into an agreement with a bank to borrow
$625,000. The note was renegotiated in May 2002 to require principal payments
of
$25,000 per month beginning August 2002 and to accrue interest at the prime
rate
plus 1.5% with the balance of principal and accrued interest due on December9,2002. The note was renegotiated in December 2002 to require principal payments
of $25,000 per month through February 2003, increasing to $40,000 per month
starting March 2003, and to accrue interest at the prime rate plus 1.5% with
the
balance of principal and accrued interest due on June 20, 2003. Substantially
all of the Company’s assets provide collateral for the borrowings. The note was
fully paid as of December 31, 2006.
We
did
not provide any current or deferred U.S. federal income tax provision or
benefit
for any of the periods presented because we have experienced operating losses
since inception. We provided a full valuation allowance on the net deferred
tax
asset, consisting of net operating loss carryforwards, because management
has
determined that it is more likely than not that we will not earn income
sufficient to realize the deferred tax assets during the carryforward
period.
The
tax
effects (computed at a 35% effective tax rate) of significant temporary
differences representing deferred tax assets for December 31, 2006 and 2005
are
as follows:
At
December 31, 2006, the Company has net operating loss carryforwards of
approximately $27.4 million. The Company has also reported certain other
tax
credits, the benefit of which has been deferred. The Company’s NOL carryforwards
and credits will begin to expire in the tax year 2012. The timing and manner
in
which these net operating loss carryforwards and credits may be utilized
in any
year by the Company will be limited to the Company’s ability o generate future
earning and also may be limited by certain provision of the U.S. tax code.
F-18
NEURALSTEM,
INC.
NOTES
TO FINANCIAL STATEMENTS
Note
7. Commitments
and Contingencies
In
February 2004, the Company entered into a new license agreement (lease) for
facilities in Montgomery County Maryland. The term of the license agreement
is
effective from March 1, 2004 through January 31, 2005. The Company has an
option
to request renewal of the license for two (2) additional terms of one year
each.
The
monthly payments for the agreement are for $3,530 per month for the initial
term
of the agreement. The two renewal terms have monthly payments of
$4,271.
On
November 1, 2005, the Company amended and extended its employment agreements
dated January 1, 1997 with Richard Garr and Karl Johe for an additional seven
(7) years which includes a base salary of $240,000 per year for each officer.
On
July 28, 2005, the Company granted both Mr. Garr and Mr. Johe stock options
for
1,200,000 shares of the Company’s common stock each vesting annually over a four
year period with an exercise price of $0.50 per share. Termination prior
to full
term on the contracts would cost the Company $240,000 per year unserved,
or as
much as $1,680,000 per contract, and immediate vesting of all outstanding
options.
Note
8.
Restatements
For
the
year ended December 31, 2005, the Company did not account for common stock
and
warrants for common stock to its consultants and note payable conversion
properly resulting in additional expenses of approximately $773,000 to
operations.
Note
9.Subsequent
Events
On
March15, 2007, the Company completed a private placement for 2,054,000 shares
of
common stock with warrants for 1,027,000 shares of common stock with an exercise
price of $3.00 per share for total gross proceeds of $5,135,000.
On
March27, 2007, the Company completed a private placement for 400,000 shares of
common
stock with warrants for 200,000 shares of common stock with an exercise price
of
$3.00 per share for total gross proceeds of $1,000,000.
F-19
Dates Referenced Herein and Documents Incorporated by Reference
