Investing
in our securities involves a high degree of risk. We have described below a number of uncertainties and risks which, in addition
to uncertainties and risks presented elsewhere in this Quarterly Report, may adversely affect our business, operating results
and financial condition. The uncertainties and risks enumerated below as well as those presented elsewhere in this Quarterly
Report should be considered carefully in evaluating our company and our business and the value of our securities.
Risks Relating to Our Stage of
Development
We have a history of losses.
Since inception
in 1996 and through March 31, 2014, we have recorded accumulated losses totaling approximately $134,345,000. On March
31, 2014, we had a working capital surplus of approximately $29,435,000 and stockholders’ equity of approximately $26,897,000.
Our net losses for the two most recent fiscal years have been approximately $19,832,000 and $10,122,000 for 2013 and 2012, respectively.
We have recognized revenue of approximately $4,000 and $103,000 in the three months ended March 31, 2014 and 2013, respectively
related to the licensing of certain intellectual property to third parties. We had no revenue from the sales of our products during
the three months ended March 31, 2014 or 2013. For the three months ended March 31, 2014 we had a net loss of approximately $5,919,000.
Our ability to
generate revenues and achieve profitability will depend upon our ability to complete the development of our proposed products,
obtain the required regulatory approvals, manufacture, market and sell our proposed products. To date, we have not generated any
revenue from the commercial sale of our proposed products. No assurances can be given as to exactly when, if at all, we will be
able to fully develop, commercialize, market, sell and/or derive any, let alone material, revenues from our proposed products.
We will need to raise additional
capital to continue operations.
Since our inception,
we have funded our operations through the sale of our securities, the exercise of options and warrants, and to a lesser degree,
from grants and research contracts and other revenue generating activities such as licensing. As of March 31, 2014, we had cash
and cash equivalents on hand of approximately $18,343,000 and $15,000,000 of short-term investments. We cannot assure you that
we will be able to secure additional capital through financing transactions, licensing agreements or grants. Our inability to
license our intellectual property, obtain grants or secure additional financing will materially impact our ability to fund our
current and planned.
We have spent
and expect to continue spending substantial cash in the research, development, clinical and pre-clinical testing of our proposed
products with the goal of ultimately obtaining FDA approval to market such products. We will require additional capital to conduct
research and development, establish and conduct clinical and pre-clinical trials, enter into commercial-scale manufacturing arrangements
and to provide for marketing and distribution of our products. We cannot assure you that financing will be available if needed.
If additional financing is not available, we may not be able to fund operations and planned growth, develop or enhance our technologies,
take advantage of business opportunities or respond to competitive market pressures. If we exhaust our cash reserves and are unable
to secure adequate additional financing, we may be unable to meet operating obligations which could result in us initiating bankruptcy
proceedings or delaying, or eliminating some or all of our research and product development programs.
Our debt
obligations expose us to risks that could adversely affect our business, operating results and financial condition. We will need
to raise additional capital to pay our indebtedness as it comes due.
We have a substantial
level of debt. As of March 31, 2014, we had approximately $7.3 million in aggregate principal amount of indebtedness outstanding.
Under our loan and security agreement we are required to make interest and principal payments on such indebtedness in the amount
of approximately $300,000 per month. As security for such indebtedness, we have pledged substantially all of our assets, including
our intellectual property. We will need to raise additional capital to pay our indebtedness as it comes due. If we are unable
to obtain funds necessary to make required payments, or if we fail to comply with the various requirements and covenants of our
indebtedness, we would be in default, which would permit the holders of our indebtedness to accelerate the maturity and require
immediate repayment. Any default under our indebtedness would have a material adverse effect on our business, operating results
and financial condition. Additionally, our loan and security agreement governing our $10 million credit facility contains a number
of affirmative and restrictive covenants, including reporting requirements and other collateral limitations, certain limitations
on liens and indebtedness, dispositions, mergers and acquisitions, restricted payments and investments, corporate changes and
limitations on waivers and amendments to certain agreements, our organizational documents, and documents relating to debt that
is subordinate to our obligations under the credit facility. Our failure to comply with the covenants in the loan and security
agreement governing the credit facility could result in an event of default that, if not cured or waived, could result in the
acceleration of all or a substantial portion of our debt and potential foreclosure on the assets securing the debt. If we are
unable to refinance or repay our indebtedness as it becomes due or upon an event of default, we may become insolvent and be unable
to continue operations.
Risks Relating to Our Business
Our business is dependent on
the successful development of our product candidates.
Our business
is significantly dependent on our two product candidates currently at different phases of clinical trials. Any clinical, regulatory
or other development that significantly delays or prevents us from completing any of our trials, any material safety issue or
adverse side effect to any study participant in these trials, or the failure of these trials to show the results expected, would
likely depress our stock price significantly and could prevent us from raising the additional capital we will need to develop
our technologies. Moreover, any adverse occurrence in our clinical trials could substantially impair our ability to initiate clinical
trials to test our product candidates in other potential indications. This, in turn, could adversely impact our ability to raise
additional capital and pursue our planned research and development efforts.
Our business relies on technologies
that we may not be able to commercially develop.
We have concentrated
the majority of our resources on the development of stem cell and small molecule technologies. Our ability to generate revenue
and operate profitably will depend on being able to develop these technologies for human applications. These are emerging technologies
that may have limited human application. We cannot guarantee that we will be able to develop our technologies or that such development
will result in products with any commercial utility or value. We anticipate that the commercial sale of such products and/or royalty/licensing
fees related to our technologies, will be our primary sources of revenue. We recognized revenue of approximately $110,000 and
$173,000 for the years ended December 31, 2013 and December 31, 2012, respectively related to the licensing of certain intellectual
property to third parties. If we are unable to develop our technologies, we may never realize any significant revenue.
Our product development programs
are based on novel technologies and are inherently risky.
We are subject
to the risks inherent in the development of products based on new technologies. The novel nature of therapies in the field of
regenerative medicine creates significant challenges in regard to product development and optimization, manufacturing, government
regulation, third party reimbursement, and market acceptance. For example, the pathway to regulatory approval for cell-based therapies,
including our product candidates, may be more complex and lengthy than the pathway for conventional drugs. These challenges may
prevent us from developing and commercializing products on a timely or profitable basis or at all.
We are unable to predict when
or if we will be able to earn revenues.
Given the uncertainty
of our technologies and the need for government regulatory approval, we cannot predict when, or if ever, we will be able to realize
revenues related to our products. As a result, we will be primarily dependent on our ability to raise capital through the sale
of our securities for the foreseeable future.
Our inability
to manufacture and store our stem cells in-house that are used in our products could adversely impact our business.
We currently
outsource the manufacturing of our stem cells and small molecule pharmaceutical compounds to third party contractors and as such
have limited ability to adequately control the manufacturing process and the safe storage thereof. Any manufacturing or storage
irregularity, error, or failure to comply with applicable regulatory procedure would require us to find new third parties to outsource
our manufacturing and storage responsibilities. Our business would suffer in the event that there are delays in locating suitable
third parties or if no suitable third parties are found.
Our inability to complete pre-clinical
and clinical testing and trials will impair our viability.
We are currently
in clinical trials for NSI-566 and NSI-189, two of our proposed products, with regard to multiple indications. We commenced our
first Phase II clinical trial of NSI-566 related to ALS, during the third quarter of 2013. Additionally, we commenced Phase I
clinical trials of NSI-566 related to motor deficit due to ischemic stroke during the fourth quarter of 2013 and anticipate commencing
the Phase I clinical trial of NSI-566 related to chronic spinal cord injury during the second quarter of 2014. Moreover, we have
completed Phase I clinical trials of NSI-189, our small molecule compound, related to major depressive disorder and are actively
looking to partner further development. Although we have commenced a number of trials, the ultimate outcome of the trials is uncertain.
If we are unable to satisfactorily complete such trials, or if such trials yield unsatisfactory results, we will be unable to
commercialize our proposed products. No assurances can be given that our clinical trials will be completed or result in successful
outcomes. If regulatory authorities do not approve our products or if we fail to maintain regulatory compliance, we would be unable
to commercialize our proposed products, and our business and results of operations could be materially harmed.
Our proposed products may not
have favorable results in clinical trials or receive regulatory approval.
Positive results
from pre-clinical studies or our Phase I and Phase II trials should not be relied upon as evidence that our clinical trials will
succeed. Even if our product candidates achieve positive results in pre-clinical studies or during our Phase I and Phase II studies,
we will be required to demonstrate through further clinical trials that our product candidates are safe and effective for use
in a diverse population before we can seek regulatory approvals for their commercial sale. There is typically an extremely high
rate of attrition from the failure of product candidates as they proceed through clinical trials. If any product candidate fails
to demonstrate sufficient safety and efficacy in any clinical trial, then we would experience potentially significant delays in,
or be required to abandon, development of that product candidate. If we delay or abandon the development efforts of any of our
product candidates, we may not be able to generate revenues.
The
results of pre-clinical studies and early-stage clinical trials, may not be predictive of the results of later-stage clinical
trials.
A number of companies
in the pharmaceutical and biotechnology industries, including those with greater resources and experience than us, have suffered
significant setbacks in Phase II and Phase III clinical trials, despite positive results from earlier-stage trials. The principal
investigator of the Phase I safety trial of our human spinal cord stem cells (HSSC's) in amyotrophic lateral sclerosis (ALS or
Lou Gehrig's disease), recently presented data on the patients in the study. The study was designed to assess the safety of intraspinal
transplantation in ALS patients and was not intended to demonstrate efficacy. While no adverse events related to the surgical
procedure or our neural stem cells were reported, the small sample size, limited time frame and preliminary nature of the study
make it difficult to draw any conclusions from the results of the study. No assurance can be given that the surgical procedure
or our neural stem cells will be deemed safe by the FDA or that efficacy in the treatment of ALS will be demonstrated in any future
studies. Failure to demonstrate safety and efficacy results acceptable to the FDA in later stage trials could impair our development
prospects and even prevent regulatory approval of our neuronal stem cells, NSI-189 or other future products.
There are no assurances that
we will be able to submit or obtain FDA approval in order to market and sell our products.
There can be
no assurance that even if the clinical trial of any potential product candidate is successfully initiated and completed, that
we will be able to submit a Biologics License Application (“BLA”) or New Drug Application (“NDA”) to the
FDA, or that any BLA or NDA we submit will be approved in a timely manner, if at all. If we are unable to submit a BLA or NDA
with respect to any future product, or if such application is not approved by the FDA, we will be unable to commercialize that
product. The FDA can and does reject BLAs and NDAs and may require additional clinical trials, even when product candidates performed
well or achieved favorable results during initial clinical trials. If we fail to commercialize our product candidates, we may
be unable to generate sufficient revenues to attain profitability and our reputation in the industry and in the investment community
would likely be damaged, each of which would have a materially adverse effect on our business.
The manufacturing of stem cell-based
therapeutic products is novel and dependent upon specialized key materials
.
The manufacturing
of stem cell-based therapeutic products is a complicated and difficult process, dependent upon substantial know-how and subject
to the need for continual process improvements. We depend almost exclusively on third party manufacturers to supply our cells.
In addition, our suppliers’ ability to scale-up manufacturing to satisfy the various requirements of our planned clinical
trials is uncertain. Manufacturing irregularities or lapses in quality control could have a material adverse effect on our reputation
and business, which could cause a significant loss of stockholder value. Many of the materials that we use to prepare our cell-based
products are highly specialized, complex and available from only a limited number of suppliers. At present, some of our material
requirements are single sourced, and the loss of one or more of these sources may adversely affect our business.
We may be subject to litigation
that will be costly to defend or pursue and uncertain in its outcome.
Our business
may bring us into conflict with licensees, licensors, or others with whom we have contractual or other business relationships
or with our competitors or others whose interests differs from ours. If we are unable to resolve these conflicts on terms that
are satisfactory to all parties, we may become involved in litigation brought by or against such parties. Any litigation is likely
to be expensive and may require a significant amount of management's time and attention, at the expense of other aspects of our
business. The outcome of litigation is always uncertain, and in some cases could include judgments against us which could have
a materially adverse effect on our business. By way of example, in May of 2008, we filed a complaint against StemCells Inc., alleging
that U.S. Patent No. 7,361,505 (the '''505 patent''), allegedly exclusively licensed to StemCells, Inc., is invalid, not infringed
and unenforceable. On the same day, StemCells, Inc. filed a complaint alleging that we had infringed, contributed to the infringement
of, and or induced the infringement of two patents allegedly exclusively licensed to StemCells. Please refer to the section of
this Quarterly Report entitled “Legal Proceedings” for a further discussion of the status of such litigation.
We may not be able to obtain necessary licenses to third-party patents and other rights.
A number of companies,
universities and research institutions have filed patent applications or have received patents relating to technologies in our
field. We cannot predict which, if any, of these applications will issue as patents or how many of these issued patents will be
found valid and enforceable. There may also be existing issued patents on which we would infringe by the commercialization of
our product candidates. If so, we may be prevented from commercializing these products unless the third party is willing to grant
a license to us. We may be unable to obtain licenses to the relevant patents at a reasonable cost, if at all, and may also be
unable to develop or obtain alternative non-infringing technology. If we are unable to obtain such licenses or develop non-infringing
technology at a reasonable cost, our business could be significantly harmed. Also, any infringement lawsuits commenced against
us may result in significant costs, divert our management’s attention and result in an award against us for substantial
damages, or potentially prevent us from continuing certain operations.
We may not be able to obtain
government or third-party patient reimbursement.
Our ability to
successfully commercialize our proposed products, if developed, in the human therapeutic field depends to a significant degree
on patient reimbursement of the costs of such products and related treatments. We cannot assure you that reimbursement in the
U.S. or in foreign countries will be available for any products developed, or, if available, will not decrease in the future,
or that reimbursement amounts will not reduce the demand for, or the price of, our products. There is considerable pressure to
reduce the cost of therapeutic products. Government and other third party payors are increasingly attempting to contain health
care costs by limiting both coverage and the level of reimbursement for new therapeutic products and by refusing, in some cases,
to provide any coverage for uses of approved products for disease indications for which the FDA or other relevant authority has
not granted marketing approval. Moreover, in some cases, government and other third party payors have refused to provide reimbursement
for uses of approved products for disease indications for which the FDA or other relevant authority has granted marketing approval.
Significant uncertainty exists as to the reimbursement status of newly approved health care products or novel therapies such as
ours. We cannot predict what additional regulation or legislation relating to the health care industry or third-party coverage
and reimbursement may be enacted in the future or what effect such regulation or legislation may have on our business. If additional
regulations are overly onerous or expensive or if healthcare related legislation makes our business more expensive or burdensome
than originally anticipated, we may be forced to significantly downsize our business plans or completely abandon the current business
model.
Our products may not be profitable
due to manufacturing costs and our inability to receive favorable pricing.
Our products
may be significantly more expensive to manufacture than other drugs or therapies currently on the market today due to a fewer
number of potential manufacturers, greater level of needed expertise and other general market conditions affecting manufacturers
of stem cell based products. Even if we are able to receive approval for the reimbursement of our proposed products the amount
of reimbursement may be significantly less than the manufacturing costs of our products. Additionally, other market factors may
limit the price which we can charge for our proposed products while still being competitive. Accordingly, even if we are successful
in developing our proposed products, we may not be able to charge a high enough price for us to earn a profit.
We are dependent on the acceptance
of our products by the healthcare community.
Our proposed
products, if approved for marketing, may not achieve market acceptance since hospitals, physicians, patients or the medical community,
in general, may decide not to accept and utilize these products. The products that we are attempting to develop represent substantial
departures from established treatment methods and will compete with a number of more conventional drugs and therapies manufactured
and marketed by major pharmaceutical companies. The degree of market acceptance will depend on a number of factors, including:
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the
clinical efficacy and safety of our proposed products;
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the
superiority of our products to alternatives currently on the market;
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the
potential advantages of our products over alternative treatment methods; and
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the
reimbursement policies of government and third-party payors.
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If the healthcare community does not
accept our products for any reason, our business will be materially harmed.
We depend on key employees and
consultants for our continued operations and future success.
We are highly
dependent on our chief executive officer, chief scientific officer and outside consultants. Although we have entered
into employment and consulting agreements with these parties, these agreements can be terminated at any time. The loss
of any of these key employees or consultants could adversely affect our opportunities and materially harm our future prospects. In
addition, we anticipate growth and expansion into areas and activities requiring additional expertise, such as clinical testing,
regulatory compliance, manufacturing and marketing. We anticipate the need for additional management personnel as well
as the development of additional expertise by existing management personnel. There is intense competition for qualified personnel
in the areas of our present and planned activities, and there can be no assurance that we will be able to attract and retain the
qualified personnel necessary for the development our business.
The employment
contracts of certain key employees contain significant anti-termination provisions which could make changes in management difficult
or expensive.
We have entered
into employment agreements with Messrs. Garr and Johe which expire on October 31, 2017. In the event either individual is terminated
prior to the full term of their respective contracts, for any reason other than a voluntary resignation, all compensation due
to such employee under the terms of the respective agreement shall become due and payable immediately. These provisions will make
the replacement of either of these employees very costly and could cause difficulty in effecting a change in control. Termination
prior to the full term of these contracts would cost us as much as approximately $1,600,000 per contract and the immediate vesting
of all outstanding options and/or warrants held by Messrs. Garr and Johe.
Our competition has significantly
greater experience and financial resources.
The biotechnology
industry is characterized by intense competition. We compete against numerous companies, many of which have substantially greater
resources. Several such enterprises have initiated cell therapy research programs and/or efforts to treat the same diseases which
we target. Given our current stage of development and resources, it may be extremely difficult for us to compete against more
developed companies.
Our outsource model depends
on third parties to assist in developing and testing our proposed products.
Our strategy
for the development, clinical and preclinical testing and commercialization of our proposed products is based in large part on
an outsource model. This model requires us to engage third parties in order to further develop our technology and products as
well as for the day to day operations of our business. In the event we are not able to enter into such relationships in the future,
our ability to operate and develop products may be seriously hindered or we may be required to spend considerable time and resources
to bring such functions in-house. Either outcome could result in our inability to develop a commercially feasible product or in
the need for substantially more working capital to complete the research in-house.
The commercialization of therapeutic
products exposes us to product liability claims.
Product liability
claims could result in substantial litigation costs and damage awards against us. We attempt to mitigate this risk by obtaining
and maintaining appropriate insurance coverage. Historically, we have obtained liability insurance that covers our clinical trials.
If we begin commercializing products, we will need to increase our insurance coverage. We may not be able to obtain insurance
on acceptable terms, if at all, and the policy limits on our insurance policies may be insufficient to cover our liability.
We currently
rely almost exclusively upon third party FDA-regulated manufacturers and suppliers for our products.
We currently
manufacture our cells both in-house and on an outsource basis. We outsource the manufacturing of our pharmaceutical compound to
third party manufacturers. We manufacture cells in-house which are not required to meet stringent FDA requirements. We use these
cells in our research and collaborative programs. At present, we outsource all the manufacturing and storage of our stem cells
and pharmaceuticals compound to be used in pre-clinical and clinical works, and which are subject to higher FDA requirements,
to Charles River Laboratories, Inc., of Wilmington, Massachusetts (stem cells) and Albany Molecular Resources, Inc. (small molecule).
Because manufacturing facilities are subject to regulatory oversight and inspection, failure to comply with regulatory requirements
could result in material manufacturing delays and product shortages, which could delay or otherwise negatively impact our clinical
trials and product development. In the event we are required to seek alternative third party suppliers or manufacturers, they
may require us to purchase a minimum amount of materials or could require other unfavorable terms. Any such event would materially
impact our business prospects and could delay the development of our products. Moreover, there can be no assurance that any manufacturer
or supplier that we select will be able to supply our products in a timely or cost effective manner or in accordance with applicable
regulatory requirements or our specifications. In addition, due to the novelty of our products and product development, there
can be no assurances that we would be able to find other suitable third party FDA-regulated manufacturers at terms reasonable
to us. Failure to secure such third party manufacturers or suppliers would materially impact our business.
We rely
on third parties to conduct our clinical trials and perform data collection and analysis, which may result in costs and delays
that prevent us from successfully commercializing our product candidates.
We do not have
the in-house capability to conduct clinical trials for our product candidates. We rely, and will rely in the future, on medical
institutions, clinical investigators, contract research organizations, contract laboratories, and collaborators to perform data
collection and analysis and other aspects of our clinical trials. Our preclinical activities or clinical trials conducted in reliance
on third parties may be delayed, suspended, or terminated if:
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the
third parties do not successfully carry out their contractual duties;
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the
third parties fail to meet regulatory obligations or expected deadlines;
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we
replace a third party for any reason; or
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the
quality or accuracy of the data obtained by third parties is compromised due to their
failure to adhere to clinical protocols, regulatory requirements, or for other reasons.
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Third party performance
failures may increase our development costs, delay our ability to obtain regulatory approval, and delay or prevent the commercialization
of our product candidates. While we believe that there are numerous alternative sources to provide these services, in the event
that we seek such alternative sources, we may not be able to enter into replacement arrangements without incurring delays or additional
costs.
Risks Relating to Intellectual
Property
We may not be able to withstand
challenges to our intellectual property rights.
We rely on our
intellectual property, including issued and applied-for patents, as the foundation of our business. Our intellectual property
rights may come under challenge. No assurances can be given that, even though issued, our current and potential future patents
will survive such challenges. For example, in 2005 one of our patents was challenged in the USPTO. Although we prevailed in this
particular matter, these cases are complex, lengthy, expensive, and could potentially be adjudicated adversely to our interests,
removing the protection afforded by an issued patent. The viability of our business would suffer if such patent protection were
limited or eliminated. Moreover, the costs associated with defending or settling intellectual property claims would likely have
a material adverse effect on our business and future prospects. At present, there is litigation with StemCells, Inc., which is
further described in this Quarterly Report in the section entitled “Legal Proceedings.”
We may not be able to adequately
protect against the piracy of the intellectual property in foreign jurisdictions.
We conduct research
in countries outside of the U.S., including through our subsidiary in the People’s Republic of China. A number of our competitors
are located in these countries and may be able to access our technology or test results. The laws protecting intellectual property
in some of these countries may not adequately protect our trade secrets and intellectual property. The misappropriation of our
intellectual property may materially impact our position in the market and any competitive advantages, if any, that we may have.
Risks Relating to Our Common Stock
The market price for our common
shares is particularly volatile.
The market for
our common shares is characterized by significant price volatility when compared to seasoned issuers, and we expect that our share
price will continue to be more volatile than those of a seasoned issuer. The volatility in our share price is attributable to
a number of factors. Mainly however, we are a speculative or “risky” investment due to our limited operating history,
lack of significant revenues to date and the uncertainty of FDA approval and future market acceptance for our products if successfully
developed. As a consequence of this enhanced risk, more risk-adverse investors may, under the fear of losing all or most of their
investment in the event of negative news or lack of progress, be more inclined to sell their shares on the market more quickly
and at greater discounts than would be the case with the stock of a seasoned issuer. Additionally, in the past, plaintiffs have
often initiated securities class action litigation against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities litigation could result in substantial costs
and liabilities and could divert management’s attention and resources.
The following
factors may add to the volatility in the price of our common shares: actual or anticipated variations in our quarterly or annual
operating results; government regulations; announcements of significant acquisitions, strategic partnerships or joint ventures;
our capital commitments; offerings of our securities and additions or departures of our key personnel. Many of these factors are
beyond our control and may decrease the market price of our common shares, regardless of our operating performance. We cannot
make any predictions or projections as to what the prevailing market price for our common shares will be at any time, including
as to whether our common shares will sustain their current market prices, or as to what effect the sale of shares or the availability
of common shares for sale at any time will have on the prevailing market price.
The requirements of being a
public company may strain our resources, divert management’s attention and affect our ability to attract and retain qualified
board members.
As a public company,
we incur significant legal, accounting and other expenses that we would not incur as a private company, including costs associated
with public company reporting requirements. We also incur costs associated with the Sarbanes-Oxley Act of 2002, as amended, the
Dodd-Frank Wall Street Reform and Consumer Protection Act and related rules implemented or to be implemented by the SEC and the
NYSE MKT. The expenses incurred by public companies generally for reporting, insurance and corporate governance purposes have
been increasing. We expect these rules and regulations to increase our legal and financial compliance costs and to make some activities
more time-consuming and costly. These laws and regulations could also make it more difficult or costly for us to obtain certain
types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and
coverage or incur substantially higher costs to obtain the same or similar coverage. These laws and regulations could also make
it more difficult for us to attract and retain qualified persons to serve on our board of directors, our board committees or as
our executive officers and may divert management’s attention. Furthermore, if we are unable to satisfy our obligations as
a public company, we could be subject to delisting of our common stock, fines, sanctions and other regulatory action and potentially
civil litigation.
We have never paid a cash dividend
and do not intend to pay cash dividends on our common stock in the foreseeable future.
We have never
paid cash dividends nor do we anticipate paying cash dividends in the foreseeable future. Accordingly, any return on your investment
will be as a result of stock appreciation if any. Additionally, we are prohibited from paying any cash dividends under the terms
of our credit agreement.
Our anti-takeover provisions
may delay or prevent a change of control, which could adversely affect the price of our common stock.
Our amended and
restated certificate of incorporation and amended and restated bylaws contain provisions that may make it difficult to remove
our board of directors and management and may discourage or delay “change of control” transactions, which could adversely
affect the price of our common stock. These provisions include, among others:
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our
board of directors is divided into three classes, with each class serving for a staggered
three-year term, which prevents stockholders from electing an entirely new board of directors
at an annual meeting;
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advance
notice procedures that stockholders must comply with in order to nominate candidates
to our board of directors and propose matters to be brought before an annual meeting
of our stockholders may discourage or deter a potential acquirer from conducting a solicitation
of proxies to elect the acquirer’s own slate of directors or otherwise attempting
to obtain control of our company; and
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our
board of directors may, without stockholder approval, issue series of preferred stock,
or rights to acquire preferred stock, that could dilute the interest of, or impair the
voting power of, holders of our common stock or could also be used as a method of discouraging,
delaying or preventing a change of control.
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If securities or industry analysts
do not publish research reports, or publish unfavorable research about our business, the price and trading volume of our common
stock could decline.
The trading market
for our common stock will depend in part on the research and reports that securities or industry analysts publish about us and
our business. We currently have limited research coverage by securities and industry analysts. In the event an analyst downgrades
our securities, the price of our securities would likely decline. If analysts cease to cover us or fails to publish regular reports
on us, interest in our securities could decrease, which could cause the price of our common stock and other securities and their
trading volume to decline.
Our corporate documents and
Delaware law contain provisions that could make it difficult for us to be acquired in a transaction that might be beneficial to
our stockholders.
Our board of
directors has the authority to issue shares of preferred stock and to fix the rights, preferences, privileges, and restrictions
of these shares without stockholder approval. Additionally, our Bylaws provide for a staggered board. These
provisions in our corporate documents, along with certain provisions under Delaware law, may make it more difficult for a third
party to acquire us or discourage a third party from attempting to acquire us, even if the acquisition might be beneficial to
our stockholders.
Our board
of directors has broad discretion to issue additional securities which might dilute the net tangible book value per share of our
common stock for existing stockholders.
We are entitled
under our certificate of incorporation to issue up to 150,000,000 shares of common stock and 7,000,000 “blank check”
shares of preferred stock. Shares of our blank check preferred stock provide the board of directors broad authority to determine
voting, dividend, conversion, and other rights. As of March 31, 2014 we have issued and outstanding 86,688,613 shares of common
stock and we have 44,462,359 shares of common stock reserved for future grants under our equity compensation plans and for issuances
upon the exercise or conversion of currently outstanding options, warrants and convertible securities. As of March 31, 2014, we
had no shares of preferred stock issued and outstanding. Accordingly, we are entitled to issue up to 18,849,028 additional shares
of common stock and 7,000,000 additional shares of “blank check” preferred stock. Our board may generally issue those
common and preferred shares, or convertible securities to purchase those shares, without further approval by our shareholders.
Any preferred shares we may issue will have such rights, preferences, privileges and restrictions as may be designated from time-to-time
by our board, including preferential dividend rights, voting rights, conversion rights, redemption rights and liquidation provisions.
It is likely that we will be required to issue a large amount of additional securities to raise capital in order to further our
development and marketing plans. It is also likely that we will be required to issue a large amount of additional securities to
directors, officers, employees and consultants as compensatory grants in connection with their services, both in the form of stand-alone
grants or under our various stock plans. The issuance of additional securities may cause substantial dilution to our shareholders.
Risks Related
to Government Regulation and Approval of our Product Candidates
Our products may not receive
regulatory approval.
The FDA and comparable
government agencies in foreign countries impose substantial regulations on the manufacturing and marketing of pharmaceutical and
biological products through lengthy and detailed laboratory, pre-clinical and clinical testing procedures, sampling activities
and other costly and time-consuming procedures. Satisfaction of these regulations typically takes several years or more and vary
substantially based upon the type, complexity and novelty of the proposed product. We are currently undertaking clinical
trials for our lead products candidates NSI-566 and NSI-189. We cannot assure you that we will successfully complete
any clinical trials in connection with such INDs. Further, we cannot predict when we might first submit any product
license application (BLA or NDA) for FDA approval or whether any such product license application will be granted on a timely
basis, if at all. Moreover, we cannot assure you that FDA approvals for any products developed by us will be granted
on a timely basis, if at all. Any delay in obtaining, or failure to obtain, such approvals could have a material adverse effect
on the marketing of our products and our ability to generate product revenue.
Development of our technologies
is subject to extensive government regulation.
Our research
and development efforts, as well as any future clinical trials, and the manufacturing and marketing of any products we may develop,
will be subject to, and restricted by, extensive regulation by governmental authorities in the U.S. and other countries. The process
of obtaining FDA and other necessary regulatory approvals is lengthy, expensive and uncertain. FDA and other legal and regulatory
requirements applicable to our proposed products could substantially delay or prevent us from initiating additional clinical trials.
We may fail to obtain the necessary approvals to commence clinical testing or to manufacture or market our potential products
in reasonable time frames, if at all. In addition, the U.S. Congress and other legislative bodies may enact regulatory reforms
or restrictions on the development of new therapies that could adversely affect the regulatory environment in which we operate
or the development of any products we may develop.
A substantial
portion of our research and development entails the use of stem cells obtained from human tissue. The U.S. federal and state governments
and other jurisdictions impose restrictions on the acquisition and use of human tissue, including those incorporated in federal
Good Tissue Practice, or “GTP,” regulations. These regulatory and other constraints could prevent us from obtaining
cells and other components of our products in the quantity or of the quality needed for their development or commercialization.
These restrictions change from time to time and may become more onerous. Additionally, we may not be able to identify or develop
reliable sources for the cells necessary for our potential products — that is, sources that follow all state and federal
laws and guidelines for cell procurement. Certain components used to manufacture our stem and progenitor cell product candidates
will need to be manufactured in compliance with the FDA’s GMP. Accordingly, we will need to enter into supply agreements
with companies that manufacture these components to GMP standards. There is no assurance that we will be able to enter into any
such agreements.
Noncompliance
with applicable requirements both before and after approval, if any, can subject us, our third party suppliers and manufacturers
and our other collaborators to administrative and judicial sanctions, such as, among other things, warning letters, fines and
other monetary payments, recall or seizure of products, criminal proceedings, suspension or withdrawal of regulatory approvals,
interruption or cessation of clinical trials, total or partial suspension of production or distribution, injunctions, limitations
on or the elimination of claims we can make for our products, refusal of the government to enter into supply contracts or fund
research, or government delay in approving or refusal to approve new drug applications.
We cannot predict if or when
we will be permitted to commercialize our products due to regulatory constraints.
Federal, state
and local governments and agencies in the U.S. (including the FDA) and governments in other countries have significant regulations
in place that govern many of our activities. We are, or may become, subject to various federal, state and local laws,
regulations and recommendations relating to safe working conditions, laboratory and manufacturing practices, the experimental
use of animals and the use and disposal of hazardous or potentially hazardous substances used in connection with its research
and development work. The preclinical testing and clinical trials of our proposed products are subject to extensive government
regulation that may prevent us from creating commercially viable products. In addition, our sale of any commercially viable product
will be subject to government regulation from several standpoints, including manufacturing, advertising, marketing, promoting,
selling, labeling and distributing. If, and to the extent that, we are unable to comply with these regulations, our
ability to earn revenues, if any, will be materially and negatively impacted.
If our
clinical trials fail to demonstrate to the FDA that any of our product candidates are safe and effective for the treatment of
particular diseases, the FDA may require us to conduct additional clinical trials or may not grant us marketing approval for such
product candidates for those diseases.
We are not permitted
to market our product candidates in the United States until we receive approval of a BLA or NDA from the FDA. Before obtaining
regulatory approvals for the commercial sale of any product candidate for a target indication, we must demonstrate with evidence
gathered in preclinical and well-controlled clinical trials, and, with respect to approval in the United States, to the satisfaction
of the FDA and, with respect to approval in other countries, similar regulatory authorities in those countries, that the product
candidate is safe and effective for use for that target indication and that the manufacturing facilities, processes and controls
used to produce the product are compliant with applicable statutory and regulatory requirements. Our failure to adequately demonstrate
the safety and effectiveness of any of our product candidates for the treatment of particular diseases may delay or prevent our
receipt of the FDA’s approval and, ultimately, may prevent commercialization of our product candidates for those diseases.
The FDA has substantial discretion in deciding whether, based on the benefits and risks in a particular disease, any of our product
candidates should be granted approval for the treatment of that particular disease. Even if we believe that a clinical trial or
trials has demonstrated the safety and statistically significant efficacy of any of our product candidates for the treatment of
a disease, the results may not be satisfactory to the FDA. Preclinical and clinical data can be interpreted by the FDA authorities
in different ways, which could delay, limit or prevent regulatory approval. If regulatory delays are significant or regulatory
approval is limited or denied altogether, our financial results and the commercial prospects for those of our product candidates
involved will be harmed, and our prospects for profitability will be significantly impaired.
In addition,
in the course of its review of a BLA or NDA or other regulatory application, the FDA or other regulatory authorities may conduct
audits of the practices and procedures of a company and its suppliers and contractors concerning manufacturing, clinical study
conduct, non-clinical studies and several other areas. If the FDA and/or other regulatory authorities conducts an audit relating
to a BLA, NDA or other regulatory application and finds a significant deficiency in any of these or other areas, the FDA or other
regulatory authorities could delay or not approve such BLA, NDA or other regulatory application. If regulatory delays are significant
or regulatory approval is limited or denied altogether, our financial results and the commercial prospects for those of our products
or product candidates involved will be harmed, and our prospects for profitability will be significantly impaired.
We are
subject to extensive and rigorous governmental regulation, including the requirement of FDA or other regulatory approval before
our product candidates may be lawfully marketed.
Both before and
after the approval of our product candidates, we, our product candidates, our operations, our facilities, our suppliers, and our
contract manufacturers, contract research organizations, and contract testing laboratories are subject to extensive regulation
by governmental authorities in the United States and other countries, with regulations differing from country to country. In the
United States, the FDA regulates, among other things, the pre-clinical testing, clinical trials, manufacturing, safety, efficacy,
potency, labeling, storage, record keeping, quality systems, advertising, promotion, sale and distribution of therapeutic products.
Failure to comply with applicable requirements could result in, among other things, one or more of the following actions: notices
of violation, untitled letters, warning letters, fines and other monetary penalties, unanticipated expenditures, delays in approval
or refusal to approve a product candidate; product recall or seizure; interruption of manufacturing or clinical trials; operating
restrictions; injunctions; and criminal prosecution. We or the FDA, or an institutional review board, may suspend or terminate
human clinical trials at any time on various grounds, including a finding that the subjects are being exposed to an unacceptable
health risk. Our product candidates cannot be lawfully marketed in the United States without FDA approval. Any failure to receive
the marketing approvals necessary to commercialize our product candidates could harm our business.
The regulatory
review and approval process of governmental authorities, which includes the need to conduct nonclinical studies and clinical trials
of each product candidate, is lengthy, expensive and uncertain, and regulatory standards may change during the development of
a particular product candidate. We are not permitted to market our product candidates in the United States or other countries
until we have received requisite regulatory approvals. For example, securing FDA approval requires the submission of an NDA to
the FDA. The approval application must include extensive nonclinical and clinical data and supporting information to establish
the product candidate’s safety and effectiveness for each indication. The approval application must also include significant
information regarding the chemistry, manufacturing and controls for the product. The FDA review process typically takes significant
time to complete and approval is never guaranteed. If a product is approved, the FDA may limit the indications for which the product
may be marketed, require extensive warnings on the product labeling, impose restricted distribution programs, require expedited
reporting of certain adverse events, or require costly ongoing requirements for post-marketing clinical studies and surveillance
or other risk management measures to monitor the safety or efficacy of the product. Markets outside of the United States also
have requirements for approval of drug candidates with which we must comply prior to commencing marketing of our products in those
markets. Obtaining regulatory approval for marketing of a product candidate in one country does not ensure we will be able to
obtain regulatory approval in other countries, but a failure or delay in obtaining regulatory approval in one country may have
a negative effect on the regulatory process in other countries. Also, any regulatory approval of any of our product candidates,
once obtained, may be withdrawn.
In addition,
we, our suppliers, our operations, our facilities, and our contract manufacturers, our contract research organizations, and our
contract testing laboratories are required to comply with extensive FDA requirements both before and after approval of our products.
For example, we are required to report certain adverse reactions and production problems, if any, to the FDA, and to comply with
certain requirements concerning advertising and promotion for our product candidates and our products. Also, quality control and
manufacturing procedures must continue to conform to current Good Manufacturing Practices, or cGMP, regulations after approval,
and the FDA periodically inspects manufacturing facilities to assess compliance with cGMP. Accordingly, we and others with whom
we work must continue to expend time, money, and effort in all areas of regulatory compliance, including manufacturing, production,
and quality control. In addition, discovery of safety issues may result in changes in labeling or restrictions on a product manufacturer
or NDA holder, including removal of the product from the market.